UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
AMERICAN NATIONAL INSURANCE COMPANY
(Exact Name of Registrant as Specified in its Charter)
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Texas
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74-0484030
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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One Moody Plaza
Galveston, Texas 77550-7999
(Address of principal executive offices) (Zip code)
(409) 763-4661
Registrants telephone number, including area code
Copy to:
Gregory S. Garrison
Sean A. Monticello
Greer, Herz & Adams, L.L.P.
One Moody Plaza, 18
th
Floor
Galveston, Texas 77550-7990
(409) 797-3200
Securities to be Registered pursuant to Section 12(b) of the Act:
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Title of each class
Common Stock
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Name of each exchange
on which registered
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($1.00 par value)
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NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. Check one:
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Large accelerated filer
o
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Accelerated filer
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Non-accelerated filer
þ
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Smaller reporting company
o
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EXPLANATORY COMMENT
American National Insurance Company $1.00 par value common stock is being registered because
the NASDAQ Stock Market LLC has become a registered national securities exchange. The stock has not
been previously registered because of the exemption for certain life insurance companies provided
by 12(g)(2)(G) of the Securities Exchange Act of 1934. The stock has been listed on the NASDAQ
Global Select Market.
AMERICAN NATIONAL INSURANCE COMPANY
TABLE OF CONTENTS
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ITEM 1. BUSINESS
Company Overview
American National Insurance Company has more than 100 years of experience. We have maintained
our home office in Galveston, Texas since our founding in 1905. Historically, our core business
has been life insurance; however, we also offer individual and group health insurance and
annuities, credit insurance, pension products, mutual funds, and property and casualty insurance
for personal lines, agribusiness, and targeted commercial exposures. We provide personalized
service to more than eight million policyholders throughout the United States, the District of
Columbia, Puerto Rico, Guam, and American Samoa. Our total assets and stockholders equity as of
December 31, 2008 were $18.4 billion and $3.1 billion, respectively.
In this document, we refer to American National Insurance Company, a Texas insurance company,
and its subsidiaries, as the Company, we, our, and us.
Business Strategy
We are an insurance company with a vision to be a leading provider of financial products and
services for current and future generations. For more than a century, we have maintained a
conservative business approach and unique corporate culture. We have an unwavering commitment to
serve agent, policyholder, and shareholder needs by providing excellent customer service and
competitively priced and diversified products. We are committed to profitable growth, which
enables us to remain financially strong. Acquisitions that are strategic and that offer synergies
are considered, but they are not our primary source of growth. Rather, we invest in our
distribution channels and markets to fuel internal growth.
We are committed to excellence and maintaining high ethical standards in all our business
dealings. Disciplined adherence to our core values has allowed us to deliver consistently high
levels of customer service through talented people, who are at the heart of our business.
Our Business Segments
Our family of companies includes five life insurance companies, eight property and casualty
insurance companies, and numerous non-insurance subsidiaries. We operate the following five
business segments:
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Property and Casualty; and
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Revenues for the Life, Annuity, Health, and Property and Casualty segments come primarily from
premiums collected on the insurance policies we write. Revenues in the Corporate and Other segment
come from investment income on unallocated capital, interest on debt, earnings from various
investment-related transactions, and the operations of several non-strategic lines of business.
Financial information, including revenues, expenses and income and loss per segment is provided
below in Managements Discussion and Analysis of Financial Condition and Results of Operations.
1
Each of our five business segments is discussed further below.
Life Segment
A life insurance policy is an agreement between an insurance company and an individual. The
typical life insurance contract provides that, in exchange for one or more premium payments, the
insurance company promises to pay at the death of the insured (or at another determined time if
earlier), a sum of money to the beneficiary.
We provide the following products under our Life segment:
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Individual and group life insurance products, including universal life, variable
universal life, whole life, and term life; and
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Universal Life.
Universal life products provide insurance coverage on the same basis as
variable life, except that premiums, and the resulting accumulated balances, are allocated only to
our general account. Universal life products may allow the insured to increase or decrease the
amount of death benefit coverage over the term of the contract and the owner to adjust the
frequency and amount of premium payments. Universal life products are interest rate-sensitive. We
credit premiums, net of insurance protection expenses and interest, at rates we determine, to an
account maintained for the policyholder, subject to a specified minimum interest rate.
Variable Universal Life.
Variable universal life products provide insurance coverage through
a contract that gives the policyholder flexibility in investment choices and, depending on the
product, in premium payments and coverage amounts. Most importantly, with variable life products,
premiums and account balances can be directed by the policyholder into a variety of separate
accounts or directed to our general account. In the separate accounts, the policyholder bears the
entire risk of the investment results. We collect specified fees for the management of these
various investment accounts and any net return is credited directly to the policyholders account.
With some products, policyholders may have the advantage of guarantees that may protect the death
benefit from adverse investment experience.
Whole Life.
Whole life products provide a guaranteed benefit upon the death of the insured in
return for the periodic payment of a fixed premium over a predetermined period. Premium payments
may be required for the entire life of the contract period, to a specified age or period, or may be
level or change in accordance with a predetermined schedule. Whole life insurance includes
policies that provide a participation feature in the form of dividends. Policyholders may receive
dividends in cash or apply them to increase death benefits, increase cash values available upon
surrender, or reduce the premiums required to maintain the contract in-force. Because the use of
dividends is specified by the policyholder, this group of products provides significant flexibility
to individuals to tailor the product to suit their specific needs and circumstances, while at the
same time providing guaranteed benefits. Whole life products are sometimes referred to as
ordinary life products.
Term Life.
Term life provides a guaranteed benefit upon the death of the insured for a
specified time period in return for the periodic payment of premiums. Coverage periods typically
range from one year to thirty years, but in no event are they longer than the period over which
premiums are paid. Term insurance products are sometimes referred to as pure protection products
because there are typically no savings or investment elements. Term contracts expire without value
at the end of the coverage period.
Term life and whole life insurance are sometimes referred to as traditional life insurance
products.
Credit Life Insurance.
Credit insurance is sold in connection with a loan, a credit card, or
other credit account and is designed to make payments to the lender for the borrower if the
borrower is unable to make payments. Credit life insurance products pay off the borrowers
remaining debt on a loan or credit account if the borrower dies during the term of coverage.
2
Annuity Segment
A popular choice in retirement planning, an annuity is any type of periodic (generally
monthly) payment made to an individual, called the annuitant. Payment options include lump sum,
income for life, or income for a certain period of time.
We provide the following products under our Annuity segment, both to individuals and to
institutional investors:
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Variable annuities; and
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Variable Annuities.
We offer variable annuities for both asset accumulation and asset
distribution needs. Variable annuities allow the contract holder to make deposits into various
investment accounts, as determined by the contract holder. The investment accounts are separate
accounts, and risks associated with such investments are borne entirely by the contract holder. In
certain variable annuity products, contract holders may also choose to allocate all or a portion of
their account to our general account and are credited with interest at rates we determine, subject
to certain minimums. In addition, contract holders may also elect minimum death benefits or
enhanced death benefits under certain contracts, for which additional fees are charged.
Fixed Annuities.
Fixed annuities are used for both asset accumulation and asset distribution
needs. Fixed annuities do not allow the same investment flexibility provided by variable
annuities, but they provide guarantees related to the preservation of principal and interest
credited. Deposits made into immediate and deferred annuity contracts are allocated to our general
account and are credited with interest at rates we determine, subject to certain minimums. For
most contracts, credited interest rates are guaranteed not to change for certain limited periods of
time, ranging from one to ten years. Fixed income annuities provide a guaranteed monthly income
for a specified period of years and/or for the life of the annuitant. Our fixed annuity products
include single premium immediate annuities and equity indexed annuities, among others.
Single Premium Immediate Annuity.
A single premium immediate annuity is an annuity
purchased by one premium payment, providing a periodic (usually monthly or annual) income
payment to the owner of the annuity for a specified period, such as for the remainder of the
annuitants life. Generally, once the payments of an immediate annuity have begun, the
contract cannot be revised or cashed in, and there is no return of part or all of the
original deposit. Annuity payments are usually fixed for the payment period, although they
may increase at a predetermined rate, depending upon the terms of the particular contract.
Equity Indexed Annuity.
Equity indexed annuities are usually deferred annuities,
meaning that payment of the annuity is not scheduled to commence until a future date. With
an equity indexed annuity, a minimum interest rate is credited at the rates required by
state insurance law. Any additional interest credited is typically tied to the performance
of a particular stock market index, such as the S&P 500. Crediting of the additional
interest, however, may be limited by caps or participation rates prescribed by the
particular product.
Health Segment
Health insurance provides coverage that protects against the loss of life, loss of earnings,
or expenses incurred due to illness or injury.
We provide the following products under our Health segment:
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Supplemental insurance;
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Medicare Supplement.
Medicare supplement insurance is a type of private health insurance
policy designed to supplement or pick up the costs of certain medical services not covered by
Medicare. It is also known as gap coverage or Medigap coverage.
Supplemental Insurance.
Supplemental insurance is designed to provide supplemental coverage
for specific events or illnesses, such as cancer, and accidental injury or death.
Hospital Surgical.
Hospital surgical insurance covers major health expenses associated with
hospitalization or surgery.
Stop-Loss.
Stop-loss coverage is used by employers to limit their exposure under
self-insurance medical plans. There are two coverage types available, which are usually offered
concurrently:
Specific Stop-Loss.
Specific stop loss coverage is initiated when claims for an
individual reach the threshold selected by the employer. After the threshold is reached, a
stop-loss policy reimburses claims paid by the employer up to the lifetime limit per
individual.
Aggregate Stop
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Loss.
Aggregate stop-loss coverage is designed to reimburse the
employer once the groups total paid claims reach the stipulated threshold.
Credit Disability.
Credit disability (also called credit accident and health) insurance pays
a limited number of monthly payments on a loan or credit account if the borrower becomes disabled
during the term of coverage.
Property and Casualty Segment
Property insurance provides protection against loss or damage to real or personal property due
to fire, windstorm, flood, hail, and other covered perils. Casualty insurance provides coverage
for legal liabilities resulting from bodily injury or property damage resulting from an accident
caused by the insured.
We provide the following products under our Property and Casualty segment:
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Agribusiness and commercial insurance; and
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Credit property and casualty insurance.
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Auto Insurance.
Auto insurance provides coverage for specific risks involved in owning and
operating an automobile, such as bodily injury, property damage (both to the insureds car and to
the car of the other driver, if the loss results from collision), fire, theft and vandalism.
Homeowners Insurance.
Homeowners insurance provides coverage that protects the insureds
property against loss from theft, liability, and most common disasters.
Agribusiness and Commercial Insurance.
Agribusiness and commercial insurance can encompass
property coverage, liability coverage, commercial automobile coverage, workers compensation
coverage, and umbrella
coverage tailored for a farm, ranch or other agricultural business operations, contractors,
and targeted businesses within the rural and suburban markets.
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Credit Property and Casualty Insurance.
Through our Property and Casualty segment, we offer
the following credit insurance products:
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Credit involuntary unemployment insurance, which pays a limited number of monthly
payments on a loan or credit account if the borrower becomes involuntarily unemployed
during the term of coverage; and
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Credit property insurance, which pays an amount sufficient to pay off the entire
debt on a piece of property serving as collateral for the loan if the property is lost
or damaged.
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Corporate and Other Segment
Our Corporate and Other segment encompasses primarily our invested assets that are not used to
support our insurance activities. It also includes our non-insurance businesses, which consist
primarily of mutual fund and investment advisory products and services. This segment provides
investment services to each of our other segments and to our non-insurance business. Our invested
assets include common and preferred stocks, bonds, commercial real estate and mortgages, and
participations in private equity funds.
Through our registered investment adviser and broker-dealer subsidiary, we also provide mutual
fund products through our Corporate and Other segment. A mutual fund is a registered investment
company with an investment manager that manages a pool of money invested for its shareholders in a
variety of instruments, such as stocks, bonds, or government securities, depending on the
objectives of the particular mutual fund.
Our Marketing Channels
We conduct our sales operations through six marketing channels. Product distribution is
aligned to satisfy specific target markets in such a way that channel conflict is minimized and key
brand identities are maintained. Whenever possible, products are cross-sold by multiple marketing
channels to maximize product offerings and return on investment in products and distribution.
Our six marketing channels are:
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Independent Marketing Group;
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Career Sales & Services Division;
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Health/Senior Age Marketing Division;
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Credit Insurance Division.
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The following table illustrates our marketing channels:
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Primary Means of
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Segment
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Marketing Channel
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Companies
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Distribution
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Life
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Independent Marketing Group;
Multiple Line;
Career Sales & Service
Division;
Health/Senior Age
Marketing Division;
Direct Marketing;
Credit Insurance Division
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American National Insurance Company;
Farm Family Life Insurance Company;
Garden State Life Insurance Company;
Standard Life and Accident
Insurance Company;
American National Life Insurance
Company of
Texas
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Independent agents;
Employee agents;
Dedicated agents;
Internet, mail,
print and broadcast
media;
General agents
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Annuity
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Independent Marketing Group;
Multiple Line;
Career Sales & Service
Division;
Health/Senior Age
Marketing Division
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American National Insurance Company;
Standard Life and Accident
Insurance Company
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Independent agents;
Employee agents;
Exclusive agents
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Property
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Multiple Line;
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American National Insurance Company;
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Multiple Line:
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and Casualty
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Credit Insurance Division
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The American National Property and
Casualty Companies;
The Farm Family Companies
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Exclusive agents
and General agents;
Credit Insurance
Division:
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Independent agents
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Health
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Career Sales & Service
Division;
Health/Senior Age
Marketing Division;
Credit Insurance Division
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American National Insurance Company;
Standard Life and Accident
Insurance Company;
American National Life Insurance
Company of
Texas
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Employee agents;
Exclusive agents;
Independent agents;
Managing general
underwriters
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Financial information, including revenues, expenses, income and loss, and total assets by segment,
is provided in Managements Discussion and Analysis Results of Operations and Related
Information by Segment. Additional information regarding business segments may be found in
Managements Discussion and Analysis and the notes to the consolidated financial statements.
Independent Marketing Group
Independent Marketing Group distributes life insurance and annuities through independent
agents, focusing on a higher-income and affluent marketplace, as well as targeted niche markets
such as the small pension plan arena. Independent Marketing Group provides products, service, and
concepts to clients in need of wealth protection, accumulation, distribution, and transfer.
Independent Marketing Group markets through financial institutions, large marketing organizations,
employee benefit firms, broker-dealers, and independent insurance agents and brokers.
Career Sales & Service Division
Career Sales & Service Division distributes life insurance, annuities, and limited benefit
health insurance products through exclusive employee agents. Career Sales & Service Division
primarily serves the lower- to middle-income marketplace.
Multiple Line
Primarily through its Multiple Line exclusive agents, Multiple Line offers a combination of
life insurance, annuities, mutual funds, financial services, and property and casualty insurance
for personal lines, agribusiness, and targeted commercial exposures. Multiple Line is committed to
remain an industry leader in tri-line sales (sales of
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homeowners, auto, and life insurance). Policyholders can do business with a single agent, a
concept that has been identified as an important driver to client satisfaction. Multiple Line
primarily serves middle and higher income individuals.
Health/Senior Age Marketing Division
The Health/Senior Age Marketing Division, through independent agents and managing general
underwriters, primarily serves the needs of middle income seniors and individuals preparing for
retirement. Although the Health/Senior Age Marketing Division offers an array of life insurance,
health insurance, and annuity products for this growing segment of the population, including group
life products, limited benefit group health insurance products, and health reinsurance, it remains
committed to traditional Medicare Supplement products. The Health/Senior Age Marketing Division is
also responsible for the administration and management of all health insurance products sold by
other marketing channels.
Direct Marketing
Direct Marketing focuses on individuals who favor purchasing insurance directly from insurance
companies. Direct Marketing offers life insurance products through the Internet, mail, print, and
broadcast media, primarily directed at middle and upper income customers.
Credit Insurance Division
The Credit Insurance Division offers products that provide protection against specific unpaid
debt in the event of loss due to death or disability, or in the event of a loss of ability to
repay, such as involuntary unemployment or untimely loss of collateral. Distribution includes
general agents who market to financial institutions, automobile dealers, and furniture dealers.
These general agents are given non-exclusive authority to solicit insurance within a specified
geographic area and to appoint and supervise subagents.
Policyholder Liabilities
We establish, and carry as liabilities, actuarially determined amounts that are calculated to
meet our policy obligations when an annuitant takes income, a policy matures or surrenders, an
insured dies or becomes disabled, or upon the occurrence of other covered events. We compute the
amounts for actuarial liabilities reported in our consolidated financial statements in conformity
with generally accepted accounting principles, or GAAP, in the United States of America, and in
accordance with standards of practice of the American Academy of Actuaries.
We establish actuarial liabilities for future policy benefits (associated with base policies
and riders, unearned mortality charges and future disability benefits), for other policyholder
liabilities (associated with unearned revenues and claims payable) and for unearned revenue (the
unamortized portion of front-end loads charged). We also establish liabilities for unpaid claims
and unpaid claim expenses. In addition, we establish liabilities for minimum death benefit
guarantees relating to certain annuity contracts and secondary guarantees relating to certain life
policies.
Pursuant to state insurance laws, we establish statutory reserves, reported as liabilities, to
meet our obligations on our respective policies. These statutory reserves are established in
amounts sufficient to meet policy and contract obligations, when taken together with expected
future premiums and interest at assumed rates. Statutory reserves generally differ from actuarial
liabilities for future policy benefits determined using GAAP.
Due to the nature of the underlying risks and the high degree of uncertainty associated with
the determination of our actuarial liabilities, we cannot precisely determine the amounts we will
ultimately pay with respect to these actuarial liabilities, and the ultimate amounts may vary from
the estimated amounts, particularly when payments may not occur until well into the future.
However, we believe our actuarial liabilities for future benefits are adequate to cover the
ultimate benefits required to be paid to policyholders. We periodically review our estimates of
actuarial liabilities for future benefits
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and compare them with our actual experience. We revise estimates, to the extent permitted or
required under GAAP, if we determine that future expected experience differs from assumptions used
in the development of actuarial liabilities.
Additional information regarding reserves may be found in Managements Discussion and Analysis
Critical Accounting Estimates
Reserves.
Risk Management
Our Asset/Liability Management Committee, under the direction of the Chief Corporate Risk
Management Officer, monitors the level of risk to which we are exposed in managing our assets and
liabilities in order to attain the desired risk-return profile. Other committees throughout our
organization have been established to proactively manage policies in force to maintain
profitability in an ever-changing economic environment. A significant aspect of this risk
management involves our managing the link between the characteristics of our investments and the
anticipated policy obligations and liabilities, a process commonly referred to as asset/liability
management. Among other things, this includes maintaining adequate reserves, monitoring claims and
persistency experience, managing interest rate spreads, and protecting against disintermediation
risk for life insurance and annuity products, as well as managing exposure concentrations,
deductibles, and reinsurance for property and casualty products. Disintermediation risk refers to
the risk that interest rates will rise, and policy loans and surrenders will increase, or that
maturing policies will not renew at anticipated rates of renewal. This risk manifests itself when
policyholders move their assets into new products offering higher rates, and we may have to sell
assets earlier than anticipated to pay for these withdrawals.
Our life insurance and annuity product designs, underwriting standards, and risk management
techniques are utilized to protect against disintermediation risk and greater than expected
mortality, persistency and morbidity risks. We strive to mitigate disintermediation risk through
the use of surrender charges, certain provisions prohibiting the surrender of a policy, and market
value adjustment features. Investment guidelines, including duration targets, asset allocation
tolerances, and return objectives, help to ensure that disintermediation risk is managed within the
constraints of profitability criteria. Prudent underwriting is applied to select and price
insurance risks, and we regularly monitor claims experience relative to our product pricing
assumptions. Implementation of disciplined claims management serves to further protect against
fraudulent and unjustified claims activity.
We also manage risk by following the industry practice of reinsuring portions of our insurance
risks. Our policyholders buy insurance from us to reduce the financial impact of losses they may
suffer. In turn, we purchase reinsurance to limit the financial impact of policyholder losses and
our exposure to catastrophic events.
We purchase reinsurance from several providers and are not dependent on any single reinsurer.
We believe the reinsurance providers from which we purchase are reputable and financially secure
carriers. Reinsurance does not eliminate our liability to pay our policyholders, and we remain
primarily liable to our policyholders for the risks we insure.
Additional information regarding our use of reinsurance may be found in Managements
Discussion and Analysis Critical Accounting Estimates
Reinsurance Recoverable.
Pricing
We establish premium rates for our life and health insurance products using assumptions as to
future mortality, morbidity, persistency, and expenses, all of which are generally based on our
experience, industry data, and projected investment earnings. Premium rates for property and
casualty insurance are influenced by many factors, including the frequency and severity of claims,
state regulation and legislation, competition, general business and economic conditions, including
market rates of interest, inflation, expense levels, and judicial decisions. In addition, many
state regulators require consideration of investment income when approving or setting property and
casualty rates, which reduces underwriting margins. Profitability is affected to the extent actual
experience deviates from the assumptions made in pricing and to the extent investment income varies
from that which is required for policy reserves.
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Collections for certain annuity and life products are not recognized as revenues but are added
to policyholder account values. Revenues from these products are derived from charges to the
account balances for insurance risk and administrative costs. Profits are earned to the extent
these revenues exceed actual costs. Profits are also earned from investment income on the deposits
invested in excess of the amounts credited to policyholder accounts.
Premiums for Medicare Supplement and other accident and health policies must take into account
the rising costs of medical care. The annual rate of medical cost inflation has historically been
higher than the general rate of inflation, necessitating frequent rate increases, most of which are
subject to approval by state regulatory agencies.
Competition
We compete principally on the basis of the scope of our distribution systems, the breadth of
our product offerings, reputation, marketing expertise and support, our financial strength and
ratings, our product features and prices, customer service, claims handling, and in the case of
producers, compensation. The market for insurance, retirement and investment products continues to
be highly fragmented and competitive. We compete with thousands of domestic and foreign insurance
companies, many of which offer one or more similar products. In addition, because many of our
products include a savings or investment component, our competition includes domestic and foreign
securities firms, investment advisors, mutual funds, banks and other financial institutions. Our
subsidiary investment advisor, as well as the mutual funds it manages, are in direct competition
with such institutions.
Several competing insurance carriers have brands that are more commonly known and spend
significantly more on advertising than we do. We remain competitive with these commonly known
brands by relying on our abilities to manage costs, provide attractive coverage and service,
maintain positive relationships with our agents, and maintain the strength of our financial
ratings. Rather than focusing our advertising efforts nationally, we support advertising in the
local markets in which our agents live and work.
Our Ratings
Insurer financial strength ratings reflect current independent opinions of rating agencies
regarding the financial capacity of an insurance company to meet the obligations of its insurance
policies and contracts in accordance with their terms. They are based on comprehensive
quantitative and qualitative evaluations of a company and its management strategy. The rating
agencies do not provide ratings as a recommendation to purchase insurance or annuities, nor are
they a warranty of an insurers current or future ability to meet its contractual obligations.
Ratings may be changed, suspended, or withdrawn at any time.
Our insurer financial strength ratings from two of the most widely referenced rating
organizations as of the date of this filing are as follows:
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A.M. Best Company: A+ (Superior)
(1)
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Standard & Poors: AA- (Very Strong)
(2)
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(1)
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A.M. Bests active company rating scale consists of thirteen ratings ranging from A++
(Superior) to D (poor). A+ is the second highest of such thirteen ratings and represents
companies superior ability to meet their ongoing obligations to policyholders.
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(2)
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Standard & Poors active company rating scale ranges from AAA (Extremely Strong) to CC
(Extremely Weak). Plus (+) or Minus (-) modifiers show the relative standing within the
categories from AA to CCC. A rating of AA is in the very strong category and represents
very strong financial security characteristics, differing only slightly from those rated
higher. AA- is the fourth highest of twenty active company ratings.
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Regulation
We are subject to extensive regulation, primarily at the state level. The method, extent, and
substance of such regulation varies by state but generally has its source in statutes that
establish standards and requirements for conducting the business of insurance and that delegate
regulatory authority to a state regulatory agency. These rules
9
have a substantial effect on our business and relate to a wide variety of matters including
insurance company licensing and examination, agent and adjuster licensing, price setting, trade
practices, policy forms, accounting methods, the nature and amount of investments, claims
practices, participation in shared markets and guaranty funds, reserve adequacy, insurer solvency,
transactions with affiliates, the payment of dividends, and underwriting standards. Some of these
matters are discussed in more detail below. For a discussion of statutory surplus information, see
Note 13 to the Consolidated Financial Statements.
Limitations on Dividends By Insurance Subsidiaries.
Dividends paid from subsidiary insurance
companies represent one source of cash for us. The ability of various of our insurance company
subsidiaries to pay dividends is restricted by state law and impacted by federal income tax
considerations.
Holding Company Regulation.
Our family of companies constitutes an insurance holding company
system that is subject to regulation throughout the jurisdictions in which our insurance companies
do business. In the U.S., our insurance companies are organized under the insurance codes of
Texas, Missouri, Oklahoma, New York, Louisiana, and California. Generally, the insurance codes in
these states require advance notice to, or in some cases approval by, state insurance regulators
prior to certain transactions between insurance companies and other entities within their holding
company system. Such requirements may deter or delay certain transactions considered desirable by
management.
Price Regulation.
Nearly all states have insurance laws requiring personal property and
casualty and health insurers to file price schedules, policy or coverage forms, and other
information with the states regulatory authority. In many cases, such price schedules, policy
forms or both must be approved prior to use. While they vary from state to state, the objectives
of these pricing laws are generally the same: a price cannot be excessive, inadequate or unfairly
discriminatory. Prohibitions on discriminatory pricing apply in the context of life insurance as
well. The speed with which an insurer can change prices in response to competition or in response
to increasing costs depends, in part, on the nature of the applicable pricing law.
An insurers ability to adjust its prices in response to competition or increasing costs is
often dependent on an insurers ability to demonstrate to the regulator that its pricing or
proposed pricing meets the requirements of the pricing laws. In those states that significantly
restrict an insurers discretion in selecting the business that it wants to underwrite, an insurer
can manage its risk of loss by charging a price that reflects the cost and expense of providing the
insurance. In those states that significantly restrict an insurers ability to charge a price that
reflects the cost and expense of providing the insurance, the insurer can manage its risk of loss
by being more selective in the type of business it offers. When a state significantly restricts
both underwriting and pricing, it becomes more difficult for an insurer to maintain its
profitability. These kinds of pricing restrictions can impact our ability to market products to
residents of such states.
Changes in our claim settlement process may require us to actuarially adjust loss information
used in our pricing process. Some state insurance regulatory authorities may not approve price
increases that give full effect to these adjustments.
From time to time, the private passenger auto insurance industry comes under pressure from
state regulators, legislators and special interest groups to reduce, freeze or set prices at levels
that do not correspond with our analysis of underlying costs and expenses. Homeowners insurance
comes under similar pressure, particularly as regulators in states subject to high levels of
catastrophe losses struggle to identify an acceptable methodology to price for catastrophe
exposure. We expect this kind of pressure to persist. In addition, our use of insurance scoring
based on credit report information for underwriting and pricing regularly comes under attack by
regulators, legislators and special interest groups in various states. The result could be
legislation or regulation that adversely affects our profitability. We cannot predict the impact
on our business of possible future legislative and regulatory measures regarding pricing.
Involuntary Markets.
As a condition of maintaining our licenses to write personal property
and casualty insurance in various states, we are required to participate in assigned risk plans,
reinsurance facilities, and joint underwriting associations that provide various types of insurance
coverage to individuals or entities that otherwise are unable to purchase such coverage from
private insurers. Underwriting results related to these arrangements, which tend to be adverse,
have been immaterial to our results of operations.
10
Guaranty Funds.
Under state insurance guaranty fund laws, insurers doing business in a state
can be assessed, up to prescribed limits, in order to cover certain obligations of insolvent
insurance companies.
Investment Regulation.
Our insurance companies are subject to regulations that require
investment portfolio diversification and that limit the amount of investment in certain categories
of assets. Failure to comply with these rules leads to the treatment of non-conforming investments
as non-admitted assets for purposes of measuring statutory surplus. Further, in some instances,
these rules require divestiture of non-conforming investments. As of December 31, 2008, the
investment portfolios of our insurance companies complied with such laws and regulations in all
material respects.
Exiting Geographic Markets; Canceling and Non-Renewing Policies.
Most states regulate an
insurers ability to exit a market. For example, states limit, to varying degrees, an insurers
ability to cancel and non-renew policies. Some states prohibit an insurer from withdrawing one or
more types of insurance business from the state, except pursuant to a plan that is approved by the
state insurance department. Regulations that limit cancellation and non-renewal and that subject
withdrawal plans to prior approval requirements could restrict our ability to exit unprofitable
markets.
Variable Life Insurance and Variable Annuities.
The sale and administration of variable life
insurance and variable annuities are subject to extensive regulatory oversight at the federal and
state level, including regulation and supervision by the Securities and Exchange Commission (the
SEC
) and the Financial Industry Regulatory Authority (
FINRA
). Our variable annuity contracts
and variable life insurance policies are issued through separate accounts that are registered with
the SEC as investment companies under the Investment Company Act of 1940. Each registered separate
account is generally divided into sub-accounts, each of which invests in an underlying mutual fund
that is itself a registered investment company under such act. In addition, the variable annuity
contracts and variable life insurance policies issued by the separate accounts are registered with
the SEC under the Securities Act of 1933. Federal and state regulatory authorities and FINRA from
time to time make inquiries and conduct examinations regarding our compliance with securities and
other laws and regulations. We cooperate with such inquiries and examinations and take corrective
action when warranted.
Broker-Dealer, Investment Adviser and Investment Companies.
Our subsidiary Securities
Management and Research, Inc. is registered with the SEC as a broker-dealer under the Securities
and Exchange Act of 1934 and a registered investment adviser under the Investment Advisers Act of
1940. Such company and the registered investment companies that it advises are subject to
extensive regulation and supervision by the SEC, FINRA, and/or, in some cases, state securities
administrators.
Privacy Regulation.
Federal laws, such as the Gramm-Leach-Bliley Act, and the laws of some
states require us to protect the security and confidentiality of certain customer information and
to notify customers about our policies and practices relating to collection and disclosure of
customer information and our policies relating to protecting the security and confidentiality of
that information. Federal law and the laws of some states also regulate disclosures of customer
information. Furthermore, state and federal laws, such as the federal Health Insurance Portability
and Accountability Act, regulate our use and disclosure of certain personal health information.
Congress, state legislatures and regulatory authorities are expected to consider additional
regulation relating to privacy and other aspects of customer information.
Environmental Considerations.
As an owner and operator of real property, we are subject to
extensive federal, state and local environmental laws and regulations. Inherent in such ownership
and operation is also the risk that there may be potential environmental liabilities and costs in
connection with any required remediation of such properties. In addition, we hold equity interests
in companies that could potentially be subject to environmental liabilities. We routinely have
environmental assessments performed with respect to real estate being acquired for investment and
real property to be acquired through foreclosure. We cannot provide assurance that unexpected
environmental liabilities will not arise. However, based on information currently available to
management, management believes that any costs associated with compliance with environmental laws
and regulations or any remediation of such properties will not have a material adverse effect on
our business, results of operations or financial condition.
11
Employees
As of December 31, 2008, we had approximately 3,160 employees, of which approximately 1,300
are employed in our Galveston, Texas home office. We consider our employee relations to be good.
ITEM 1A. RISK FACTORS
The following describes our most significant risks:
Difficult conditions in the economy generally may materially adversely affect our business and
results of operations, and these conditions may not improve in the near future.
Our results of operations are materially affected by conditions in the economy in both the
U.S. and elsewhere. The stress experienced by global capital markets that began in the second half
of 2007 continued and substantially increased during 2008. Recently, concerns over inflation,
energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market,
and a declining real estate market in the U.S. have contributed to increased volatility and
diminished expectations for the economy and the markets going forward. These factors, combined with
volatile oil prices, declining business and consumer confidence, and increased unemployment, have
precipitated a recession.
Factors such as consumer spending, business investment, government spending, the volatility
and strength of the capital markets, and inflation all affect the business and economic environment
and, ultimately, the amount and profitability of our business. In an economic downturn
characterized by higher unemployment, declining consumer confidence, lower family income, increased
defaults on mortgages and consumer loans, lower corporate earnings, lower business investment and
lower consumer spending, the demand for our insurance and financial products could be adversely
affected. Such negative economic factors may also affect our ability to receive the appropriate
rate for the risks we insure with our policyholders and annuity contract holders. In an economic
downturn, our policyholders may choose to defer paying insurance premiums or stop paying insurance
premiums altogether, resulting in an elevated incidence of lapses or surrenders of policies. Our
individual protection life insurance markets, particularly our Career Sales & Service Division and
our Multiple Line distribution channels, which serve primarily the lower and middle income markets,
respectively, face competition from alternative uses of the customers disposable income. All of
these outcomes could affect earnings negatively and could have a material adverse effect on our
business, results of operations and financial condition.
The current mortgage crisis also has raised the possibility of future legislative and
regulatory actions in addition to the recent enactment of the Emergency Economic Stabilization Act
of 2008 that could further impact our business. We cannot predict whether or when such actions may
occur, or what impact, if any, such actions could have on our business, results of operations and
financial condition.
The Internal Revenue Code may be changed to address the fiscal challenges currently faced by
the federal government. These changes could include changes to the taxation of life insurance,
annuities, mutual funds, retirement savings plans, and other investment alternatives offered by us.
Such changes could have an adverse impact on the desirability of some of our products.
Differences between risk assumptions used to price our products and actual experience could
materially affect our profitability.
Our product pricing includes long-term assumptions regarding investment returns, mortality,
morbidity (the rate of incidence of illness), persistency (the rate at which our policies remain in
force), and operating costs and expenses of our business. The profitability of our business
substantially depends on the extent to which our actual experience is consistent with the
assumptions we use to price our products. If we fail to appropriately price the risks we insure,
or if our claims experience is more severe than our underlying risk assumptions, our profit margins
could be negatively affected. Any potentially overpriced risks could negatively impact new
business growth and retention of existing business.
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Increased claims activity resulting from catastrophic events, whether natural or man-made, may
result in significant losses.
We experience increased claims activity when catastrophic events impact geographic locations
in which our policyholders live or do business. Catastrophes can be caused by natural events, such
as hurricanes, tornadoes, wildfires, earthquakes, snow, hail and windstorms, or other factors, such
as terrorism, riots, hazardous material releases, or utility outages. Our life and health
insurance operations are additionally exposed to the risk of catastrophic mortality or illness,
such as a pandemic, an outbreak of an easily communicable disease, or another event that causes a
large number of deaths or high morbidity. Significant influenza pandemics have occurred three
times in the last century, but neither the likelihood, timing, nor the severity of a future
pandemic can be predicted. The effectiveness of external parties, including governmental and
non-governmental organizations, in combating the severity of such a catastrophe could have a
material impact on the losses experienced by us.
We cannot accurately predict catastrophes, or the number and type of catastrophic events that
will affect us. As a result, our operating and financial results may vary significantly from one
period to the next. While we anticipate and plan for catastrophe losses, there can be no assurance
that our financial results will not be adversely affected by our exposure to losses arising from
catastrophic events in the future that exceed our assumptions.
In addition, the extent of our losses in connection with catastrophic events is a function of
the severity of the event and the total amount of policyholder exposure in the affected area.
Where we have geographic concentrations of policyholders, such as in our group insurance
operations, a single catastrophe (such as an earthquake) or destructive weather trend affecting a
region may have a significant impact on our financial condition and results of operations.
As an insurance company, we face a significant risk of litigation and regulatory investigations
which may result in significant financial losses, harm our reputation, and prevent us from
implementing our business strategy.
We face a significant risk of litigation and regulatory investigations in the ordinary course
of operating our business, including the risk of class action lawsuits. Our pending legal and
regulatory actions include proceedings specific to us and others generally applicable to business
practices in the industries in which we operate. In connection with our insurance operations,
plaintiffs lawyers may bring lawsuits, including class actions, alleging, among other things,
issues relating to sales or underwriting practices, claims payments and procedures, product design,
disclosure, administration, additional premium charges for premiums paid on a periodic basis,
denial or delay of benefits, and breaches of fiduciary or other duties to customers. Plaintiffs in
class action suits and other types of lawsuits may seek very large or indeterminate amounts,
including punitive and treble damages. The damages claimed and the amount of any probable and
estimable liability, if any, may remain unknown for substantial periods of time and could result in
a material adverse effect on our business, financial condition, results of operation and
reputation.
The insurance industry has become the focus of increased scrutiny by regulatory and law
enforcement authorities. This scrutiny includes the commencement of investigations and other
proceedings relating to allegations of improper conduct in connection with the payment of, and
disclosure with respect to, contingent commissions paid by insurance companies to intermediaries,
the solicitation and provision of fictitious or inflated quotes, the use of inducements in the sale
of insurance products, the issuance of refunds of unearned premiums upon termination of credit
insurance, the accounting treatment for finite insurance and reinsurance or other non-traditional
or loss mitigation insurance and reinsurance products, and, generally, the marketing of products.
One possible result of these investigations and attendant lawsuits is that many insurance industry
practices and customs may change. Such changes could adversely affect our ability to implement our
business strategy.
In addition, increased regulatory scrutiny and any resulting investigations or proceedings
could result in new legal actions and precedents and industry-wide regulations that could adversely
affect our business, financial condition, and results of operations and could impact our ability to
offer certain products.
13
The determination of the amount of allowances and impairments taken on our investments and the
valuation allowance on the deferred income tax asset are judgmental and could materially impact our
results of operations or financial position.
The determination of the amount of allowances and impairments vary by investment type and is
based upon our periodic evaluation and assessment of known and inherent risks associated with the
respective asset class. Such evaluations and assessments are revised as conditions change and new
information becomes available. Management updates its evaluations regularly and reflects changes in
allowances and impairments in operations as such evaluations are revised. Furthermore, additional
impairments may need to be taken or allowances provided for in the future. Historical trends may
not be indicative of future impairments or allowances.
For debt and equity securities not subject to Emerging Issues Task Force Issue (EITF) No.
99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets, as amended by FASB Staff Position (FSP) EITF 99-20-1 (EITF 99-20),
an other-than-temporary impairment charge is taken when we do not have the ability and intent to
hold the security until the forecasted recovery or based on the probability that we may not be able
to receive all contractual payments when due. Debt securities accounted for under EITF 99-20 may
experience other-than-temporary impairment in future periods in the event an adverse change in cash
flows is anticipated or probable. Furthermore, equity securities may experience
other-than-temporary impairment in the future based on the prospects for recovery in value in a
reasonable period.
Many criteria are considered during this process including, but not limited to, our ability
and intent to hold the investment for a period of time sufficient to allow for an anticipated
recovery in value; the expected recoverability of principal and interest; the length of time and
extent to which the fair value has been less than amortized cost for fixed income securities or
less than cost for equity securities; the financial condition, near-term and long-term prospects of
the issue or issuer, including relevant industry conditions and trends and implications of rating
agency actions and offering prices; and the specific reasons that a security is in a significant
unrealized loss position, including market conditions, which could affect liquidity.
Other-than-temporary impairment losses result in a reduction to the cost basis of the underlying
investment.
Deterioration in the public debt and equity markets could lead to additional investment losses.
The prolonged and severe disruptions in the public debt and equity markets, including among
other things, widening of credit spreads, bankruptcies and government intervention in a number of
large financial institutions, have resulted in significant realized and unrealized losses in our
investment portfolio. For the year ended December 31, 2008, we incurred substantial realized and
unrealized investment losses, as described in the Investments section of Managements Discussion
and Analysis, included below. Subsequent to December 31, 2008, through the date of this report,
conditions in the public debt and equity markets have continued to deteriorate, and pricing levels
have continued to decline. As a result, depending on market conditions, we could incur substantial
additional realized and unrealized losses in future periods, which could have a material adverse
impact on our results of operations, equity, business, and insurer financial strength.
Our future results are dependent in part on our ability to successfully operate in insurance,
annuity and investment product industries that are highly competitive.
The insurance, annuity and investment product industries are highly competitive. The product
development and product life-cycles have shortened in many product segments, leading to more
intense competition with respect to product features. In addition, many of our competitors have
well-established national reputations and market similar products. Competition for customers and
agents has led to increased marketing and advertising by our competitors, varied agent compensation
structures, as well as the introduction of new insurance products and aggressive pricing. We also
compete for customers funds with a variety of investment products offered by financial services
companies other than insurance companies, such as banks, investment advisors, mutual fund companies
and other financial institutions. Moreover, the ability of banks to be affiliates of insurers may
have a material adverse effect on all of our product lines by substantially increasing the number,
size and financial strength of potential competitors. If we cannot effectively respond to
increased competition for the business of our current and prospective customers, we may not be able
to grow our business or we may lose market share. In addition, if we fail
14
to maintain our discipline in pricing and underwriting in the face of this competition, our
underwriting profits may be adversely affected.
Furthermore, certain competitors operate using a mutual insurance company structure, which
means generally every policyholder has voting rights in addition to their rights as a policyholder.
Therefore, such companies may have dissimilar profitability and return targets.
We may be unable to attract and retain sales representatives and third-party independent agents for
our products.
We must attract and retain productive sales representatives and third-party independent agents
to sell our insurance, annuity and investment products. Strong competition exists among insurers
for producers with demonstrated ability. We compete with other insurers for producers primarily on
the basis of our financial position, stable ownership, support services, compensation, and product
features. We continue to undertake several initiatives to grow our agency force while continuing
to enhance the efficiency and production of our existing sales force. We cannot provide assurance
that these initiatives will succeed in attracting and retaining new sales representatives and
agents. Sales of individual insurance, annuities and investment products, and our results of
operations and financial condition could be materially adversely affected if we are unsuccessful in
attracting and retaining sales representatives and agents.
In choosing an insurance provider, an agent may consider ease-of-doing business, reputation,
price of product, customer service, claims handling, and the insurers compensation structure. We
may be unable to compete with insurers that adopt more aggressive pricing policies or compensation
structures, insurers that offer a broader array of products, or that offer policies similar to ours
at lower prices or as part of a package of products, or insurers that have extensive promotional
and advertising campaigns. Even though we may establish a contractual relationship with an agent
on a short-term basis, there is no certainty that such business arrangement will be continued on a
longer-term basis.
In addition, certain products are distributed under agreements with companies that are not
affiliated with us. Termination of one or more of these agreements could have a detrimental effect
on our operations and financial condition.
Our risk management policies and procedures may leave us exposed to unidentified or unanticipated
risk, which could negatively affect our business.
Management of operational, legal, and regulatory risks requires, among other things, policies
and procedures to record and verify a large number of transactions and events. We have devoted
significant resources to develop risk management policies and procedures, and we expect to continue
to do so. Nonetheless, these policies and procedures may not be fully effective. Many of our
methods for managing risk and exposures are based upon the use of observed historical market
behavior or statistics premised on historical models. As a result, these methods may not
accurately predict future exposures, which could be significantly greater than historical measures
indicate. Other risk management methods depend upon the evaluation of information that is publicly
available or otherwise accessible regarding markets, clients, catastrophe occurrence, or other
matters. This information may not always be accurate, complete, up-to-date or properly evaluated.
See Quantitative and Qualitative Disclosures About Market Risk in Managements Discussion and
Analysis below.
Reinsurance may not be available, affordable or adequate to protect us against losses.
As part of our overall risk management strategy, we purchase reinsurance for certain risks
underwritten by our business segments. Market conditions beyond our control determine the
availability and cost of reinsurance protection for new business. In certain circumstances, the
price of reinsurance for business already reinsured may also increase. Any decrease in the amount
of reinsurance will increase our risk of loss, and any increase in the cost of reinsurance will,
absent a decrease in the amount of reinsurance, reduce our earnings. Accordingly, we may be forced
to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on
acceptable terms, which could adversely affect our ability to write future business or result in
the assumption of more risk with respect to those policies we issue.
15
Emerging claim and coverage issues could negatively impact our business.
As insurance industry practices and legal, judicial, social, and other conditions outside of
our control change, unexpected and unintended issues related to claims and coverage may emerge.
These issues may adversely affect our business by extending coverage beyond our underwriting intent
or increasing the type, number, or size of claims. Such emerging claims and coverage issues
include (i) evolving theories of liability and judicial decisions expanding the interpretation of
our policy provisions, thereby increasing the amount of damages for which we are liable, and (ii) a
growing trend of plaintiffs targeting insurers in purported class action litigation relating to
claims handling and other practices in the insurance industry. The effects of these and other
related unforeseen emerging issues are extremely hard to predict and could harm our business and
adversely affect our operating results and financial condition.
Our financial results may be adversely affected by the cyclical nature of the property and casualty
business in which we participate.
The property and casualty insurance market is traditionally cyclical, experiencing periods
characterized by relatively high levels of price competition, less restrictive underwriting
standards, and relatively low premium rates, followed by periods of relatively low levels of
competition, more selective underwriting standards, and relatively high premium rates. We are
currently operating in a period characterized by significant price competition, which may reduce
our margins. While both types of periods pose challenges to us, if we were to relax our
underwriting standards or pricing in response to the competitive market, a period of increased
claims activity could adversely affect our financial condition and results of operations.
Inflationary pressures on medical care costs, auto parts and repair, construction costs, and other
economic factors may increase the amount we pay for claims and negatively affect our underwriting
results.
Rising medical costs require us to make higher payouts in connection with health insurance
claims and claims of bodily injury under our property and casualty and healthcare policies.
Likewise, increases in costs for auto parts and repair services, construction costs, and
commodities result in higher loss costs for property damage claims. Thus, inflationary pressures
could increase the cost of claims. These inflationary pressures may require us to increase our
reserves. Our potential inability to adjust pricing for our products to account for cost increases
or find other offsetting supply chain and business efficiencies may negatively impact our
underwriting profit and financial results.
Interest rate fluctuations and other events may require us to accelerate the amortization of
deferred policy acquisition costs (DAC), which could adversely affect our consolidated financial
condition and results of operations.
DAC represents the costs that vary with and are related primarily to the acquisition of new
and renewal insurance and annuity contracts. When interest rates rise, surrenders of policies and
withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to
buy products with higher or perceived higher returns in exchange for the surrender or withdrawal,
requiring us to accelerate the amortization of DAC. To the extent such amortization exceeds
surrender or other charges earned as income upon surrender and withdrawals of certain life
insurance policies and annuity contracts, our results of operations could be negatively affected.
The rate of amortization of DAC is also contingent upon profitability of the business.
Typically, estimated lower levels of profitability require a higher rate of acceleration for DAC
amortization; in contrast, estimated higher levels of profitability require a lower rate of
acceleration for DAC amortization. DAC for both insurance-oriented and investment-oriented
products is reviewed for recoverability, which involves estimating the future profitability of
current business. This review involves significant management judgment. If the actual emergence
of future profitability were to be substantially lower than estimated, we could be required to
accelerate DAC amortization, and such acceleration could adversely affect our results of
operations. See also Managements Discussion and Analysis Critical Accounting Estimates and
Notes 2 and 6 to the Consolidated Financial Statements.
16
Changes in market interest rates may lead to a significant decrease in the sales and profitability
of our spread-based products.
Some of our products, principally interest sensitive life insurance and fixed annuities,
expose us to the risk that changes in interest rates may reduce our spread, or the difference
between the amounts that we are required to pay under the contracts and the rate of return we are
able to earn on the underlying investment intended to support obligations under such contracts.
This spread is a key component of our net income.
Our ability to manage our investment margin for spread-based products is dependent upon
maintaining profitable spreads between investment yields and interest crediting rates. When market
interest rates decrease or remain at relatively low levels, proceeds from investments that have
matured or that have been prepaid or sold may be reinvested at lower yields, reducing investment
margin. Lower rates in such an environment can offset decreases in investment yield on some
products; however, these changes could be limited by market conditions and regulatory or
contractual minimum rate guarantees. Moreover, the new rates may not match the timing or magnitude
of changes in asset yields. Furthermore, decreases in the rates offered on products could make
those products less attractive, leading to lower sales and/or changes in the level of surrenders
and withdrawals for these products. Non-parallel shifts in interest rates, such as increases in
short-term rates without accompanying increases in medium- and long-term rates, can influence
customer demand for fixed annuities, which could impact the level and profitability of new
investments by customers.
Increases in market interest rates can also have negative effects, for example by increasing
the attractiveness of other insurance or investment products to our customers, which can lead to
higher surrenders at a time when fixed income investment asset values are lower as a result of the
increase in interest rates. For certain products, principally fixed annuity and interest-sensitive
life products, the earned rate on assets could lag behind rising market yields. We may react to
market conditions by increasing rates, which could narrow spreads.
While we develop and maintain asset/liability management programs and procedures designed to
mitigate the effect on spread income of rising or falling interest rates, no assurance can be given
that changes in interest rates will not affect such spreads. Additionally, our asset/liability
management programs and procedures incorporate assumptions about the relationship between
short-term and long-term interest rates (
i.e.,
, the slope of the yield curve) and relationships
between risk-adjusted and risk-free interest rates, market liquidity, and other factors. The
effectiveness of our asset/liability management programs and procedures may be negatively affected
whenever actual results differ from these assumptions.
If the counterparties to our reinsurance arrangements or to the derivative instruments we use to
hedge our business risks default or fail to perform, we may be exposed to risks we had sought to
mitigate, which could have a material adverse effect on our financial condition and results of
operations.
We use reinsurance and, to a lesser extent, derivative instruments to mitigate our risks in
various circumstances. In general, reinsurance does not relieve us of our direct liability to our
policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit risk on all of
our policies with respect to our reinsurers. We cannot provide assurance that our reinsurers will
pay the reinsurance recoverables owed to us or that they will pay these recoverables on a timely
basis. A reinsurers insolvency, inability, or unwillingness to make payments under the terms of
reinsurance agreements with us could have a material adverse effect on our financial condition and
results of operations.
In addition, we use derivative instruments to hedge various business risks. We enter into
derivative instruments, including options, with a number of counterparties. If our counterparties
fail or refuse to honor their obligations under these derivative instruments, our hedges of the
related risk will be ineffective. Although our use of derivative instruments is not as significant
as that of many of our competitors, such counterparty failures nevertheless could have a material
adverse effect on our financial condition and results of operations.
17
Our investment portfolio includes fixed-income securities, equity securities, and commercial real
estate, and fluctuations in these markets could adversely affect the valuation of our investment
portfolio, our net investment income, and our overall profitability.
Our investment portfolio is subject to market risks, such as risks associated with changes in
interest rates, market volatility, and deterioration in the credit of companies in which we have
invested. When interest rates rise, the value of our investment portfolio may decline due to
decreases in the fair value of our fixed-income securities that comprise a substantial portion of
our investment portfolio. In a declining interest rate environment, prepayments and redemptions
affecting our investment securities and mortgage loan investments may increase as issuers and
borrowers seek to refinance at lower rates. Such a decline in market rates could reduce our
investment income as new funds are invested at lower yields.
Our investments in commercial real estate have been adversely impacted by the downturn in the
U.S. housing market. It is possible that the valuations of our real estate investments will
continue to decrease if the real estate market continues to deteriorate. In addition, the value of
our investments in equities has declined in correlation with the recent downturn of the U.S. equity
markets.
Generally, we expect to hold all of our fixed maturity investments to maturity, including
investments that have declined in value. Our intent can change, however, due to financial market
fluctuations, changes in our investment strategy, or changes in our evaluation of the issuers
financial condition and prospects.
Domestic and international equity markets have recently experienced heightened volatility and
turmoil. In the event of extreme prolonged market events, such as the current global credit
crisis, we could incur significant losses. Even in the absence of a market downturn, however, we
are exposed to substantial risk of loss due to market volatility. Investment returns are an
important part of our overall profitability, and fluctuations in the fixed-income, equity, or real
estate markets could negatively affect the timing and amount of our net investment income and
adversely affect our financial condition.
A decline in equity markets or an increase in volatility in the equity markets may adversely affect
sales of our investment products.
Significant downturns and volatility in the equity markets could adversely affect our sales of
investment products, which may have a material adverse effect on our financial condition and
results of operations in three principal ways. First, market downturns and volatility may
discourage purchases of variable annuities, variable life insurance, equity indexed products, and
mutual funds that have returns linked to the performance of the equity markets and may cause some
of our existing customers to withdraw cash values or reduce investments in such products.
Second, downturns and volatility in the equity markets may have a material adverse effect on
the revenues and returns from our savings and investment products and services. Because these
products and services depend on fees related primarily to the value of assets under management, a
decline in the equity markets could reduce our revenues by reducing the value of the investment
assets we manage. In particular, the variable life and annuity business is highly sensitive to
equity markets, and a sustained weakness in the markets could decrease revenues and earnings in
variable life and annuity products.
Third, we provide certain guarantees within some of our products that protect policyholders
against significant downturns in the equity markets. For example, we offer variable annuity
products with guaranteed features, such as minimum death and withdrawal benefits. These guarantees
may be more costly than expected in volatile or declining equity market conditions, which could
cause us to increase liabilities for future policy benefits, negatively affecting our net income.
18
Concentration of our investment portfolios in any particular segment of the economy may have
adverse effects on the results of our operations and financial position.
The concentration of our investment portfolios in any particular industry, group of related
industries, or geographic sector could have an adverse effect on our investment portfolios and
consequently on our results of operations and financial position. While we seek to mitigate this
risk by having a broadly diversified portfolio, events or developments that have a negative impact
on any particular industry, group of related industries, or geographic region may have a
disproportionate adverse effect on our investment portfolios to the extent that the portfolios are
concentrated rather than diversified.
Some of our investments are relatively illiquid.
Our investments in privately placed securities, mortgage loans, and equity covering real
estate, including real estate joint ventures and other limited partnership interests, are
relatively illiquid. If we require significant amounts of cash on short notice in excess of
ordinary course cash requirements, it may be difficult or we may not be able to monetize these
investments in a timely manner, and we may be forced to sell them for less than we otherwise would
have been able to realize.
In addition, the fixed-income markets are experiencing a period of extreme volatility, which
has negatively impacted market liquidity conditions. Initially, the concerns on the part of market
participants were focused on the sub-prime segment of the mortgage-backed securities (MBS) market.
However, these concerns have since expanded to include a broad range of MBSs (including those
backed by commercial mortgages), asset-backed securities and other fixed income securities,
including those rated investment grade, the U.S. and international credit and interbank money
markets generally, and a wide range of financial institutions and markets, asset classes and
sectors. As a result, the market for fixed income instruments has experienced decreased liquidity,
increased price volatility, credit downgrade events, and increased probability of default.
Securities that are less liquid are more difficult to value and may be hard to dispose of. These
events and the continuing market upheavals may have an adverse effect on us, in part because we
have a large investment portfolio and also are dependent upon customer behavior. Our revenues are
likely to decline in such circumstances, and our profit margins could erode. In addition, in the
event of extreme prolonged market events, such as the global credit crisis, we could incur
significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of
loss due to market volatility.
Defaults on our mortgage loans may adversely affect our profitability.
Our mortgage loan investments face default risk. Our mortgage loans are principally
collateralized by commercial properties. At December 31, 2008, loans that were either delinquent
or in the process of foreclosure were less than 1% of our mortgage loan investments. An increase
in the default rate of our mortgage loan investments could have a material adverse effect on our
business, results of operations, and financial condition.
A downgrade or a potential downgrade in our financial strength ratings could result in a loss of
business and could adversely affect our financial condition and results of operations.
Financial strength ratings, which various Nationally Recognized Statistical Rating
Organizations (NRSROs) publish as indicators of an insurance companys ability to meet
policyholder and contract holder obligations, are important to maintaining public confidence in our
products, our ability to market our products, and our competitive position. On September 18,
September 29, October 2, and October 10, 2008, A.M. Best Company, Inc., Fitch Ratings Ltd., Moodys
and Standard & Poors, respectively, each revised its outlook for the U.S. life insurance sector to
negative from stable, citing, among other things, the significant deterioration and volatility in
the credit and equity markets, economic and political uncertainty, and the expected impact of
realized and unrealized investment losses on life insurers capital levels and profitability.
In view of the difficulties experienced recently by many financial institutions, including our
competitors in the insurance industry, we believe it is possible that the NRSROs will heighten the
level of scrutiny that they apply to such institutions, will increase the frequency and scope of
their credit reviews, will request additional information from the companies that they rate, and
may adjust upward the capital and other requirements employed in the NRSRO models for maintenance
of certain ratings levels.
19
We cannot predict what actions rating agencies may take, or what actions we may take in
response to the actions of rating agencies, which could adversely affect our business. As with
other companies in the financial services industry, our ratings could be downgraded at any time and
without any notices by any NRSRO.
Downgrades in our financial strength ratings could have a material adverse effect on our
financial condition and results of operations in many ways, including:
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reducing new sales of insurance products, annuities, and investment products;
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adversely affecting our relationships with our sales force and independent sales
intermediaries;
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materially increasing the number or amount of policy surrenders and withdrawals by
policyholders and contract holders;
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requiring us to reduce prices for many of our products and services to remain
competitive;
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adversely affecting our ability to obtain reinsurance at reasonable prices or at
all; and
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adversely affecting our relationships with credit counterparties.
|
The continued threat of terrorism and ongoing military actions may adversely affect the level of
claim losses we incur and the value of our investment portfolio.
The continued threat of terrorism, both within the U.S. and abroad, ongoing military actions,
and heightened security measures in response to these types of threats may cause significant
volatility in global financial markets and result in loss of life and property, disruption to
commerce, and reduced economic activity. Some of the assets in our investment portfolio may be
adversely affected by reduced economic activity caused by the continued threat of terrorism. We
cannot predict whether, and the extent to which, companies in which we maintain investments may
suffer losses as a result of financial, commercial, or economic disruptions, or how any such
disruptions might affect the ability of those companies to pay interest or principal on their
securities. The continued threat of terrorism also may result in increased reinsurance prices and
reduced insurance coverage and may cause us to retain more risk than we otherwise would retain if
we were able to obtain reinsurance at lower prices. In addition, the occurrence of terrorist
actions could result in higher claims under our insurance policies than anticipated.
We are subject to extensive regulation, and potential further restrictive regulation may increase
our operating costs and limit our growth.
As insurance companies, broker-dealers, investment advisers and/or investment companies, our
subsidiaries and affiliates are subject to extensive laws and regulations. The method of such
regulation varies, but typically has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision relate primarily to:
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licensing companies and agents to transact business;
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calculating the value of assets to determine compliance with statutory requirements;
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restricting the size of risks that may be insured under a single contract;
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mandating certain insurance benefits;
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regulating certain premium rates;
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reviewing and approving policy forms and reports of financial condition required to
be filed;
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regulating unfair trade and claims practices, including imposing restrictions on
marketing and sales practices, distribution arrangements, and payment of inducements;
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regulating advertising;
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20
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establishing statutory capital and reserve requirements and solvency standards;
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determining methods of accounting;
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fixing maximum interest rates on insurance policy loans and minimum rates for
guaranteed crediting rates on life insurance policies and annuity contracts;
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approving changes in control of insurance companies;
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restricting the payment of dividends and other transactions between affiliates; and
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regulating the types, amounts and valuation of investments.
|
These laws and regulations are complex and subject to change. Moreover, they are administered
and enforced by a number of different governmental authorities, including state insurance
regulators, state securities administrators, the Securities and Exchange Commission , the Internal
Revenue Service, the Financial Industry Regulatory Authority, the U.S. Department of Justice, and
state attorneys general, each of which exercises a degree of interpretive latitude. Consequently,
we are subject to the risk that compliance with any particular regulators or enforcement
authoritys interpretation of a legal issue may not result in compliance with another regulators
or enforcement authoritys interpretation of the same issue.
In addition, there is risk that any particular regulators or enforcement authoritys
interpretation of a legal issue may change over time to our detriment, or that changes in the
overall legal environment may, even absent any particular regulators or enforcement authoritys
interpretation of a legal issue changing, cause us to change our views regarding the actions we
need to take from a legal risk management perspective, thus necessitating changes to our practices
that may, in some cases, limit our ability to grow and improve the profitability of our business.
The regulatory environment could have other significant effects on us and our business. Among
other things, we could be fined, prohibited from engaging in some or all of our business
activities, or made subject to limitations or conditions on our business activities. Significant
regulatory actions against us could have material adverse financial effects, cause significant
reputational harm, or harm business prospects. Compliance with applicable laws and regulations is
time consuming and personnel-intensive, and changes in these laws and regulations may materially
increase our direct and indirect compliance and other expenses of doing business, thus having a
material adverse effect on our financial condition and results of operations. In particular,
changes in the regulations governing the registration and distribution of variable insurance
products, such as changes in the regulatory standards under which the sale of a variable annuity
contract or variable life insurance policy is considered suitable for a particular customer, could
have a material adverse effect, as could certain state insurance regulations that extend
suitability requirements to non-variable products. In addition, with respect to our property and
casualty and health business, state departments of insurance regulate and approve underwriting
practices and rate changes, which can delay the implementation of premium rate changes or prevent
us from making changes we believe are necessary to match rate to risk.
In recent years, the state insurance regulatory framework has come under public scrutiny and
members of Congress have discussed proposals to provide for optional federal chartering of
insurance companies. In addition, state legislators and insurance regulators continue to examine
the appropriate nature and scope of state insurance regulation. Furthermore, we anticipate
government involvement in healthcare to increase in the coming years, as it attempts to provide
minimum coverage to all individuals. We can make no assurances regarding the potential impact of
state or federal measures that may change the nature or scope of insurance regulation.
Changes in tax laws may decrease sales and profitability of certain products.
Under current federal and state income tax laws, certain products we offer, primarily life
insurance and annuities, receive favorable tax treatment designed to encourage consumers to
purchase these products. This favorable treatment may give certain of our products a competitive
advantage over non-insurance products.
Congress from time to time may consider legislation that would reduce or eliminate the
favorable policyholder tax treatment currently applicable to life insurance and annuities.
21
Congress also may consider proposals to reduce the taxation of certain products or investments
that may compete with life insurance and annuities. Legislation that increases the taxation on
insurance products and/or reduces the taxation on competing products could lessen the advantage or
create a disadvantage for certain of our products, making them less competitive. Such proposals,
if adopted, could have a material adverse effect on our financial position and ability to sell such
products and could result in the surrender of some existing contracts and policies. In addition,
changes in the federal estate tax laws could negatively affect the demand for the types of life
insurance used in estate planning.
Changes in U.S. federal and state securities laws and regulations may affect our operations and our
profitability.
Certain of our variable annuity contracts and variable life insurance policies are subject to
federal and state securities laws and regulations that apply to insurance products that are also
securities. As a result, some of our activities in offering and selling variable insurance
contracts and policies are subject to extensive regulation under these securities laws.
Federal and state securities laws and regulations are primarily intended to ensure the
integrity of the financial markets and to protect investors in the securities markets, as well as
protect investment advisory or brokerage clients. These laws and regulations generally grant
regulatory agencies broad rulemaking and enforcement powers, including the power to limit or
restrict the conduct of business for failure to comply with securities laws and regulations.
Changes to these laws or regulations that restrict the conduct of our business could have a
material adverse effect on our financial condition and results of operations. In particular,
changes in the regulations governing the registration and distribution of variable insurance
products, such as changes in the regulatory standards for suitability of variable annuity contracts
or variable life insurance policies, could have a material adverse effect on our operations and
profitability and could ultimately impact our ability to offer certain of these products.
Furthermore, recently promulgated SEC regulations that would require the registration of
equity-indexed annuities may impact our ability to offer this product.
New accounting rules or changes to existing accounting rules could negatively impact our business.
We are required to comply with generally accepted accounting principles. A number of
organizations are instrumental in the development and interpretation of GAAP, such as the SEC, the
Financial Accounting Standards Board, and the American Institute of Certified Public Accountants.
GAAP is subject to constant review by these organizations and others in an effort to address
emerging accounting rules and issue interpretative accounting guidance on a continual basis. We
can give no assurance that future changes to GAAP will not have a negative impact on us.
In addition, we are required to comply with statutory accounting principles (
SAP
) in our
insurance operations. SAP and various components of SAP (such as actuarial reserving methodology)
are subject to constant review by the National Association of Insurance Commissioners (
NAIC
) and
its taskforces and committees, as well as state insurance departments, in an effort to address
emerging issues and otherwise improve or alter financial reporting. The NAIC is currently working
to reform state regulation in various areas, including comprehensive reforms relating to life
insurance reserves and the accounting for such reserves. We cannot predict whether or in what form
reforms will be enacted and, whether the reforms, if enacted, will positively or negatively affect
us.
Prohibition on the use of customer credit information in connection with pricing and underwriting
could impact our ability to price policies and consequently our profitability.
Within the limits of state and federal regulations, our property and casualty personal lines
use customer credit information to price policies. Certain groups and regulators have asserted
that the use of credit information may have a discriminatory impact and are calling for the
prohibition or restriction on the use of credit data in underwriting and pricing. Elimination of
the use of this information for underwriting purposes could have an adverse affect on our
profitability, because we would have less data upon which to price policies.
22
The occurrence of events that are unanticipated in our disaster recovery systems and business
continuity planning could impair our ability to conduct business effectively.
Our home office is located in Galveston, Texas, on the coast of the Gulf of Mexico. We have
taken action to protect our ability to service our policyholders in the event of a hurricane or
other natural disaster affecting Galveston through our off-site disaster recovery systems and
business continuity planning. The primary offices of our property and casualty insurance companies
are located in Springfield, Missouri and Albany, New York. These offices help to insulate our
property and casualty operations from coastal catastrophes. Furthermore, we have established a
remote processing center in San Antonio, Texas which will support operations in the event that the
Galveston area is affected by natural disaster. There is no assurance, however, that these efforts
will prove successful. In the event of a hurricane or other natural disaster, an industrial
accident, or acts of terrorism or war that would impact our corporate headquarters, events
unanticipated in our disaster recovery systems could have an adverse impact on our ability to
conduct business and on our results of operations and financial condition, particularly if those
events affect our computer-based data processing, transmission, storage and retrieval systems. In
the event that a significant number of our managers, employees, or agents were unavailable
following such a disaster, our ability to effectively conduct our business could be compromised.
We may not be able to continue to be a low cost provider of property and casualty products due to
the potential effects of the use of comparative rating software.
The increased transparency that arises from the use of comparative rating software in the
property and casualty insurance market could work to our competitive disadvantage. Comparative
rating software, which already is widely used in personal auto and homeowners insurance, offers
competitors the opportunity to model the premiums we charge over the spectrum of personal insurance
policies we sell. Increased transparency of our rating structure may allow some competitors to
mimic our pricing, thereby possibly reducing our competitive advantage.
Our direct marketing of life insurance presents risks that may be greater than those of our more
traditional distribution channels.
Through our subsidiary Garden State Life Insurance Company, we offer life insurance directly
to consumers through the internet, mail, print and broadcast media. Significant changes in postage
costs, advertising costs, media viewing habits, or the acceptance of unsolicited marketing mail by
consumers could negatively affect this business.
In addition, greater insurance risk uncertainty is involved because the underwriting process
is simplified for policies that result from our direct marketing efforts. For example, through our
direct marketing efforts, we may have a higher rate of denying claims made under these policies
since there may be a greater rate of fraudulent disclosure on the applications for such policies.
As with other insurance products, if we fail to adequately price the risks we insure, our
profit margins could be negatively affected. We have attempted to address this greater risk
uncertainty with increased pricing of these policies. To the extent we may have overpriced risks,
it could further impact new-business growth and retention of existing business attained through
direct marketing.
If we are unable to maintain the availability of our systems and safeguard the security of our
data, our ability to conduct our business may be compromised and our reputation may be harmed.
We use computer systems to store, retrieve, evaluate, and utilize customer and company data
and information. Our information technology and telecommunications systems, in turn, interface
with and rely upon third-party systems. Our business is highly dependent on our ability, and the
ability of our employees and agents, to access these systems to perform necessary business
functions, such as providing new-business quotes, processing new and renewal business, making
changes to existing policies, filing and paying claims, providing customer support, pricing our
products and services, establishing reserves, and timely and accurately reporting financial
results. Systems failures or outages and our ability to recover from these failures and outages
could compromise our
23
ability to perform these functions on a timely basis, which could hurt our business and our
relationships with our agents and policyholders.
A breach of security with respect to our systems or those of our third-party vendors providing
outsourced services could also jeopardize the confidentiality of our customers personal data,
which could harm our reputation and expose us to possible liability. We rely on encryption and
authentication technology licensed from third parties to provide security and authentication
capabilities, but we cannot guarantee that advances in computer capabilities, computer viruses,
programming or human errors, loss or theft of computer equipment, or other events or developments
would not result in a breach of our security measures, misappropriation of our proprietary
information, misappropriation of customers personal data, or an interruption of our business
operations.
We have invested significant time and resources to mitigate these systems and data security
risks; however, we cannot be certain that our efforts to mitigate such risks will be effective in
all cases.
Employee error and misconduct may be difficult to detect and prevent and may result in significant
losses.
Losses may result from, among other things, fraud, errors, failure to document transactions
properly, failure to obtain proper internal authorization, or failure to comply with regulatory
requirements. There have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years, and there is a risk
that employee misconduct could occur. It is not always possible to deter or prevent employee
misconduct, and the precautions we take to prevent and detect this activity may not be effective in
all cases.
Our business operations depend on our ability to appropriately execute and administer our policies
and claims.
Our primary business is writing and servicing life, property and casualty, and health
insurance for individuals, families and commercial business. Because we deal with large numbers of
similar policies, any problems or discrepancies that arise in our pricing, underwriting, billing,
processing, claims handling or other practices, whether as a result of employee error, vendor
error, or technological problems, could have negative repercussions on our financial results and
our reputation if such problems or discrepancies are replicated through multiple policies.
Our Medicare Supplement business could be negatively affected by alternative healthcare providers.
The Medicare Supplement business is impacted by market trends in the senior
-
aged healthcare
industry that provide alternatives to traditional Medicare, such as health maintenance
organizations and other managed care or private plans. The success of these alternative healthcare
solutions for senior-aged persons could negatively affect the sales and premium growth of
traditional Medicare Supplement insurance and could impact our ability to offer such products.
Our Medicare Supplement business is subject to intense competition and stringent pricing
regulation, which could negatively impact future sales and affect our ability to offer this
product.
In recent years, price competition in the traditional Medicare Supplement market has been
significant, characterized by some insurers who have been willing to earn very small profit margins
or to under-price new sales in order to gain market share. We have elected not to under-price new
sales, which has negatively affected sales and could continue to do so if these industry practices
continue. Our Medicare Supplement business is also subject to stringent regulation, which includes
price setting rules that result in a maximum amount of profit that can be made, with no limits on
potential loss of the insurer. Under such regulations, we are unable to raise premiums beyond the
established set price. Thus, restrictions on the level of our profits could materially adversely
affect our ability to offer this product.
24
ITEM 2. FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
American National Insurance Company
(and its subsidiaries)
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|
(dollar amounts in millions, except per
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|
share amounts, or unless otherwise noted)
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2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
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|
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|
Year ended December 31,
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|
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|
Revenues
|
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|
2,519
|
|
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|
3,056
|
|
|
|
3,105
|
|
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|
3,036
|
|
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|
2,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Income (loss) from continuing operations
|
|
|
(173
|
)
|
|
|
246
|
|
|
|
279
|
|
|
|
243
|
|
|
|
262
|
|
|
|
|
|
|
|
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|
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|
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|
|
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|
Net income (loss)
|
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|
(154
|
)
|
|
|
241
|
|
|
|
273
|
|
|
|
236
|
|
|
|
256
|
|
|
|
|
|
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|
|
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|
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|
Per common share
|
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|
|
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|
|
|
|
|
|
|
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|
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|
Income (loss) from continuing operations
basic
|
|
|
(6.52
|
)
|
|
|
9.28
|
|
|
|
10.53
|
|
|
|
9.18
|
|
|
|
9.91
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Income (loss) from continuing operations
diluted
|
|
|
(6.52
|
)
|
|
|
9.22
|
|
|
|
10.48
|
|
|
|
9.14
|
|
|
|
9.88
|
|
|
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|
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|
|
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Net income (loss) basic
|
|
|
(5.82
|
)
|
|
|
9.09
|
|
|
|
10.32
|
|
|
|
8.91
|
|
|
|
9.65
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|
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|
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|
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Net income (loss) diluted
|
|
|
(5.82
|
)
|
|
|
9.04
|
|
|
|
10.27
|
|
|
|
8.87
|
|
|
|
9.63
|
|
|
|
|
|
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|
|
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|
|
|
|
|
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|
Cash dividends per share
|
|
|
3.08
|
|
|
|
3.05
|
|
|
|
3.01
|
|
|
|
2.97
|
|
|
|
2.96
|
|
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Selected data
|
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Return on equity
|
|
|
(14.0
|
)%
|
|
|
6.9
|
%
|
|
|
8.2
|
%
|
|
|
4.7
|
%
|
|
|
8.4
|
%
|
|
|
|
|
|
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|
Long term obligations
|
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Redeemable preferred stock
|
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Dividend payout ratio
|
|
|
N/A
|
|
|
|
38.1
|
%
|
|
|
38.7
|
%
|
|
|
43.9
|
%
|
|
|
35.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
18,379
|
|
|
|
18,461
|
|
|
|
17,932
|
|
|
|
17,493
|
|
|
|
16,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
3,134
|
|
|
|
3,737
|
|
|
|
3,575
|
|
|
|
3,378
|
|
|
|
3,296
|
|
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Set forth on the following pages is managements discussion and analysis (MD&A) of our
financial condition, as of December 31, 2008 compared with December 31, 2007, and results of
operations for each of the years ended December 31, 2008, 2007 and 2006. This narrative analysis
should be read in conjunction with the forward looking statement information below, the audited
consolidated financial statements, related notes included in Item 13 and
Risk Factors
included in
Item 1A.
Forward-Looking Statements
Certain statements contained herein are forward-looking statements. The forward-looking
statements contained herein are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and include estimates and assumptions related to
economic, competitive and legislative developments. Forward looking statements may be identified by
words such as expects, intends, anticipates, plans, believes, estimates, will or
words of similar meaning; and include, but are not limited to, statements regarding the outlook of
our business and financial performance. These forward looking statements are subject to change and
uncertainty which are, in many instances, beyond our control and, have been made based upon our
expectations and beliefs concerning future developments and their potential effect upon us. There
can be no assurance that future developments will be in accordance with our expectations, or that
the effect of future developments on us will be anticipated. These forward-looking statements are
not a guarantee of future performance and involve risks and uncertainties. There are certain
important factors that could cause actual results to differ, possibly materially, from expectations
or estimates reflected in such forward-looking statements. These factors include among others: (1)
international economic and financial crisis, including the performance and fluctuations of fixed
income, equity, real estate, credit capital and other financial markets; (2) interest rate
fluctuations; (3) estimates of our reserves for future policy benefits and claims; (4) differences
between actual experience regarding mortality, morbidity, persistency, surrender experience,
interest rates or market returns, and the assumptions we use in pricing our products, establishing
liabilities and reserves or for other purposes; (5) changes in our assumptions related to deferred
policy acquisition costs, valuation of business acquired or goodwill; (6) changes in our
claims-paying or credit ratings; (7) investment losses and defaults; (8) competition in our product
lines and for personnel; (9) changes in tax law; (10) regulatory or legislative changes; (11)
adverse determinations in litigation or regulatory matters and our exposure to contingent
liabilities, including in connection with our divestiture or winding down of businesses; (12)
domestic or international military actions, natural or man-made disasters, including terrorist
activities or pandemic disease, or other events resulting in catastrophic loss of life; (13)
ineffectiveness of risk management policies and procedures in identifying, monitoring and managing
risks; (14) effects of acquisitions, divestitures and restructurings, including possible
difficulties in integrating and realizing the projected results of acquisitions; (15) changes in
statutory or U.S. Generally Accepted Accounting Principles (GAAP) practices or policies; and (16)
changes in assumptions for retirement expense. It has never been a matter of corporate policy for
us to make specific projections relating to future earnings, and we do not endorse any projections
regarding future performance made by others. Additionally, we do not publicly update or revise
forward-looking statements based on the outcome of various foreseeable or unforeseeable events.
26
Overview
We are a diversified insurance and financial services company. Chartered in 1905, we are
headquartered in Galveston, Texas. We offer a broad spectrum of life, annuity, health, and property
and casualty insurance products. We also offer mutual fund investments through our broker dealer
subsidiary.
We are organized into five business segments: Life, Annuity, Health, Property and Casualty,
and Corporate and Other. The life, annuity, and health insurance businesses are primarily operated
through five domestic insurance companies. The property and casualty insurance business is operated
through eight domestic property and casualty insurance companies. The Corporate and Other segment
encompasses our non-insurance businesses and the invested assets that are not used to support our
insurance activities. We operate in all 50 states, the District of Columbia, Guam, American Samoa
and Puerto Rico.
Our revenues (losses) consist primarily of the following:
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net premiums earned on individual term and whole life insurance, property and casualty
insurance, credit insurance, health insurance and single premium immediate annuity
products;
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net investment income and net realized investment gains (losses); and
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insurance and investment product fees and other income, including surrender charges,
mortality and expense risk charges, primarily from variable life and annuity and universal
life insurance policies, management fees and commissions from other investment products,
and other administrative charges.
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Our expenses primarily consist of the following:
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benefits provided to policyholders and contract holders and changes in reserves held for
future benefits;
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interest credited on account balances;
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|
acquisition and operating expenses, including commissions, marketing expenses, policy
and contract servicing costs, overhead and other general expenses that are not capitalized
(shown net of deferrals);
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amortization of deferred policy acquisition costs and other intangible assets; and
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Outlook
In recent years, our business has been and likely will continue to be, influenced by a number
of industry-wide and segment or product specific trends and conditions. In our discussion below, we
first outline the broad macro-economic or industry trends (General Trends) that we expect will have
an impact on our overall business. Second, we discuss certain segment specific trends that we
believe may impact either individual segments of our business or specific products within these
segments.
27
General Trends
Challenging Financial and Economic Environment:
The current financial crisis that began in
mid-2007 is having adverse economic and financial market consequences around the world. In spite of
government efforts, the downturn in the economy continues, and there is intense stress in the
financial markets. During 2008, these market conditions contributed to an increase in other-than
temporary impairment losses of $367.0 million in our $14.5 billion investment portfolio. These
market conditions have contributed to an increased level of other-than-temporary impairments on our
investment portfolio compared to prior years. While we expect to experience continued volatility in
the valuation of our investments, we believe that the current credit environment also provides us
with opportunities to invest in select asset classes and sectors that may enhance our investment
performance over time because of our intent and ability to hold these securities to maturity. Our
ability to do so is supported by our strong liquidity position, which cushions us from the need to
liquidate securities with significant unrealized losses to meet cash obligations. Due to continued
acquisitions and consolidations principally among financial institutions, we have experienced
credit concentrations beyond our normal guidelines. However, we believe those concentrations are
manageable as we work to rebalance our investment portfolio to manage risk and investment returns.
We believe that as expectations for global economic growth are lowered, factors such as
consumer spending, business investment, the volatility and condition of the capital markets and
inflation, will affect the business and economic environment and, in turn, adversely impact the
demand for financial and insurance products. Adverse changes in the economy could affect earnings
negatively and have a material adverse effect on our business, results of operations and financial
condition. However, we believe we are in a position to mitigate these risks using our financial
strength, active risk management and disciplined underwriting for all of our products. Our diverse
product mix across multiple lines of business (life, annuity, health, property and casualty) is a
key strength that will help us in these challenging economic times and will give us the ability to
serve the changing needs of our customer base. For example, recent fluctuations in the stock market
have led investors to search for financial products that are insulated from the volatility of the
markets. We are well positioned to serve the demand in this marketplace given our focus on fixed
annuity products in recent years. Also, through our conservative business approach, we believe we
remain financially strong and committed to providing a steady and reliable source of financial
protection for policyholders and investors alike.
Low Interest Rates:
The current interest rate environment is particularly challenging for life
and annuity companies as the spreads on deposit-type funds and contracts narrow and policies reach
their minimum crediting rates. Low market interest rates may reduce the spreads between the amounts
we credit fixed annuity and individual life policyholders and the yield we earn on the investments
that support these obligations. In response to the unusually low interest rates, we have reduced
the guaranteed minimum crediting rates on newly issued fixed annuity contracts and reduced
crediting rates on in-force contracts, where permitted to do so. These actions have helped mitigate
the adverse impact of low interest rates on our spreads and on the profitability of these products,
although sales volume may diminish as a result. A gradual increase in longer term interest rates
relative to short term rates generally will have a favorable effect on the profitability of these
products. Although rapidly rising interest rates could result in reduced persistency in our
spread-based retail products, as contract holders shift assets into higher yielding investments, we
believe that our ability to react quickly to the changing marketplace will allow us to manage this
risk. Also, with less revenue coming from investment income, we are under pressure to raise rates
in our property and casualty business, as are other property and casualty insurers. However, we
believe that raising rates across the board will be difficult in a competitive market.
Focus on Operating Efficiencies:
The challenging economic environment and the large investment
related losses across the industry have created a renewed focus on operating cost reductions and
efficiencies. We continue to focus aggressively on efficiently managing our cost base while
maintaining our commitment to provide superior customer service for agents and policyholders.
Investments in technology are aligned with activities and are coordinated through a disciplined
project management process. In 2009, we will continue steps to consolidate our data centers and
Information Technology (IT) operations to realize some of the synergies between our subsidiaries.
We also anticipate using technology to enhance our web experience for policyholders and agents. In
28
addition, we are planning to implement an electronic application that will enhance the efficiency
and accuracy of the application process for independent agents in our life and health business.
Changing Regulatory Environment
: The insurance industry is regulated at the state level with
some life and annuity products and services also subject to federal regulation. The debate over the
federal regulatory role in the insurance industry continues to be a divisive issue within the
industry. We continue to proactively monitor this debate to determine its impact on our business.
Equity-indexed annuity sales may slow in the marketplace over the next year or two, as a result of
new SEC registration requirements for such products. If we determine that the registration
requirements and increased regulation for indexed products are onerous and costly for us, making
this product less viable, we will focus more attention on our variable annuity products. We also
anticipate that changing government regulations in Medicare will impact our Medicare supplement
product. We are closely monitoring these regulatory changes and will continue to research, develop
and introduce new products in light of changes in the regulatory environment.
Legislative changes could help expand our retirement products. On August 17, 2006, President
Bush signed the Pension Protection Act of 2006 (PPA) into law. The PPA permits new employees to
be automatically enrolled in an employers 401(k) plan and allows for annuities to be an investment
option in the plan. The automatic enrollment and other provisions of the PPA may, over time,
continue to have an impact on demand for pension, retirement savings and lifestyle protection
products in both the institutional and retail markets. We anticipate continued growth in pension
plans under administration and in the number of individuals covered by these plans.
Life and Annuity
Due to the current market and economic turmoil of recent months, life insurance companies have
experienced declining demand for market-linked products and significant declines in their
investment portfolios in 2008. We experienced lower life sales in 2008 and expect this trend to
continue into 2009. Life insurance continues to be a mainstay product for us as it has during our
105 year history. We believe that the combination of predictable and decreasing mortality rates,
positive cash flow generation for many years after policy issue, few adverse or uncertain political
factors as well as favorable persistency characteristics, suggests a viable and profitable future
for this line of business. We continue to use a wide variety of marketing channels and plan to
expand our traditional distribution models with additional independent agents. We also anticipate
that demand for our interest-sensitive insurance products will be stronger than for our traditional
products in 2009 because they provide policyholders with more flexibility as to the premium payment
and death benefit amount. Additionally, these products allow policyholders to receive a minimum
guaranteed return and allow them to potentially benefit from future changes in interest rates.
These products are also profitable for us as they provide greater flexibility to manage rates and
margins.
While the annuity segment had insignificant sales volume fifteen years ago, this segment now
represents a major and growing contributor to our operations. Although we anticipate a slowdown in
variable annuity sales in 2009 as a result of the current market turmoil, we also anticipate fixed
annuity sales to continue to increase as investors seek less volatile investment vehicles. In light
of the current market, we are committed to maintaining our variable and fixed annuity product
lines. We have a conservation program to retain policyholders through proactive communication and
education when a policyholder is considering surrendering his or her policy. This has resulted in
our retaining more than 10% of policyholders that have submitted surrender requests.
Effective management of billions of dollars of invested assets and associated liabilities
involving credited rates and, where applicable, financial hedging instruments (which are utilized
as hedges of equity indexed annuity sales), will also be crucial to our success in the annuity
segment. Asset disintermediation, the risk of large outflows of cash at times when it is
disadvantageous to us to dispose of invested assets, is a major risk associated with this segment.
This risk is monitored and managed in the Asset Liability Management (ALM) Committee, which uses
actuarial and investment techniques. The ALM Committee monitors asset disintermediation risk
through the use of statistical measures such as duration and the projection of future cash flows
using large numbers of possible future interest environments and the use of modeling to identify
potential risk areas. These techniques are designed to manage asset/liability cash flow and
minimize potential losses.
29
Demographics
: We believe that a key driver shaping the actions of the life insurance industry
is the rising income protection, wealth accumulation, and insurance needs of the retiring Baby
Boomers (those born between 1946 and 1964). According to the U.S. Census published in 2008, about
19.6 percent of the total population will be over 65 by 2030, compared to about 12.4 percent now.
Also, the most rapidly growing age group is expected to be the 85 and older population. As a result
of increasing longevity and uncertainty regarding the Social Security system, retirees will need to
accumulate sufficient savings to support retirement income requirements.
We are well positioned to address the Baby Boomers rapidly increasing need for savings tools
and for income protection. We believe that our overall financial strength and broad distribution
channels will position us to respond with income protection products needed by Baby Boomers for
retirement planning and income requirements. We are ready to respond to individuals approaching
retirement age who seek information to plan for and manage their retirement needs. Our products
that offer guaranteed income flows, including single premium immediate annuities, are well
positioned to serve this market.
Competitive Pressures
: The life insurance industry remains highly competitive. Product
development and product life-cycles have shortened in many products, leading to more intense
competition with respect to product features. In addition, several of the industrys products can
be quite homogeneous and subject to intense price competition. We believe that we possess
sufficient scale, financial strength and flexibility to effectively compete in this market.
The annuity market also remains highly competitive. In addition to aggressive annuity rates
and new product features such as guaranteed living benefit riders, within the industry there is
growing competition from other financial service firms. Many insurers are re-evaluating their
distribution channels and the way they deliver products to consumers. At this time, we have elected
not to provide guaranteed living benefits as a part of our variable annuity products. While this
may have impeded our ability to sell variable annuities in the short run, this strategy has given
us an advantage in terms of profitability in the long run. We believe that these products were not
adequately priced historically, and many of our competitors are facing the consequences of
mispricing the product.
We believe that we will continue to be competitive in the life and annuity markets through our
broad line of products, our distinct distribution channels, and our consistent high level of
customer service. We continue to modify our products to meet customer needs and to expand our
reach where we believe we can have profitable growth. Some of the steps we have taken to improve
our competitive position in the market include:
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|
We have a project under way to establish a New York insurance subsidiary. We anticipate
that sales will begin through this new company in the fourth quarter of 2009. A full
portfolio of annuity products will be available for sale once the subsidiary is
established, followed in subsequent years by our life products. Initial sales are
anticipated through independent agents. Based on competitors market experience, we expect
annuity deposits from this subsidiary to represent five to ten percent of total deposits
received.
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|
|
|
Sales of traditional life insurance products through our Career Sales and Services
Division are expected to remain relatively flat through 2009. To offset the slower sales
growth, we will continue to focus on policy persistency and expense management.
|
|
|
|
We have repositioned the competitiveness of life products sold through our Independent
Marketing Group, particularly at older ages. While this repositioning has resulted in a
slowing of sales in the last quarter of 2008, it has and will help improve the predicted
profitability of these products in 2009 and beyond.
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|
We believe there will be a continuing shift in sales emphasis to utilizing the Internet,
endorsed direct mail and innovative product/distribution combinations. Although we expect
our direct sales of life insurance products in 2009 to exhibit slower growth, we will
continue to sell traditional life insurance products (term life and whole life) through our
Internet and third-party marketing distribution channels. Additional national partners were
added during 2007, and marketing programs with these partners increased during 2008.
|
30
Health
We experienced reduced Medicare Supplement sales in recent years as the industry moved toward
Medicare Advantage plans and Part D plans, which redirected much of our agents focus. We chose to
remain committed to the traditional Medicare Supplement plans, which we consider to be viable for
the long term. This focus resulted in a decrease in the number of policyholders for these products.
The trend of decreased sales began to reverse in 2007 and in 2008, and we expect continued
increases in sales of the traditional products during 2009. This increased scale is helpful in
supporting the costs associated with serving this market.
Sales of Hospital Surgical health insurance are expected to show strong growth in 2009.
Profitability for these products is dependent on diligent management of policy premiums, relative
to benefits paid, and rigid attention to underwriting the health risks of each policyholder.
Maintaining adequate scale is also a significant contributor to profitability as it decreases unit
costs and allows us to negotiate better arrangements with healthcare providers. We consider new and
existing health products on a case-by-case basis, in light of current market and regulatory
environments, as well as management expectations.
We anticipate government involvement in healthcare to increase in the coming years, as it
attempts to provide minimum coverage to all individuals. We believe that our focus on Hospital
Surgical products may provide additional opportunities as individuals attempt to supplement that
basic coverage.
We anticipate employers will continue to increase offerings of consumer-driven health plans as
a way to temper healthcare costs. Our Health/Senior Age Marketing Division will continue to support
independent producers and maintain products that meet their sales needs, while moving toward direct
consumer products that will position us for the next generation.
Property and Casualty
Since 2006, the property and casualty insurance industry has been experiencing a soft market,
characterized by flat or declining premium growth. U.S. Property/Casualty Review and Preview
published by A.M. Best on February 9, 2009 noted that net premiums written across the industry are
expected to decrease in 2008. This continuous decrease is driven by competition in most lines of
business, as well as macroeconomic factors including the current recession, the credit crisis,
rising unemployment and the housing correction. A.M. Best expects this competitive pressure will
continue in 2009, with an average forecast growth in net premiums written of 0.9%. We believe that
we will experience continued pressure on pricing in 2009. To compete in this tough pricing
environment, our long-term plans include developing tiered pricing for our agricultural and
commercial lines. Tiered pricing will create a broader range of premiums than we currently are
using and is designed to improve our competitive position and profitability.
Property and casualty insurers across the industry had substantial investment losses in 2008
from weakened financial markets. In addition, large catastrophe losses in 2008 from Hurricanes
Gustav and Ike and a multitude of other storm losses impaired property and casualty insurers
underwriting results. A combination of the catastrophe and investment losses put pressure on the
industrys overall financial performance. We experienced increased catastrophe losses in 2008 from
the abnormally low level of 2007. While catastrophe events are extremely difficult to predict and
losses from these events vary from year to year, we will continue to manage our exposure to these
losses through ongoing assessment of risk, disciplined underwriting, and the use of reinsurance to
transfer excessive exposure.
With less consumer credit being offered in the market, we anticipate that fewer credit-related
insurance products will be purchased. The tightening of credit is more heavily impacting the
products written through the auto dealer market. However, the collateral protection production
tends to increase in this type of economic environment. We continue to update credit insurance
product offerings and pricing to meet these changing market needs. We are reviewing and
implementing improved procedures to enhance customer service and, at the same time, looking for
efficiencies to reduce administrative costs.
31
Competition
: Property and casualty insurers are facing a competitive pricing environment. In
the fourth quarter, the Council of Insurance Agents & Brokers Commercial P/C Market Index Survey
noted signs of the leveling off of commercial property and casualty market premiums. Prices in
personal lines indicate a mixed trend, with rates in the auto insurance sector showing signs of
improving, while prices in the property sector continue to soften.
Despite the challenging pricing environment, we expect to identify profitable opportunities
through our strong distribution channels, expanding geographic coverage and new product
development. Through our multiple-line exclusive agents, we will continue to focus on increasing
the percentage of clients that buy their home, auto and life from us. We have introduced new
products, such as a new product targeted toward the young family market in 2007, which has been a
main driver for increased policy counts in homeowners and auto insurance. The integration of the
Farm Family companies over the last eight years has allowed us to expand our geographic coverage
into the Northeast and our product portfolio to include agribusiness. Similarly, Farm Family has
expanded its product portfolio to include additional personal line property and casualty products.
We expect that our agribusiness product will continue to be a leading seller in the Northeast
United States. Agribusiness sales in other states are expected to show steady growth.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements have been prepared in conformity with GAAP. The
preparation of financial statements requires us to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and their accompanying notes. Actual
results could differ from results reported using those estimates.
We have identified the following estimates as critical in that they involve a high degree of
judgment and are subject to a significant degree of variability:
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|
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Other-than-temporary impairment of investment securities;
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|
|
|
Deferred acquisition costs;
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|
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|
Reinsurance recoverable;
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|
|
|
Pension and postretirement benefit plans;
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|
|
|
Litigation contingencies; and
|
Our accounting estimates inherently require the use of judgments relating to a variety of
assumptions, in particular, expectations of current and future mortality, morbidity, persistency,
losses and loss adjustment expenses, recoverability of receivables, investment returns and
interest rates. In developing these estimates, we make subjective and complex judgments that are
inherently uncertain and subject to material changes as facts and circumstances develop. Although
variability is inherent in these estimates, we believe that the amounts provided are appropriate,
based upon the facts available upon compilation of the consolidated financial statements. Due to
the inherent uncertainty when using assumptions and estimates, the effect of certain accounting
policies under different conditions or assumptions could be different from those reported in the
consolidated financial statements. A discussion of the various critical accounting estimates is
presented below.
Other-Than-Temporary Impairment of Investment Securities
Our accounting policy requires that a decline in the fair value of investment securities below
their amortized cost basis be evaluated to determine if the decline is other-than-temporary. There
are a number of
assumptions and estimates inherent in evaluating impairments to determine if they are
other-than-temporary
32
including 1) our ability and intent to hold the investment for a period of
time sufficient to allow for an anticipated recovery in value; 2) the expected recoverability of
principal and interest; 3) the length of time and extent to which the fair value has been less than
amortized cost for fixed income securities or less than cost for equity securities; 4) the
financial condition, near-term and long-term prospects of the issue or issuer, including relevant
industry conditions and trends and implications of rating agency actions and offering prices; and
5) the specific reasons that a security is in a significant unrealized loss position, including
market conditions, which could affect liquidity. Each quarter we review our investments that have
material unrealized losses for other-than-temporary impairments.
Realized gains are attributable to the sale of our invested assets, while realized losses are
due to both the sale of investment assets and the write-down of investments from
other-than-temporary impairments. In 2008, the consolidated pretax realized loss on invested assets
was $379.7 million, with pre-tax realized gains of $41.0 million and $100.3 million reported for
the years ended 2007 and 2006, respectively. Included in these amounts are other-than-temporary
impairment write-downs of $367.0 million, $7.2 million and $8.7 million for the years ended 2008,
2007 and 2006, respectively.
Deferred Acquisition Costs
We incur significant costs in connection with acquiring insurance business. These costs, which
include commissions and certain other expense, are primarily related to the acquisition of new
business. Such costs are generally deferred and amortized. The deferred costs are recorded as an
asset commonly referred to as deferred policy acquisition costs (DAC). The DAC asset balance is
subsequently charged to income (i.e., amortized) over the lives of the underlying contracts in
relation to the anticipated emergence of premiums, gross margins, or gross profits, depending on
the type of product.
For traditional life insurance and payout annuities, deferred costs consist of certain
underwriting fees, commissions (in excess of ultimate renewal commissions) and certain agent fringe
benefit costs, other policy set-up costs, and the cost of insurance in-force gained through
acquisitions. The DAC on traditional life and annuity products is amortized with interest over the
anticipated premium-paying period of the related policies, in proportion to annual premium revenue
to be received over the life of the policies. The present value of expected premium revenue is
estimated by using the same mortality, morbidity, persistency and withdrawal assumptions (with
provisions for adverse deviation) used in computing liabilities for future policy benefits. These
assumptions are not revised after policy issuance or acquisition (i.e., they are locked in)
unless the DAC balance is deemed to be unrecoverable. We periodically perform loss recognition
analysis utilizing best estimate assumptions to determine whether or not the DAC balance is
recoverable. See the discussion of
Life and Annuity Reserves
below for additional details.
Costs deferred on universal life, variable universal life, limited pay life and
investment-type deferred annuity contracts are amortized as a level percentage of the present
value of estimated gross profits. These gross profits are dependent principally upon revenues in
excess of the amounts credited to policy holders, death benefits, surrender benefits and expenses
to administer the business. Our estimates of future gross profits are influenced by our
assumptions including mortality, investment return, expenses and persistency. These assumptions
are developed based on our experience. We review and update our assumptions at least annually.
Changes to these assumptions result in adjustments which increase or decrease DAC amortization.
Actual gross profits in a given reporting period can vary from our initial estimates resulting in
an increase or decrease in the rate of amortization. We regularly evaluate the gross profits to
determine if actual experience or other evidence suggests that earlier estimates should be
revised. See the
Life and Annuity Reserves
discussion below for additional details.
DAC associated with acquisitions of certain blocks of in-force business is referred to as the
present value of profits asset. Such DAC consists of the unamortized portion of the present value
of profits asset as of the statement date. The initial present value of profits assets were
determined based on the present value of projected earnings from the block(s) of business acquired
as of the acquisition date. Subsequent to the acquisition date, the present value of profits asset
is then amortized in proportion to premiums, gross profits, or gross margins from the acquired
block of business.
DAC on health products is amortized with interest over the anticipated premium-paying period
of the related policies. Expected premium revenue is estimated using the same actuarial assumptions
used in computing
33
reserves for future policy benefits. Health insurance products that require DAC
consideration are those with contractual obligations, which includes all of our products.
DAC associated with property and casualty insurance business consists of commissions. These
costs are amortized over the coverage period of the related policies in relation to premium revenue
recognized.
We had a total DAC asset of approximately $1.48 billion and $1.25 billion at December 31, 2008
and 2007, respectively.
Reserves
Life & Annuity Reserves:
Liability for Future Policy Benefits and Policy Account Balances
For traditional
life products, liabilities for future policy benefits have been calculated based on a net level
premium method using estimated investment yields, withdrawals, mortality and other assumptions
that were appropriate at the time that the policies were issued. Estimates used are based on our
experience, adjusted with a provision for adverse deviation. Investment yields used for
traditional life products range from 3.0% to 8.0% and vary by issue year. We review experience
assumptions at least annually and compare them with our actual experience. When we determine that
future expected experience differs such that the DAC asset is not recoverable and/or reserves are
not sufficient to provide for policy benefits (after any applicable DAC has been written off), a
loss event is recognized, as discussed below.
Future policy benefits for universal life and investment-type deferred annuity contracts
reflect the current account value before applicable surrender charges.
Future policy benefits for group life policies have been calculated using a level interest
rate ranging from 3.0% to 5.5%. Mortality and withdrawal assumptions are based on our experience.
Fixed payout annuities included in future policy benefits are calculated using a level
interest rate of 5.0%. Mortality assumptions are based on standard industry mortality tables.
Liabilities for payout annuities classified as investment contracts (payout annuities without life
contingencies) are determined as the present value of future benefits at the breakeven interest
rate determined at inception.
Interest assumptions used for future policy benefits on health policies are calculated using
graded interest rates ranging from 3.5% to 8.0%. Morbidity and termination assumptions are based on
our experience.
At least annually, we test the net benefit reserves (policy benefit reserves less DAC)
established for life insurance products, including consideration of future expected premium
payments, to determine whether they are adequate to provide for future policyholder benefit
obligations. The testing process is referred to as Loss Recognition for traditional products or
Unlocking for non-traditional products. The assumptions used to perform the tests are our current
best-estimate assumptions as to policyholder mortality, persistency, company maintenance expenses
and invested asset returns.
For traditional business, a lock-in principle applies, whereby the assumptions used to
calculate the benefit reserves and DAC are set when a policy is issued and do not change with
changes in actual experience. These assumptions include margins for adverse deviation in the event
that actual experience differs from the original assumptions.
For non-traditional business, best-estimate assumptions are updated to reflect the observed
changes based on experience studies and current economic conditions. We reflect the effect of such
assumption changes in DAC and reserve balances accordingly. Due to the long-term nature of many of
the liabilities, small changes in certain assumptions may cause large changes in the degree of
reserve adequacy or DAC recoverability. In particular, changes in estimates of the future invested
asset return assumption have a large effect on the degree of reserve adequacy.
34
Life Reserving Methodology
We establish liabilities for amounts payable under life
insurance policies, including participating and non-participating traditional life insurance and
interest sensitive and variable universal life insurance. In general, amounts are payable over an
extended period of time and related liabilities are calculated as the present value of future
expected benefits to be paid, reduced by the present value of future expected premiums (for
traditional life insurance), or as the account value established for the policyholder (for
universal and variable universal life insurance). Such liabilities are established based on methods
and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal
assumptions used in the establishment of liabilities for future policy benefits are mortality,
policy lapse, investment return, inflation, expenses and other contingent events as appropriate to
the respective product type.
For non-participating traditional life insurance policies, future policy benefits are
calculated consistent with Statement of Financial Accounting Standard (SFAS) No. 60,
Accounting
and Reporting by Insurance Enterprises,
(FAS 60) and are equal to the aggregate of the present
value of expected future benefit payments and related expenses, less the present value of expected
future net premiums. Assumptions as to mortality and persistency are based upon our experience,
with provisions for adverse deviation, when the basis of the liability is established. Interest
rates for the aggregate future policy benefit liabilities range from 3.0% to 8.0% and vary by issue
year.
Future policy benefit liabilities for participating traditional life insurance policies are
calculated consistent with SFAS No. 120,
Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts an
amendment of FASB Statements No. 60, 97 and 113 and Interpretation No. 40
, and are equal to the
aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated
based upon the non-forfeiture interest rate, ranging from 2.5% to 6.0%, and mortality rates assumed
in calculating the cash surrender values described in such contracts); and (ii) the liability for
terminal dividends.
Future policy benefits for interest sensitive and variable universal life insurance policies
are calculated consistent with SFAS No. 97,
Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments
,
(FAS 97) for universal life type products and are equal to the current account value established
for the policyholder. Some of our universal life policies contain secondary guarantees, for which
an additional liability is established consistent with the American Institute of Certified Public
Accountants Statement of Position 03-01,
Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts
(SOP 03-01). Liabilities
for universal life secondary guarantees and paid-up guarantees are determined by estimating the
expected value of death benefits payable when the account balance is projected to be zero and
recognizing those benefits over the accumulation period based on total expected assessments.
We regularly evaluate estimates used and adjust the additional liability balances, with a
related charge or credit to benefit expense, if actual experience or other evidence suggests that
earlier assumptions should be revised. The assumptions used in estimating the secondary and paid-up
guarantee liabilities are consistent with those used for amortizing DAC and are thus subject to the
same variability and risk. The benefits used in calculating the liabilities are based on the
average benefits payable over a range of scenarios.
Annuity Reserving Methodology
We establish liabilities for amounts payable under
annuity contracts including fixed payout annuities and deferred annuities. An immediate or payout
annuity is an annuity contract in the benefit or payout phase. In a fixed payout annuity
contract, the insurance company agrees, for a cash consideration, to make specified benefit
payments for a fixed period, or for the duration of a designated life or lives. The cash
consideration can be funded with a single payment, as is the case with single premium immediate
annuities, or with a schedule of payments, as is the case with limited pay products.
Payout annuities with more than an insignificant amount of mortality risk are calculated
consistent with guidance under FAS 60 and under FAS 97 for limited pay insurance contracts. Benefit
and maintenance expense reserves are established by using assumptions reflecting our expectations,
including an appropriate margin for adverse deviation. Payout annuities are reserved using standard
industry mortality tables specified for statutory reporting and an interest rate of 5% for life
annuities and 3% for shorter duration contracts, such as term certain
payouts. If the resulting reserve would otherwise cause profits to be recognized at the issue
date, additional reserves are established. The resulting recognition of profits would be gradual
over the expected life of the contract.
35
A deferred annuity is an annuity contract that has not reached the starting date of its
periodic benefit payout. The company establishes liabilities for deferred annuities based on
methods and underlying assumptions in accordance with FAS 97 for investment contracts. Under FAS 97
for investment contracts, reserves for Policyholder Account Balances are established as the account
value held on behalf of the policyholder. The possible need for additional reserves for guaranteed
minimum death benefits are determined per guidance under SOP 03-01. Currently, no additional
reserves are recorded for guaranteed minimum death benefits due to the immaterial amount of this
reserve. Our exposure to this risk is minimal. The profit recognition on deferred annuity contracts
is gradual over the expected life of the contract. No immediate profit is recognized on the sale of
the contract.
Health Reserves:
Overview
We establish policy reserves and claims reserves for known policy-specific
liabilities. Further, we establish liabilities for the payment of medical expenses which have been
incurred during the reporting period but have not yet been paid. Additionally, Incurred But Not
Reported (IBNR) amounts are determined using actuarial standards of practice which look at the
time elapsed between when a claim is first incurred and when the final payment has been made (a
completion factor analysis).
As of year-end 2008, the Health total claim reserve and liability was $122.5 million, versus $123.1
million at year-end 2007.
Reserving Methodology
Several methods are employed to establish claim reserves and
liabilities for Health lines of business.
Completion Factor Approach
: The claim reserves for most health care coverage can be
suitably calculated using a Completion Factor Method. This method assumes that the historical lag
pattern will be an accurate representation for the payment of claims that have been incurred but
not yet completely paid. An estimate of the unpaid claim reserves is calculated by subtracting
period-to-date paid claims from an estimate of the ultimate aggregate payment for all incurred
claims in the time period. The method is based on the pattern of claims incurred within a given
month and paid out in future months until such a point that no more payments are expected.
Completion factors are calculated which complete the current period-to-date payment totals for
each incurred month to estimate the ultimate expected payout. The method is best used when the
incurred date and subsequent paid date is known for each claim and if fairly consistent patterns
can be determined from the progression date of incurral until the date paid in full. The completion
factor approach is also best used when the time between date of incurral and final payment is short
(i.e., less than 24 month) in duration.
For the individual and association medical block (including Medicare Supplement) we use a
completion factor approach to generate claim liability and reserves. Group and managing general
underwriter claim reserves are also calculated by these methods. Some of the larger managing
general underwriters that we use engage external actuarial firms to provide an estimate of the
claim reserves for their respective blocks. Outstanding claim inventories are monitored by
management monthly to determine if any adjustment to the completion factor approach is needed.
Tabular Reserves
:
Disability Income and Long Term Care blocks of business utilize a
tabular calculation to generate the Present Value of Expected Future Payments. These reserves are
called tabular because they rely on the published valuation tables for disability termination as
maintained by the Society of Actuaries and validated by the National Association of Insurance
Commissions (NAIC). Tabular reserves are determined by applying termination assumptions related
to mortality or recovery, or for Long Term Care, shifts in the mode of care, to the stream of
contractual benefit payments. The present value of these expected benefit payments at the required
rate of return establishes the tabular reserve.
Credit Health claim reserves and liabilities are also based on a tabular calculation, using
actuarial tables published by the Society of Actuaries and accepted by the NAIC. The reserve for
this business is calculated as a function of open claims using the same actuarial tables discussed
above. Periodically we test the total claim reserve using a completion factor calculation.
36
Case Reserves
:
Case reserves are also required for certain lines of business. Case
reserves reflect known claims where an estimate of the exposure is readily available and
quantifiable based on historical experience or other similar basis. We establish Long Term Care and
Nursing Home reserves, on a case by case basis, by reviewing the open claims and estimating the
remaining liability and applying probabilities derived from continuance tables based on company and
industry experience.
Liability for Future Policy Benefits
Liabilities for future policy benefits have
been calculated based on a net level premium method. Future policy benefits are calculated
consistent with FAS 60 and are equal to the aggregate of the present value of expected future
benefit payments, less the present value of expected future premiums. Morbidity and termination
assumptions are based on our experience or published valuation tables when available and
appropriate. Interest rates for the aggregate future policy benefit liabilities range from 3.5% to
8.0% and vary by issue year.
Premium Deficiency Reserves
Deficiency reserves are established when the expected
benefit payments for a classification of policies having homogenous characteristics are in excess
of the expected premiums for these policies. The determination of a deficiency reserve takes into
consideration the likelihood of premium rate increases, the timing of these increases, and the
expected benefit utilization patterns. We have a premium deficiency reserve for the Major Medical
block of business. This line of business is in run-off and continues to under-perform relative to
the original pricing. The assumptions and methods used to determine the deficiency reserves are
reviewed periodically for reasonableness and the reserve amount is monitored against emerging
losses.
Property and Casualty Reserves:
Reserves for Loss and Loss Adjustment Expense (LAE)
We establish property and
casualty reserves to provide for the estimated costs of paying claims under insurance policies
written. These reserves include estimates for both:
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|
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Case reserves cost of claims that were reported to us but not yet paid, and
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Reserves for IBNR anticipated cost of claims incurred but not reported. IBNR reserves
include a provision for potential development on case reserves, losses on claims currently
closed which may reopen in the future as well as claims which have been incurred but not
yet reported.
|
These reserves also include an estimate of the expense associated with settling claims,
including legal and other fees, and the general expenses of administering the claims adjustment
process. The two major categories of loss adjustment expense are defense and cost containment
expense and adjusting and other expense. The following tables show our net loss and LAE reserves
for case reserves and IBNR combined as of December 31, 2008 and 2007:
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Year Ended December 31, 2008
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|
Year Ended December 31, 2007
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|
Gross
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|
|
Ceded
|
|
|
Net
|
|
|
Gross
|
|
|
Ceded
|
|
|
Net
|
|
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|
(in thousands)
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE reserves
|
|
$
|
957,378
|
|
|
$
|
109,518
|
|
|
$
|
847,860
|
|
|
$
|
888,571
|
|
|
$
|
79,071
|
|
|
$
|
809,500
|
|
Case Reserves
:
Reserves for reported losses are established on either a judgment or
formula basis, depending on the type of the loss. Formula reserves are used for losses such as
credit property, automobile, property damage liability and automobile physical damage. They are
based on historical paid loss data for similar claims with provisions for trend changes, such as
those caused by inflation. The formula reserve is a fixed amount for each claim of a given type.
The judgment reserve amounts are set on a per case basis based on the facts and circumstances
of each case, the type of claim and the expectation of damages. We regularly monitor the adequacy
of judgment reserves and formula reserves on a case by case basis and change the amount of such
reserves as necessary.
37
IBNR:
We estimate IBNR based on many variables, including historical statistical
information, inflation, legal developments, economic conditions, general trends in claim severity,
frequency and other factors that could affect the adequacy of loss reserves.
Our loss and premium data is aggregated by exposure class and by accident year (i.e., the year
in which losses were incurred). IBNR reserves are calculated by projecting our ultimate losses on
each class of business and subtracting paid losses and case reserves. Unlike case reserves, IBNR
is generally calculated at an aggregate level and cannot usually be directly identified as reserves
for a particular loss or contract. Our overall reserve practice provides for ongoing claims
evaluation and adjustment (if necessary) based on the development of related data and other
relevant information pertaining to such claims. Adjustments in aggregate reserves, if any, are
reflected in the operating results of the period during which such adjustments are made.
Reserving Methodology
We primarily utilize the following actuarial methods in our
reserving process:
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Initial Expected Loss Ratio method: This method calculates an estimate of ultimate
losses by applying an estimated loss ratio to an estimate of ultimate earned premium for
each accident year. This method is appropriate for classes of business where the actual
paid or reported loss experience is not yet mature enough to override our initial
expectations of the ultimate loss ratios.
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Bornhuetter Ferguson: This method uses as a starting point an assumed initial expected
loss ratio method and blends in the loss ratio implied by the claims experience to date by
using loss development patterns based on our own historical experience. This method is
generally appropriate where there are few reported claims and a relatively less stable
pattern of reported losses.
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Loss or Expense Development (Chain Ladder): This method uses actual loss or defense and
cost containment expense data and the historical development profiles on older accident
periods to project more recent, less developed periods to their ultimate position. This
method is appropriate when there is a relatively stable pattern of loss and expense
emergence and a relatively large number of reported claims.
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Ratio of Paid Defense and Cost Containment Expense to Paid Loss Development: This method
uses the ratio of paid defense and cost containment expense to paid loss data and the
historical development profiles on older accident periods to project more recent, less
developed periods to their ultimate position. In this method, an ultimate ratio of paid
defense and cost containment expense to paid loss is selected for each accident period. The
selected paid defense and cost containment expense to paid loss ratio is then applied to
the selected ultimate loss for each accident period to estimate the ultimate defense and
cost containment expense. Paid defense and cost containment expense is then subtracted from
the ultimate defense and cost containment expense to calculate the unpaid defense and cost
containment expense for that accident period.
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Calendar Year Paid Adjusting and Other Expense to Paid Loss: This method uses the ratio
of prior calendar years paid expense to paid loss to project ultimate loss adjustment
expenses for adjusting and other expense. The key to this method is the selection of the
paid expense to paid loss ratio based on prior calendar years activity. A percentage of
the selected ratio is applied to the case reserves (depending on the line of insurance) and
100% to the indicated IBNR reserves. These ratios assume a percentage of the expense is
incurred when a claim is opened and the remaining percentage is paid throughout the claims
life.
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The basis of our selected single point best estimate on a particular line of business is often
a blend of the results from two or more methods (e.g. weighted averages). Our estimate is highly
dependent on actuarial and management judgment as to which method(s) is most appropriate for a
particular accident year and class of business. Our methodology changes over time, as new
information emerges regarding underlying loss activity and other factors.
38
Key Assumptions:
Implicit in the actuarial methodologies utilized above are two critical reserving assumptions:
(i) the selected loss ratio used in the initial expected loss ratio method and Bornhuetter Ferguson
method for each accident year and (ii) the expected loss development profiles. The loss ratio
selections and our loss development profiles are primarily developed using our own historical
claims and loss experience.
39
Reserving by class of business:
The weight given to a particular actuarial method is dependent upon the characteristics
specific to each class of business, including the types of coverage and the expected claim-tail.
Short-tail business
Lines of business for which loss data emerge more quickly are referred
to as short-tail lines of business. For these lines, emergence of paid losses and case reserves is
credible and likely indicative of ultimate losses; therefore, more reliance is placed on the Loss
or Expense Development methods.
Large catastrophe and weather events are analyzed separately using information from our claims
staff and loss development profiles from similar events and from our own historical experience.
Long-tail business
For long-tail lines of business, emergence of paid losses and case
reserves is less credible in early periods and, accordingly, may not be indicative of ultimate
losses. For these lines of business more reliance is placed on the Bornhuetter Ferguson and initial
expected loss ratio methods.
Credit business
For credit lines of business, the IBNR is estimated either by applying a
selected ratio to the unearned premium reserve or by using the loss development methods described
above.
Loss adjustment expenses
We estimate adjusting and other expense separately from loss
reserves using the Calendar Year Paid-to-Paid method. Reserves for defense and cost containment
expense are estimated separately from loss reserves, using either the Loss or Expense Development
method or Ratio of Paid Defense and Cost Containment Expense to Paid Loss method.
Reinsurance Recoverable
Reinsurance recoverable balances include amounts owed to us in respect of paid and unpaid
ceded losses and loss expenses and are presented net of a reserve for non-recoverability. At
December 31, 2008 and 2007, reinsurance recoverable balances were $482.8 million and $438.1
million, respectively.
Recoveries on our gross ultimate losses are determined using distributions of gross ultimate
loss by layer of loss retention to estimate ceded IBNR as well as through the review of individual
large claims. The most significant assumption we use is the average size of the individual losses,
for those claims that have occurred, but have not yet been recorded by us. The reinsurance
recoverable is based on what we believe are reasonable estimates and is disclosed separately on the
consolidated financial statements. However, the ultimate amount of the reinsurance recoverable is
not known until all losses are settled.
We manage counterparty risk by entering agreements with only highly rated reinsurers. We do
not have a specified minimum rating that we require. We monitor the concentrations of the
reinsurers and reduce the participation percentage of the lower-rated companies when appropriate.
We believe we currently have no reinsurance amounts with any significant risk of becoming
unrecoverable due to reinsurer insolvency.
Also, our reinsurance contracts contain clauses that allow us to terminate the participation
with reinsurers who are downgraded. Our risk assessment is comprised of industry ratings, recent
news and reports, and a limited review of financials, for any new reinsurer under consideration. We
also may require letters of credit, trust agreements, or cash advances from unauthorized reinsurers
(reinsurers not licensed in our state of domicile) to fund their share of outstanding losses and
LAE. Final assessment is based on the judgment of senior management.
Pension and Postretirement Benefit Plans
We maintain one open qualified defined benefit pension plan and one qualified defined benefit
pension plan that is closed to new participants. In addition, we also sponsor three non-qualified
defined benefit pension plans that restore benefits that would otherwise be curtailed by statutory
limits on qualified plan benefits for certain key executives. We also provide certain health and
life insurance benefits to qualified current and former employees.
40
The pension benefit and postretirement benefit obligations and related costs for all plans are
calculated using actuarial concepts in accordance with the relevant GAAP pronouncements. Two key
assumptions, the discount rate and the expected return on plan assets, are important elements of
expense and/or liability measurement. We evaluate these key assumptions annually. Other assumptions
involve demographic factors such as retirement age, mortality, turnover and rate of compensation
increases.
As described in Note 2 to the Consolidated Financial Statements, effective December 31, 2006,
the Company adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans
(FAS 158). In accordance with FAS 158, we recognize the funded status of
defined benefit pension and other postretirement plans, on our consolidated balance sheet.
We use a discount rate to determine the present value of future benefits on the measurement
date. The guideline for setting this rate is a high-quality long-term corporate bond rate. A higher
discount rate decreases the present value of benefit obligations and decreases pension expense. To
determine the expected long-term rate of return on plan assets, a building-block method is used.
The expected rate of return on each asset is broken down into three components: (1) inflation, (2)
the real risk-free rate of return (i.e. the long-term estimate of future returns on default-free
U.S. government securities), and (3) the risk premium for each asset class (i.e. the expected
return in excess of the risk-free rate). Using this approach, the precise expected return derived
will fluctuate somewhat from year to year; however, it is our policy to hold this long-term
assumption relatively constant.
The assumptions used in the measurement of our pension benefit obligations for 2008 and 2007
are as follows:
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Year Ended December 31,
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2008
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2007
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|
Used for Net Benefit
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Used for Net Benefit
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Cost in Fiscal Year
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Used for Benefit
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Cost in Fiscal Year
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Used for Benefit
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1/1/2008 to
|
|
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Obligations as of
|
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|
1/1/2007 to
|
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|
Obligations as of
|
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|
12/31/2008
|
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|
12/31/2008
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|
12/31/2007
|
|
|
12/31/2007
|
|
Discount rate
|
|
|
6.10
|
%
|
|
|
6.17
|
%
|
|
|
5.75
|
%
|
|
|
6.10
|
%
|
Rate of compensation
increase
|
|
|
4.20
|
%
|
|
|
4.20
|
%
|
|
|
3.75
|
%
|
|
|
4.20
|
%
|
Long-term rate of return
|
|
|
7.65
|
%
|
|
|
7.65
|
%
|
|
|
7.65
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%
|
|
|
7.65
|
%
|
For additional information regarding our pension plan obligations, see Item 8,
Financial Statements
and Supplementary Data
, Note 15 to the Consolidated Financial Statements.
Litigation Contingencies
We review existing litigation matters and potential litigation items with counsel every
quarter to determine if any adjustments to reserves for possible losses are necessary. Reserves for
losses are established whenever they are probable and estimable. We establish reserves based on our
best estimate of the probable loss. If no one number within the range of possible losses is more
probable than any other, we record a reserve at the low end of the estimated range.
Based on information currently available, we believe that amounts ultimately paid, if any,
arising from existing and currently potential litigation would not have a material effect on our
results of operations and financial position. However, it should be noted that the frequency of
large damage awards, which bear little or no relation to the economic damages incurred by
plaintiffs continue to create the potential for an unpredictable judgment in any given lawsuit. It
is possible that, if the defenses in these lawsuits are not successful, and the judgments are
greater than we anticipate, the resulting liability could have a material impact on the
consolidated financial results.
41
Federal Income Taxes
The effective tax rate for December 31, 2008, 2007 and 2006 was (40.7) %, 30.5% and 32.1%,
respectively. The principal cause of the difference between the effective tax rate and the U.S.
Statutory rate of 35% is usually tax favored investment income, such as tax exempt bonds and
dividends, qualifying for the dividends received deduction. In 2008, there was an additional
difference in the effective tax rate as a combination of realized tax losses on the sale of our
Mexican subsidiary and losses from operations resulted in a tax benefit. See further discussion in
Note 17 to the Consolidated Financial Statements.
In 2007, the Internal Revenue Service (IRS) announced its intention to issue regulations
dealing with certain computational aspects of the dividends received deduction related to separate
account assets. The ultimate timing and substance of any such regulations is unknown at this time,
but is not expected to have a material impact on our consolidated financial statements.
Other future events such as tax legislation or changes in the IRSs interpretation of tax laws
may impact the ultimate deductibility of certain items just as economic changes may impact the
value of deferred tax assets. Any such changes could significantly affect the amounts reported in
the consolidated financial statements in the year these changes occur.
The Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48), dated June
2006. FIN 48 requires companies to recognize the tax benefit of an uncertain tax position only when
the position is more likely than not to be sustained, assuming examination by tax authorities.
Tax benefits recognized in the financial statements are measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement. A liability is
recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the
benefit recorded in the consolidated financial statements, along with any interest and penalty (if
applicable) on the excess.
On January 1, 2007, we adopted the provisions of FIN 48, which were effective for fiscal years
beginning after December 15, 2006. As a result of the adoption, we decreased retained earnings and
increased our reserve for unrecognized tax benefits of approximately $3.6 million. We do not
believe we are subject to any penalties in the open years and, therefore, have not booked any such
amounts. We classify interest and penalties (if applicable) as income tax expense in the
consolidated financial statements.
We will file a consolidated federal income tax return for 2008. Certain subsidiaries are not
eligible to be included in the consolidated federal income tax return. Separate provisions for
income taxes have been determined for these entities and the corresponding amounts are included in
our consolidated financial statements.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the years ended
December 31, 2008, 2007 and 2006 and should be read in conjunction with the
Outlook
section. For a
discussion of our segment results, see
Results of Operations and Related Information by Segment
.
The following table sets forth the consolidated results of operations:
42
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Year Ended December 31,
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Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
1,888,495
|
|
|
$
|
1,999,623
|
|
|
$
|
1,977,634
|
|
|
$
|
(111,128
|
)
|
|
$
|
21,989
|
|
Other Policy Revenues
|
|
|
174,899
|
|
|
|
155,230
|
|
|
|
139,605
|
|
|
|
19,669
|
|
|
|
15,625
|
|
Net Investment Income
|
|
|
796,177
|
|
|
|
812,969
|
|
|
|
836,017
|
|
|
|
(16,792
|
)
|
|
|
(23,048
|
)
|
Gain/(Loss) from sale of investments, net
|
|
|
(379,709
|
)
|
|
|
41,027
|
|
|
|
100,256
|
|
|
|
(420,736
|
)
|
|
|
(59,229
|
)
|
Other Income
|
|
|
38,779
|
|
|
|
47,224
|
|
|
|
51,107
|
|
|
|
(8,445
|
)
|
|
|
(3,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Premiums & Other Revenues
|
|
|
2,518,641
|
|
|
|
3,056,073
|
|
|
|
3,104,619
|
|
|
|
(537,432
|
)
|
|
|
(48,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits And Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Benefits
|
|
|
1,601,854
|
|
|
|
1,551,698
|
|
|
|
1,514,168
|
|
|
|
50,156
|
|
|
|
37,530
|
|
Interest credited to policy account balances
|
|
|
299,833
|
|
|
|
295,894
|
|
|
|
297,551
|
|
|
|
3,939
|
|
|
|
(1,657
|
)
|
Commissions
|
|
|
475,345
|
|
|
|
456,537
|
|
|
|
423,291
|
|
|
|
18,808
|
|
|
|
33,246
|
|
Other operating costs and expenses
|
|
|
508,800
|
|
|
|
465,140
|
|
|
|
455,937
|
|
|
|
43,660
|
|
|
|
9,203
|
|
Change in deferred policy acquisition costs
|
|
|
(67,439
|
)
|
|
|
(60,442
|
)
|
|
|
8,385
|
|
|
|
(6,997
|
)
|
|
|
(68,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses
|
|
|
2,818,393
|
|
|
|
2,708,827
|
|
|
|
2,699,332
|
|
|
|
109,566
|
|
|
|
9,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before other items and
federal
income taxes
|
|
$
|
(299,752
|
)
|
|
$
|
347,246
|
|
|
$
|
405,287
|
|
|
$
|
(646,998
|
)
|
|
$
|
(58,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
Consolidated revenues declined $537.4 million to $2.5 billion for 2008, from $3.1 billion in
2007. This decrease was primarily due to:
|
|
|
Investment losses realized during the year, including $367.0 million in
other-than-temporary impairment write-downs; and
|
|
|
|
Lower sales of our single premium immediate annuity products, caused by the drop in
interest rates, which made the product less competitive.
|
Such investment losses and lower sales were partially offset by other policy revenues arising
primarily from mortality charges and fees on the in-force block of
universal life policies. In 2008, we witnessed a continuation of increased sales of universal life
products.
Consolidated revenues declined $48.6 million for 2007 from 2006. This decrease was a result of:
|
|
|
Lower premiums due to a trend towards interest sensitive products;
|
|
|
|
Lower investment income due to decreasing yields on securities; and
|
|
|
|
Investment losses realized during the year, including $7.2 million in
other-than-temporary impairment write-downs.
|
These decreases in revenues in 2007 were partially offset by:
|
|
|
Increased premium revenues from the increased sales of single premium immediate
annuities, including a small group of very large policies representing approximately $49.8
million of premiums; and
|
|
|
|
Increase in other policy revenues due to increased sales of universal life products.
|
43
Consolidated benefits and expenses increased $109.6 million to $2.8 billion for the year ended
December 31, 2008, compared to the same period in 2007. This increase was primarily due to:
|
|
|
Increase in benefits paid on the growing block of Annuity business;
|
|
|
|
The impact of increased catastrophe losses in our Property and Casualty business; and
|
|
|
|
Additional operating expenses incurred due to non-recurring litigation costs and costs
for preparing for compliance with SEC and Sarbanes-Oxley requirements.
|
RESULTS OF OPERATIONS AND RELATED INFORMATION BY SEGMENT
Life
The Life segment markets traditional life insurance products such as whole life and term life,
and interest sensitive life insurance products such as universal life and variable universal life.
These products are marketed on a nationwide basis through employee agents, Multiple Line agents,
independent agents and brokers and direct marketing channels.
Life segment financial results for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
299,338
|
|
|
$
|
315,893
|
|
|
$
|
327,594
|
|
|
$
|
(16,555
|
)
|
|
$
|
(11,701
|
)
|
Other Policy Revenues
|
|
|
154,984
|
|
|
|
130,744
|
|
|
|
115,082
|
|
|
|
24,240
|
|
|
|
15,662
|
|
Net Investment Income
|
|
|
226,643
|
|
|
|
229,092
|
|
|
|
231,414
|
|
|
|
(2,449
|
)
|
|
|
(2,322
|
)
|
Other Income
|
|
|
3,767
|
|
|
|
3,967
|
|
|
|
4,577
|
|
|
|
(200
|
)
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
684,732
|
|
|
|
679,696
|
|
|
|
678,667
|
|
|
|
5,036
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits And Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Benefits
|
|
|
296,078
|
|
|
|
273,750
|
|
|
|
280,203
|
|
|
|
22,328
|
|
|
|
(6,453
|
)
|
Interest credited to policy account balances
|
|
|
62,221
|
|
|
|
63,289
|
|
|
|
66,910
|
|
|
|
(1,068
|
)
|
|
|
(3,621
|
)
|
Commissions
|
|
|
126,813
|
|
|
|
141,517
|
|
|
|
96,612
|
|
|
|
(14,704
|
)
|
|
|
44,905
|
|
Other operating costs and expenses
|
|
|
222,908
|
|
|
|
200,361
|
|
|
|
185,752
|
|
|
|
22,547
|
|
|
|
14,609
|
|
Change in deferred policy acquisition costs
|
|
|
(42,103
|
)
|
|
|
(57,666
|
)
|
|
|
4,233
|
|
|
|
15,563
|
|
|
|
(61,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses
|
|
|
665,917
|
|
|
|
621,251
|
|
|
|
633,710
|
|
|
|
44,666
|
|
|
|
(12,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income
taxes
|
|
$
|
18,815
|
|
|
$
|
58,445
|
|
|
$
|
44,957
|
|
|
$
|
(39,630
|
)
|
|
$
|
13,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, 2008 earnings decreased to $18.8 million from $58.4 million for 2007. The decrease
in earnings primarily resulted from certain non-recurring expenses, an increase in the benefit to
revenue ratio, a decrease in net investment income, and credit crisis related events. Non
recurring expenses related to extraordinary expenses for lawsuit settlements and expenses for
implementation costs related to Sarbanes-Oxley compliance. The life benefits to revenue ratio
increased from 49.6% for 2007 to 52.3% for 2008. It is not clear whether this is an ongoing trend,
since the ratio decreased in 2007 from 2006. Higher life claims across all marketing segments
contributed to the increased life benefits ratio, as did a very large increase in percentage of
sales at higher issue ages. The unexpected sales increase of higher issue age policies resulted
from one plan that was under-priced at those higher ages. During 2008, we implemented a re-pricing
of this plan to include increases in premiums at the higher issue ages to eliminate the
under-pricing. The credit crisis indirectly caused the loss of funding for a sizable number of
life policies that were using a low-interest bank loan program to reduce the net insurance cost of
the policies. The source of funding for a portion of the bank loans was discontinued, resulting in
the withdrawal of cash values and the subsequent loss of gross margins of the related policies.
Net investment income decreased due to a continued decline in overall portfolio rates on
investments of the Life segment.
44
2007 earnings increased to $58.4 million from $45.0 million for 2006. The increase in
earnings primarily resulted from a decrease in the life benefits to revenue ratio, and a decrease
in DAC amortization expense. This was offset by a modest decrease in investment income resulting
in a modest compression in earned investment spreads. The life benefits to revenue ratio decreased
from 51.1% to 49.6% on essentially flat revenues. As discussed above, this ratio does not appear
to exhibit an ongoing trend; thus variations in the ratio appear to be random fluctuations from
long term expectations. DAC amortization expense decreased from 2006, mainly due to a high lapse
event in first quarter 2006 on a sizable block of life policies.
The following tables summarize key data for the Life segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Increase / (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Life Insurance in-force:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional life
|
|
$
|
46,473,285
|
|
|
$
|
46,072,374
|
|
|
$
|
45,050,586
|
|
|
$
|
400,911
|
|
|
$
|
1,021,788
|
|
Interest sensitive life
|
|
|
23,397,571
|
|
|
|
22,610,693
|
|
|
|
20,940,233
|
|
|
|
786,878
|
|
|
|
1,670,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total life insurance in-force
|
|
$
|
69,870,856
|
|
|
$
|
68,683,067
|
|
|
$
|
65,990,819
|
|
|
$
|
1,187,789
|
|
|
$
|
2,692,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Increase / (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
Number of policies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional life
|
|
|
2,453,270
|
|
|
|
2,607,552
|
|
|
|
2,712,894
|
|
|
|
(154,282
|
)
|
|
|
(105,342
|
)
|
Interest sensitive life
|
|
|
174,031
|
|
|
|
175,088
|
|
|
|
174,243
|
|
|
|
(1,057
|
)
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total life insurance policies
|
|
|
2,627,301
|
|
|
|
2,782,640
|
|
|
|
2,887,137
|
|
|
|
(155,339
|
)
|
|
|
(104,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
Revenues from traditional life insurance products include scheduled premium payments from
policyholders on whole life and term life products. These premiums are in exchange for financial
protection for the policyholder from a specific insurable event, such as death or disability. The
change in these premiums is impacted by new sales during the period and the persistency of in-force
policies.
Premiums decreased $16.6 million to $299.4 million for the year ended December 31, 2008
compared to $315.9 million for the same period in 2007. This decrease reflects our ongoing,
long-term marketing strategy of moving away from traditional life products and towards interest
sensitive, variable, or indexed products. We expect this trend towards interest sensitive products
to continue for the foreseeable future as our in-force traditional life policies mature. Premiums
decreased $11.7 million to $315.9 million for the year ended December 31, 2007 compared to $327.6
million for the same period in 2006, as a result of the trend towards interest sensitive life
products.
Other Policy Revenues
Other policy revenues include mortality charges, earned policy service fees, and surrender
charges on interest sensitive life insurance policies. These charges increased $24.2 million, or
18.5%, to $155.0 million for 2008, from $130.7 million for 2007. The increase was primarily due to
increased mortality charges and fees resulting from a continuation in 2008 of increased sales of
universal life products experienced in 2007. Other policy revenues increased $15.7 million, or
13.6%, to $130.7 million for 2007 from $115.1 million for 2006, due to increased sales of universal
life products.
Net Investment Income
Net investment income in the Life segment decreased slightly to $226.6 million for the year
ended December 31, 2008, from $229.1 million for the year ended December 31, 2007. This decrease
was due to a slight decrease in the investment yield earned on a larger block of invested assets
supporting the Life segment. Net investment income decreased $2.3 million, or 1.0%, to $229.1
million for the year ended December 31, 2007, from
45
$231.4 million for the year ended December 31,
2006. This decrease reflects lower yields on our invested asset portfolio. We continue to manage
the crediting rates on interest sensitive products to reflect the lower yields and maintain a
suitable interest spread.
Interest rates on non-interest sensitive life products, such as whole life and term life
policies, cannot be adjusted. In a low interest rate environment the effect of this lower yield
earned directly impacts earnings. Refer to the
Investments
discussion beginning on page 71 for
further analysis of the net investment income yields.
Policy Benefits
Policy benefits include death claims, surrenders and other benefits paid to traditional whole
life and term life policyholders (net of reserves released on terminated policies), reserve
increases on existing traditional life policies (reflecting the passage of time on persisting
policies in anticipation of future claims), claim benefits in excess of account balances returned
to interest sensitive life policyholders, and interest credited on account balances.
Benefits increased $22.3 million to $296.1 million for the year ended December 31, 2008, from
$273.8 million for the same period in 2007. This increase was primarily due to an increase of $11.0
million in the liability for future policy benefits on interest sensitive policies. Benefits
decreased $6.5 million to $273.8 million for 2007 from $280.2 million in 2006, due to lower claim
amounts.
Commissions
Commissions decreased $14.7 million to $126.8 million for 2008, from $141.5 million for 2007.
The decrease in commissions reflects a decrease in sales of interest sensitive products from the
level of sales established in 2007. Commissions increased $44.9 million to $141.5 million for the
year ended December 31, 2007, from $96.6 million for the year ended December 31, 2006. This was the
result of significantly increased sales in 2007 of the long term guarantee universal life products.
Other Operating Costs and Expenses
Other operating costs and expenses increased $22.5 million to $222.9 million for the year
ended December 31, 2008, from $200.4 million for the year ended December 31, 2007. Much of this
increase resulted from non-recurring legal costs related to certain litigation. Other operating
costs and expenses increased $14.6 million to $200.4 million for 2007 from $185.8 million for 2006.
This was primarily caused by the increase in acquisition costs from increased sales in 2007 of long
term guarantee universal life product. The increase also included the effect of $1.6 million in
non-recurring legal costs recognized during 2007.
Change in Deferred Policy Acquisition Costs
We incur significant costs in connection with acquiring new business referred to as DAC. A
significant amount of the costs vary with and relate to the production of new business are deferred
and capitalized as an asset on the consolidated balance sheet. Such costs consist principally of
commissions, agency and policy issue expenses. DAC is amortized in proportion to premiums, gross
profits, or gross margins, depending on the type of contract. Change in DAC represents acquisition
costs capitalized net of amortization of DAC.
46
The following table presents the components of the change in DAC for the year ended December
31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs capitalized
|
|
$
|
129,031
|
|
|
$
|
144,936
|
|
|
$
|
85,871
|
|
Amortization of DAC
|
|
|
(86,928
|
)
|
|
|
(87,270
|
)
|
|
|
(90,104
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in DAC
|
|
$
|
42,103
|
|
|
$
|
57,666
|
|
|
$
|
(4,233
|
)
|
|
|
|
|
|
|
|
|
|
|
We regularly review the underlying DAC assumptions, including future mortality, expenses,
lapses, premium persistency, investment yields and interest spreads. Slight adjustments to these
assumptions can significantly impact changes in DAC. We monitor the amortization of DAC as a
percentage of gross profits before DAC amortization, as a deterioration of this ratio could
indicate an emergence of adverse experience affecting the future profitability of a particular
block of business and, in turn, affect the recoverability of DAC from such future profits.
The amortization of DAC as a percentage of gross profits for 2008 was 48.6% compared with
41.9% in 2007. The deterioration of this ratio was a result of reduced gross profits in 2008 from
overall reduced profitability of the life business. Profitability was down due to decreased
investment yields, increased surrenders and certain non-recurring expenses as discussed above. The
amortization of DAC as a percentage of gross profits for the year of 2007 was 41.9% compared with
43.9% in 2006. The decrease in this ratio was a result of increased gross profits following an
increase in the volume of in-force business.
Capitalized acquisition costs decreased $15.9 million to $129.0 million for 2008, from $144.9
million for 2007. Capitalized acquisition costs increased $59.1 million to $144.9 million for the
year ended December 31, 2007 from $85.9 million for the year ended December 31, 2006. This increase
was the result of commissions and other policy acquisition costs related to the increased sales of
the long term guarantee universal life products in 2007.
Average lapse/surrender rates in the Life segment increased slightly from 10.1% for 2007, to
10.5% for 2008. These combined rates reflect both first year and renewal business. First year lapse
rates are typically much higher on traditional life business than in later years. In general,
stable or lower lapse rates are important toward maintaining profitability of the Life segment, as
higher lapse rates will reduce the average life expectancy of the in-force block of business and
could result in acceleration in the amortization of DAC. Over the course of 2006 through 2008, we
experienced normal fluctuations in lapse rates.
Reinsurance
The table below summarizes reinsurance reserve and premium amounts assumed and ceded for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
Premiums
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Assumed
|
|
$
|
25,553
|
|
|
$
|
28,413
|
|
|
$
|
26,321
|
|
|
$
|
8,460
|
|
|
$
|
10,355
|
|
|
$
|
10,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Ceded
|
|
|
147,523
|
|
|
|
124,316
|
|
|
|
101,087
|
|
|
|
80,826
|
|
|
|
66,068
|
|
|
|
55,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
173,076
|
|
|
$
|
152,729
|
|
|
$
|
127,408
|
|
|
$
|
89,286
|
|
|
$
|
76,423
|
|
|
$
|
66,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
We use reinsurance to mitigate excessive risk to the Company. Our current retention limit is
$700,000 for traditional and universal life. Accidental death benefits and premium waiver benefits
are fully retained on new business issued beginning in 2008. Increases in reserves and premium
amounts ceded primarily reflect increased use of reinsurance in conjunction with treaties related
to universal life products.
We periodically adjust our reinsurance program and retention limits as market conditions
warrant, consistent with our corporate risk management strategy. While we have, in the past,
reinsured up to 90% of new business, we are currently reinsuring newly developed products on a
modified excess retention basis (policies with a face value in excess of $500,000), in which we
reinsure mortality risk on a yearly renewable term basis, with a 75% quota share in excess of
$500,000 up to our retention and then a 100% quota share in excess of retention.
In the case of credit life business, we use reinsurance primarily as a means to provide
producers of credit-related insurance products the opportunity to participate in the underwriting
risk through offshore producer-owned reinsurance companies. The reinsurance treaties entered into
by the Credit Insurance Division are normally written on a 100% coinsurance basis with benefit
limits of $100,000 on credit life and $1,000 monthly payment on credit disability.
We do not typically assume business from other carriers. An exception includes the assumption
of certain blocks of credit life business as noted above in the table.
Annuity
We develop, sell and support a variety of immediate and deferred annuities, including fixed,
equity-indexed and variable products. We sell these products through independent agents, brokers,
financial institutions, and Multiple Line and employee agents. Segment financial results for the
periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
116,248
|
|
|
$
|
222,748
|
|
|
$
|
112,455
|
|
|
$
|
(106,500
|
)
|
|
$
|
110,293
|
|
Other Policy Revenues
|
|
|
19,915
|
|
|
|
24,486
|
|
|
|
24,523
|
|
|
|
(4,571
|
)
|
|
|
(37
|
)
|
Net Investment Income
|
|
|
374,023
|
|
|
|
364,607
|
|
|
|
353,157
|
|
|
|
9,416
|
|
|
|
11,450
|
|
Other Income
|
|
|
(5,718
|
)
|
|
|
345
|
|
|
|
(595
|
)
|
|
|
(6,063
|
)
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
504,468
|
|
|
|
612,186
|
|
|
|
489,540
|
|
|
|
(107,718
|
)
|
|
|
122,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits And Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Benefits
|
|
|
142,867
|
|
|
|
249,878
|
|
|
|
135,384
|
|
|
|
(107,011
|
)
|
|
|
114,494
|
|
Interest credited to policy account
balances
|
|
|
237,612
|
|
|
|
232,605
|
|
|
|
230,641
|
|
|
|
5,007
|
|
|
|
1,964
|
|
Commissions
|
|
|
79,213
|
|
|
|
58,635
|
|
|
|
53,966
|
|
|
|
20,578
|
|
|
|
4,669
|
|
Other operating costs and expenses
|
|
|
45,491
|
|
|
|
35,030
|
|
|
|
33,139
|
|
|
|
10,461
|
|
|
|
1,891
|
|
Change in deferred policy acquisition
costs
|
|
|
(20,690
|
)
|
|
|
(911
|
)
|
|
|
3,475
|
|
|
|
(19,779
|
)
|
|
|
(4,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses
|
|
|
484,493
|
|
|
|
575,237
|
|
|
|
456,605
|
|
|
|
(90,744
|
)
|
|
|
118,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and
federal income taxes
|
|
$
|
19,975
|
|
|
$
|
36,949
|
|
|
$
|
32,935
|
|
|
$
|
(16,974
|
)
|
|
$
|
4,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, 2008 earnings decreased to $20.0 million from $36.9 million for 2007. Several
factors contributed to pressure on earnings, including compressed earned investment spreads,
decreased annuity surrender charge revenue, increased DAC amortization from an increase in
surrender benefits withdrawn, and certain non-recurring
expenses. Earned investment spreads were temporarily compressed in 2008 by a fairly large
cash position that had built up as a result of the very large inflow of funds into fixed deferred
annuities just as rates on short term invested assets were plummeting to extremely low levels.
While surrender charge revenue for fixed deferred annuities actually decreased in 2008 compared
with 2007, the total amount of benefits withdrawn increased as a
result for the following two
48
reasons. First,
policyholders increased utilization of the free partial withdrawal option. Second, during 2008 an
increasing number of policyholders took advantage of an option provided under certain contracts
that permits policyholders, at the end of a guaranteed interest period, during a thirty day window,
to take a withdrawal without penalty. As more policyholders reach the end of the guarantee period
window, we expect an increase in the number of surrenders under this option in the future, which
may result in continued decreases in surrender charge revenue. As a result of the higher level of
surrender activity on fixed deferred annuities, DAC amortization expense increased, further
decreasing earnings. Non recurring expenses related to extraordinary expenses for implementation
costs of Sarbanes-Oxley compliance and expenses for lawsuit settlements.
Earnings in 2007 increased to $36.9 million from $32.9 million for 2006. Single premium
immediate annuity revenues were significantly higher from higher premiums; however, these increased
revenues had relatively little immediate impact on net gain, as initial reserves completely offset
the single premium and up-front profits are deferred and amortized over the expected life of the
single premium immediate annuity. Gross spreads were higher, by approximately $8.2 million
resulting from a slightly higher average investment spread on fixed deferred annuities and slightly
higher average balances. We were able to keep other management and overhead expenses from
increasing during 2007, helping maintain the 2007 gain in profitability for the Annuity segment.
Premiums
Annuity premium and deposit amounts received during the last three years are shown in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Fixed Deferred Annuity
|
|
$
|
1,553,431
|
|
|
$
|
755,216
|
|
|
$
|
710,375
|
|
|
$
|
798,215
|
|
|
$
|
44,841
|
|
Equity Indexed Deferred Annuity
|
|
|
85,334
|
|
|
|
90,327
|
|
|
|
78,658
|
|
|
|
(4,993
|
)
|
|
|
11,669
|
|
Variable Deferred Annuity
|
|
|
103,233
|
|
|
|
119,507
|
|
|
|
90,173
|
|
|
|
(16,274
|
)
|
|
|
29,334
|
|
Single Premium Immediate Annuity
|
|
|
141,758
|
|
|
|
261,413
|
|
|
|
165,420
|
|
|
|
(119,655
|
)
|
|
|
95,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,883,756
|
|
|
$
|
1,226,463
|
|
|
$
|
1,044,626
|
|
|
$
|
657,293
|
|
|
$
|
181,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Policy Deposits
|
|
|
(1,767,508
|
)
|
|
|
(1,003,715
|
)
|
|
|
(932,171
|
)
|
|
|
(763,793
|
)
|
|
|
(71,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earned Premiums
|
|
$
|
116,248
|
|
|
$
|
222,748
|
|
|
$
|
112,455
|
|
|
$
|
(106,500
|
)
|
|
$
|
110,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts received on single premium immediate annuities are classified as premiums and are
taken immediately into income. Amounts received from deferred annuity policyholders and equity
indexed annuity policyholders are classified as deposits and are not immediately taken into income.
Interest earned on the policyholders deposits in excess of that which is credited to those
policyholders and fees paid by those policyholders are classified as income.
Profits from fixed deferred annuity contracts arise primarily from the interest margin that we
are able to earn on the fixed deferred annuity account balances invested in our general fund.
Amounts from variable annuities emanate from management and expense fees earned by us for
managing and investing the variable annuity deposits.
Profits from single premium immediate annuities are derived from interest earnings in excess
of those assumed in the premium rates, gains from higher than assumed mortality rates and gains
from expenses lower than assumed.
Fixed deferred annuity receipts increased $798.2 million to $1.6 billion for 2008 compared to
an increase of $44.8 million for 2007. The increase in premiums was the result of the current
economic circumstances leading investors to seek safer, less volatile investment avenues. This
flight to quality also led to a decline in the equity indexed annuity area with premiums
declining $5.0 million to $85.3 million for the year ended December 31, 2008 compared to an
increase of $11.7 million for the same period in 2007.
49
The flight to quality in the market also led to a decline in variable deferred annuity
premiums. Premiums declined $16.3 million to $103.2 million for the year ended December 31, 2008
compared to an increase of $29.3 million in 2007.
Premiums from single premium immediate annuities decreased $119.7 million to $141.8 million
for 2008 compared to $261.4 million for 2007. The year 2007 was an exceptional year for these
products, as premium income increased by $49.8 million from a small group of very large policies
sold. In 2008, premiums returned to their 2006 levels. The competitiveness of rates in the single
premium immediate annuity line can change very quickly and premium income can reflect changes in
our position relative to the financial marketplace. Cash flows from these products, therefore, can
be somewhat volatile from period to period.
Other Policy Revenues
Other policy revenues include surrender penalty charges, management and expense fees, other
expense charges, and charges for riders on deferred annuities. Other policy revenues declined from
$24.5 million for the year ended December 31, 2007 to $19.9 million for the year ended December 31,
2008. Management and expense charges that are related to account balances declined in line with the
decrease in market value of these account balances. There was also a reduction in surrender fees
assessed to policyholders, as people took advantage of no-charge windows offered during the year.
Net Investment Income
Net investment income, which is a key component of the profitability of the Annuity segment
increased from $364.6 million for the year ended December 31, 2007 to $374.0 million for 2008. The
increase was the result of a higher asset base somewhat offset by lower yields for 2008 compared to
the same period in 2007, as a result of the $707.9 million increase in fixed deferred annuity
account values to $6.9 billion as of December 31, 2008 compared to $6.2 billion as of December 31,
2007. This increase in investment income was partially offset by the $24.4 million negative market
value adjustment on derivatives held to hedge equity indexed annuity values. The market value
adjustment is largely offset by related reserve adjustments on the embedded derivative in the
associated equity indexed annuity contract. These derivatives are reported as assets or liabilities
on the consolidated balance sheet and are recorded and measured at fair value.
Realized and unrealized gains or losses on the derivative hedge portfolio are recognized in
earnings as investment income. Equity indexed annuities include a fixed host annuity contract and
an embedded equity derivative option. The gain or loss on the embedded option is recognized in
earnings as interest credited to policyholders. The following table details the gain or loss on
derivatives related to equity indexed annuities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008 vs. 2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative hedge gain / (loss)
|
|
$
|
(24,400
|
)
|
|
$
|
(141
|
)
|
|
$
|
(24,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative gain / (loss)
|
|
$
|
23,184
|
|
|
$
|
434
|
|
|
$
|
22,750
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income increased to $364.6 million for 2007 compared to $353.2 million for
2006. The increase was the result of higher average asset balances for the year ended December 31,
2007 compared to the same
period in 2006. Refer to the
Investments
discussion beginning
on page 71 for further
discussion of the net investment income yields.
For a number of years, earnings in the Annuity segment have been pressured by a long term
trend of lower average yield rates on the bonds and mortgage loans supporting the reserves.
Offsetting the effect of lower yield rates, crediting rates on interest sensitive products have
been decreased accordingly where permitted by policy terms. Since about 90% of the Annuity segment
is interest sensitive, offsetting credited rate adjustments are usually possible subject to minimum
interest rate guarantees that may apply. All contracts also have minimum floor interest rate
guarantees, and we have reconfigured the product portfolio to lower those guarantees in response to
the current low interest rate environment.
50
Interest Margin and Account Values
Our annuity products, including fixed deferred annuities, variable deferred annuities and
single premium immediate annuities generally have limited mortality risk, and hence we evaluate the
performance of our Annuity segment primarily based on interest margins and changes in account
values. Interest margin is determined as the difference between our earned rate of interest and the
related crediting rates on average account values. The table below shows the interest margins for
the annuity products directly impacted by interest rates. (In
Thousands, except Percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Fixed Deferred Annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
$
|
102,062
|
|
|
$
|
99,376
|
|
|
$
|
94,725
|
|
Annualized Rate
|
|
|
1.55
|
%
|
|
|
1.61
|
%
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Deferred Annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortality & Expense Charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
$
|
4,581
|
|
|
$
|
4,498
|
|
|
$
|
3,586
|
|
Annualized Rate
|
|
|
1.24
|
%
|
|
|
1.18
|
%
|
|
|
1.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Premium Immediate Annuity (SPIA)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margins Including Mortality:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
$
|
2,981
|
|
|
$
|
5,454
|
|
|
$
|
2,838
|
|
Annualized Rate
|
|
|
0.43
|
%
|
|
|
0.87
|
%
|
|
|
0.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annuity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margins Including SPIA Mortality:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
$
|
109,624
|
|
|
$
|
109,328
|
|
|
$
|
101,149
|
|
Annualized Rate
|
|
|
1.51
|
%
|
|
|
1.56
|
%
|
|
|
1.52
|
%
|
Interest Margins:
The profits on fixed deferred annuity contracts and single premium immediate
annuities are driven by interest margins and, to a lesser extent, other policy fees. Target
interest margins vary by product depending on such factors as interest bonuses, level of
commissions, and length of surrender charge periods. As shown in the table above, interest margins
on fixed deferred annuities decreased only 6 basis points from 1.61% for the year of 2007 to 1.55%
for the year of 2008. The gross margin on single premium immediate annuities, which includes the
effect of mortality, decreased from 0.87% for 2007 to 0.43% for 2008. Similarly, as shown in the
table above, interest margins for 2007 increased to 0.87% from 0.54% for 2006. These movements were
the result of fluctuations in mortality gains.
A portion of the variable deferred annuity policies in the table above include guaranteed
minimum death benefits. The total account value related to variable deferred annuity policies with
guaranteed minimum death benefit features was $60.4 million and $99.3 million as of December 31,
2008 and December 31, 2007, respectively.
We are subject to equity market volatility related to these guaranteed minimum death benefits.
We use reinsurance to mitigate the mortality exposure associated with such benefits. Our maximum
guaranteed minimum death benefit exposure, before reinsurance, which represents the total exposure
in the event that all annuitants die, was $17.9 million and $1.4 million as of December 31, 2008
and as of December 31, 2007 respectively. The increase since December 31, 2007 reflects an increase
in annuity contracts in-force with guaranteed minimum death
benefits and reflects increased risk resulting from the poor equity and fixed income market
conditions experienced in 2008. See the
Reinsurance
discussion below for additional information on
our risk management utilizing reinsurance.
Account Values:
In addition to interest margins, we monitor account values and changes in
account values as a key indicator of the performance of our Annuity segment. The table below shows
the account values and the changes in these values as a result of net inflows, fees, interest
credited and market value changes for 2008, 2007 and 2006.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Fixed Deferred Annuity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period
|
|
$
|
6,210,456
|
|
|
$
|
6,121,475
|
|
|
$
|
6,015,019
|
|
|
$
|
88,981
|
|
|
$
|
106,456
|
|
Net inflows (outflows)
|
|
|
487,410
|
|
|
|
(123,195
|
)
|
|
|
(102,715
|
)
|
|
|
610,605
|
|
|
|
(20,480
|
)
|
Fees
|
|
|
(15,363
|
)
|
|
|
(19,899
|
)
|
|
|
(20,921
|
)
|
|
|
4,536
|
|
|
|
1,022
|
|
Interest credited
|
|
|
235,862
|
|
|
|
232,075
|
|
|
|
230,092
|
|
|
|
3,787
|
|
|
|
1,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period
|
|
$
|
6,918,365
|
|
|
$
|
6,210,456
|
|
|
$
|
6,121,475
|
|
|
$
|
707,909
|
|
|
$
|
88,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Deferred Annuity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period
|
|
$
|
429,505
|
|
|
$
|
331,971
|
|
|
$
|
265,467
|
|
|
$
|
97,534
|
|
|
$
|
66,504
|
|
Net inflows
|
|
|
24,364
|
|
|
|
66,571
|
|
|
|
34,602
|
|
|
|
(42,207
|
)
|
|
|
31,969
|
|
Fees
|
|
|
(4,582
|
)
|
|
|
(4,498
|
)
|
|
|
(3,586
|
)
|
|
|
(84
|
)
|
|
|
(912
|
)
|
Change in market value and other
|
|
|
(140,276
|
)
|
|
|
35,461
|
|
|
|
35,488
|
|
|
|
(175,737
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period
|
|
$
|
309,011
|
|
|
$
|
429,505
|
|
|
$
|
331,971
|
|
|
$
|
(120,494
|
)
|
|
$
|
97,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Premium Immediate Annuity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve, beginning of period
|
|
$
|
693,137
|
|
|
$
|
557,866
|
|
|
$
|
502,904
|
|
|
$
|
135,271
|
|
|
$
|
54,962
|
|
Net inflows (outflows)
|
|
|
(26,330
|
)
|
|
|
107,861
|
|
|
|
30,526
|
|
|
|
(134,191
|
)
|
|
|
77,335
|
|
Interest and mortality
|
|
|
34,334
|
|
|
|
27,410
|
|
|
|
24,436
|
|
|
|
6,924
|
|
|
|
2,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve, end of period
|
|
$
|
701,141
|
|
|
$
|
693,137
|
|
|
$
|
557,866
|
|
|
$
|
8,004
|
|
|
$
|
135,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Deferred Annuity
: Account values associated with fixed deferred annuities increased
$707.9 million to $6.9 billion as of December 31, 2008, compared to $6.2 billion as of December 31,
2007. This increase in account value was attributable to net inflows and interest credited of
$723.3 million less fees of $15.4 million. Sales of fixed deferred annuity products rose to $1.6
billion for the year ended December 31, 2008 compared to $755.2 million in the same period of 2007.
Net inflows for the year ended December 31, 2008 were $487.4 million compared to net outflows of
$123.2 million for the same period in 2007. The net inflows in the fourth quarter rose as investors
elected the safety of fixed deferred annuities over the volatility of other investment vehicles.
Fees charged against account values decreased $4.5 million to $15.4 million for the year ended
December 31, 2008 compared to $19.9 million for 2007. These fees include withdrawal charges levied
against policies being partially or fully withdrawn. Although policy surrenders increased in 2008,
surrender charges declined as policyholders took advantage of no-charge windows offered during the
year. Fees charged against account values decreased $1.0 million to $19.9 million for 2007 compared
to $20.9 million for 2006, again as a result of a lower level of surrenders in 2007 than in 2006.
Variable Deferred Annuity:
Variable deferred annuity account values decreased $120.5 million
to $309.0 million for 2008 compared to $429.5 million for 2007. The decrease in account value was
attributable to net inflows, offset by market decline.
Net inflows for 2008 and 2007 were $24.4 and $66.6 million, respectively. Changes in market
value for 2008 decreased the total account value by $140.3 million compared to market appreciation
of $35.5 million for the same period in 2007. Account values in 2008 were significantly affected by
decreased equity values due to the significant declines in the financial markets that occurred
during the fourth quarter. The average aggregate account values in-force in 2008 were, however,
comparable to the average aggregate account values in-force in 2007. Thus fees charged against
account values of $4.6 million for 2008 were comparable to the $4.5 million in fees charged for
2007.
The average account balance in 2007 was about 29.4% higher than in 2006, resulting in fees
charged against account values that increased to $4.5 million for 2007 from $3.6 million in 2006.
Net inflows for 2007 were $66.6 million, compared to net inflows of $34.6 million for 2006. Market
appreciation for the year ended December 31, 2007 was $35.5 million, approximately unchanged from
December 31, 2006.
52
Single Premium Immediate Annuity:
Single premium immediate annuity reserves increased $8.0
million to $701.1 million for 2008 compared to $693.1 million for 2007 due to reserves established
on inflows from new sales and accretion of reserves on existing policies due to interest and
mortality. Net outflows for the year ended December 31, 2008 were $26.3 million, compared to net
inflows of $107.9 million for 2007. This decrease is consistent with the decrease in new premiums
received during 2008 compared with 2007, resulting in a net outflow situation in which benefits
paid exceed premiums received. Net inflows for 2007 were $107.9 million, compared to net inflows of
$30.5 million for 2006. This increase is consistent with the increase in new premiums received
during 2007 compared with 2006.
Policy Benefits & Interest Credited to Policy Account Balances
Benefits consist of interest credited to deferred annuities and annuity payments and reserve
increases on single premium immediate annuity contracts. These benefits decreased $102.0 million to
$380.5 million for the year ended December 31, 2008, compared to $482.5 million for the same period
in 2007. This decrease is primarily due to smaller reserve increases resulting from a 46% reduction
in single premium immediate annuity sales combined with a $24.3 million market value adjustment on
derivatives held to hedge equity indexed annuity values. Benefits increased $116.5 million to
$482.5 million for the year ended December 31, 2007, compared to $366.0 million for the same period
in 2006. This increase is the result of the increase in single premium immediate annuity sales.
Interest credited increased $5.0 million to $237.6 million for the year ended December 31,
2008 compared to $232.6 million for 2007. This 2.2% increase is primarily the result of the 11.4%
increase in the average fixed deferred annuity account values for 2008 compared to 2007. The
increase in asset values was offset by decreases in the interest crediting rates on these accounts.
Since we experienced decreases in yields on investments in our general account as a result of
market conditions, we reduced the interest crediting rates on interest sensitive annuity contracts
to maintain a profitable interest spread. Interest credited to account values increased 0.9% from
$230.1 million for 2006 to $232.1 million for 2007, in line with a 1.5% increase in the average
fixed deferred annuity account value for the year ended December 31, 2007 compared to the same
period in 2006.
The annualized surrender rate on deferred annuities calculated by the number of policies that
experienced full or partial surrender was 14.6% of the account value for 2008 compared with 12.3%
for 2007 and 12.1% for 2006. Income from surrender charges fell in 2008 as policyholders took
advantage of options allowing them to surrender up to 10% of the policy value each policy year
without incurring a surrender penalty. As more policyholders reach the end of the guarantee period
window, we expect the trend of a higher volume of withdrawals coupled with reduced income from
surrender charges to continue.
Commissions
Commissions increased $20.6 million to $79.2 million for 2008, from $58.6 million for 2007,
which is in line with the increase in premiums.
Other Operating Costs and Expenses
Other operating costs and expenses increased $10.5 million from $35.0 million for the year
2007 to $45.5 million for 2008. These increases are attributable to the increased level of new
business written during the year, leading to agent production bonus payments. We expect agent
production bonuses to vary with the level of production. In addition, we incurred expenses
associated with preparing for compliance with SEC and Sarbanes-Oxley requirements.
53
Change in Deferred Acquisition Costs
We incur costs including commissions, agency and policy issue expenses and agent financing
expenses in connection with acquiring new and renewing existing business. As previously discussed,
a significant portion of costs that vary with and relate to the production of new business are
deferred as DAC and are reflected as an asset on the consolidated balance sheet.
DAC on investment-type annuities is amortized in proportion to gross profits. Change in DAC
represents acquisition costs capitalized, net of changes in the amortization of existing DAC. The
following table presents the components of change in DAC for the years ended December 31, 2008,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs capitalized
|
|
$
|
96,544
|
|
|
$
|
71,723
|
|
|
$
|
65,149
|
|
Amortization of DAC
|
|
|
(75,854
|
)
|
|
|
(70,812
|
)
|
|
|
(68,624
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in DAC
|
|
$
|
20,690
|
|
|
$
|
911
|
|
|
$
|
(3,475
|
)
|
|
|
|
|
|
|
|
|
|
|
A performance measure of the Annuity segment is amortization of DAC as a percentage of gross
profits. The amortization expense was increased to 68.9% of gross profits in 2008 compared to 61.6%
in 2007. Deterioration in this measure is primarily due to higher lapses in 2008. A more complete
discussion of policyholder persistency is given in the
Policy Benefits &Interest Credited to Policy
Account Balances
section above.
Acquisition costs capitalized increased $24.8 million to $96.5 million for 2008 compared to
$71.7 million for 2007. This increase was the result of commissions and other costs related to the
increased sales of fixed deferred annuity policies, offset slightly by declines in sales of
variable deferred annuity and single premium immediate annuity policies.
Reinsurance
We employ reinsurance for guaranteed minimum death benefit risks on certain variable annuity
contracts. Our maximum guaranteed minimum death benefit exposure, before reinsurance, which
represents the total exposure in the event that all annuity policyholders die, was $17.9 million
and $1.4 million as of December 31, 2008 and as of December 31, 2007, respectively. After
reinsurance the net amounts at risk were $9.9 million and $0.4 million respectively. All such
guaranteed minimum death benefit reinsurance is with reinsurers rated A or higher with A.M. Best.
Health
The Health segment is primarily focused on supplemental and limited benefit coverage products
including Medicare Supplement insurance for the aged population as well as cancer, hospital
surgical, and disability income policies for the general population. Premium volume for health
insurance-related products is concentrated in Medicare Supplement (41.5%) and Hospital Surgical
(13.5%). Other health products include credit accident and
health, employer-based stop loss, and dental coverage. We distribute our health insurance
products through our captive sales force, as well as through a network of independent agents and
managing general underwriters. Segment results for the periods indicated were as follows:
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
290,883
|
|
|
$
|
283,765
|
|
|
$
|
303,285
|
|
|
$
|
7,118
|
|
|
$
|
(19,520
|
)
|
Net Investment Income
|
|
|
16,566
|
|
|
|
16,710
|
|
|
|
18,964
|
|
|
|
(144
|
)
|
|
|
(2,254
|
)
|
Other Income
|
|
|
13,252
|
|
|
|
13,048
|
|
|
|
17,204
|
|
|
|
204
|
|
|
|
(4,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
320,701
|
|
|
|
313,523
|
|
|
|
339,453
|
|
|
|
7,178
|
|
|
|
(25,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits And Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Benefits
|
|
|
223,055
|
|
|
|
209,840
|
|
|
|
216,775
|
|
|
|
13,215
|
|
|
|
(6,935
|
)
|
Commissions
|
|
|
43,219
|
|
|
|
39,342
|
|
|
|
42,097
|
|
|
|
3,877
|
|
|
|
(2,755
|
)
|
Other operating costs and expenses
|
|
|
69,961
|
|
|
|
57,975
|
|
|
|
61,699
|
|
|
|
11,986
|
|
|
|
(3,724
|
)
|
Change in deferred policy acquisition costs
|
|
|
5,023
|
|
|
|
5,774
|
|
|
|
6,131
|
|
|
|
(751
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses
|
|
|
341,258
|
|
|
|
312,931
|
|
|
|
326,702
|
|
|
|
28,327
|
|
|
|
(13,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations before other
items and federal income taxes
|
|
$
|
(20,557
|
)
|
|
$
|
592
|
|
|
$
|
12,751
|
|
|
$
|
(21,149
|
)
|
|
$
|
(12,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for the Health lines of business have declined from the 2006 historical level in the
$20 million range to the current level which is closer to break-even, excluding one-time items.
The one-time items impacting 2008 include legal settlements that negatively impacted earnings by
$19.8 million. The decline to break even earnings has mostly resulted from a decline in the
profitability of the Medicare Supplement business. Medicare Supplement earnings are expected to
rebound as the initial popularity of Medicare Advantage wanes and sales volumes of Medicare
Supplement policies resumes.
Premiums
The Health segments earned premiums were $290.9 million in the year ended December 31, 2008,
compared to $283.8 million earned in 2007 and $303.3 million earned in 2006
.
The increase of
approximately 2.5% during 2008 was driven by premium rate increases offset slightly by shifts in
the product mix being sold and in-force. The product mix has been shifting due to several market
drivers. One driver has been the popularity of Medicare Advantage and prescription drug products.
The decrease in earned premium from the year ended 2006 to 2007 was driven in large part by our
continued focus on traditional Medicare Supplement polices versus Medicare Advantage and
prescription drug products. We opted to not pursue the Medicare Advantage and prescription drug
market due to the Center for Medicare and Medicaid Services history of restrictive pricing
controls and the competitive landscape. Medical Supplement policies increased to about 60,000
policies in-force for the year ended 2008 from about 57,000 policies in-force for the same period
in 2007.
Major Medical business continues to lapse in favor of less comprehensive Hospital Surgical
coverage. As of December 31, 2008, there are about 4,880 Major Medical certificates in-force
compared to approximately 7,500 as of December 31, 2007, a decrease of 35.0%. The decline in number
of policies has been offset by an increase in Hospital Surgical certificates from about 10,500 as
of December 31, 2007 to about 15,500 as of December 31, 2008. We expect the decline in the number
Major Medical policies in-force to continue at this current pace. This line of business is no
longer competitively priced and new sales have diminished. Premium will remain significant,
however, since premiums for Major Medical are at least twice that of other products sold.
We anticipate that Medicare Supplement and Hospital Surgical policies will be the main drivers
of top line growth in 2009. Policies written through managing general underwriters are employer
stop-loss contracts. The Company provides oversight for a fee and retains a minority insurance
interest. The fees generated by the managing general underwriters were $10.7 million in 2008, as
compared to $10.3 million in 2007. We expect these fees to remain relatively consistent in 2009 as
we add new managing general underwriter relationships but also continue to evaluate the success of
our current relationships.
Credit accident and health policies are also limited benefit policies. Benefit amounts are not
linked to credit amounts outstanding or loan balances, but instead offer fixed benefit amounts paid
on a periodic basis in the event of
disability or sickness. These policies are sold through retailers, such as auto dealers and
furniture dealers. The
55
amount of business written through automobile dealers has been declining due
to the tight credit markets; however, the volume of business written through retail furniture
dealers has remained consistent.
Credit accident and health earned premiums represent the amortization of the written premium
over the life of the policy because premiums are paid in full at the time the policy is purchased.
Credit accident and health earned premium remained relatively flat, $24.7 million for 2008 compared
to $25.5 million for 2007. Credit accident and health markets have been consolidating as various
competitors leave the market. This has increased our pipeline of general agents and other
relationships. Therefore, while the market has been declining in terms of organic growth, the
expansion of distribution relationships has kept premium income relatively flat.
Our in-force policies and premium amounts as of December 31, 2008 and December 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Premiums
|
|
|
Certificates / Policies
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Number
|
|
|
Percentage
|
|
|
|
(in thousands)
|
|
Medicare Supplement
|
|
$
|
120,757
|
|
|
|
41.5
|
%
|
|
|
60,264
|
|
|
|
8.2
|
%
|
Managing General Underwriter
|
|
|
13,160
|
|
|
|
4.5
|
|
|
|
124,829
|
|
|
|
17.0
|
|
Group
|
|
|
33,758
|
|
|
|
11.7
|
|
|
|
21,409
|
|
|
|
2.9
|
|
Major Medical
|
|
|
38,951
|
|
|
|
13.4
|
|
|
|
4,884
|
|
|
|
0.7
|
|
Hospital Surgical
|
|
|
39,340
|
|
|
|
13.5
|
|
|
|
15,468
|
|
|
|
2.1
|
|
Long Term Care
|
|
|
2,719
|
|
|
|
0.9
|
|
|
|
2,055
|
|
|
|
0.3
|
|
Supplemental Insurance
|
|
|
8,213
|
|
|
|
2.8
|
|
|
|
47,133
|
|
|
|
6.4
|
|
Credit Accident and Health
|
|
|
24,676
|
|
|
|
8.5
|
|
|
|
323,158
|
|
|
|
44.0
|
|
All Other
|
|
|
9,309
|
|
|
|
3.2
|
|
|
|
135,921
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
290,883
|
|
|
|
100.0
|
%
|
|
|
735,121
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Premiums
|
|
|
Certificates / Policies
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Number
|
|
|
Percentage
|
|
|
|
(in thousands)
|
|
Medicare Supplement
|
|
$
|
114,283
|
|
|
|
40.3
|
%
|
|
|
57,162
|
|
|
|
7.5
|
%
|
Managing General Underwriter
|
|
|
15,054
|
|
|
|
5.3
|
|
|
|
139,683
|
|
|
|
18.4
|
|
Group
|
|
|
33,492
|
|
|
|
11.8
|
|
|
|
20,882
|
|
|
|
2.8
|
|
Major Medical
|
|
|
49,313
|
|
|
|
17.4
|
|
|
|
7,509
|
|
|
|
1.0
|
|
Hospital Surgical
|
|
|
24,228
|
|
|
|
8.5
|
|
|
|
10,526
|
|
|
|
1.4
|
|
Long Term Care
|
|
|
3,437
|
|
|
|
1.2
|
|
|
|
2,229
|
|
|
|
0.3
|
|
Supplemental Insurance
|
|
|
8,574
|
|
|
|
3.0
|
|
|
|
51,409
|
|
|
|
6.8
|
|
Credit Accident and Health
|
|
|
25,471
|
|
|
|
9.0
|
|
|
|
319,285
|
|
|
|
42.2
|
|
All Other
|
|
|
9,913
|
|
|
|
3.5
|
|
|
|
148,780
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,765
|
|
|
|
100.0
|
%
|
|
|
757,465
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
Net investment income remained relatively consistent at $16.7 million for 2007, compared to
$16.6 million for 2008, after decreasing $2.3 million during 2007 from $19.0 million in 2006. The
decrease for 2006 to 2007 was primarily the result of a decrease in invested assets, compounded by
declining yields due to market conditions. Refer to the
Investments
discussion below for further
analysis.
56
Policy Benefits
The medical benefit ratio, measured as the ratio of claims and other benefits to premiums,
increased from 73.9% for 2007 to 76.7% for the year of December 31, 2008. Much of the $13.2 million
increase from 2007 to 2008 was attributable to litigation involving one managing general
underwriter that resulted in $8.9 million of reinsurance write offs in 2008. We have terminated our
relationship with this particular managing general underwriter. Excluding the impact of this event,
the medical benefit ratio was flat year over year. We expect the loss ratio to decline in 2009 due
to the continued decline of in-force Major Medical policies and continued growth in Hospital
Surgical policies.
During 2008, the Health segment reserve increased $2.2 million compared to a decrease of $2.9
million in the reserve during 2007. The Health claim reserve decreased $0.6 million to $122.5
million for 2008 as compared to $123.1 million for 2007. This decrease in Health claim reserves is
due to the decline of the Major Medical business.
Commissions
Commissions were $43.2 million in 2008, compared to $39.3 million in 2007. This increase of
approximately 9.9% is the result of an increase in sales and the resulting higher first year
commissions. Initial year policies pay at a higher commission rate than renewal policies.
Other Operating Costs and Expenses
Other operating costs and expenses increased 20.7% from $58.0 million for the year ended
December 31, 2007 to $70.0 million for the year ended December 31, 2008. The biggest driver for
this increase is a $10.9 million reserve increase for settlements related to certain litigation. We
do not expect adjustments for such litigation in 2009. Expenses unrelated to this litigation
increased by $1.0 million over the prior year or 1.7%, consistent with increases in premiums.
Change in Deferred Policy Acquisition Costs
Health premiums are recognized as revenue when due, but certain expenses associated with
written premiums, such as commissions, are incurred immediately and before premiums can be earned.
In order to recognize profits over the life of the policy, we establish an accrual for the
amortization of DAC. Over 50% of the Health segment DAC is generated by the commissions associated
with the distribution of Medicare Supplement policies, and over 30% is attributable to credit
accident and health policies. The change in DAC was $5.0 million for 2008 compared to $5.8 million
for 2007. We expect the change in DAC to remain relatively consistent as a percentage of earned
premiums.
We also record a provision for deferred acquisition costs associated with the commissions on
credit accident and health premiums. These premiums are paid in full but recognized over the life
of the loan, which may have substantial durations, approaching 94 months for certain auto related
loans. Changes in credit accident and health-related DAC relate to the amount of business sold and
the speed at which current in-force business is paid off.
As of December 31, 2008, the Health related DAC was $74.9 million compared to $79.9 million as
of December 31, 2007. The $5.0 million decrease in DAC reflects the amortization of older in-force
blocks of business, partially offset by capitalization of current sales.
Reinsurance
For the Major Medical business, we use reinsurance on an excess of loss basis. Our retention
limit is $500,000 per claim on these types of policies. Certain amounts of stop-loss and other
types of catastrophe health reinsurance programs are also reinsured. We manage these risks by
reinsuring over 90% of the risk to highly rated reinsurance companies. We also maintain some
reinsurance on a quota share basis for our long term care and disability income business.
57
Reinsurance is also used in the credit accident and health business. In certain cases, and
especially in the auto retail market, we may also reinsurer the policy written with a dealer-owned
(producer-owned) captive reinsurer. This arrangement allows the dealerships to also participate in
the performance of these credit accident and health contracts.
Property and Casualty
We write Property and Casualty business through our Multiple Line agents and Credit Insurance
Division agents. We evaluate our property and casualty insurance operations based on the total
underwriting results (net premiums earned less incurred losses and loss expenses, policy
acquisition costs and other underwriting expenses) and the following ratios:
|
|
|
Loss and loss adjustment expense ratio (loss ratio), which is calculated by dividing
policy benefits by net premiums earned;
|
|
|
|
|
Underwriting expense ratio (expense ratio), which is calculated by dividing all
expenses related to the issuance of new and renewal policies by net premiums earned; and
|
|
|
|
|
Combined ratio, which is the sum of the loss ratio and the expense ratio.
|
A combined ratio under 100% generally indicates an underwriting profit, while a ratio greater
than 100% indicates an underwriting loss. The combined ratio does not include net investment
income, other income or income taxes.
Our Property and Casualty segment consists of two product lines: (i) Personal Lines products,
which we market primarily to individuals and which represent 59.2% of net premiums written, and
(ii) Commercial Lines products, which focus primarily on businesses engaged in agricultural
markets and which represent 40.8% of net premiums written. We primarily underwrite personal and
commercial automobile, homeowners, agribusiness product and credit related property insurance.
Segment results for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
1,184,686
|
|
|
$
|
1,191,113
|
|
|
$
|
1,284,456
|
|
|
$
|
(6,427
|
)
|
|
$
|
(93,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
$
|
1,182,026
|
|
|
$
|
1,177,217
|
|
|
$
|
1,234,300
|
|
|
$
|
4,809
|
|
|
$
|
(57,083
|
)
|
Net Investment Income
|
|
|
69,348
|
|
|
|
75,041
|
|
|
|
72,759
|
|
|
|
(5,693
|
)
|
|
|
2,282
|
|
Other Income
|
|
|
8,973
|
|
|
|
8,623
|
|
|
|
7,524
|
|
|
|
350
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
1,260,347
|
|
|
|
1,260,881
|
|
|
|
1,314,583
|
|
|
|
(534
|
)
|
|
|
(53,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits And Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Benefits
|
|
|
939,854
|
|
|
|
818,230
|
|
|
|
881,806
|
|
|
|
121,624
|
|
|
|
(63,576
|
)
|
Commissions
|
|
|
226,100
|
|
|
|
217,043
|
|
|
|
230,616
|
|
|
|
9,057
|
|
|
|
(13,573
|
)
|
Other operating costs and expenses
|
|
|
132,601
|
|
|
|
110,705
|
|
|
|
109,940
|
|
|
|
21,896
|
|
|
|
765
|
|
Change in deferred policy
acquisition costs
|
|
|
(9,669
|
)
|
|
|
(7,639
|
)
|
|
|
(5,454
|
)
|
|
|
(2,030
|
)
|
|
|
(2,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses
|
|
|
1,288,886
|
|
|
|
1,138,339
|
|
|
|
1,216,908
|
|
|
|
150,547
|
|
|
|
(78,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss) from operations before other
items and federal income taxes
|
|
$
|
(28,539
|
)
|
|
$
|
122,542
|
|
|
$
|
97,675
|
|
|
$
|
(151,081
|
)
|
|
$
|
24,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
79.5
|
%
|
|
|
69.5
|
%
|
|
|
71.4
|
%
|
|
|
10.0
|
%
|
|
|
(1.9
|
%)
|
Underwriting Expense ratio
|
|
|
29.5
|
%
|
|
|
27.2
|
%
|
|
|
27.2
|
%
|
|
|
2.3
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
109.0
|
%
|
|
|
96.7
|
%
|
|
|
98.6
|
%
|
|
|
12.3
|
%
|
|
|
(1.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty earnings decreased in 2008 compared to 2007 due to a decrease in
underwriting results resulting from a significant increase in catastrophe losses in 2008.
Hurricanes Gustav and Ike, and the increased frequency of tornadoes and hailstorms in the
Midwestern and Southeastern states, resulted in a $99.6
58
million increase in catastrophe losses, net of reinsurance. Net income for 2008 was also
negatively impacted by a $21.9 million increase in other operating costs and expenses, largely due
to legal settlement related costs.
Property and casualty earnings increased $24.9 million in 2007 compared to 2006, primarily due
to an unusually low level of catastrophe losses. Catastrophe losses were $17.8 million lower in
2007 compared to 2006. While net premiums written and net premiums earned decreased significantly
in 2007, there was no corresponding loss of income, as the decline in premiums was offset by lower
losses, both catastrophe and non-catastrophe. The decrease in premiums was the result of our risk
management program to reduce exposure in coastal areas, following significant losses from Hurricane
Katrina in 2005.
Net Premiums Written and Earned
Net premiums written is a measure of the premiums charged for policies issued during a fiscal
period. Property and casualty premiums are recognized as earned premiums proportionately over the
contract period. The majority of our automobile policies have terms of six months to one year
while our credit related property policies have terms of six months to five years, depending on the
related loan period. All other policies, such as homeowners policies and the agribusiness product
policies, have terms of twelve months. The portion of the premiums written applicable to the
unexpired terms of the policies are recorded as unearned premiums on our consolidated balance
sheet.
Net premiums written were $1.2 billion, $1.2 billion and $1.3 billion for 2008, 2007 and 2006,
respectively. Net premiums written decreased $6.4 million in 2008 compared to 2007, reflecting a
$27.0 million decrease in personal and commercial auto net premiums written. The decrease is due to
high levels of competition in this line, combined with a $5.6 million reinsurance reinstatement
premium and higher overall reinsurance costs. The decreases in net premiums written were partially
offset by $17.4 million increase credit insurance for 2008 compared to 2007.
Net premiums written decreased $93.3 million for 2007 compared to 2006, as a result of our
ongoing risk management program to reduce exposure in coastal areas and a $62.3 million decrease in
credit related insurance premiums. The decrease was also the result of higher reinsurance costs
reflecting our expanded reinsurance coverage.
We continue to take a disciplined approach to evaluating and pricing risks. Disciplined
underwriting, which seeks to accept suitable risks only at the right price, will result in
underwriting profitability in the long-term. We expect total property and casualty net premiums
written to remain stable in 2009, with slight decreases in personal and commercial auto and
homeowners which we expect to be offset by continued growth of our agribusiness products. We expect
slower growth of our credit-related insurance products by the recession-driven decline in new car
sales and other consumer goods and the continued tight credit environment.
Reinsurance costs increased 11.3% for 2009 renewals as a result of our 2008 catastrophe
losses. We expect the impact of catastrophe losses and the turmoil in the financial markets to
reduce supply and increase pressure on insurers to raise rates further, with the potential for our
rates to increase in the fourth quarter of 2009 or first quarter of 2010. Refer to the discussion
of our reinsurance program and the effect on the consolidated financial statements, under Part I,
Item 1
, Business.
Net premiums earned were relatively consistent at $1.2 billion for the years ended 2008, 2007
and 2006, respectively. Net premiums earned increased $4.8 million in 2008 compared to 2007. Net
premiums earned for 2007 include a reduction of $11.2 million relating to the increase in our
estimate of retrospective premium adjustments payable on auto and home policies with no reported
losses for three years. Excluding the effect of this adjustment, earned premium decreased $6.4
million, primarily due to decreases in personal and commercial auto net premiums written for the
year ended December 31, 2008 and a $5.6 million reinsurance reinstatement premium, which was fully
earned in 2008.
Net premiums earned decreased $57.1 million in 2007. The decrease was primarily due to our
catastrophe risk management plan that reduced the number of policies in-force in coastal states,
contributing to the majority of a $40.6 million decrease in personal auto and a $16.2 million
decrease in homeowner net premiums earned during 2007.
59
Net Investment Income
Net investment income decreased by $5.7 million to $69.3 million for the year ended December
31, 2008 compared to the same period in 2007. The decrease was the result of declining investment
yields. Net investment income increased $2.3 million from $72.8 million for the year ended December
31, 2006 compared to the same period for 2007 due to higher average investment balances, partially
offset by declining investment yields. Refer to the
Investments
discussion beginning on page 71 for
further analysis.
Policy Benefits
Claims and other benefits include loss and loss adjustment expenses incurred on property and
casualty policies. The loss ratios were 79.5%, 69.5% and 71.4% for the years ended December 31,
2008, 2007 and 2006, respectively.
The increase in loss ratio for 2008 compared to 2007 was due to the significant level of
catastrophe losses during 2008, particularly compared to the low level of losses in 2007. 2008 was
a busy year for natural catastrophes in the United States compared to 2007 and 2006, which were
relatively mild. Our catastrophe losses for the year ended December 31, 2008 are only exceeded by
catastrophe losses we experienced in 2005 that resulted from Hurricane Katrina and Rita claims. For
the year ended December 31, 2008, gross catastrophe losses increased to $187.3 million, compared to
$26.9 million and $44.7 million for the years ended December 31, 2007 and 2006, respectively.
Estimated reinsurance recoveries on all catastrophe losses were $60.8 million for the year end
December 31, 2008. There were no reinsurance recoveries on catastrophe losses for the years ended
December 31, 2007 and 2006.
These catastrophe losses contributed to a 10.0% increase in the loss ratio during 2008. The
increase in property losses is a part of the normal variability in this segment and is the result
of increases in both the frequency and severity of losses. We continue to evaluate our catastrophe
risk exposures, particularly in the coastal areas and manage our risk by reducing in-force policies
in these areas and purchasing additional reinsurance coverage where we believe it is cost efficient
to do so.
While our auto loss ratio increased due to increased severity, we continued to experience a
decrease in the frequency of claims compared to those during the same period in 2007. This decrease
represents an ongoing industry trend to lower loss frequency in recent years due to safer
automobiles, fewer miles driven in 2008, and an aging driving population. We anticipate this trend
will continue in 2009.
The loss ratio decreased to 69.5% in 2007 compared to 71.4% in 2006 as a result of the low
level of catastrophe losses. Catastrophe losses declined $17.8 million to $26.9 million in 2007,
accounting for 1.6% of the decrease in the loss ratio.
Commissions and Change in Deferred Policy Acquisition Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Commissions
|
|
$
|
226,100
|
|
|
$
|
217,043
|
|
|
$
|
230,616
|
|
|
$
|
9,057
|
|
|
$
|
(13,573
|
)
|
Change in deferred policy acquisition costs
|
|
|
(9,669
|
)
|
|
|
(7,639
|
)
|
|
|
(5,454
|
)
|
|
|
(2,030
|
)
|
|
|
(2,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and change in deferred
acquistion costs
|
|
$
|
216,431
|
|
|
$
|
209,404
|
|
|
$
|
225,162
|
|
|
$
|
7,027
|
|
|
$
|
(15,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions increased $9.1 million from $217.0 million in 2007 to $226.1 million in 2008. This
increase was the result of a $9.5 million increase in credit related insurance commissions due to
an increase in net premiums earned, attributable to the continued growth of our credit-related
property products, which generally have a higher commission rate than our other products. This
increase was partially offset by lower commissions on personal and commercial auto policies, which
reported lower net premiums earned in 2008 compared to 2007.
60
Commissions decreased $13.6 million from $230.6 million in 2006 to $217.0 million in 2007.
This decrease resulted from a decline of $7.1 million in commissions on credit-related property
policies and $7.6 million in commissions on personal auto due to the decrease in in-force policies
resulting from our risk reduction program.
Other Operating Costs and Expenses
Other operating costs and expenses were $132.6 million, $110.7 million and $109.9 million in
2008, 2007 and 2006, respectively.
Other operating costs and expenses increased $21.9 million to $132.6 million for the year
ended December 31, 2008 from $110.7 million for the same period in 2007. The increase included $9.5
million of settlement related costs, discussed below, increased salary costs of $4.3 million,
allocated pension costs of $2.5 million, and increased professional services fees of $2.2 million
related to preparing for compliance with SEC and Sarbanes-Oxley requirements.
Shortly after Hurricane Ike, we learned that one of our agents had failed to forward customer
premiums to the Texas Windstorm Association to obtain windstorm coverage. While the former agent
was not representing the Company in these transactions, we are assisting the affected customers and
have recognized a $1.1 million charge in 2008 related to this.
During 2008, we recognized additional legal accruals in connection with certain litigation.
61
Products
The following table shows net premiums written and earned and key ratios for our auto,
homeowners, credit related property and other policies for the years ended December 31, 2008, 2007
and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto (Personal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial)
|
|
|
Owner
|
|
|
Agribusiness
|
|
|
Credit
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
557,700
|
|
|
$
|
203,516
|
|
|
$
|
93,148
|
|
|
$
|
148,351
|
|
|
$
|
181,971
|
|
|
$
|
1,184,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
565,999
|
|
|
$
|
205,764
|
|
|
$
|
98,049
|
|
|
$
|
135,072
|
|
|
$
|
177,142
|
|
|
$
|
1,182,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
77.7
|
%
|
|
|
111.0
|
%
|
|
|
91.7
|
%
|
|
|
39.3
|
%
|
|
|
72.5
|
%
|
|
|
79.5
|
%
|
Underwriting expense ratio
|
|
|
23.5
|
%
|
|
|
27.0
|
%
|
|
|
32.6
|
%
|
|
|
64.9
|
%
|
|
|
23.1
|
%
|
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
101.2
|
%
|
|
|
138.0
|
%
|
|
|
124.3
|
%
|
|
|
104.2
|
%
|
|
|
95.6
|
%
|
|
|
109.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
584,707
|
|
|
$
|
207,093
|
|
|
$
|
85,842
|
|
|
$
|
130,916
|
|
|
$
|
182,555
|
|
|
$
|
1,191,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
575,954
|
|
|
$
|
199,126
|
|
|
$
|
88,860
|
|
|
$
|
137,443
|
|
|
$
|
175,834
|
|
|
$
|
1,177,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
75.9
|
%
|
|
|
68.4
|
%
|
|
|
68.9
|
%
|
|
|
47.9
|
%
|
|
|
67.0
|
%
|
|
|
69.5
|
%
|
Underwriting expense ratio
|
|
|
21.8
|
%
|
|
|
25.8
|
%
|
|
|
34.6
|
%
|
|
|
54.4
|
%
|
|
|
21.6
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
97.7
|
%
|
|
|
94.2
|
%
|
|
|
103.5
|
%
|
|
|
102.3
|
%
|
|
|
88.6
|
%
|
|
|
96.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
606,994
|
|
|
$
|
214,271
|
|
|
$
|
75,552
|
|
|
$
|
193,841
|
|
|
$
|
193,798
|
|
|
$
|
1,284,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
610,082
|
|
|
$
|
215,347
|
|
|
$
|
81,733
|
|
|
$
|
153,663
|
|
|
$
|
173,475
|
|
|
$
|
1,234,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
75.2
|
%
|
|
|
78.5
|
%
|
|
|
65.4
|
%
|
|
|
49.9
|
%
|
|
|
71.4
|
%
|
|
|
71.4
|
%
|
Underwriting expense ratio
|
|
|
21.7
|
%
|
|
|
25.0
|
%
|
|
|
34.4
|
%
|
|
|
55.6
|
%
|
|
|
20.4
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
96.9
|
%
|
|
|
103.5
|
%
|
|
|
99.8
|
%
|
|
|
105.5
|
%
|
|
|
91.8
|
%
|
|
|
98.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a discussion of our most significant products:
Personal Automobile
: We continue to see reductions in our personal automobile premium rates
due to a highly competitive insurance marketplace. Net earned premiums decreased $10.3 million, or
2.2%, in 2008 compared to 2007, despite insignificant changes in policy count during this period.
Price competition continues to pressure profitability. We expect to see further downward pricing
pressure through 2009. However, we will continue to concentrate on our strategy of improving
profitability through disciplined underwriting.
In 2007 we introduced a new product targeted toward the young family market, which combines
personal auto and homeowners insurance. We believe our continued focus on customer satisfaction
contributed to our improved auto policy lapse ratio, which decreased from approximately 10.4% in
2007 to 9.8% in 2008. We do not expect our lapse ratio to significantly change in 2009.
Net earned premiums decreased $40.6 million, or 7.8%, for the year ended December 31, 2007
compared to 2006. This decrease was the result of increased competition, which resulted in an
overall decrease in in-force policies of 16,152 and rate decreases in a number of states. The New
Jersey personal automobile market continues to
62
be impacted by the entrance of new companies in the
state with competitively priced plans that exclude the legacy issue of repricing existing accounts.
The loss ratios in 2008, 2007 and 2006 were 77.9%, 76.0% and 74.3%, respectively. The increase
for 2008 compared to 2007 is primarily due to increased auto physical damage losses related to
catastrophe activity partially
offset by lower auto liability loss experience. In recent years, we have experienced a
decrease in loss frequency offset by an increase in loss severity.
The combined ratios for 2008, 2007 and 2006 were 101.2%, 97.3% and 95.7%, respectively, which
are comparable to the industry average for the same periods of 98.5%, 98.3% and 95.5%,
respectively, per A.M. Best.
Commercial Automobile:
While we continue to focus on strengthening underwriting and improving
pricing, renewal prices decreased in 2008 compared to 2007, which continues to place pressure on
net premiums written and earned. Disciplined underwriting allowed us to increase net earned
premiums from $96.2 million in 2007 to $96.8 million for 2008 despite a 1.5% decrease in policy
count in 2008. We expect premiums to decrease slightly in 2009 as rate decreases initiated in 2008
continue to be realized.
Net earned premiums increased $6.5 million from $89.8 million in 2006 to $96.2 million in
2007. This was the result of a 4.4% increase in policy count for 2007 as we expanded sales into new
states.
The loss ratios for 2008, 2007 and 2006 were 77.0%, 75.6% and 80.6%, respectively. The
decrease in the loss ratio since 2006 reflects our disciplined underwriting and focus on
appropriate risks.
Homeowners
: Net earned premiums increased $6.7 million from $199.1 million in 2007 to $205.8
million in 2008. Net earned premiums in 2007 include an $11.2 million reduction related to our
increased estimate of the retrospective premium adjustment payable on auto and home policies with
no reported losses for three years. The portion of this adjustment attributable to homeowners
policies was approximately $5.2 million. Excluding the effect of the premium adjustments on
homeowners policies and reinsurance reinstatement premiums of approximately $5.6 million, of which
$4.7 million was attributable to homeowners policies, net earned premiums increased $6.2 million.
During the same period, policy count decreased by 1.4% as we continued our risk management to
reduce exposure in the coastal areas. The decrease in policy count was offset by increases in
insured values.
Net earned premiums decreased $16.2 million from $215.3 million for 2006 to $199.1 million for
2007 as we took significant action to reduce our net exposure to homeowners in coastal areas
following losses related to Hurricanes Katrina and Rita in 2005. As a result of these actions,
policy count decreased 2.5% and reinsurance costs increased as a result of our expanded reinsurance
coverage.
The loss ratios in 2008, 2007 and 2006 were 111.0%, 68.4% and 78.5%, respectively. The
significant increase in the loss ratio for 2008 compared to 2007 and 2006 is due to the increased
level of catastrophe losses. Gross catastrophe losses for 2008 were $187.3 million, of which $131.9
million was attributable to homeowners claims from 2008 catastrophe occurrences, compared to $26.9
million for 2007. 2008 losses include $44.7 million for Hurricane Ike, $35.1 million for an
Oklahoma/Arkansas hailstorm and $26.7 million for Hurricane Gustav. Estimated reinsurance
recoveries on all catastrophe losses were $60.8 million for 2008. During 2008, we also experienced
an increase in storm and weather related losses, not designated as catastrophes, which adversely
impacted the loss ratio.
We continue to take prudent actions to generate profitable premium growth and reduce earnings
volatility. We expect to continue to reduce exposures in coastal areas where we feel pricing is not
commensurate with the risk exposure, which will result in declines in policy count in 2009. While
we seek to replace lost in-force policies with new business and increase insured values for our
in-force book, we expect an overall decrease in net premiums written and earned in 2009. We also
expect the economic recession and continued low level of new home sales to negatively impact
premium growth, as average insured values decline with the decline in home values and as consumers
increase deductibles to reduce insurance costs.
The combined ratios for 2008, 2007 and 2006 were 138.0%, 94.2% and 103.5%, respectively,
compared to the industry combined ratios per A.M. Best of 116.5%, 95.7% and 89.4%, respectively.
Our combined ratio was negatively impacted in 2008 due to our concentration of business in the
Midwest, which experienced increased catastrophe losses, resulting in a combined ratio 21.5% above
the industry average. Conversely, our combined ratio
63
benefited from our geographic concentration
and the unusually low level of catastrophe losses in 2007, resulting in a combined ratio 1.5% below
the industry average.
The expense ratio increased to 27.0% for 2008 from 25.8% in 2007, resulting from modest
increases in staffing levels to continue to properly service policy administration and claims. The
expense ratio was consistent from 2006 to 2007.
Agribusiness Product
: Our agribusiness product allows policyholders to customize and combine
their coverage for residential and household contents, buildings and building contents, farm
personal property and liability. Our policy count for this line of business increased 1.1% for
2008. Net earned premium increased $9.1 million to $98.0 million for 2008, compared to $88.9
million for 2007. This increase is primarily the result of rate increases initiated during 2007
that were fully earned in 2008. Average premium per policy increased 9.0% during 2008 compared to
2007. We continue to focus our resources on agents that are committed to and active in the
agriculture and targeted commercial markets. We expect to continue to grow our policy count for
this product in 2009.
A 6.8% increase in policy count in 2007, combined with rate increases where appropriate,
resulted in a $7.2 million increase in net earned premiums from $81.7 million in 2006 to $88.9
million. The increase in policy count and net earned premium was driven by growth in our targeted
markets as we expanded commercial products into new states, allowing us to reach more customers.
The loss ratios for 2008, 2007 and 2006 were 91.7%, 68.9% and 65.4%, respectively. The loss
ratio in 2008 reflects an increase in property losses with several new claims over $50,000 as a
result of storm and weather related losses. This represents normal variability in this line, which
is sensitive to the frequency and severity of storm and weather related losses.
Credit related property
: Credit related property insurance products are offered on
automobiles, furniture and appliances in connection with the financing of those items. The policies
pay an amount if the insured property is lost or damaged and is not directly related to an event
affecting the consumers ability to pay the debt. The primary distribution channel for credit
related property insurance is general agents who market to auto dealers, furniture stores and
financial institutions.
Net earned premiums were $135.1 million, $137.4 million and $153.7 million for 2008, 2007 and
2006, respectively. While we expect the worsening economy and more stringent lending standards to
reduce the demand for credit and credit insurance products, we continue to expect to add new
business partners.
The loss ratio for 2008, 2007 and 2006 was 39.3%, 47.9% and 49.9%, respectively, while the
expense ratio was 64.9%, 54.4% and 55.6%, respectively. The increase in 2008 was a result of the
$1.0 million allocated legal accrual in connection with certain litigation.
Reinsurance
We reinsure a portion of the risks that we underwrite to manage our loss exposure and protect
capital resources. In return for a premium, reinsurers assume a portion of the losses and loss
adjustment expense incurred. Amounts not reinsured are known as retention. We primarily use three
types of reinsurance to manage our loss exposures:
|
|
|
Treaty reinsurance, in which certain types of policies are automatically reinsured
without the need for approval by the reinsurer of the individual risks;
|
|
|
|
Facultative reinsurance, in which individual insurance policy or a specific risk is
reinsured with the prior approval of the reinsurer. Facultative reinsurance is purchased
for risks which fall outside the treaty reinsurance; and
|
|
|
|
Excess of loss treaty reinsurance, where the reinsurer indemnifies us against all, or a
specified portion, of losses and loss adjustment expense incurred in excess of a specified
retention or attachment point, and up to the contract limit.
|
64
In addition to treaty and facultative reinsurance, we are partially protected by the Terrorism
Risk Insurance Act of 2002, which was modified and extended through December 31, 2014 via the
Terrorism Risk Insurance Program Reauthorization Act of 2007.
Our growing surplus has allowed us to increase retentions in recent years. Our retention for
each loss increased from $500,000 in 2005 to $1.0 million in 2008. Our catastrophe reinsurance
retention has also increased, from $4.0 million per event in 2002 to $25.0 million in 2007 and
$40.0 million in 2008. However, in order to manage our risk exposure, we purchased additional
catastrophe reinsurance coverage for Louisiana, Texas, and the Northeast, effectively lowering our
retention in these states. In 2008, we also purchased additional catastrophe reinsurance coverage
to provide protection against the frequency of events by reducing our retention on multiple events
to $20.0 million each, subject to a $40.0 million annual limit.
The property catastrophe reinsurance limit has increased substantially, from $110.0 million in
2002 to $450.0 million in 2007. In 2008, we purchased catastrophe reinsurance coverage to provide
protection for losses up to $520.0 million. In addition, we have purchased $125.0 million of
protection for earthquake losses in the territorial limits of the United States excluding
California, thereby increasing our earthquake coverage to $645.0 million. The catastrophe
reinsurance limit was increased significantly after Hurricane Katrina.
In 2008, the property catastrophe excess reinsurance program provides $500.0 million of
protection above $40.0 million in two layers:
|
|
|
90.0% of losses in excess of $40.0 million up to $80.0 million; and
|
|
|
|
97.5% of losses in excess of $80.0 million up to $500.0 million.
|
A top and drop cover provides protection on a first occurrence from $500.0 million to $520.0
million, or can be used to address multiple catastrophic events by providing protection for $20.0
million of losses in excess of $20.0 million on a second occurrence, provided an aggregate of $20.0
million has been surpassed on the first occurrence. The top and drop cover is also placed at
97.5%.
Prior Period Reserve Development
The table below shows the development of our loss and loss adjustment expense reserves. The
table does not present individual accident or policy year development data.
The top line shows our original reserves, net of reinsurance recoverable, for each of the
indicated years. The table then shows the cumulative net paid loss and loss adjustment expense as
of successive years. The table also shows the re-estimated amount of previously recorded reserves
based on experience as of the end of each succeeding year. The cumulative deficiency or redundancy
represents the aggregate change in the estimates over all prior years. Conditions and trends that
affected development of liabilities in the past may not necessarily occur in the future.
Accordingly, it may be inappropriate to anticipate future redundancies or deficiencies based on
historical experience.
The deficiency/ (redundancy) for different balance sheet dates is cumulative and should not be
added together.
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Liability for unpaid losses and
loss adjustment expenses, net
of reinsurance (includes
loss reserves, IBNR, allocated
and unallocated expense)
|
|
|
304,537
|
|
|
|
331,431
|
|
|
|
384,191
|
|
|
|
425,129
|
|
|
|
490,215
|
|
|
|
590,365
|
|
|
|
678,379
|
|
|
|
796,267
|
|
|
|
801,953
|
|
|
|
809,500
|
|
|
|
847,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid losses
and loss expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
149,108
|
|
|
|
161,942
|
|
|
|
192,167
|
|
|
|
228,699
|
|
|
|
233,074
|
|
|
|
256,386
|
|
|
|
274,810
|
|
|
|
366,007
|
|
|
|
296,621
|
|
|
|
318,946
|
|
|
|
|
|
Two years later
|
|
|
219,048
|
|
|
|
236,136
|
|
|
|
280,667
|
|
|
|
322,112
|
|
|
|
338,459
|
|
|
|
377,139
|
|
|
|
405,748
|
|
|
|
506,463
|
|
|
|
453,042
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
258,018
|
|
|
|
280,004
|
|
|
|
323,685
|
|
|
|
370,179
|
|
|
|
399,651
|
|
|
|
445,702
|
|
|
|
479,410
|
|
|
|
590,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
280,833
|
|
|
|
297,942
|
|
|
|
345,507
|
|
|
|
396,758
|
|
|
|
429,408
|
|
|
|
479,524
|
|
|
|
518,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
286,524
|
|
|
|
306,853
|
|
|
|
356,119
|
|
|
|
407,212
|
|
|
|
443,161
|
|
|
|
498,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
291,170
|
|
|
|
311,746
|
|
|
|
362,307
|
|
|
|
412,004
|
|
|
|
452,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
293,325
|
|
|
|
314,097
|
|
|
|
365,331
|
|
|
|
416,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
294,986
|
|
|
|
315,750
|
|
|
|
367,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
296,336
|
|
|
|
317,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
297,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilites re-estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
295,202
|
|
|
|
330,858
|
|
|
|
368,951
|
|
|
|
432,028
|
|
|
|
488,595
|
|
|
|
564,287
|
|
|
|
638,910
|
|
|
|
770,238
|
|
|
|
711,881
|
|
|
|
764,796
|
|
|
|
|
|
Two years later
|
|
|
304,657
|
|
|
|
323,422
|
|
|
|
372,991
|
|
|
|
435,574
|
|
|
|
488,455
|
|
|
|
564,485
|
|
|
|
617,374
|
|
|
|
737,341
|
|
|
|
711,251
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
302,758
|
|
|
|
324,838
|
|
|
|
376,776
|
|
|
|
441,564
|
|
|
|
490,717
|
|
|
|
553,163
|
|
|
|
596,242
|
|
|
|
739,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
304,336
|
|
|
|
323,853
|
|
|
|
379,498
|
|
|
|
441,309
|
|
|
|
482,799
|
|
|
|
538,459
|
|
|
|
596,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
303,922
|
|
|
|
324,878
|
|
|
|
379,318
|
|
|
|
435,796
|
|
|
|
476,615
|
|
|
|
542,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
304,411
|
|
|
|
326,786
|
|
|
|
380,050
|
|
|
|
432,953
|
|
|
|
478,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
306,526
|
|
|
|
326,798
|
|
|
|
379,270
|
|
|
|
433,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
306,503
|
|
|
|
326,345
|
|
|
|
380,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
306,308
|
|
|
|
327,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
307,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficiency/(redundancy),
net of reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,971
|
|
|
|
(3,744
|
)
|
|
|
(4,106
|
)
|
|
|
8,863
|
|
|
|
(12,011
|
)
|
|
|
(47,932
|
)
|
|
|
(81,609
|
)
|
|
|
(56,443
|
)
|
|
|
(90,702
|
)
|
|
|
(44,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Loss and Loss Adjustment Expense Liability Development-Gross
|
|
|
|
For the Years Ended December 31,
|
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Net reserve, as
initially estimated
|
|
|
304,537
|
|
|
|
331,431
|
|
|
|
384,191
|
|
|
|
425,129
|
|
|
|
490,215
|
|
|
|
590,365
|
|
|
|
678,379
|
|
|
|
796,267
|
|
|
|
801,953
|
|
|
|
809,500
|
|
|
|
847,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance and
other recoverables
as initially estimated
|
|
|
193,885
|
|
|
|
35,677
|
|
|
|
47,162
|
|
|
|
65,327
|
|
|
|
61,077
|
|
|
|
61,600
|
|
|
|
80,526
|
|
|
|
86,186
|
|
|
|
86,898
|
|
|
|
79,071
|
|
|
|
109,518
|
|
Gross reserve as
initially estimated
|
|
|
498,422
|
|
|
|
367,108
|
|
|
|
431,353
|
|
|
|
490,456
|
|
|
|
551,292
|
|
|
|
651,965
|
|
|
|
758,905
|
|
|
|
882,453
|
|
|
|
888,851
|
|
|
|
888,571
|
|
|
|
957,378
|
|
For 2008, the net favorable prior year loss and loss adjustment expense development was $44.7
million, compared to approximately $90.1 million of net favorable prior year loss and loss
adjustment expense development for 2007, as a result of better than expected paid and incurred loss
emergence across several lines of business.
The current year loss ratio is a blend of the current accident year loss ratio and the impact
of favorable or adverse development on prior accident years during the current calendar year.
Excluding the 3.8% impact of favorable prior year loss development for accident years 2007 and
prior, the 2008 loss ratio would have been 83.3%. Excluding the 7.7% impact of favorable prior year
loss development for accident years 2006 and prior, the 2007 loss ratio would have been 77.2%
Net favorable reserve development in each of the last two years was primarily generated from
the personal auto, commercial auto and commercial multi-peril lines. The favorable development
reflects the recognition of better than expected loss emergence rather than explicit changes to our
actuarial assumptions. The homeowners line experienced moderate reserve deterioration related to
the continuing settlement of Hurricane Katrina claims.
For additional information regarding losses and loss expenses, refer to Item 8, Note 6 to the
Consolidated Financial Statements and Financial Condition and Results of Operations section.
66
Corporate and Other
Corporate and Other primarily includes the capital not allocated to support our insurance
business segments. Our capital and surplus is invested and managed by internal investment staff.
Investments include publicly traded equities, real estate, mortgage loans, high-yield bonds,
venture capital partnerships, mineral interests and tax-advantaged instruments. See the
Investment
s
section of the MD&A for a more detailed discussion of our investments. Our registered investment
advisor subsidiary also manages a family of mutual funds and earns management fees, which are
insignificant to the overall segment results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
109,597
|
|
|
$
|
127,519
|
|
|
$
|
159,723
|
|
|
$
|
(17,922
|
)
|
|
$
|
(32,204
|
)
|
Gain/(Loss) from sale of investments, net
|
|
|
(379,709
|
)
|
|
|
41,027
|
|
|
|
100,256
|
|
|
|
(420,736
|
)
|
|
|
(59,229
|
)
|
Other income
|
|
|
18,505
|
|
|
|
21,241
|
|
|
|
22,397
|
|
|
|
(2,736
|
)
|
|
|
(1,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
(251,607
|
)
|
|
|
189,787
|
|
|
|
282,376
|
|
|
|
(441,394
|
)
|
|
|
(92,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits And Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating costs and expenses
|
|
|
37,839
|
|
|
|
61,069
|
|
|
|
65,407
|
|
|
|
(23,230
|
)
|
|
|
(4,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses
|
|
|
37,839
|
|
|
|
61,069
|
|
|
|
65,407
|
|
|
|
(23,230
|
)
|
|
|
(4,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other items
and federal income taxes
|
|
$
|
(289,446
|
)
|
|
$
|
128,718
|
|
|
$
|
216,969
|
|
|
$
|
(418,164
|
)
|
|
$
|
(88,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income/ (loss) before other items and federal income taxes decreased $418.2 million,
from a gain of $128.7 million for 2007 to a loss of $289.4 million for 2008. We recorded $367.0
million of other-than-temporary impairments on security investments in 2008 and $7.2 million and
$8.7 million in 2007 and 2006, respectively.
Discontinued Operations
On December 4, 2008, we sold our life insurance business in Mexico, American National de
Mexico, Compania de Seguros de Vida, S.A. de C.V., along with non-insurance affiliates Servicios de
Administracion American National S.A. de C.V. and American National Promotora de Ventas S.A. de
C.V. to a third party for approximately $2.4 million. These operations were established in 1999 and
reported losses in all years since inception. Management chose to sell these operations to prevent
a continued negative impact on consolidated results of operations. See further detail regarding the
discontinued operations disclosed in Note 17 to the Consolidated Financial Statements.
67
Liquidity
Liquidity is a measure of our ability to generate sufficient cash flows to meet the short-term
and long-term cash requirements of our business operations. We meet our liquidity requirements
primarily through positive cash flows from our insurance operations and investments. Premium
deposits and annuity considerations, other policy revenue, investment income and investment
maturities and prepayments are the primary sources of funds. Primary uses of funds are investment
purchases, dividends, claims and payments to policyholders and contract holders in connection with
surrenders, withdrawals and loans, as well as operating expenses.
Our cash and short-term investment position at December 31, 2008 was $361.3 million, down from
$832.3 million for 2007. The $471.0 million decrease in cash and short-term investments relates
primarily to increases in bond, mortgage loan and real estate investments, and increases in claim
payments in 2008 compared to 2007. This was partially offset by a decline in surrender charges
experienced in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/ (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
171,681
|
|
|
$
|
462,913
|
|
|
$
|
503,493
|
|
|
$
|
(291,232
|
)
|
|
$
|
(40,580
|
)
|
Investing activities
|
|
|
(690,441
|
)
|
|
|
(436,670
|
)
|
|
|
(148,836
|
)
|
|
|
(253,771
|
)
|
|
|
(287,834
|
)
|
Financing activities
|
|
|
450,787
|
|
|
|
(107,051
|
)
|
|
|
(199,207
|
)
|
|
|
557,838
|
|
|
|
92,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
$
|
(67,973
|
)
|
|
$
|
(80,808
|
)
|
|
$
|
155,450
|
|
|
$
|
12,835
|
|
|
$
|
(236,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities decreased $291.2 million from 2007 to 2008. This was
primarily due to lower cash flows from premiums collected from our Life, Health, and Property and
Casualty segments, coupled with an increase in paid claims due to increased catastrophe claims and
cash underwriting expenses attributable to strong annuity sales in comparison to the prior year.
The increased deposits from annuity sales are recorded as part of the cash flows from financing
activities in accordance with U.S. GAAP rules. As such, they are not reflected in the cash flows
from operating activities. Cash flows from operating activities decreased $40.6 million from 2006
to 2007 due to an increase in underwriting expenses.
Cash flows used in investing activities increased $253.8 million from 2007 to 2008 and
increased $287.8 million from 2006 to 2007. The change in net cash used in 2008 as compared to the
prior year was primarily due to increased investments in fixed income securities, real estate, and
mortgage loans. Total sales of all asset classes were lower in 2008 due to depressed market prices.
In 2007, more bond maturities occurred than in 2008, resulting in decreased cash received from
maturities year over year. Cash flows used in investing activities increased in 2007 compared to
2006 primarily due to increased purchases of bonds, real estate, and investments in mortgage loans.
This was partially offset by increased proceeds from sales of equity investments and cash from
sales of real estate investments.
Cash flows from financing activities increased $557.8 million from 2007 to 2008 resulting from
a net increase in annuity sales. Refer to the
Results of Operations Annuity
for further
discussion. Additionally, cash flows from financing activities increased $92.2 million from 2006
to 2007. This change was primarily due to increased annuity sales with a consistent level of
policyholder withdrawals year over year.
We were committed at December 31, 2008 to purchase, expand or improve real estate, to fund
mortgage loans and to purchase other invested assets in the amount of $203.7 million, compared to
$272.2 million for 2007. The expansion of real estate investments and mortgage loans in 2008 has
been robust compared to 2007 due to more attractive yields. This resulted in a net use of
investment cash for both mortgage loans and direct investments in real estate of $447.3 million.
68
In the normal course of business, we guarantee bank loans for customers of a third-party
marketing operation. The customers, through the use of a trust, use the bank loans to fund premium
payments of life insurance policies issued. The loans are secured by the cash values of the life
insurance policies. In the case of a default on the bank loan, we would be obligated to pay off
the loan. We made a payment of $99.5 million in 2008 related to these bank loans. The total
amounts of guarantees outstanding for 2008 and 2007 were approximately $206.5 million and $304.1
million, respectively; while the total cash values of the related life insurance policies was
$212.0 million for 2008 and $316.0 million for 2007.
We
believe that our future liquidity needs will be adequately met from all of the above sources. Given our
historical cash flows and current financial results, we believe that the cash flow from our
operating activities over the next year will provide sufficient liquidity for our operations and
will provide sufficient funds to enable us to make dividend and other payments as needed to support
our operations.
Capital Resources
Our capital resources at December 31, 2008, 2007 and 2006 consisted of stockholders equity
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity, excluding accumulated other comprehensive
income (loss), net of tax (AOCI)
|
|
$
|
3,355,004
|
|
|
$
|
3,590,812
|
|
|
$
|
3,433,754
|
|
|
$
|
(235,808
|
)
|
|
$
|
157,058
|
|
AOCI, net of tax
|
|
|
(221,148
|
)
|
|
|
145,972
|
|
|
|
141,869
|
|
|
|
(367,120
|
)
|
|
|
4,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
3,133,856
|
|
|
$
|
3,736,784
|
|
|
$
|
3,575,623
|
|
|
$
|
(602,928
|
)
|
|
$
|
161,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have notes payable on our consolidated balance sheet that are not part of our capital
resources. These notes payable represent amounts borrowed by real estate joint ventures that we are
required to consolidate into our results in accordance with accounting rules. The lenders for the
notes payable have no recourse to us in the event of default by the joint ventures.
Therefore, the only amount of liability we have for these notes payable is limited to our
investment in the joint ventures, which totaled $13.2 million at December 31, 2008.
Total stockholders equity in 2008 decreased $602.9 million primarily due to the total net
loss of $154.0 million, combined with $331.8 million in net unrealized losses related to marketable
investment securities and $82.7 million in dividends paid to stockholders. The increase in
stockholders equity from 2006 to 2007 is comprised of $240.8 million in net income, partially
offset by stockholder dividends of $81.5 million and a $4.2 million cumulative effect adjustment
upon the adoption of FIN 48,
Accounting for Uncertainty in Income Taxes An interpretation of FASB
Statement No. 109
.
Statutory Surplus and Risk-based Capital
Statutory surplus represents the capital of our insurance companies reported in accordance
with accounting practices prescribed or permitted by the applicable state insurance departments.
State laws specify regulatory actions if an insurers risk-based capital (RBC), a measure of an
insurers solvency, falls below certain levels. The NAIC has a standard formula for annually
assessing RBC. The formulas identify companies that are undercapitalized.
The RBC formula for life companies establishes capital requirements relating to insurance,
business, asset and interest rate risks, and effective for 2005 it addresses the equity, interest
rate and expense recovery risks associated with variable annuities and group annuities that contain
death benefits or certain living benefits.
RBC is calculated for property and casualty companies after adjusting capital for certain
underwriting, asset, credit and off-balance sheet risks. The achievement of long-term growth will
require growth in the statutory capital of our insurance subsidiaries to roll up into the
consolidated entity. Our subsidiaries may secure additional statutory capital through various
sources, such as retained statutory earnings or equity contributions from us. As of
69
December 31,
2008, the levels of our and our insurance subsidiary surplus and risk-based capital exceeded the
NAICs minimum RBC requirements.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
|
|
More than 5
|
|
|
|
Total
|
|
|
year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
years
|
|
|
|
(in thousands)
|
|
Life insurance obligations (1)
|
|
$
|
6,543,414
|
|
|
$
|
14,029
|
|
|
$
|
42,690
|
|
|
$
|
262,212
|
|
|
$
|
6,224,483
|
|
Annuity obligations (1)
|
|
|
9,499,020
|
|
|
|
1,232,677
|
|
|
|
3,271,554
|
|
|
|
2,202,539
|
|
|
|
2,792,250
|
|
Property & Casualty insurance obligations (2)
|
|
|
993,561
|
|
|
|
442,315
|
|
|
|
363,981
|
|
|
|
113,436
|
|
|
|
73,829
|
|
Accident & Health insurance obligations (3)
|
|
|
152,306
|
|
|
|
94,353
|
|
|
|
20,376
|
|
|
|
9,667
|
|
|
|
27,910
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to purchase and fund investments (4)
|
|
|
50,916
|
|
|
|
39,548
|
|
|
|
2,821
|
|
|
|
|
|
|
|
8,547
|
|
Mortgage loan commitments (5)
|
|
|
152,793
|
|
|
|
142,915
|
|
|
|
9,878
|
|
|
|
|
|
|
|
|
|
Operating leases (6)
|
|
|
3,844
|
|
|
|
1,495
|
|
|
|
1,892
|
|
|
|
446
|
|
|
|
11
|
|
Defined benefit pension plans (7)
|
|
|
157,347
|
|
|
|
7,635
|
|
|
|
19,599
|
|
|
|
17,494
|
|
|
|
112,619
|
|
Net unrecognized tax benefits (8)
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,554,201
|
|
|
$
|
1,975,967
|
|
|
$
|
3,732,791
|
|
|
$
|
2,605,794
|
|
|
$
|
9,239,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Life and annuity obligations include estimated claim, benefit, surrender
and commission obligations offset by expected future premiums and deposits on
in-force insurance policies and contracts. All amounts are gross of
reinsurance. Estimated claim, benefit and surrender obligations are based on
mortality and lapse assumptions that are comparable with historical experience.
Estimated payments on interest-sensitive life and annuity obligations include
interest credited to those products. The interest crediting rates are derived
by deducting current product spreads from a constant investment yield. The
obligations shown in the table have not been discounted at present value. As a
result, the estimated obligations for insurance liabilities included in the
table exceed the liabilities recorded in reserves for future policy benefits
and the liability for policy and contract claims. Due to the significance of
the assumptions used, the amounts presented could materially differ from actual
results. Separate account obligations have not been included since those
obligations are not part of the general account obligations and will be funded
by cash flows from separate account assets. The general account obligations for
insurance liabilities will be funded by cash flows from general account assets
and future premiums and deposits. Participating policyholder dividends payable
consists of liabilities related to dividends payable in the following calendar
year on participating policies. As such, the contractual obligation related to
participating policyholder dividends payable is presented in the table above in
the less than one year category at the amount of the liability presented in the
consolidated balance sheet. All estimated cash payments represented in the
table above are undiscounted as to interest, net of estimated future premiums
on policies currently in-force and gross of any reinsurance recoverable.
Estimated future premiums on participating policies currently in-force are net
of future policyholder dividends payable. Future policyholder dividends, the
participating policyholder share obligation on the consolidated balance sheet,
represents the accumulated net income from participating policies and a
pro-rata portion of unrealized investment gains (losses), net of tax, reserved
for payment to such policyholders as policyholder dividends. Because of the
nature of the participating policyholder obligation, the exact timing and
amount of the ultimate participating policyholder obligation is subject to
significant uncertainty and the amount of the participating policyholder
obligation is based upon a long-term projection of the performance of the
participating policy block.
|
|
(2)
|
|
Expected future gross loss and loss adjustment expense payments from
property and casualty policies. This includes case reserves for reported claims
and reserves for claims IBNR. Timing of future payments is estimated based on
the Companys historical payment patterns. The timing of these payments may
vary significantly from the amounts shown above. The ultimate losses may vary
materially from the recorded amounts which are our best estimates.
|
|
(3)
|
|
Accident and health insurance obligations reflect estimated future claim
payment amounts net of reinsurance for claims incurred prior to 1/1/2009. The
estimate does not include claim payments for claims incurred after 12/31/2008.
Estimated claim payment amounts are based on mortality and morbidity
assumptions that are
|
70
|
|
|
|
|
consistent with historical experience and are not
discounted with interest so will exceed the liabilities recorded in reserves
for future claim payments. Due to the significance of the assumptions used,
actual results could vary greatly from the estimates shown here.
|
|
(4)
|
|
Expected payments to fund investments based on capital commitments and
other related contractual obligations.
|
|
(5)
|
|
Expected future payments to fund investments based on mortgage loan
commitments and other related contractual obligations.
|
|
(6)
|
|
Represents estimated obligations due to contracts and agreements entered
into within the ordinary course of business for items classified by SFAS 13 as
Operating Leases. We rent office space which qualifies as operating
leases under SFAS 13.
|
|
(7)
|
|
Represents estimated payments for pension benefit obligations for the
non-qualified defined benefit pension plan. As such, these payments are funded
through continuing operations. A liability has been established for the full
amount of benefits accrued as per FAS158, including a provision for the effects
of future salary inflation on the accrued benefits.
|
|
(8)
|
|
Net unrecognized tax benefits relates to FIN 48. We believe it is
reasonably possible that the FIN 48 liability balance will be settled for
approximately $1 million within the next 12 months with the resolution of an
outstanding issue resulting from the Internal Revenue Service examination of
the 1999 through 2003 tax years.
|
Off-Balance Sheet Arrangements
Our only off-balance sheet transactions relate to third-party marketing operation bank loans
which were discussed previously under the Liquidity section of the MD&A.
Related Party Transactions
We have various agency, consulting and investment arrangements with individuals and
corporations that are considered to be related parties. Each of these arrangements has been
reviewed and approved by our Board Audit Committee. The total amount involved in these
arrangements, both individually and in the aggregate, is not considered to be material to any
segment or to our overall operations. See
Item 7 Certain Relationships and Related Transactions
and Director Independence
for additional information on related party transactions.
Investments
General
We manage our investment portfolio to optimize the rate of return that is commensurate with
sound and prudent underwriting practices and maintaining a well diversified portfolio. Our
investment operations are governed by various regulatory authorities, including but not limited to,
the Texas Department of Insurance. We have an established, formal Investment Plan and Guidelines
approved by our Board of Directors. Collectively, these documents provide issuer and geographic
concentration limits, investment size limits, and other applicable parameters such as loan to value
guidelines.
Investment activity, including the setting of investment policies and defining acceptable risk
levels, is subject to review and approval of our Investment Committee, a committee made up of two
members of the Board of Directors and senior investment professionals.
Our insurance and annuity products are primarily supported by investment grade bonds,
collateralized mortgage obligations, and commercial mortgage loans. We purchase fixed income
security investments and designate them as either held-to-maturity or available-for-sale as
necessary to match our estimated future cash flow needs. We make use of statistical measures such
as duration and the modeling of future cash flows using stochastic interest rate scenarios to
balance our investment portfolio to match the pricing objectives of our underlying insurance
products. As part of our asset/liability management program, we monitor the composition of our
fixed income securities between held-to-maturity and available-for-sale securities and adjust the
concentrations of various investments within the portfolio as investments mature or with the
purchase of new investments.
71
We invest directly in quality commercial mortgage loans with yields that compare favorably
with other fixed income securities. Investments in residential mortgage loans have not historically
been part of our investment portfolio, and we do not anticipate investing in them in the future
Our strong capitalization enables us to invest our excess capital (that not needed to support
our insurance lines) in equity securities and investment real estate where there are opportunities
for more significant returns. We make investments in real estate and equity securities based on a
risk/reward analysis. We anticipate that the crisis in the real estate market and the equity
markets may produce buying opportunities for us in 2009.
Composition of Invested Assets
The following summarizes the carrying values of our invested assets by asset class as of
December 31, 2008 and December 31, 2007 (other than investments in unconsolidated affiliates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(in thousands)
|
|
Bonds Held to Maturity, at amortized cost
|
|
$
|
6,681,837
|
|
|
|
45.9
|
%
|
|
$
|
6,692,447
|
|
|
|
44.7
|
%
|
Bonds Available for Sale, at fair value
|
|
|
3,820,837
|
|
|
|
26.3
|
|
|
|
3,837,988
|
|
|
|
25.7
|
|
Preferred Stock, at fair value
|
|
|
48,822
|
|
|
|
0.3
|
|
|
|
78,885
|
|
|
|
0.5
|
|
Common Stock, at fair value
|
|
|
853,530
|
|
|
|
5.9
|
|
|
|
1,194,982
|
|
|
|
8.0
|
|
Mortgage Loans, at amortized cost
|
|
|
1,877,053
|
|
|
|
13.0
|
|
|
|
1,540,081
|
|
|
|
10.3
|
|
Policy Loans, at outstanding balance
|
|
|
354,398
|
|
|
|
2.4
|
|
|
|
346,002
|
|
|
|
2.3
|
|
Investment Real Estate, net of depreciation
|
|
|
528,905
|
|
|
|
3.6
|
|
|
|
477,458
|
|
|
|
3.2
|
|
Short-term Investments
|
|
|
295,170
|
|
|
|
2.0
|
|
|
|
698,262
|
|
|
|
4.7
|
|
Other Invested Assets
|
|
|
85,151
|
|
|
|
0.6
|
|
|
|
89,791
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
14,545,703
|
|
|
|
100.0
|
%
|
|
$
|
14,955,896
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total invested assets decreased by $410.2 million from $15.0 billion as of December 31, 2007
to $14.5 billion as of December 31, 2008. The decrease in our invested assets during 2008 was
primarily the result of other than temporary impairments in our bond and stock portfolios coupled
with significant unrealized losses on those securities carried at fair value. There have been no
significant changes in our investment allocation by asset class and we do not anticipate any
significant changes in 2009.
Fair Value Disclosures
The fair value of fixed income securities, equity securities, mortgage loans and short-term
investments is determined by the use of third party pricing services, independent broker quotes and
internal valuation methodologies. See the SFAS No. 157,
Fair Value Measurement
analysis in Note 5
to the Consolidated Financial Statements for further discussion of the calculation of fair value
for our investments.
As of December 31, 2008, 100% of our equity securities are considered to be Level 1 securities
as their fair values are determined by observable market prices.
We obtain publicly available prices from third party pricing services for our fixed maturity
securities. The typical inputs from pricing services include, but are not limited to, reported
trades, bids, offers, issuer spreads, cash flow and performance data. These inputs are usually
market observable; however, based on the trading volumes and the lack of quoted market prices for
fixed maturities, the pricing services may adjust these values. The adjustments made to the quoted
prices are based on recently reported trades for comparable securities. We perform a periodic
analysis of the prices received from the third parties to verify that the price represents a
reasonable estimate of fair value. These prices obtained from third party services are classified
as Level 2.
72
Certain private placement debt securities are priced via independent broker quotes and
internal valuation methodologies. The quotations received from the broker may use inputs that are
difficult to corroborate with observable market data. Additionally, we only obtain non-binding
quotations from the independent brokers. Internal pricing methodologies include inputs such as
externally provided credit spreads and internally determined credit ratings. Due to the significant
non-observable inputs, these prices determined by the use of independent broker pricing and
internal valuation methodologies are classified as Level 3.
The discount rate for the fair value of mortgage loans is determined by the weighted average
adjustment of the spread factor against U.S. treasury rates. The spread factor includes an
adjustment for quality rating, property
type, geographic distribution and payment status (current, delinquent, in process of
foreclosure) of each loan. Management performs quarterly reviews and weighs each adjustment to
calculate the spread factor based on the current economic environment and lending practices. All
mortgage loan investments are classified as Level 2.
Other-Than-Temporary Impairments
In order to identify and evaluate investments which may be other-than-temporarily impaired, we
have various quarterly processes in place. For our securities investments, every quarter we review
the entire portfolio of investments that have unrealized losses. We use various rules of thumb to
determine which securities need further review to determine if they are other-than-temporarily
impaired. The criteria include the amount by which our cost exceeds the market value, the length of
time the market value has been below our cost, any public information about the issuer that would
indicate the security could be impaired, and our intent and ability to hold the security until its
value recovers. Once these securities are identified, we perform further review of current ratings,
rating downgrades and exposure to continued deterioration in the economy. We evaluate each security
based on individual circumstances to determine if the impairment is other-than-temporary.
For our real estate, mortgage loan and other long-lived investment assets, we perform a
quarterly review of assets to determine if there are any valuation issues. We evaluate various
information on each asset including but not limited to payment history, property inspection, tenant
creditworthiness, guarantees and the effect of economic conditions. Once we determine there is a
possible adverse change in the condition of the investment, we complete debt service coverage
analysis, appraisals and comparisons to similar properties to determine if the investment is
other-than-temporarily-impaired.
For the year ended December 31, 2008, we determined that there were $367.0 million of
other-than-temporary impairments in our investment portfolio. No other-than-temporary impairment
was recorded in 2008 as a result of a change in our intent and ability to hold to recovery. The
following summarizes our other-than-temporary impairments by investment type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
(165,802
|
)
|
|
$
|
(1,089
|
)
|
|
$
|
(6,967
|
)
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services
|
|
|
(125,518
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(74,231
|
)
|
|
|
(6,077
|
)
|
|
|
(1,700
|
)
|
Mortgage loans
|
|
|
(740
|
)
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
(745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments
|
|
$
|
(367,036
|
)
|
|
$
|
(7,166
|
)
|
|
$
|
(8,667
|
)
|
|
|
|
|
|
|
|
|
|
|
The impairments recognized for the year ended December 31, 2008 between fixed maturities and
equity securities were $165.8 million and $199.7 million, respectively. The majority of these
impairments, $231.7 million, relate to financial services industry investments. As of December 31,
2008 we have received the principal and interest in accordance with the contractual terms for a
majority of these impaired securities.
73
Fixed Maturity Securities
We allocate most of our fixed maturity income securities to support our insurance business.
The following table identifies the fixed maturity securities by type as of December 31, 2008 and
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
% of Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Corporate bonds
|
|
$
|
8,197,057
|
|
|
$
|
71,968
|
|
|
$
|
(943,424
|
)
|
|
$
|
7,325,601
|
|
|
|
73.5
|
%
|
Mortgage-backed securities
|
|
|
1,205,379
|
|
|
|
17,974
|
|
|
|
(82,118
|
)
|
|
|
1,141,235
|
|
|
|
11.5
|
|
States and political subdivisions
|
|
|
742,175
|
|
|
|
10,940
|
|
|
|
(19,922
|
)
|
|
|
733,193
|
|
|
|
7.4
|
|
Public utilities
|
|
|
587,265
|
|
|
|
8,440
|
|
|
|
(35,668
|
)
|
|
|
560,037
|
|
|
|
5.5
|
|
US Treasury and government agencies
|
|
|
174,037
|
|
|
|
3,355
|
|
|
|
(3
|
)
|
|
|
177,389
|
|
|
|
1.8
|
|
Foreign governments
|
|
|
5,254
|
|
|
|
1,618
|
|
|
|
(87
|
)
|
|
|
6,785
|
|
|
|
0.1
|
|
Other
|
|
|
30,230
|
|
|
|
2
|
|
|
|
(4,932
|
)
|
|
|
25,300
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income
|
|
$
|
10,941,397
|
|
|
$
|
114,297
|
|
|
$
|
(1,086,154
|
)
|
|
$
|
9,969,540
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
% of Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Corporate bonds
|
|
$
|
7,907,068
|
|
|
$
|
124,974
|
|
|
$
|
(180,500
|
)
|
|
$
|
7,851,542
|
|
|
|
74.6
|
%
|
Mortgage-backed securities
|
|
|
1,163,340
|
|
|
|
7,508
|
|
|
|
(22,363
|
)
|
|
|
1,148,485
|
|
|
|
10.9
|
|
States and political subdivisions
|
|
|
644,547
|
|
|
|
7,882
|
|
|
|
(981
|
)
|
|
|
651,448
|
|
|
|
6.2
|
|
Public utilities
|
|
|
603,686
|
|
|
|
14,699
|
|
|
|
(6,061
|
)
|
|
|
612,324
|
|
|
|
5.8
|
|
US Treasury and government agencies
|
|
|
250,420
|
|
|
|
1,945
|
|
|
|
(312
|
)
|
|
|
252,053
|
|
|
|
2.4
|
|
Foreign governments
|
|
|
6,668
|
|
|
|
664
|
|
|
|
(23
|
)
|
|
|
7,309
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income
|
|
$
|
10,575,729
|
|
|
$
|
157,672
|
|
|
$
|
(210,240
|
)
|
|
$
|
10,523,161
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, our fixed maturity securities had an estimated fair market value of
$10.0 billion, which was $971.8 million (8.9%) below the amortized cost. At December 31, 2007, our
fixed maturity securities had an estimated fair market value of $10.5 billion, which was $52.6
million (0.5%) below the amortized cost. The overall investment portfolio is affected by concerns
driven by deterioration in the credit market. This market condition has led to significant asset
write-downs as discussed above in the Other-Than-Temporary Impairments section.
74
The following table summarizes the fixed income portfolios contractual maturities, as of
December 31, 2008 and December 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized Cost
|
|
|
Percent
|
|
|
Estimated Fair Value
|
|
|
Percent
|
|
|
|
(in thousands)
|
|
Bonds Held To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
335,885
|
|
|
|
5.0
|
%
|
|
$
|
334,044
|
|
|
|
5.4
|
%
|
Due after one year through five years
|
|
|
2,880,344
|
|
|
|
43.1
|
|
|
|
2,674,238
|
|
|
|
43.5
|
|
Due after five years through ten years
|
|
|
2,722,138
|
|
|
|
40.7
|
|
|
|
2,436,099
|
|
|
|
39.6
|
|
Due after ten years
|
|
|
737,619
|
|
|
|
11.1
|
|
|
|
700,052
|
|
|
|
11.4
|
|
Without single maturity date
|
|
|
5,851
|
|
|
|
0.1
|
|
|
|
4,270
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Bonds Held To Maturity
|
|
$
|
6,681,837
|
|
|
|
100.0
|
%
|
|
$
|
6,148,703
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds Available For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
154,877
|
|
|
|
3.6
|
%
|
|
$
|
153,727
|
|
|
|
4.0
|
%
|
Due after one year through five years
|
|
|
1,359,792
|
|
|
|
31.9
|
|
|
|
1,237,037
|
|
|
|
32.4
|
|
Due after five years through ten years
|
|
|
2,012,462
|
|
|
|
47.2
|
|
|
|
1,733,270
|
|
|
|
45.3
|
|
Due after ten years
|
|
|
722,153
|
|
|
|
17.0
|
|
|
|
689,786
|
|
|
|
18.1
|
|
Without single maturity date
|
|
|
10,276
|
|
|
|
0.3
|
|
|
|
7,017
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Bonds Available For Sale
|
|
$
|
4,259,560
|
|
|
|
100.0
|
%
|
|
$
|
3,820,837
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,941,397
|
|
|
|
|
|
|
$
|
9,969,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Amortized Cost
|
|
|
Percent
|
|
|
Estimated Fair Value
|
|
|
Percent
|
|
|
|
(in thousands)
|
|
Bonds Held To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
319,141
|
|
|
|
4.8
|
%
|
|
$
|
320,415
|
|
|
|
4.8
|
%
|
Due after one year through five years
|
|
|
1,892,993
|
|
|
|
28.3
|
|
|
|
1,929,781
|
|
|
|
28.8
|
|
Due after five years through ten years
|
|
|
3,295,874
|
|
|
|
49.2
|
|
|
|
3,261,365
|
|
|
|
48.8
|
|
Due after ten years
|
|
|
1,178,588
|
|
|
|
17.6
|
|
|
|
1,168,268
|
|
|
|
17.5
|
|
Without single maturity date
|
|
|
5,851
|
|
|
|
0.1
|
|
|
|
5,345
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Bonds Held To Maturity
|
|
$
|
6,692,447
|
|
|
|
100.0
|
%
|
|
$
|
6,685,174
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds Available For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
110,830
|
|
|
|
2.9
|
%
|
|
$
|
114,900
|
|
|
|
3.0
|
%
|
Due after one year through five years
|
|
|
1,018,829
|
|
|
|
26.2
|
|
|
|
1,016,771
|
|
|
|
26.5
|
|
Due after five years through ten years
|
|
|
2,143,337
|
|
|
|
55.2
|
|
|
|
2,096,740
|
|
|
|
54.6
|
|
Due after ten years
|
|
|
605,010
|
|
|
|
15.6
|
|
|
|
604,463
|
|
|
|
15.8
|
|
Without single maturity date
|
|
|
5,276
|
|
|
|
0.1
|
|
|
|
5,113
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Bonds Available For Sale
|
|
$
|
3,883,282
|
|
|
|
100.0
|
%
|
|
$
|
3,837,987
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,575,729
|
|
|
|
|
|
|
$
|
10,523,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
The following table identifies the total invested assets by credit quality as of December 31,
2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Amortized
|
|
|
|
|
|
|
% of Fair
|
|
|
Amortized
|
|
|
|
|
|
|
% of Fair
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
(in thousands)
|
|
AAA
|
|
$
|
1,671,644
|
|
|
$
|
1,644,482
|
|
|
|
16.5
|
%
|
|
$
|
2,077,984
|
|
|
$
|
2,066,478
|
|
|
|
19.6
|
%
|
AA
|
|
|
1,044,896
|
|
|
|
984,250
|
|
|
|
9.9
|
|
|
|
1,103,379
|
|
|
|
1,107,575
|
|
|
|
10.5
|
|
A
|
|
|
4,278,795
|
|
|
|
3,983,117
|
|
|
|
40.0
|
|
|
|
3,829,658
|
|
|
|
3,824,449
|
|
|
|
36.4
|
|
BBB
|
|
|
3,266,507
|
|
|
|
2,801,027
|
|
|
|
28.1
|
|
|
|
3,028,852
|
|
|
|
2,997,080
|
|
|
|
28.5
|
|
BB
|
|
|
282,298
|
|
|
|
222,591
|
|
|
|
2.2
|
|
|
|
235,289
|
|
|
|
234,436
|
|
|
|
2.2
|
|
Below BB
|
|
|
397,257
|
|
|
|
334,074
|
|
|
|
3.3
|
|
|
|
300,567
|
|
|
|
293,143
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,941,397
|
|
|
$
|
9,969,540
|
|
|
|
100.0
|
%
|
|
$
|
10,575,729
|
|
|
$
|
10,523,161
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have limited exposure to below investment grade securities. In aggregate, below investment
grade securities amount to less than 6.0% of our fixed income securities at December 31, 2008. This
is consistent with the prior year. Corporate bonds represent $7.3 billion (73.5 %) of our fixed
maturity securities at fair value, as of December 31, 2008.
Equity Securities
We have invested $902.4 million, or 6.2% of our invested assets, in a well diversified equity
investment portfolio. Of these equity securities, 94.6% are invested in publicly traded (on a
national US stock exchange) common stock. The remaining 5.4% of the equity portfolio is invested in
publicly traded preferred stock.
We carry our equity portfolio at fair value based on quoted market prices obtained from
independent pricing services. The amortized cost and estimated fair market value of the equity
portfolio as of December 31, 2008 and 2007 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Common Stock
|
|
$
|
820,908
|
|
|
$
|
115,692
|
|
|
$
|
(83,070
|
)
|
|
$
|
853,530
|
|
Peferred Stock
|
|
|
60,718
|
|
|
|
3,609
|
|
|
|
(15,505
|
)
|
|
|
48,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
881,626
|
|
|
$
|
119,301
|
|
|
$
|
(98,575
|
)
|
|
$
|
902,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Common Stock
|
|
$
|
866,371
|
|
|
$
|
375,402
|
|
|
$
|
(46,791
|
)
|
|
$
|
1,194,982
|
|
Peferred Stock
|
|
|
87,422
|
|
|
|
1,742
|
|
|
|
(10,279
|
)
|
|
|
78,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
953,793
|
|
|
$
|
377,144
|
|
|
$
|
(57,070
|
)
|
|
$
|
1,273,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
We maintain a well diversified equity portfolio. Our common stock portfolio is summarized
below by market sector distribution:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in percent)
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
Consumer Goods
|
|
|
20
|
%
|
|
|
19
|
%
|
Energy & Utilities
|
|
|
13
|
|
|
|
13
|
|
Financials
|
|
|
16
|
|
|
|
24
|
|
Health Care
|
|
|
13
|
|
|
|
11
|
|
Industrials
|
|
|
8
|
|
|
|
8
|
|
Information Technology
|
|
|
13
|
|
|
|
13
|
|
Materials
|
|
|
2
|
|
|
|
3
|
|
Communication
|
|
|
5
|
|
|
|
3
|
|
Mutual Funds
|
|
|
10
|
|
|
|
6
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
The decrease in the financial sector relates to the deterioration in the current market. Refer
to the Other-Than-Temporary Impairments discussion above. The changes in distribution for other
sectors are a reflection of their relative position in comparison to the change in the financial
sector and do not represent changes in our diversification goals.
Mortgage Loans
We invest primarily in commercial mortgage loans that are diversified by property type and
geography. We do not make residential mortgage loans; therefore, we have no direct exposure to
sub-prime or Alt A mortgage loans. Generally, mortgage loans are secured by first liens on
income-producing real estate with a loan-to-value ratio of up to 75%. Mortgage loans are used as a
component of fixed income investments that support our insurance liabilities. Mortgage loans
comprised 13.0% of total invested assets at December 31, 2008. Mortgage loans on real estate are
recorded at carrying value, which is comprised of the original cost, net of repayments,
amortization of premiums, accretion of discounts, unamortized deferred revenue and valuation
allowances.
The following tables present the distribution across property types and geographic regions for
mortgage loans at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in percent)
|
|
Industrial
|
|
|
25
|
%
|
|
|
24
|
%
|
Office buildings
|
|
|
30
|
|
|
|
25
|
|
Shopping centers
|
|
|
21
|
|
|
|
24
|
|
Hotels and motels
|
|
|
17
|
|
|
|
15
|
|
Commercial
|
|
|
3
|
|
|
|
9
|
|
Other
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in percent)
|
|
West South Central
|
|
|
22
|
%
|
|
|
23
|
%
|
South Atlantic
|
|
|
17
|
|
|
|
16
|
|
Pacific
|
|
|
13
|
|
|
|
16
|
|
East North Central
|
|
|
22
|
|
|
|
15
|
|
Middle Atlantic
|
|
|
10
|
|
|
|
11
|
|
East South Central
|
|
|
4
|
|
|
|
4
|
|
New England
|
|
|
5
|
|
|
|
7
|
|
Mountain
|
|
|
5
|
|
|
|
5
|
|
West North Central
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
Total Properties
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
We increased our investment in mortgage loans on real estate by $337.0 million in 2008 as the
combination of yield and collateral made them relatively attractive compared to other fixed income
alternatives. In response to the market, we increased our investment in office buildings
(principally medical offices) by 5% reducing our relative exposure to retail.
As of December 31, 2008 and 2007, our valuation allowance for mortgage loan credit losses was
$19.4 million and $15.6 million, respectively. The valuation allowance has two components. The
first component is based on our historic portfolio default risk of 0.8% of current loans. The
second component of the allowance is calculated through analysis of specific loans that are
believed to be at a higher risk of becoming impaired in the near future.
At December 31, 2008, delinquent mortgage loans and foreclosed properties were $11.8 million
or 0.6% of the total mortgage loans. We do not expect these investments to adversely affect our
investment portfolio or our ability to maintain our matching of assets and liabilities.
The average coupon yield on the principal funded for mortgage loans was 6.6% in 2008 compared
with 6.4% in 2007. The increase in yield was the result of new loans being made at market rates
above the existing average coupon yield.
Investment in Real Estate
We invest in commercial real estate with positive cash flows or where appreciation in value is
expected. Real estate is owned directly by our insurance companies, through non-insurance
affiliates, or through joint ventures. The carrying value of real estate is stated at cost, less
allowance for depreciation and valuation impairments. Depreciation is provided over the estimated
useful lives of the properties. We did not record any material other-than-temporary-impairments on
investment real estate in 2008.
The following tables present the distribution across property types and geographic regions for
real estate at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in percent)
|
|
Industrial
|
|
|
45
|
%
|
|
|
43
|
%
|
Office buildings
|
|
|
18
|
|
|
|
20
|
|
Shopping centers
|
|
|
23
|
|
|
|
23
|
|
Hotels and motels
|
|
|
2
|
|
|
|
2
|
|
Commercial
|
|
|
1
|
|
|
|
1
|
|
Other
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in percent)
|
|
West South Central
|
|
|
64
|
%
|
|
|
60
|
%
|
South Atlantic
|
|
|
16
|
|
|
|
17
|
|
Pacific
|
|
|
2
|
|
|
|
3
|
|
East North Central
|
|
|
6
|
|
|
|
6
|
|
Middle Atlantic
|
|
|
|
|
|
|
|
|
East South Central
|
|
|
10
|
|
|
|
11
|
|
New England
|
|
|
|
|
|
|
|
|
Mountain
|
|
|
1
|
|
|
|
1
|
|
West North Central
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Total Properties
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
Policy Loans
Certain life insurance products offered by us permit policyholders to borrow funds from us
using their policy as collateral. The maximum amount of the policy loan depends upon the policys
surrender value and the number of years since policy origination. As of December 31, 2008, we had
$354.4 million in policy loans with a loan to surrender value of 58.3%. Interest rates on policy
loans primarily range from 3.0 % to 8.0 % per annum.
Policy loans may be repaid at any time by the policyholder and have priority to any claims on
the policy. If the policyholder fails to repay the policy loan, funds are withdrawn from the
policys death benefits.
Short-Term Investments
Short-term investments are composed primarily of Commercial Paper rated A2/P2 or better by
Standard & Poors and Moodys, respectively. The amount of short-term investments fluctuates
depending on our liquidity needs. An additional short-term investment reserve was built in 2007
because of anticipated surrenders on annuities in 2008. Consistent with our asset/liability
management program in place, short-term investments were increased to cover cash flows from the
potential surrender liabilities. Short-term investments returned to historic levels by year end
2008 based on the asset/liability management program to support our liquidity needs. Additionally,
there is a decrease in surrenders in the current market environment which indicates a lesser need
for the additional short-term investments.
79
Investment Income and Realized Gains/ (Losses):
Investment income and realized gains/ (losses) on investments, before federal income taxes,
for the years ended December 31, 2008, 2007 and 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
Gains (Losses) on Investments
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Bonds
|
|
$
|
623,356
|
|
|
$
|
620,035
|
|
|
$
|
610,268
|
|
|
$
|
(157,272
|
)
|
|
$
|
366
|
|
|
$
|
3,192
|
|
Preferred stocks
|
|
|
5,687
|
|
|
|
4,561
|
|
|
|
3,356
|
|
|
|
(49,172
|
)
|
|
|
|
|
|
|
(6
|
)
|
Common stocks
|
|
|
28,977
|
|
|
|
27,002
|
|
|
|
28,641
|
|
|
|
(164,407
|
)
|
|
|
23,913
|
|
|
|
62,872
|
|
Mortgage loans
|
|
|
118,067
|
|
|
|
103,627
|
|
|
|
104,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
114,198
|
|
|
|
126,926
|
|
|
|
151,099
|
|
|
|
1,005
|
|
|
|
18,563
|
|
|
|
26,888
|
|
Other invested assets
|
|
|
12,123
|
|
|
|
40,994
|
|
|
|
56,386
|
|
|
|
(5,977
|
)
|
|
|
(40
|
)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
902,408
|
|
|
|
923,145
|
|
|
|
953,802
|
|
|
|
(375,823
|
)
|
|
|
42,802
|
|
|
|
92,999
|
|
Investment expenses
|
|
|
(106,231
|
)
|
|
|
(110,176
|
)
|
|
|
(117,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in
valuation allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,886
|
)
|
|
|
(1,775
|
)
|
|
|
7,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
796,177
|
|
|
$
|
812,969
|
|
|
$
|
836,017
|
|
|
$
|
(379,709
|
)
|
|
$
|
41,027
|
|
|
$
|
100,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total decrease in investment income was primarily driven by changes in real estate income
and other invested assets. A high level of property sales due to favorable market conditions in the
prior year led to increased investment income in year 2007. Based on average property sales in
2008, the real estate income decreased, contributing to the lower investment income in year 2008.
The decrease in income for other invested assets was due to the loss incurred on the options held
to hedge equity indexed annuity sales. This was due to a decline in the fair value of such options
in 2008. The equity indexed annuity options make up the majority of the other invested assets.
Refer to the
Results of Operations Annuity
section for further discussion.
The majority of the realized losses are write-downs of securities due to other-than-temporary
impairments. Such write-downs totaled $367.0 million in 2008 compared to $7.2 million and $8.6
million for years ended 2007 and 2006, respectively. Realized gains and real estate investment
income fluctuate because they are the result of decisions to sell invested assets that depend on
considerations of investment values, market opportunities and tax consequences. We do not hold
investments for trading purposes and only sell when the opportunity fits our investment objectives.
In 2006, we were net seller of stocks and real estate after determining that market conditions were
appropriate for such action. We sold a lesser amount in 2007 and very little in 2008.
All of the realized gains and losses are allocated to the Corporate and Other segment. The
risk of realized losses is charged to the insurance segments through a monthly default charge with
the income from the charge allocated to the Corporate and Other segment to compensate it for any
potential realized losses that would be recorded. The default charge rate is set as a percentage
of the asset base that supports each of the insurance segments, with the rate set depending on the
risk level of the asset involved.
80
Unrealized Gains and Losses:
The net change in unrealized gains/(losses) on marketable securities, as presented in the
stockholders equity section of the consolidated statements of financial position, equaled a loss
of $331.8 million in 2008 and a gain of $0.3 million and $28.9 million in 2007 and 2006,
respectively.
The change in the net unrealized gains or losses for the years ended December 31, 2008, 2007
and 2006, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Bonds available-for-sale
|
|
$
|
(393,429
|
)
|
|
$
|
(4,443
|
)
|
|
$
|
(38,062
|
)
|
Preferred stocks
|
|
|
(3,359
|
)
|
|
|
(9,544
|
)
|
|
|
150
|
|
Common stocks
|
|
|
(295,988
|
)
|
|
|
11,161
|
|
|
|
70,520
|
|
Amortization of deferred policy acquisition costs
|
|
|
164,937
|
|
|
|
3,080
|
|
|
|
13,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527,839
|
)
|
|
|
254
|
|
|
|
46,283
|
|
Provision for federal income taxes
|
|
|
185,273
|
|
|
|
(130
|
)
|
|
|
(16,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342,566
|
)
|
|
|
124
|
|
|
|
30,094
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains of investments
attributable to participating policyholders interest
|
|
|
10,738
|
|
|
|
144
|
|
|
|
(1,159
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(331,828
|
)
|
|
$
|
268
|
|
|
$
|
28,935
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the net unrealized loss for our available for sale bond portfolio
totaled $438.8 million, comprised of $43.0 million of unrealized gains and $481.8 million of
unrealized losses. This is compared to a net unrealized loss for the available for sale bond
portfolio totaling $45.3 million and $40.9 million at December 31, 2007 and 2006, respectively. The
unrealized losses in the available for sale bond portfolio were in corporate bonds, primarily
comprised of securities in the financial services sector. These gross unrealized losses were
primarily company specific and due to current market conditions.
As of December 31, 2008 the net unrealized gain for the common stock portfolio totaled $33.9
million. This is compared to a net unrealized gain for the common stocks totaling $329.9 million
and $317.5 million at December 31, 2007 and 2006, respectively. The 2008 change in the net
unrealized gain/ (loss) resulted from the declining market conditions, which was offset by the
recording of other-than-temporary impairments as noted above.
As of December 31, 2008 the net unrealized loss for the preferred stock portfolio totaled
$11.9 million. This is compared to a net unrealized loss for the preferred stocks totaling $8.5
million at December 31, 2007, and net unrealized gain of $1.0 million in 2006. Again, the reason
for the increase in the unrealized loss is primarily the realizing of part of the loss through
other-than-temporary impairments.
Quantitative and Qualitative Disclosures about Market Risk
We hold a diversified portfolio of investments that includes cash, bonds, preferred stocks,
common stocks, mortgage loans, policy loans, and real estate. Our investments are subject to
various market risks including interest rate risk, credit risk and risk of changes in equity
prices. Adverse changes to these rates and prices may occur due to changes in the liquidity of a
market or market segment, or to changes in market perceptions of credit worthiness and/or risk
tolerance.
Our management and culture is generally risk adverse and emphasizes risk management throughout
all our operations. The active management of market risk is integral to our results of operations.
A key component of our risk management program is our ALM (asset/liability management) Committee.
The ALM committee, under the direction of the Chief Corporate Risk Management Officer, monitors the
level of risk to which we are exposed in managing our assets and liabilities in order to attain the
desired risk-return profile. A significant aspect of this risk
81
management involves our managing the
link between the characteristics of our investments and the anticipated policy obligations and
liabilities; a process commonly referred to as asset/liability management. Among other things, this
includes maintaining adequate reserves, monitoring claims experience, managing interest rate
spreads and protecting against disintermediation risk for life insurance and annuity products. As part
of our risk management procedures we also manage exposure concentrations, deductibles and
reinsurance for property and casualty products.
As a part of the ALM process, we establish target asset portfolios for each major insurance
product, which represent the investment strategies used to profitably fund our liabilities within
acceptable levels of risk. We monitor these strategies through regular review of portfolio metrics,
such as effective duration, yield curve sensitivity, convexity, liquidity, asset sector
concentration and credit quality. In executing these asset/liability management strategies, we
regularly reevaluate the estimates used in determining the approximate amounts and timing of
payments to or on behalf of policyholders for insurance liabilities. Many of these estimates are
inherently subjective and could impact our ability to achieve our asset/liability management goals
and objectives.
In addition to our ALM Committee, in recent years, we have expanded our efforts with respect
to enterprise risk management to help us proactively identify, prioritize and manage various risks
including market risks. Under the leadership of our Chief Corporate Risk Management Officer and the
support of our Board of Directors, we have developed an approach and have focused our effort to
accomplish the principles of enterprise risk management including:
|
|
|
Designing an approach to identify potential risks and events that may affect the
entity;
|
|
|
|
|
Managing risks within our risk profile; and
|
|
|
|
|
Providing reasonable assurance regarding the achievement of our strategic
objectives.
|
We expect these ongoing enterprise risk management efforts will broaden the set of risk
management tools used to ensure the efficient allocation of capital and enhanced measurement of
possible diversification benefits across business segments and risk classes.
Interest Rate Risk
The primary market risk to the investment portfolio is the interest rate risk associated with
investments in fixed maturity securities. Interest rate risk is the risk that the value of our
interest-sensitive assets or liabilities will change with changes in market interest rates. Fixed
maturity securities represent a significant portion (72.2%) of our investment portfolio. Our
exposure to interest rate risk relates to the market price and/or cash flow variability associated
with the changes in market interest rates. Our exposure to cash flow changes are discussed fully in
the Liquidity and Capital Resources section of the MD&A. The fair market value of these fixed
maturity securities are inversely related to changes in market interest rates. As interest rates
fall, the coupon and dividend streams of existing fixed rate investments become more valuable as
market values rise and vice versa. We utilize our ALM Committee as the primary tool to monitor
interest rate risk. The carrying value of our investment portfolio as of December 31, 2008 and 2007
was $14.5 billion and $15.0 billion, respectively; of which 45.9% at year-end 2008 was invested in
held-to-maturity bonds, 26.3% was invested in available for-sale bonds, and the remaining amounts
primarily were invested in equity securities, mortgage loans, policy loans, real estate and short
term investments. Detailed information regarding the carrying values of our investment portfolio
can be found in the
Investments
section of the MD&A.
The interest rate exposure for our investments in mortgage loans is relatively insignificant
compared to other risk exposures. These loans are expected to be repaid from the cash flows or
proceeds from the sale of real estate. As of December 31, 2008 these mortgage loans have fixed
rates from 5.0% to 12.0% and variable rates from 2.5% to 9.0%. Most of the mortgage loan contracts
require periodic payments of both principal and interest and have amortization periods of three
years to thirty years.
82
Market interest rate fluctuation has a direct impact on the value of our fixed maturity
securities. At December 31, 2008, we had a recorded net unrealized investment loss of $393.4
million on our available-for-sale bond portfolio, compared to a net unrealized loss of $4.4 million
at December 31, 2007. This change was primarily the result of significant deterioration in the
credit markets during 2008. Information regarding our unrealized gains or losses can be found in
the
Investments
section of the MD&A.
Interest Rate sensitivity analysis:
The table below shows the sensitivity of our fixed
maturity investments to increases and decreases in interest rates and the pre-tax change in market
value resulting from such changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in market value given an interest rate
|
|
|
|
increase/(decrease) of X basis points
|
|
|
|
(100)
|
|
|
(50)
|
|
|
50
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio
|
|
$
|
391,701
|
|
|
$
|
198,650
|
|
|
$
|
(203,759
|
)
|
|
$
|
(406,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio
|
|
$
|
468,095
|
|
|
$
|
236,083
|
|
|
$
|
(240,750
|
)
|
|
$
|
(482,021
|
)
|
Actual results could differ materially from the amounts noted above due to the assumptions and
estimates used in calculating the analysis above. Our interest rate sensitivity analysis was
calculated assuming instantaneous, one time parallel shifts in the corresponding year end Treasury
yield curves of +/-100bps, and +/-50bps. All other variables were assumed to remain constant.
Therefore, these calculations may not fully reflect any prepayment to the portfolio, changes in
corporate spreads or non-parallel changes in interest rates.
In addition to our fixed maturity securities being subject to interest-rate risk, we also have
liabilities that are sensitive to interest-rate risk. These liabilities include annuities and
interest sensitive insurance contracts, which have the same type of interest rate exposure as our
fixed maturity securities. We employ a combination of product design, pricing and ALM strategies to
reduce the adverse effects of interest rate movements on these liabilities. Product design and
pricing strategies include the use of surrender charges or restrictions on withdrawals in some
products. ALM strategies include the use of derivatives to hedge equity indexed annuity values, the
purchase of securities structured to protect against prepayments, prepayment restrictions related
fees on mortgage loans, and consistent monitoring of the pricing of our products in order to better
match the duration of the assets and liabilities they support.
In addition to interest rate fluctuations impacting our assets and liabilities, we are also
exposed to disintermediation risk. Disintermediation risk refers to the risk that interest rates
will rise and policy loans and surrenders will increase; or that maturing policies will not renew
at anticipated rates of renewal. This risk manifests itself when due to rapid changes in interest
rates, policyholders move their assets into new products offering higher rates. We then may have to
sell assets earlier than anticipated to pay for these withdrawals. Our life insurance and annuity
product designs, underwriting standards and risk management techniques are utilized to protect
against disintermediation risk and greater than expected mortality and morbidity risks. We strive
to mitigate disintermediation risk through the use of surrender charges, certain provisions
prohibiting the surrender of a policy, and market value adjustment features. Investment guidelines,
including duration targets, asset allocation tolerances and return objectives, help to ensure that
disintermediation risk is managed within the constraints of profitability criteria. Prudent
underwriting is applied to select and price insurance risks, and we regularly monitor claims
experience relative to our product pricing assumptions. Implementation of disciplined claims
management serves to further protect against fraudulent and unjustified claims activity.
83
Credit Risk
Credit risk is the level of certainty that a security issuer will maintain its ability to
honor the terms of a particular security until maturity. Our insurance and annuity products
are primarily supported by investments in fixed maturity securities which primarily include
investment grade bonds and collateralized mortgage obligations. Information regarding the credit
quality of our fixed maturity portfolio can be found in fixed maturities discussion in the
Investments
section of the MD&A.
To manage credit risk, we have an established, formal Investment Plan and Guidelines approved
by our Board of Directors. Collectively, these documents provide issuer and geographic
concentration limits, investment size limits and other applicable parameters such as loan to value
guidelines. Investment activity, including the setting of investment policies and defining
acceptable risk levels, is subject to review and approval of our Investment Committee, a committee
of two members of the Board of Directors and senior investment professionals.
We are also exposed to credit risk as a result of our reinsurance program. We manage our
underwriting risk exposures by following the industry practice of reinsuring portions of our
insurance risks. We purchase reinsurance from several providers and are not dependent on any single
reinsurer. While we believe these reinsurance providers are reputable and financially secure
carriers, our reinsurance program does result in us being subject to credit risk of default of the
reinsurer. Reinsurance does not eliminate our liability to pay our policyholders, and we remain
primarily liable to our policyholders for the risks we insure.
Equity Risk
Equity risk is the risk that we will incur losses due to adverse changes in the general levels
of the equity markets or in the levels of specific investments within the investment portfolio. At
December 31, 2008, we held approximately $902.4 million of common and preferred stock securities
which had equity risk. There was a serious decline in equity markets during the second half of
2008. Our exposure to the equity markets is managed by sector and mimics the Standard & Poors 500
Index (S&P 500) with minor variations. As a result of the challenging market conditions, we
incurred substantial realized losses ($213.6 million), primarily in the latter half of 2008. We
continue to mitigate our equity risk by diversification of the overall investment portfolio and
through prudent investing activities in the equity markets.
Changes in Accounting Principles
Refer to Item 13, Note 2 to the Consolidated Financial Statements for a discussion on recently
issued accounting pronouncements not yet adopted.
84
Supplementary Financial Information
Selected Quarterly Financial Data
The unaudited quarterly results of operations for 2008 and 2007 are summarized in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Total revenues
|
|
$
|
724,080
|
|
|
$
|
731,188
|
|
|
$
|
522,493
|
|
|
$
|
540,880
|
|
|
$
|
2,518,641
|
|
Total benefits, losses and expenses
|
|
|
681,137
|
|
|
|
744,873
|
|
|
|
707,635
|
|
|
|
684,748
|
|
|
|
2,818,393
|
|
Income/(loss) before taxes and other items
|
|
|
42,943
|
|
|
|
(13,685
|
)
|
|
|
(185,142
|
)
|
|
|
(143,868
|
)
|
|
|
(299,752
|
)
|
Income tax expense/(benefit)
|
|
|
10,220
|
|
|
|
(11,237
|
)
|
|
|
(62,526
|
)
|
|
|
(58,487
|
)
|
|
|
(122,030
|
)
|
Minority interest in income/(loss) of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
31
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
7,648
|
|
|
|
613
|
|
|
|
(1,795
|
)
|
|
|
(1,501
|
)
|
|
|
4,965
|
|
Income/(loss) from continuing operations
|
|
|
40,371
|
|
|
|
(1,835
|
)
|
|
|
(124,411
|
)
|
|
|
(86,851
|
)
|
|
|
(172,726
|
)
|
Income/(loss) from discontinued operations
|
|
|
(1,346
|
)
|
|
|
(1,100
|
)
|
|
|
(622
|
)
|
|
|
21,796
|
|
|
|
18,728
|
|
Net income/(loss)
|
|
|
39,025
|
|
|
|
(2,935
|
)
|
|
|
(125,033
|
)
|
|
|
(65,055
|
)
|
|
|
(153,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.47
|
|
|
|
(0.11
|
)
|
|
|
(4.72
|
)
|
|
|
(2.46
|
)
|
|
|
(5.82
|
)
|
Diluted
|
|
|
1.47
|
|
|
|
(0.11
|
)
|
|
|
(4.72
|
)
|
|
|
(2.46
|
)
|
|
|
(5.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Total revenues
|
|
$
|
745,238
|
|
|
$
|
819,285
|
|
|
$
|
766,357
|
|
|
$
|
725,193
|
|
|
$
|
3,056,073
|
|
Total benefits, losses and expenses
|
|
|
676,323
|
|
|
|
735,917
|
|
|
|
650,476
|
|
|
|
646,111
|
|
|
|
2,708,827
|
|
Income before taxes and other items
|
|
|
68,915
|
|
|
|
83,368
|
|
|
|
115,881
|
|
|
|
79,082
|
|
|
|
347,246
|
|
Income tax expense
|
|
|
20,517
|
|
|
|
25,228
|
|
|
|
36,949
|
|
|
|
23,169
|
|
|
|
105,863
|
|
Minority interest in income of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
482
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
2,130
|
|
|
|
2,105
|
|
|
|
1,383
|
|
|
|
(1,752
|
)
|
|
|
3,866
|
|
Income from continuing operations
|
|
|
50,528
|
|
|
|
60,245
|
|
|
|
80,315
|
|
|
|
54,643
|
|
|
|
245,731
|
|
Income/(loss) from discontinued operations
|
|
|
(1,326
|
)
|
|
|
(1,251
|
)
|
|
|
(1,070
|
)
|
|
|
(1,311
|
)
|
|
|
(4,958
|
)
|
Net income
|
|
|
49,202
|
|
|
|
58,994
|
|
|
|
79,245
|
|
|
|
53,332
|
|
|
|
240,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.86
|
|
|
|
2.23
|
|
|
|
2.99
|
|
|
|
2.01
|
|
|
|
9.09
|
|
Diluted
|
|
|
1.84
|
|
|
|
2.22
|
|
|
|
2.98
|
|
|
|
2.00
|
|
|
|
9.04
|
|
85
ITEM 3. PROPERTIES
Our home office is located in Galveston, Texas. We own and occupy approximately 420,000 square
feet of office space in this building. We also own the following additional properties that are
materially important to our operations:
|
|
|
We own and occupy three buildings in League City, Texas, consisting of a total
of approximately 298,000 square feet. Approximately one-third of such space is
leased to third parties. Our use of these facilities is related primarily to our
Life, Health, and Corporate and Other segments.
|
|
|
|
|
Our Property and Casualty segment conducts substantial operations through the
American National Property and Casualty group of companies in Springfield,
Missouri, and the Farm Family companies in Glenmont, New York. The Springfield
facility is approximately 232,000 square feet, of which we occupy approximately
two-thirds, with the remaining portion leased to third parties. The Glenmont
facility is approximately 140,000 square feet, all of which is occupied by us.
|
|
|
|
|
We own an approximately 100,000 square foot facility in San Antonio, Texas. We
occupy approximately one half of this facility. We use this facility as a remote
processing center for customer support and to support other business operations in
the event the Galveston home office is evacuated due to catastrophic weather.
|
We believe our properties are adequate and suitable for our business as currently conducted
and are adequately maintained. The above properties do not include properties we own for
investment only.
86
|
|
|
ITEM 4.
|
|
SECURITY OWNERSHIP BY DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the close of business on March 31, 2009, we had 26,820,166 shares of our $1 par value
per share common stock issued and outstanding. There were no other classes of shares issued and
outstanding. The following table sets forth information as of March 31, 2009 concerning each
person or group owning more than five percent of the outstanding shares of our common stock. As
described in the notes to the table set forth below, certain named persons share the power of
voting and disposition with respect to certain shares of common stock. Consequently, such shares
are shown as being beneficially owned by more than one person.
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
|
Percent of
|
|
Name and Address of
Beneficial Owner
|
|
Beneficial Ownership
|
|
|
Class
|
|
|
|
|
|
|
|
|
|
|
5% Beneficial Owners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE MOODY FOUNDATION
(1)
2302 Post office Street, Suite 704
Galveston, Texas 77550
|
|
|
6,157,822
|
|
|
|
22.96
|
|
|
|
|
|
|
|
|
|
|
LIBBIE SHEARN MOODY TRUST
(2)
c/o Moody National Bank
Trust Department
2302 Post office Street
Galveston, Texas 77550
|
|
|
9,949,585
|
|
|
|
37.10
|
|
|
|
|
|
|
|
|
|
|
MOODY NATIONAL BANK, TRUSTEE
(4)
2302 Post office Street
Galveston, Texas 77550
|
|
|
12,489,057
|
(3)
|
|
|
46.57
|
|
|
|
|
(1)
|
|
The Moody Foundation is a charitable trust classified as a private foundation
which was established in 1942 by W. L. Moody, Jr., and his wife, Libbie Shearn Moody, for
charitable and educational purposes. The Trustees of The Moody Foundation are Robert L. Moody
and Frances Anne Moody-Dahlberg, who are also our directors, and Ross Rankin Moody. Frances
Anne Moody-Dahlberg and Ross Rankin Moody are children of Robert L. Moody.
|
|
(2)
|
|
The Libbie Shearn Moody Trust is a split-interest trust with both charitable and
non-charitable beneficiaries. Such trust was established in 1943 and funded by a residuary
bequest under the Will of Libbie Shearn Moody. Moody National Bank is the Trustee of the
Libbie Shearn Moody Trust and, as such, has sole voting power with respect to the 9,949,585
shares of common stock owned by such Trust.
|
|
(3)
|
|
In addition to acting as Trustee of and voting the common stock owned by the Libbie
Shearn Moody Trust, Moody National Bank also acts as (i) trustee for and votes the 1,155,000
shares of common stock owned by the W.L. Moody, Jr. Trust for Grandchildren (Trust 19) and
487,794 shares of common stock owned by other trusts (see Security Ownership of Management
for additional information); (ii) agent for and votes 780,000
shares of common stock held pursuant to an Agency and Investment Services Agreement for the
benefit of The Moody Endowment, a non-profit corporation; and (iii) custodian for and votes
116,678 shares of common stock held pursuant to a Custodial Agreement with Transitional Learning
Center at Galveston, a non-profit corporation. Accordingly, Moody National Bank, as trustee,
agent or custodian, votes an aggregate of 12,489,057 shares, which constitutes 46.57% of our
outstanding shares.
|
|
(4)
|
|
Management has been advised that Moody Bank Holding Company, Inc. (MBHC), which is
wholly-owned by Moody Bancshares, Inc. (Bancshares), owns approximately 97.8% of the common
stock of Moody National Bank. Management has further been advised that the Three R Trusts,
trusts created by Robert L. Moody for the
|
87
|
|
|
|
|
benefit of his children (two of whom, Russell S.
Moody and Frances Anne Moody-Dahlberg are our directors) own 100% of Bancshares Class B Stock
(which elects a majority of Bancshares directors) and 51.3% of Bancshares Class A Stock.
Accordingly, the Three R Trusts, through ownership of Bancshares, controls Moody National
Bank. The Trustee of the Three R Trusts is Irwin M. Herz, Jr., one of our advisory directors,
and a partner in Greer, Herz & Adams, L.L.P., 18th Floor, One Moody Plaza, Galveston, Texas,
General Counsel to us and counsel to Moody National Bank, Bancshares and MBHC. Robert L.
Moody is Chairman of the Board, Chief Executive Officer and a director of Moody National Bank,
Bancshares and MBHC.
|
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The information contained in the following table is given with respect to the ownership of our
common stock on March 31, 2009 by each of our directors, each of the executive officers named in
the Summary Compensation Table, and for our directors and executive officers as a group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
Percent of
|
|
Name of
Beneficial Owner
|
|
Beneficial Ownership
|
|
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur O. Dummer
|
|
|
5,267
|
(1)
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Shelby M. Elliott
|
|
|
4,667
|
(2)
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard Ferdinandtsen
|
|
|
63,000
|
(3)
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Frances Anne Moody-Dahlberg
(4)
|
|
|
8,000
|
(2)
|
|
Direct
|
|
|
*
|
|
|
|
|
6,157,822
|
(5)
|
|
Indirect
|
|
|
22.96
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert L. Moody
(4)(6)
|
|
|
493,809
|
(7)
|
|
Direct
|
|
|
3.92
|
|
|
|
|
557,135
|
(8)(9)
|
|
Indirect
|
|
|
|
|
|
|
|
6,157,822
|
(5)
|
|
Indirect
|
|
|
22.96
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell S. Moody
(4)
|
|
|
8,000
|
(2)
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
William L. Moody IV
(4)(6)
|
|
|
98,240
|
(10)
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank P. Williamson
|
|
|
5,717
|
(11)
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
James D. Yarbrough
|
|
|
8,000
|
(2)
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen E. Pavlicek
|
|
|
600
|
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory V. Ostergren
|
|
|
1,500
|
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Behrens
|
|
|
100
|
|
|
Direct
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
All Directors and Executive Officers as
a Group
|
|
|
702,279
|
|
|
Direct
|
|
|
2.62
|
|
|
|
|
6,714,957
|
|
|
Indirect
|
|
|
25.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,417,236
|
|
|
|
|
|
27.66
|
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
Includes 4,667 shares of our Restricted Stock.
|
|
(2)
|
|
Shares of our Restricted Stock.
|
88
|
|
|
(3)
|
|
Includes 60,000 shares of our Restricted Stock.
|
|
(4)
|
|
Robert L. Moody and William L. Moody IV are life income beneficiaries of Trust 19.
Frances Anne Moody-Dahlberg and Russell S. Moody, two of our directors, are children of Robert
L. Moody and, as such, have a contingent residuary interest in Robert L. Moodys beneficial
interest in Trust 19. The numbers in the table above do not include shares held in Trust 19.
(See Footnote 3 under Security Ownership of Certain Beneficial Owners above for additional
information about Trust 19.)
|
|
(5)
|
|
These shares are owned by The Moody Foundation, of which Frances Anne Moody-Dahlberg
and Robert L. Moody are Trustees. (See Security Ownership of Certain Beneficial Owners
above.)
|
|
(6)
|
|
Robert L. Moody and William L. Moody IV are life income beneficiaries of the
Libbie Shearn Moody Trust. Robert L. Moody has advised management that he has assigned all of
his life income interest in such trust to National Western Life Insurance Company, a Colorado
insurance company controlled by him. The numbers in the table above do not include shares
held in the Libbie Shearn Moody Trust. (See Footnote 2 under Security Ownership of Certain
Beneficial Owners above for additional information about such trust.)
|
|
(7)
|
|
Includes 150,000 shares of our Restricted Stock.
|
|
(8)
|
|
Robert L. Moody is the sole owner of the 1% general partner in the M-N Family
Limited Partnership (the M-N Partnership), which owns 507,025 shares of our common stock.
As the sole owner of the general partner of the M-N Partnership, Robert L. Moody has the
indirect power to manage the assets of the
M-N
Partnership, including
voting the
M-N
Partnerships 507,025 shares of our common stock.
|
|
(9)
|
|
Robert L. Moody is a 1% general partner in the RLMFLP Limited Partnership (the
RLMFLP Partnership), which owns 50,000 shares of our Restricted Stock. As the sole general
partner of the RLMFLP Partnership, Robert L. Moody has the power to manage the assets of the
RLMFLP Partnership, including voting the RLMFLP Partnerships 50,000 shares of our Restricted
Stock. Mr. Moody also holds 110 shares as agent.
|
|
(10)
|
|
Includes 8,000 shares of our Restricted Stock.
|
|
(11)
|
|
Includes 4,667 shares of our Restricted Stock.
|
SECURITY OWNERSHIP OF ADVISORY DIRECTORS
The information contained in the following table is given with respect to the ownership of our
common stock on March 31, 2009 by each of our advisory directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
Percent of
|
|
Name of
Beneficial Owner
|
|
Beneficial Ownership
|
|
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin M. Herz, Jr.
|
|
|
16,815
|
(1)
|
|
Direct
|
|
|
*
|
|
|
|
|
9,550
|
(2)
|
|
Indirect
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Eugene Lucas
|
|
|
8,684
|
(1)
|
|
Direct
|
|
|
*
|
|
|
|
|
13
|
(3)
|
|
Indirect
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
E. Douglas McLeod
|
|
|
8,000
|
(4)
|
|
|
|
|
*
|
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
Includes 8,000 shares of our Restricted Stock.
|
|
(2)
|
|
Shares owned by the Three R Trusts, of which Mr. Herz is Trustee. (See Footnote 4
under Security Ownership of Certain Beneficial Owners above for additional information about
the Three R Trusts.)
|
|
(3)
|
|
Shares owned by spouse.
|
|
(4)
|
|
Shares of our Restricted Stock.
|
The information shown in the previous three tables was obtained from Statements of Beneficial
Ownership furnished to us by each of the persons or entities listed or from other communications
with such persons or entities.
89
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
INFORMATION CONCERNING DIRECTORS
The following information is given with respect to the directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
First
|
|
|
|
|
|
|
|
|
Elected to
|
Name
|
|
Age
|
|
Principal Occupation and Background
|
|
Board
|
|
|
|
|
|
|
|
|
|
|
|
Arthur O. Dummer
(1)
|
|
|
75
|
|
|
President, The Donner Company
(privately owned actuarial
consulting company), Salt Lake
City, Utah; Past Chairman of the
Board of Directors of the National
Organization of Life and Health
Guaranty Associations, Herndon,
Virginia; Director of Casualty
Underwriters Insurance Company,
Salt Lake City, Utah (privately
owned insurance company);
Director, Chairman of the Board of
Directors of American Community
Mutual Insurance Company, Livonia,
Michigan (mutual insurance
company); President and Director
of Western United Holding Company,
Spokane, Washington (privately
owned insurance holding company);
Past Director of Beneficial Life
Insurance Company, Salt Lake City,
Utah; Aurora National Life
Assurance Company, Los Angeles,
California; Continental Western
Life Insurance Company, Des
Moines, Iowa; Utah Home Fire
Insurance Company, Salt Lake City,
Utah; and PHA Life Insurance
Company, Portland, Oregon (all
privately owned insurance
companies); Past Director of
National Western Life Insurance
Company, Austin, Texas.
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Shelby M.
Elliott
(2)(3)
|
|
|
82
|
|
|
President-Emeritus of Texas
Chiropractic College since 2004;
President of Texas Chiropractic
College from 1990 through 2003;
Director of Moody National Bank
from March 2000 to March 2004
(privately owned bank); Past
Director of First Texas Bank,
Vidor, Texas (privately owned
bank); Past Director of Yettie
Kersting Memorial Hospital,
Liberty, Texas; and Past Chairman
of the American Chiropractic
Association.
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard
Ferdinandtsen
(4)
|
|
|
72
|
|
|
President of the Company since
April 2000 and Chief Operating
Officer since April 1997; also a
director and/or officer of each
principal subsidiary of the
Company. Prior positions with the
Company include Senior Executive
Vice President, Chief
Administrative Officer from April
1996 to April 1997; Senior Vice
President, Health Insurance from
April 1993 to April 1996; and
Senior Vice President, Group
Insurance from July 1990 to April
1993. Prior to joining the
Company, Mr. Ferdinandtsen served
as President and Chief Operating
Officer of American Security Life
Insurance Company from April 1983
to January 1991.
|
|
|
1997
|
|
|
|
|
|
|
|
|
|
|
|
|
Frances Anne
Moody-Dahlberg
(5)(6)
|
|
|
39
|
|
|
Executive Director of The Moody
Foundation (charitable and
educational foundation) since
January 1998, and a Trustee of The
Moody Foundation since February
2004; Director of National Western
Life Insurance Company, Austin,
Texas; Director of Gal-Tex Hotel
Corporation (hotel management
corporation) from March 2000 to
December 2003; Director of The
Moody Endowment (charitable
corporation) from 1991 to February
2004.
|
|
|
1987
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
First
|
|
|
|
|
|
|
|
|
Elected to
|
Name
|
|
Age
|
|
Principal Occupation and Background
|
|
Board
|
|
|
|
|
|
|
|
|
|
|
|
Robert L. Moody
(4)(5)
|
|
|
73
|
|
|
Chief Executive Officer since July
1991 and Chairman of the Board
since 1982; Chairman of the Board,
Chief Executive Officer and
Director of Moody National Bank
(banking services); Chairman of
the Board, Chief Executive Officer
and Director of National Western
Life Insurance Company, Austin,
Texas; Trustee of The Moody
Foundation (charitable and
educational foundation).
|
|
|
1960
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell S.
Moody
(5)(6)
|
|
|
48
|
|
|
Investments, League City, Texas.
Director of National Western Life
Insurance Company, Austin, Texas;
Director of Gal-Tex Hotel
Corporation (hotel management
company) from March 2000 to
December 2003.
|
|
|
1986
|
|
|
|
|
|
|
|
|
|
|
|
|
William L. Moody
IV
(4)(7)
|
|
|
84
|
|
|
Investments and Ranching, Oil and
Gas, Galveston, Texas; Trustee,
Board of Trustees of Rosenberg
Library (charitable organization);
Trustee, University of Texas
Medical Branch Development Board
(charitable organization);
President and Director of Moody
Ranches, Inc. (investments and
ranching); Director of American
National Life Insurance Company of
Texas (subsidiary life insurance
company).
|
|
|
1951
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank P.
Williamson
(1)(2)(3)
|
|
|
76
|
|
|
Retired Pharmacist; Director of
SM&R Investments, Inc. and
American National Investment
Accounts, Inc. from 1997 to March,
2004 (mutual funds advised by a
Company subsidiary).
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
James P.
Yarbrough
(1)(2)
|
|
|
53
|
|
|
County Judge, County of Galveston,
Texas since January 1995; James D.
Yarbrough & Co., October 1989
through December 1994 (privately
owned contract management and
financial consulting firm);
Member, Galveston County Economic
Development Alliance; Advisory
Director, Texas First Bank -
Galveston, Galveston, Texas
(privately owned bank); Ex-Officio
Director, Texas City-LaMarque
Chamber of Commerce; Member,
Development and Advisory Council,
University of Houston Clear
Lake, Houston, Texas; Director,
Health Facilities Development
Corporation of Galveston County,
Texas; Director, Juvenile Justice
Alternate Education Program Board
of Galveston County, Texas;
Director, Juvenile Board of
Galveston County, Texas; Director,
Purchasing Agent Board of
Galveston County, Texas; Director,
Texas Environmental Research
Consortium (non-profit
corporation); Member, Governors
Commission for Disaster Recovery
and Renewal.
|
|
|
2001
|
|
|
|
|
(1)
|
|
Member of the Audit Committee.
|
|
(2)
|
|
Member of the Compensation Committee.
|
|
(3)
|
|
Member of the Nominating Committee.
|
|
(4)
|
|
Member of the Executive Committee.
|
|
(5)
|
|
Robert L. Moody is Chairman of the Board, Chief Executive Officer and controlling
shareholder of National Western Life Insurance Company, a publicly traded life insurance company.
|
|
(6)
|
|
The Moody Foundation owns 34.0% and the Libbie Shearn Moody Trust owns 50.2% of
Gal-Tex Hotel Corporation.
|
|
(7)
|
|
Member of the Finance Committee.
|
91
INFORMATION CONCERNING ADVISORY DIRECTORS
The Board of Directors has appointed the following persons as our advisory directors. Our
advisory directors serve at the pleasure of the Board. Although advisory directors do not vote on
matters considered by the Board, we benefit from their experience and advice. Advisory directors
receive the same compensation and benefits as our Directors who are not also our officers.
The following information is given with respect to our advisory directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year First
|
|
Years
|
|
|
|
|
|
|
|
|
Appointed
|
|
Served as
|
|
|
|
|
|
|
|
|
Advisory
|
|
a
|
Name
|
|
Age
|
|
Principal Occupation and Background
|
|
Director
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin M. Herz, Jr.
|
|
|
68
|
|
|
Partner of Greer, Herz & Adams,
L.L.P., General Counsel to the
Company; Trustee of the Three R
Trusts (trust for the benefit of
the children of Robert L. Moody).
|
|
|
2004
|
|
|
1984 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Eugene
Lucas
(1)
|
|
|
83
|
|
|
President and Director of Gal-Tex
Hotel Corporation, Gal-Tenn Hotel
Corporation, Gal-Tex Woodstock,
Inc., and LHH Hospitality, LLC
(hospitality and hotel management
companies); President of Colorado
Landmark Hotels, LLC, Kentucky
Landmark Hotels, LLC, and Virginia
Landmark Hotels, LLC (hospitality
and hotel management companies);
Director of Colonel Museum, Inc.
(charitable corporation);
President and Director of
1859-Beverage Company (hospitality
company).
|
|
|
2004
|
|
|
1981 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E. Douglas
McLeod
(2)
|
|
|
67
|
|
|
Director of Development of The
Moody Foundation (charitable and
educational foundation); Chairman
and Director of Moody Gardens,
Inc. (charitable corporation);
Attorney; Director of National
Western Life Insurance Company,
Austin, Texas; Vice President and
Director of Colonel Museum, Inc.
(charitable corporation); Past
Director and past Chairman of
Center for Transportation and
Commerce (charitable corporation);
Director and Executive Board
Member, South Texas College of Law
(law school); Director, San
Jacinto Museum of History.
|
|
|
2004
|
|
|
1984 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert L. Moody, Jr.
|
|
|
49
|
|
|
President and Director of Moody
Insurance Group, Inc. (privately
owned insurance agency); Director
of Moody National Bank; Director
of ANREM Corporation (subsidiary
real estate management
corporation); Director of HomeTown
Bank, National Association
(national bank); Trustee of the
Moody Endowment (charitable
corporation); Ranching.
|
|
|
2009
|
|
|
1982 to 1987
|
|
|
|
(1)
|
|
The Moody Foundation owns 34.0% and the Libbie Shearn Moody Trust owns 50.2% of
Gal-Tex Hotel Corporation.
|
|
(2)
|
|
Robert L. Moody is Chairman of the Board, Chief Executive Officer and controlling
shareholder of National Western Life Insurance Company, a publicly traded life insurance
company.
|
Family Relationships
Robert L. Moody, our Chairman of the Board and Chief Executive Officer, is the cousin of
William L. Moody IV, one of our directors. Russell S. Moody and Frances Anne Moody-Dahlberg, two
of our directors, are children of Robert L. Moody. Robert L. Moody, Jr., a son of Robert L. Moody
and brother of Russell S. Moody and Frances Ann Moody-Dahlberg, is one of our advisory directors.
92
IDENTIFICATION OF EXECUTIVE OFFICERS
The following is a list of our executive officers, other than Messrs. Moody and Ferdinandtsen,
who are also directors, their current ages, and their positions and offices for the past five
years.
|
|
|
|
|
|
|
Name of Officer
|
|
Age
|
|
Position (Year Elected to Position)
|
|
|
|
|
|
|
|
James E. Pozzi
|
|
|
58
|
|
|
Senior Executive Vice President, Chief Administrative Officer
(2008); Senior Executive Vice President, Corporate Planning,
Systems and Life Administration (2004-2008)
|
|
|
|
|
|
|
|
Ronald J. Welch
|
|
|
63
|
|
|
Senior Executive Vice President, Corporate Risk Officer &
Chief Actuary (2008); Senior Executive Vice President, Chief
Actuary and Chief Corporate Risk Management Officer
(2004-2008)
|
|
|
|
|
|
|
|
David A. Behrens
|
|
|
46
|
|
|
Executive Vice President, Independent Marketing (1999)
|
|
|
|
|
|
|
|
Bill J. Garrison
|
|
|
75
|
|
|
Executive Vice President, Director of Career Sales & Service
Division (1988)
|
|
|
|
|
|
|
|
Michael W. McCroskey
|
|
|
65
|
|
|
Executive Vice President, Investments (1995); Treasurer (2001)
|
|
|
|
|
|
|
|
Gregory V. Ostergren
|
|
|
53
|
|
|
Executive Vice President, Director of Multiple Line (2000)
|
|
|
|
|
|
|
|
Dwain A. Akins
|
|
|
58
|
|
|
Senior Vice President, Corporate Affairs, Chief Corporate
Compliance Officer (2006); Vice President, Corporate
Compliance (2003-2006)
|
|
|
|
|
|
|
|
Albert L. Amato, Jr.
|
|
|
60
|
|
|
Senior Vice President, Life Insurance Administration (1994)
|
|
|
|
|
|
|
|
Scott F. Brast
|
|
|
45
|
|
|
Senior Vice President, Real Estate / Mortgage Loan
Investments (2005); Vice President, Real Estate Investments
(2000-2005)
|
|
|
|
|
|
|
|
Frank V. Broll, Jr.
|
|
|
59
|
|
|
Senior Vice President & Actuary (2005); Vice President &
Actuary (1986-2005)
|
|
|
|
|
|
|
|
Gordon D. Dixon
|
|
|
63
|
|
|
Senior Vice President, Securities Investments (2004)
|
|
|
|
|
|
|
|
Bernard S. Gerwel
|
|
|
50
|
|
|
Senior Vice President, Chief MLEA Administrative Officer
(2006); Senior Vice President, Marketing Information and
Technology Services of American National Property and
Casualty Company (2002)
|
|
|
|
|
|
|
|
Rex D. Hemme
|
|
|
60
|
|
|
Senior Vice President & Actuary (2005); Vice President &
Actuary (1993-2005)
|
|
|
|
|
|
|
|
Johnny D. Johnson
|
|
|
56
|
|
|
Senior Vice President, Corporate Chief Information Officer
(2008); Senior Vice President, Chief Information Officer
(2007); Chief Information Officer, AEGON Financial Partners,
AEGON USA (2002-2007)
|
|
|
|
|
|
|
|
Bruce M. LePard
|
|
|
52
|
|
|
Senior Vice President, Human Resources (2006); Vice
President, Human Resources of ING Investment Management, Inc.
(2000-2005)
|
|
|
|
|
|
|
|
James W. Pangburn
|
|
|
52
|
|
|
Senior Vice President, Credit Insurance Division (2004)
|
|
|
|
|
|
|
|
Stephen E. Pavlicek
|
|
|
62
|
|
|
Senior Vice President, Chief Financial Officer (2007); Senior
Vice President, Controller (1996-2007)
|
|
|
|
|
|
|
|
Ronald C. Price
|
|
|
57
|
|
|
Senior Vice President, Chief Marketing Officer Career Life Agencies (2004)
|
|
|
|
|
|
|
|
Steven H. Schouweiler
|
|
|
62
|
|
|
Senior Vice President, Health Insurance Operations (1998)
|
|
|
|
|
|
|
|
Shannon L. Smith
|
|
|
49
|
|
|
Senior Vice President, Chief Multiple Line Marketing Officer
(July 2008); Program Marketing Manager of Meadowbrook
Insurance Group (April 2008 July 2008); Vice President
Marketing and Distribution of Lincoln General Insurance
Company (July 2003 October 2007)
|
93
There
are no arrangements or understandings pursuant to which any officer
was appointed. All
officers are appointed annually by the Board of Directors and serve until their successors are
elected and qualified, unless otherwise specified by the Board.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis explains the philosophy underlying our compensation
strategy and the fundamental elements of compensation paid to the Chief Executive Officer (CEO),
Chief Financial Officer, and other executive officers included in the Summary Compensation Table,
to whom we refer collectively as our Named Executive Officers. Specifically, this Compensation
Discussion and Analysis addresses the following:
|
|
|
Oversight of our compensation programs;
|
|
|
|
|
Objectives of our compensation programs;
|
|
|
|
|
How we determine each element of compensation;
|
|
|
|
|
Elements of compensation; and
|
|
|
|
|
Other important compensation policies.
|
Oversight of Our Compensation Programs
The Compensation Committee of our Board of Directors (the Board Compensation Committee)
exercises oversight of the compensation programs for our Named Executive Officers. The Board
Compensation Committee is supported in its role by our Management Compensation Committee. The
Management Compensation Committee is comprised of three of our most senior officers: G. Richard
Ferdinandtsen, President and Chief Operating Officer; James E. Pozzi, Senior Executive Vice
President and Chief Administrative Officer; and Ronald J. Welch, Senior Executive Vice President,
Corporate Risk Officer and Chief Actuary.
The compensation process for our Named Executive Officers begins with an annual evaluation by
the Management Compensation Committee. As part of this evaluation process, the Management
Compensation Committee considers our performance, internal equity and consistency, each executive
officers individual performance over the prior year, any changes in responsibilities, and the
future potential of each executive officer, as well as data available from professionally-conducted
market studies obtained from a range of industry and general market sources.
Based on these evaluations, the Management Compensation Committee formulates recommendations
with respect to (i) annual pay increases, (ii) performance criteria for incentive compensation, and
(iii) long-term incentive grants, if any. Following the review and approval of these
recommendations by the Chairman and Chief Executive Officer, the President and Chief Operating
Officer presents the Management Compensation Committees evaluations and recommendations to the
Board Compensation Committee. Recommendations with respect to the President and Chief Operating
Officers pay are made by the Chairman and Chief Executive Officer. The Board
Compensation Committee makes its own determination of pay for the Chairman and Chief Executive
Officer with the advice of its outside consultant.
To evaluate the compensation of our Named Executive Officers and other senior executive
officers relative to market comparables and to better inform the Board Compensation Committee in
making fiscal 2008 compensation decisions, the Board Compensation Committee engaged Mercer (US)
Inc. (Mercer), a global human resources consulting firm, to conduct a competitive evaluation of
the Named Executive Officers compensation relative to a peer group and nationally published market
surveys of executive compensation practices, and to evaluate total shareholder performance relative
to the peer group and the S&P 500, as explained below under Market Comparisons. Following the
receipt of Mercers report, the Board Compensation Committee approved the compensation of the Named
Executive Officers and submitted its compensation recommendations to our Board of Directors. The
Board of Directors approved those recommendations.
94
Objectives of Our Compensation Programs
The overall goal of our executive compensation programs is to retain and reward leaders who
create long-term value for our stockholders. With this goal in mind, our compensation programs are
designed to:
|
|
|
Attract and retain experienced, highly qualified individuals who are in a position to
make significant contributions to our success;
|
|
|
|
Drive exceptional performance and motivate our executive officers to achieve desired
financial results;
|
|
|
|
Provide our executives with opportunities to develop a significant ownership stake in
the Company; and
|
|
|
|
Align the interests of our executive officers with the long-term interests of our
shareholders.
|
How We Determine Each Element of Compensation
In determining the amounts of each element of compensation and the aggregate compensation for
our Named Executive Officers, we review market practices as described under Market Comparisons
below. We do not use any specific formulae or attempt to satisfy any specific ratio for
compensation among our executive officers. We also do not generally target any particular
allocation for base salary, annual incentive, or long-term equity awards as a percentage of total
compensation. Final pay levels are decided based on a review of relevant market practices,
individual role and tenure, and each executives ability to impact financial and operational
results. Historically, our compensation programs have more heavily emphasized fixed compensation,
which is different from the greater weight provided to incentive compensation by many of our peers.
However, as described under 2009 Program below, our compensation programs will place greater
weight on performance-based compensation in the future.
Market Comparisons
In November 2007, Mercer evaluated the total direct compensation (consisting of base salary,
annual incentives, and long-term incentives) of our Named Executive Officers relative to market
practices as follows:
|
|
|
The compensation of our Chairman and Chief Executive Officer (CEO) was compared to
that of CEOs at a peer group of companies and to survey data.
|
|
|
|
The compensation of our President and Chief Operating Officer was compared to that of
the number two executive officer at the peer companies. Because the President and Chief
Operating Officer has significantly greater responsibilities compared to Chief Operating
Officer job descriptions provided in surveys, we excluded the survey data for this
position.
|
|
|
|
The compensation of our other Named Executive Officers was compared to that of
executives in comparable positions using published survey data only, as they were not
identified at the time Mercer conducted the peer company analysis.
|
Going forward, the compensation of all five Named Executive Officers will be compared to both data
sources.
The peer group includes companies that compete with us for talent, face similar challenges in
the financial services sector, and have senior executives with comparable responsibilities. Peer
group fiscal 2006 revenues ranged from $0.87 billion to $5.4 billion (median revenues of $3.0
billion), and assets size ranged from $6.3 billion to $39.8 billion (median assets of $14.3
billion). Our assets were approximately $17.9 billion in 2006, and revenues were approximately $3.1
billion. The peer group is comprised of the following financial service companies:
W.R. Berkley Corporation
Cincinnati Financial Corporation
The Hanover Insurance Group, Inc.
HCC Insurance Holdings, Inc.
Horace Mann Educators Corporation
Old Republic International Corporation
Phoenix Companies, Inc.
95
Protective Life Corporation
StanCorp Financial Group, Inc.
Torchmark Corporation
Transatlantic Holdings, Inc.
Unitrin, Inc.
White Mountains Insurance Group, Ltd.
The published survey data covers a larger set of companies, including many if not all of the
peer companies within the insurance industry. The specific surveys used for fiscal 2008 were:
|
|
|
Mercers Benchmark Database;
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|
|
|
Watson Wyatts Survey Report on Top Management Compensation;
|
|
|
|
Watson Wyatts Survey Report on Health, Annuity, & Life Insurance Positions;
|
|
|
|
Watson Wyatts Survey Report on Property & Casualty Insurance Positions; and
|
|
|
|
LOMAs Executive Compensation Survey Report.
|
Key findings of Mercers evaluation were as follows:
|
|
|
As of the end of 2006, our three-year total shareholder return outperformed the peer
group and the S&P 500 median:
|
3-Year Total Shareholder Return (Stock Price Plus Reinvested Dividends)
ANICO vs. Peer Group Median and S&P 500 Index
|
|
|
Chairman and Chief Executive Officer total direct compensation was in the top quartile
of the peer organizations. Our three-year total shareholder return performance as of
fiscal year end 2006 was higher than the peer group and the S&P 500 median as illustrated
in the chart above. Mercer also found that while our Chairman and CEOs pay mix was
heavily weighted toward base salary, his interests were adequately aligned with
shareholders given his significant stock ownership. Later in 2008, Mercer conducted an
additional performance analysis indicating that our three-year total shareholder return as
of fiscal year end 2007 was positioned at the 75
th
percentile of the peers.
|
|
|
|
President and Chief Operating Officer total direct compensation approximated the peer
group median.
|
|
|
|
Senior Vice President, Chief Financial Officer; Executive Vice President, Director of
Multiple Line; and Executive Vice President, Independent Marketing total direct
compensation was below the 25th percentile.
|
96
Elements of Compensation Provided to the Named Executive Officers and Why We Pay Each Element
The following table lists the primary elements of our executive compensation program and the
primary purpose of each element. Additional explanation of each element follows the table.
|
|
|
Element
|
|
Purpose
|
|
|
|
Base Salary
|
|
Provide a fixed level of competitive compensation
|
Annual Incentive Compensation
|
|
Focus executive attention on key financial and
operational measures
|
Long-Term Incentive
Compensation
(consisting of
restricted stock and stock
appreciation rights)
|
|
Align the interests of executives with long-term
shareholder value and retain executive talent
|
Retirement Benefits
(consisting of qualified and
non-qualified Company
pension plans and the
Companys 401(k) plan)
|
|
Assist executives in providing for their
financial security and future personal needs
|
Welfare Benefits
(consisting of basic and
supplemental health
insurance, disability
protection, and life
insurance)
|
|
Assist executives in providing for
their current personal needs
|
Base Salary
Base salary is an important component of total compensation for our Named Executive Officers,
and it is vital to our goal of recruiting and retaining executive officers with proven abilities.
Base salaries were initially determined for each Named Executive Officer based on abilities,
qualifications, accomplishments, and prior work experience. Upward adjustments are considered
annually based on market data, the consistency of the executive officers individual performance
over the prior year, changes in responsibilities, future potential, and internal equity. Setting
of annual salaries is important because each Named Executive Officers target annual incentive
compensation is set as a percentage of annual salary levels.
With the exception of Robert L. Moody, Chairman and CEO, and G. Richard Ferdinandtsen,
President and Chief Operating Officer, each of the Named Executive Officers received a base salary
increase in 2008. The base salaries of Stephen E. Pavlicek, Senior Vice President and Chief
Financial Officer, Gregory V. Ostergren, Executive Vice President, Director of Multiple Line, and
David A. Behrens, Executive Vice President, Independent Marketing increased 4.82%, 3.81% and 4.40%,
respectively, during 2008 over the 2007 levels. The base salary increases were made to improve the
competitive positioning relative to market for these three Named Executive Officers.
Annual Incentive Compensation
Our Named Executive Officers participated in the Executive Incentive Compensation Program.
Eligibility to participate in this program is determined by our Board Compensation Committee and
approved by the Board of Directors. Payouts are based on actual performance relative to
predetermined performance objectives across a range of performance measures that the executive has
the ability to impact.
Incentive Opportunities:
Annual incentive opportunities are expressed as a percentage of base
salary. For each applicable performance measure, there are three levels of performance objectives
(Level 1, Level 2, and Level 3), with increased incentive opportunities associated with each level.
An officer must fully meet or exceed the applicable performance objective at each particular level
in order to receive the incentive opportunity associated with that level. No pro-rated amount is
paid for partial progress towards a level.
The following table describes the aggregate potential award levels, as a percentage of base
salary, across all performance measures applicable to each Named Executive Officer.
97
2008 Potential Annual Incentive Levels as a Percentage of Base Salary for the Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Name/Title
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Robert L. Moody, Chairman of the Board
of Directors and Chief Executive Officer
|
|
|
12.33
|
%
|
|
|
24.67
|
%
|
|
|
37
|
%
|
G. Richard Ferdinandtsen, President and
Chief Operating Officer
|
|
|
20
|
%
|
|
|
40
|
%
|
|
|
60
|
%
|
Stephen E. Pavlicek, Senior Vice
President and Chief Financial Officer
|
|
|
12
|
%
|
|
|
24
|
%
|
|
|
36
|
%
|
Gregory V. Ostergren, Executive Vice
President, Director of Multiple Line
|
|
|
18
|
%
|
|
|
36
|
%
|
|
|
54
|
%
|
David A. Behrens, Executive Vice
President, Independent Marketing
|
|
|
12
|
%
|
|
|
24
|
%
|
|
|
36
|
%
|
Performance Measures:
The Board Compensation Committee generally establishes specific
performance measures and the corresponding levels of performance objectives for each of our Named
Executive Officer after consideration of our annual corporate plan and after review of
recommendations from the Management Compensation Committee. Named Executive Officers are
reasonably likely to meet some, but not all, Level 1 objectives. Achievement of a Level 2 payout
generally means that the Named Executive Officers performance has met yearly objectives
established under our annual corporate plan. The Board Compensation Committee considers Level 2
objectives to be aggressive. Level 3 objectives are established at levels above and beyond the
expected achievement associated with a particular performance measure.
Performance measures used in the 2008 Executive Incentive Compensation Program are listed and
explained below. Particular performance measures are selected for each Named Executive Officer
based on the financial and operational measures that he has the ability to impact. Not all
measures are used for every Named Executive Officer. Unless otherwise noted below, measures are
calculated on a GAAP accounting basis. Adjustments may be made for extraordinary occurrences in a
particular year that are not expected to recur. Any such adjustments will be reported to the Board
of Directors and approved by the Board Compensation Committee and could include such unusual items
as the effects of natural disasters and unexpected litigation against us.
|
1.
|
|
Total Consolidated Operating Revenues.
|
|
2.
|
|
Adjusted Consolidated After Tax GAAP Income
: This is consolidated net income, adjusted
for changes in unrealized capital gains and losses, and adjusted for unusual items. This
incentive is based on a five-year average of adjusted consolidated after tax GAAP income.
|
|
3.
|
|
Return on Equity from Insurance Lines (adjusted for unusual items).
|
|
|
4.
|
|
Total Corporate Return on Equity
: This is adjusted gain divided by adjusted equity.
|
|
|
|
Adjusted gain is consolidated net income, adjusted for changes in unrealized capital
gains/losses, and adjusted for unusual items.
|
|
|
|
Adjusted equity is beginning shareholders equity minus unrealized gain/loss on
bonds (FAS 115).
|
|
5.
|
|
Weighted Direct Earned Premium
: This is the total weighted direct earned premium, which
is premium income to us that is weighted in accordance with industry standards for
measuring premium. Pursuant to such standards, recurring premiums are weighted at 100%,
and single life premiums, excess life premiums, and annuity deposits are weighted at 10% of
the actual amount received. Direct earned premium refers to premium actually received.
|
|
6.
|
|
Shared Services Controllable Costs
: This is the actual controllable non-distribution
related operating expenses for our home office and League City, Texas operations.
|
|
7.
|
|
Timeliness of Report
: This represents the average working days past the end of the
month until our monthly operating reports are distributed, excluding the month of January
and the end of each quarter.
|
|
8.
|
|
Multiple Line Direct Life Earned Premium
: This includes life and annuity weighted
direct earned premium for Multiple Line Marketing operations.
|
|
9.
|
|
Multiple Line Direct Written P&C Premium
: This consists of direct written premium for
our primary property and casualty insurance operations.
|
98
|
10.
|
|
Multiple Line After-Tax GAAP Profit
: This represents the total Multiple Line Marketing
operations after-tax GAAP profit, excluding the after-tax impact of net catastrophic
losses, realized investment gains (losses), and very extraordinary items.
|
|
11.
|
|
Multiple Line Weighted Life and Annuity Premium Sales
: This consists of weighted life
and annuity sales for Multiple Line Marketing operations. Premium sales is a measurement
of annualized premium expected to be collected from in-force policies.
|
|
12.
|
|
ANPAC Profit
: This represents the consolidated GAAP after-tax gain from insurance
operations for American National Property and Casualty Company and its subsidiaries,
including investment earnings from unallocated surplus, and excluding the after-tax impact
of net catastrophic losses, realized investment gains (losses), and very extraordinary
items.
|
|
13.
|
|
Farm Family Profit
: This is the consolidated GAAP after-tax operating net income for
Farm Family Casualty Insurance Company, United Farm Family Insurance Company, and Farm
Family Life Insurance Company, which equals net income excluding the after-tax impact of
net catastrophic losses, realized investment gains (losses), and very extraordinary items.
|
|
14.
|
|
Multiple Line ANICO Profit
: This is the consolidated GAAP operating net income for
Multiple Line Marketing operating at the Company, which equals net income excluding
realized investment gains (losses) and very unusual items.
|
|
15.
|
|
Independent Marketing Group Life Weighted Direct Earned Premium
: This is life weighted
direct earned premium associated with Independent Marketing Group operations.
|
|
16.
|
|
Independent Marketing Group Annuity Statutory Reserves
: This is annuity statutory
reserves associated with Independent Marketing Group operations.
|
|
17.
|
|
Independent Marketing Group Marketing Expense Ratio
: This is the total expenses
associated with the Independent Marketing Group distribution channel divided by total
premiums collected through the Independent Marketing Group.
|
|
18.
|
|
Independent Marketing Group Profit before Federal Income Tax
: This represents the
total Independent Marketing Group GAAP net income before federal income taxes.
|
99
The table below shows the performance measures and their relative weightings as a percentage
of the total incentive opportunity for each Named Executive Officer during 2008.
2008 Annual Incentive Performance Measures and Weightings for the
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Measure
|
|
Moody
|
|
|
Ferdinandtsen
|
|
|
Pavlicek
|
|
|
Ostergren
|
|
|
Behrens
|
|
Consolidated Total
Annual Revenues
|
|
|
16
|
%
|
|
|
22.5
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Adjusted
Consolidated After
Tax GAAP Income
|
|
|
68
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Equity
from Insurance
Lines
|
|
|
8
|
%
|
|
|
22.5
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
Total Corporate
Return on Equity
|
|
|
8
|
%
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Direct
Earned Premium
|
|
|
|
|
|
|
22.5
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Shared Services
Controllable Costs
|
|
|
|
|
|
|
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
Timeliness of Report
|
|
|
|
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
Multiple Line
Direct Life Earned
Premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
|
|
Multiple Line
Direct Written P&C
Premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
Multiple Line
After-Tax GAAP
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
%
|
|
|
|
|
Multiple Line
Weighted Life and
Annuity Premium
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
|
|
ANPAC Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
Farm Family Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
|
|
Multiple Line ANICO
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
%
|
|
|
|
|
Independent
Marketing Life
Weighted Direct
Earned Premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
%
|
Independent
Marketing Annuity
Statutory Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
%
|
Independent
Marketing -
Marketing Expense
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
%
|
Independent
Marketing Profit
Before FIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
%
|
The actual aggregate annual incentive award payment for 2008 to the Named Executive Officers
ranged from 9% to 27% of their respective base salaries. The following table shows how each Named
Executive Officer performed relative to his aggregate target (Level 2) award opportunity.
100
2008 Aggregate Target (Level 2) Incentive Opportunity Compared to Actual Aggregate Incentive Award Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody
|
|
|
Ferdinandtsen
|
|
|
Pavlicek
|
|
|
Ostergren
|
|
|
Behrens
|
|
|
Aggregate Target
Incentive
Opportunity (as a
percentage of base
salary)
|
|
|
24.67
|
%
|
|
|
40
|
%
|
|
|
24
|
%
|
|
|
36
|
%
|
|
|
24
|
%
|
Actual aggregate
incentive award
earned (as a
percentage of base
salary)
|
|
|
27
|
%
|
|
|
24
|
%
|
|
|
18
|
%
|
|
|
9
|
%
|
|
|
24
|
%
|
Monthly Incentive Compensation
In addition to participating in the Executive Incentive Compensation Program, Mr. Behrens is
eligible to receive monthly bonuses payable under the plan for officers of our Independent
Marketing Group. None of our other Named Executive Officers are eligible for these monthly
production bonuses. The process for determining monthly incentive opportunities is substantially
similar to the process discussed under Annual Incentive Compensation above. Bonuses are paid
monthly as earned.
Mr. Behrens monthly incentive compensation under the 2008 Executive Incentive Compensation
Program is based on new paid life, annuity, and mutual fund sales through the Independent Marketing
Group. The specific performance measures used are listed below.
|
1.
|
|
Excess and Single Premiums
. This represents premiums paid on excess and single
premium life policies sold through the Independent Marketing Group.
|
|
2.
|
|
Life Target Premiums
. This represents premiums paid on other life policies
sold through the Independent Marketing Group.
|
|
3.
|
|
Annuity Sales
. This represents new deposits in annuity products sold through
the Independent Marketing Group. Deposits received on group variable annuity product
in amounts in excess of $5,000,000 per individual policy will be counted at a rate of
20% of other annuity premium.
|
|
4.
|
|
Mutual Fund Sales
. This represents new investment in mutual funds managed by
our subsidiary Securities Management and Research, Inc., a registered investment
adviser and broker-dealer, and sold through the Independent Marketing Group. Incentive
compensation payable under this performance measurement is paid directly by Securities
Management and Research, Inc.
|
Incentive opportunities are determined as a percentage of sales of different products. Mr.
Behrens monthly award with respect to Excess and Single Premium policies is a flat 0.10% of
sales. The following table describes Mr. Behrens potential monthly award levels, as a percentage
of product sales, associated with each of the three other performance measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Measure
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Life Target Premiums
|
|
|
0.30
|
%
|
|
|
0.50
|
%
|
|
|
0.70
|
%
|
Annuities
|
|
|
0.015
|
%
|
|
|
0.025
|
%
|
|
|
0.035
|
%
|
Mutual Funds
|
|
|
0.015
|
%
|
|
|
0.025
|
%
|
|
|
0.035
|
%
|
The following table shows how Mr. Behrens performed relative to his target (Level 2) award
opportunity for these three performance measures.
101
|
|
|
|
|
|
|
|
|
|
|
Target (Level 2) Incentive Opportunity
|
|
|
Actual Incentive Award Earned
|
|
Performance Measure
|
|
(as a percentage of sales)
|
|
|
(as a percentage of sales)
|
|
|
Life Target Premiums
|
|
|
0.50
|
%
|
|
|
0.58
|
%
|
Annuities
|
|
|
0.025
|
%
|
|
|
0.03
|
%
|
Mutual Funds
|
|
|
0.025
|
%
|
|
|
0
|
%
|
Long-Term Incentive Compensation
In 1999, our Board of Directors and stockholders approved the American National Insurance
Company 1999 Stock and Incentive Plan (the 1999 Plan). All of our employees, as well as
directors and consultants of American National Insurance Company, are eligible to participate in
the 1999 Plan. The Plan is administered by our Board Compensation Committee. The 1999 Plan
provides for the grant of any or all of the following types of awards: (1) stock options, including
incentive stock options and non-qualified stock options; (2) stock appreciation rights (SARs), in
tandem with stock options or freestanding; (3) restricted stock; (4) performance awards; and (5)
incentive awards. To date, however, we have made grants only of restricted stock and freestanding
SARs.
In determining grants under the 1999 Plan, the Board Compensation Committee considers the
recommendations of the Management Compensation Committee. Such recommendations are reviewed and
approved by the Chairman and Chief Executive Officer and presented to the Board Compensation
Committee by the President and Chief Operating Officer. The President and Chief Operating Officer
discusses with the Board Compensation Committee the performance of plan participants, the need for
retention of such individuals, and any changes in responsibilities.
In 2008, Mr. Moody and Mr. Ferdinandtsen received service-based restricted stock grants
pursuant to the 1999 Plan. Mr. Moody was awarded 50,000 shares of restricted stock, and Mr.
Ferdinandtsen was awarded 20,000 shares. These grants were effective on May 1, 2008, and on that
date our common stock closed at $116.48 per share. Such restricted stock will vest fully in 2018
provided that the recipient remains in our employ continuously until such time. In addition, such
stock will fully vest upon the death or disability of the recipient or, with the Board of
Directors consent, upon the recipients retirement. Mr. Moody and Mr. Ferdinandtsen are critical
to our long-term success, and the restricted stock grant with a ten-year vesting period provides a
high-level of retention incentive, while enhancing executive ownership.
All other Named Executive Officers were granted SARs during 2008. The Board Compensation
Committee believes that SARs align Named Executive Officer efforts with shareholder value creation,
as the SARs pay out only if our stock price appreciates relative to the grant date value. SARs
grants vest 20% per year over a five-year period beginning the first anniversary of the grant.
Vested SARs expire five years from the date of vesting.
The number of SARs awarded to a particular officer depends on that officers position and
level of responsibility. The Board Compensation Committee has designated various discrete groups
of officers who may receive SARs, with each group based on relative position and level of
responsibility. For our officers receiving SARs, the number of SARs that may be awarded ranges
from 500 to 7,000, depending on the particular group of officers to which the individual belongs.
Of our Named Executive Officers, Mr. Behrens and Mr. Ostergren were in the group of officers
designated to receive 5,000 SARs each during 2008, and Mr. Pavlicek was in the group of officers
designated to receive 3,000 SARs each during 2008. These SARs were granted effective May 1, 2008
and have a strike price of $116.48 per share, the closing price of our common stock on that date.
102
Grant Practices
Historically, we generally have made grants of restricted stock and SARs every three years
(see 2009 Program below for changes in 2009). Consistent with this schedule, the Board
Compensation Committee approves and grants equity awards at its regularly scheduled meeting in
April based on recommendations from the Management Compensation Committee and Mercer. There is no
relationship between the timing of equity incentive award grants and our release of material,
non-public information. Although the Board Compensation Committee has the discretion to make
interim equity award grants under the 1999 Plan, the Board Compensation Committee generally does
not do so. However, an interim equity award grant may be made when a new hire joins our company at
an officer level for which SAR grants have been made, or when an individual is promoted to such a
level.
Retirement Benefits
We maintain Company-sponsored retirement and deferred compensation plans for the benefit of
our salaried employees, including our Named Executive Officers. These benefits are designed to
assist employees, including our Named Executive Officers, in providing for their financial security
and personal needs. Specifically, we maintain a qualified pension plan and non-qualified deferred
compensation plans. The purpose of the non-qualified deferred compensation plans is to restore
curtailments of benefits under the qualified plan required to comply with the Internal Revenue Code
of 1986, as amended (the Code). Each of these plans, and the benefits provided under each to the
Named Executive Officers, is further discussed below in connection with the Pension Benefits
table.
The Named Executive Officers are also eligible to participate in our 401(k) Plan, which is a
Company-wide, tax-qualified retirement plan. The intent of the plan is to provide all employees
with a tax-advantaged savings opportunity for retirement. We sponsor this plan to help employees
at all levels save and accumulate assets for use during their retirement. As required, eligible
pay under this plan is capped at Code annual limits. We do not match employee contributions in our
401(k) Plan.
Other Benefits
Basic health benefits, disability protection, life insurance and similar programs are provided
to make certain that access to healthcare and income protection is available to our employees and
their family members. Each of our Named Executive Officers, as well as all of our officers at the
level of vice president and above, participates in our Merit Plan, an insured medical plan that
supplements our core medical insurance plan. The Merit Plan provides coverage for co-pays,
deductibles, and other out-of-pocket expenses that are not covered by the core medical insurance
plan. Such coverage is limited to medical expenses that could be deducted by the recipient for
federal income tax purposes.
Perquisites
During 2008, perquisites to our Named Executive Officers included benefits under the Merit
Plan discussed immediately above; automobile allowances; payment of dining club membership fees;
and guest travel, lodging, entertainment, and food and beverage at Company business conferences or
other events. The perquisites and benefits provided to each Named Executive Officer during 2008
are reported in the All Other Compensation column of the Summary Compensation Table. While in
the past perquisites might have represented a material component of compensation for some of our
Named Executive Officers, our current policy has reduced these benefits and their percentage of
total compensation.
2009 Program
The objectives of the 2009 compensation program are to better align our total direct
compensation and pay-mix with market compensation for the Named Executive Officers by placing
greater emphasis on performance-based pay. Highlights of the 2009 Named Executive Officer
compensation program are as follows:
103
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Base Salary:
We have implemented a base salary freeze for all Named Executive
Officers. In addition
,
$3 million of the CEOs base salary has been re-allocated to annual
incentive opportunity, increasing the emphasis on performance-based pay.
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Annual Incentives:
Annual incentives will be settled in a combination of cash and
service-based restricted stock. The mix of cash and equity will be determined by the Board
Compensation Committee based on internal equity and the needs of the organization.
Aggregate cash incentive payouts will be capped at target (Level 2); however, Named
Executive Officers can earn up to 150% of target for any individual performance measure.
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Timing of Equity Grants:
Going forward, we expect that equity will be granted annually
instead of every three years.
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Other Important Compensation Policies Affecting Named Executive Officer Compensation
Employment and Severance Contracts.
In general, it is our Board of Directors policy not to
enter into employment agreements with, or provide executive severance benefits to, our executive
officers beyond those generally available to our salaried employees. As a result, our Named
Executive Officers serve at the pleasure of the Board and are at will employees.
Trading in Our Stock Derivatives.
Our Insider Trading Policy prohibits executive officers
from purchasing or selling options on our common stock, engaging in short sales with respect to our
common stock, or trading in puts, calls, straddles, equity swaps, or other derivative securities
that are directly linked to our common stock.
Tax Deductibility of the Named Executive Officers Incentive and Equity Compensation.
Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for
compensation over $1.0 million paid to a corporations chief executive officer and the three other
most highly compensated executive officers, excluding the chief financial officer. This limitation
applies only to compensation that is not considered performance based as defined in Section
162(m) rules. As we will be considered a public company under these rules only following our
registration with the SEC, Section 162(m) did not apply to us in 2008.
In designing our 2009 compensation programs, the Board Compensation Committee considered the
effects of Section 162(m) together with other factors relevant to our business needs. The Board
Compensation Committee intends, to the extent it deems desirable, to take steps to preserve the
deductibility of the compensation we pay. However, the Board Compensation Committee has not
adopted a policy that all compensation paid must be tax-deductible and qualified under Section
162(m).
We believe that the 2009 compensation to be paid to our Named Executive Officers that is not
considered performance-based will be fully deductible under Section 162(m), except for a portion
paid to our Chairman and Chief Executive Officer.
Compensation Consultant
As noted above, the Board Compensation Committee has retained Mercer to provide information,
analyses, and advice regarding compensation. The Mercer consultant who performs these services
reports directly to the Board Compensation Committee chair.
The Board Compensation Committee has established procedures that it considers adequate to
ensure that Mercers advice to the Committee remains objective and is not influenced by our
management. These procedures include: a direct reporting relationship of the Mercer consultant to
the Committee; a provision in the Committees engagement letter with Mercer specifying the
information, data, and recommendations that can and cannot be shared with management; an annual
update to the Committee on Mercers financial relationship with us, including a summary of the work
performed for us during the preceding twelve months; and written assurances from Mercer that,
within the Mercer organization, the Mercer consultant who performs services for us has a reporting
relationship and compensation determined separately from Mercers other lines of business and from
its other work for us. Mercer has provided the Committee with written assurance that these
procedures continue to be in place and were followed during the last completed fiscal year.
104
At the Board Compensation Committees direction, Mercer provided the following services for
the Committee during fiscal 2007 and 2008:
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Evaluated the competitive positioning of our top eighteen executives base salaries,
annual incentive and long-term incentive compensation relative our primary peers and the
broader insurance industry;
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Assessed the alignment of our compensation levels for the Named Executive Officers
relative to the performance of the Company against our primary peers;
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Assisted with the development of the 2009 compensation program for our top eighteen
executives, including recommendations for base salary, incentive compensation opportunity,
the performance required to earn such incentives, and the form of incentives to be provided
in cash and equity;
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Provided input on changes to the American National Insurance Company 1999 Stock and
Incentive Plan document for compliance with Section 162(m) of the Internal Revenue Code;
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Assisted with the preparation of the Compensation Discussion and Analysis for this
registration statement;
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Briefed the Committee on executive compensation trends among our peers and the broader
industry;
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Provided ongoing advice to the Board Compensation Committee as needed for ad hoc
requests.
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With the consent of the Board Compensation Committee chair, Mercer may, from time to time,
contact our executive officers for information necessary to complete its assignments and may make
reports and presentations to and on behalf of the Committee that the executive officers also
receive.
All of the decisions with respect to determining the amount or form of executive compensation
under our executive compensation programs are ultimately made by the Board Compensation Committee
and may reflect factors and considerations other than the information and advice provided by
Mercer.
105
Summary Compensation Table
The following table sets forth all of the compensation awarded to, earned by, or paid to our
principal executive officer, principal financial officer, and the three other highest paid
executive officers for the year ended December 31, 2008. These individuals are referred to below
as the Named Executive Officers. None of the Named Executive Officers has a written or unwritten
employment agreement or arrangement with us.
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Change in
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Pension
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Value
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and
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Non-qualified
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Non-Equity
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Deferred
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Stock
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SAR
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Incentive Plan
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Compensation
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All Other
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Name and Principal Position
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Year
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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Total
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Robert L. Moody
,
Chairman of the
Board and
Chief
Executive Officer
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2008
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$
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5,000,000
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$
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157
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$
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1,535,400
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$
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0
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$
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1,350,000
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$
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5,788,062
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$
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603,599
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*
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$
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14,277,218
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G.
Richard Ferdinandtsen
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President and
Chief Operating Officer
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2008
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$
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1,000,000
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$
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158
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$
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583,160
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$
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0
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$
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240,000
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$
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1,458,632
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$
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199,819
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*
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$
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3,481,769
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David A. Behrens
,
Executive Vice
President,
Independent
Marketing
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2008
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$
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310,646
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$
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136
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$
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0
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-$
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40,609
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$
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839,133
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$
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52,539
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$
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24,854
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$
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1,186,699
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Gregory V. Ostergren
,
Executive Vice
President,
Director
of Multiple Line
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2008
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$
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533,240
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$
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301
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$
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0
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-$
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175,139
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$
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49,792
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$
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292,655
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$
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24,498
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$
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725,347
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Stephen E. Pavlicek
,
Senior Vice
President and
Chief
Financial Officer
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2008
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$
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248,493
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$
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136
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$
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0
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-$
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37,121
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$
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45,052
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$
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203,564
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$
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24,774
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$
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484,898
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*
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Consists primarily of dividends on restricted stock, as shown in the All Other Compensation Table
Named Executive Officers below.
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Column (a) Salary.
These amounts represent base salary, including any amount of base salary the
Named Executive Officer may have contributed to our 401(k) plan.
Column (b) Bonus.
These amounts reflect an annual holiday bonus paid in December.
Column (c) Stock Awards.
These values represent grants of restricted stock to Mr. Moody and Mr.
Ferdinandtsen pursuant to the American National Insurance Company 1999 Stock and Incentive Plan.
See the Grants of Plan-Based Awards table below for more information. Further information regarding the American
National Insurance Company 1999 Stock and Incentive Plan is provided below.
106
The numbers in Column (c) represent the amount recognized as expense during 2008 for financial
statement reporting purposes, calculated in accordance with Financial Accounting Standards Board
Statement No. 123R, Share-Based Payment (FAS 123R), based on the stock price at the time of the
grant. Pursuant to SEC rules, the amounts shown exclude the impact of any estimated forfeitures
related to service-based vesting conditions. Such restricted stock will vest fully in 2018
provided that the recipient remains in our employ continuously until such time. In addition, such
stock will fully vest upon the death or disability of the recipient or, with the Board of
Directors consent, upon the recipients retirement. Dividends on restricted stock are included in
Column (g) All Other Compensation.
Column (d) SAR Awards.
These values include stock appreciation rights (SARs) granted to the
Named Executive Officers pursuant to the American National Insurance Company 1999 Stock and
Incentive Plan. The Grants of Plan-Based Awards table below has more information. The numbers
in Column (d) represent the portion of the fair value of SARs recognized as expense during 2008 for
financial statement reporting purposes, calculated in accordance with FAS 123R. Pursuant to SEC
rules, the amounts shown exclude the impact of any estimated forfeitures related to service-based
vesting conditions. Such amounts do not represent cash payments made to Named Executive Officers,
amounts realized, or amounts that may be realized by the Named Executive Officers. These SARs are
cash-settled and, as such, are accounted for under FAS 123R as liabilities. Accordingly, we record
these awards as a component of other non-current liabilities on the consolidated balance sheet.
For liability awards, the fair value of the award, which determines the measurement of the
liability on the consolidated balance sheet, is remeasured at each reporting period until the award
is settled; therefore, the fair value of SARs granted is recognized ratably over the vesting
period. Fluctuations in the fair value of the liability award are recorded as increases or
decreases in compensation cost, either immediately or over the remaining service period, depending
on the vested status of the award. SAR grants vest 20% per year over a five-year period beginning
the first anniversary of the grant. Vested SARs have a life of five years from the date of vesting.
The SARs granted during 2008 have an exercise price of $116.48, the closing price of our common
stock on May 1, 2008, the grant date. Our common stock had a closing price of $73.73 per share on
December 31, 2008.
Column (e) Non-Equity Incentive Plan Compensation.
These amounts show the annual cash incentives
payable under the Executive Incentive Compensation Program for 2008 performance, as further
described in the Compensation Discussion and Analysis section above. For Mr. Behrens, this amount
represents $74,555 in annual incentive compensation and $764,578 in monthly production bonus under
such program. For all other Named Executive Officers, the amounts shown in this column represent
annual incentive compensation under such program. See the Grants of Plan-Based Awards table
below for more information about this incentive opportunity.
Column (f) Change in Pension Value and Nonqualified Deferred Compensation Earnings.
These
amounts represent the 2008 increase in the present value of the Named Executive Officers benefits
under our tax-qualified pension plan and nonqualified pension plan. The Pension Benefits Table
below has more information. There is no nonqualified deferred compensation plan for the Named
Executive Officers.
Column (g) All Other Compensation.
These amounts include the items in the table below. Messrs.
Moody, Pavlicek and Behrens are provided membership in the South Shore Harbour Country Club in
League City, Texas, a facility owned by a subsidiary, in connection with their service to our
company. Because we incur no incremental cost in providing such membership, no amount is disclosed
for this benefit. Amounts included in this column are further detailed in the table that follows.
107
All Other Compensation Table Named Executive Officers
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Group Life
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Restricted Stock
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Insurance
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Name and Principal Position
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Dividends
|
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Premium
(1)
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Perquisites
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Total
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Robert L. Moody
,
Chairman of the
Board and
Chief
Executive Officer
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$
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577,500
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$
|
1,112
|
|
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$
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24,987
|
(2)(3)(4)
|
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$
|
603,599
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G. Richard Ferdinandtsen
,
President and Chief Operating Officer
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$
|
169,400
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$
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1,112
|
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$
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29,307
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(2)(3)(4)
|
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$
|
199,819
|
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David A. Behrens
,
Executive Vice
President,
Independent
Marketing
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$
|
0
|
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$
|
180
|
|
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$
|
24,674
|
(2)(3)
|
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$
|
24,854
|
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Gregory
V. Ostergren
,
Executive Vice
President,
Director of Multiple Line
|
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$
|
0
|
|
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$
|
516
|
|
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$
|
23,982
|
(2)(3)
|
|
$
|
24,498
|
|
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|
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|
|
|
|
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Stephen E. Pavlicek
,
Senior Vice President and
Chief Financial Officer
|
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$
|
0
|
|
|
$
|
792
|
|
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$
|
23,982
|
(2)(3)
|
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$
|
24,774
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(1)
|
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We provide group life insurance coverage to all salaried employees. The amount
included in the table represents the premium for such coverage for each Named Executive Officer.
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(2)
|
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Includes our Merit Plan benefit. The Merit Plan is an insured medical plan that
supplements our core medical insurance plan. Coverage under the Merit Plan is provided for all
officers of the level of vice president and above, as well as for their spouses and any dependents.
The Merit Plan provides coverage for co-pays, deductibles, and other out-of-pocket expenses that
are not covered by the core medical insurance plan. Such coverage is limited to medical expenses
that could be deducted by the recipient for federal income tax purposes. The Merit Plan is
underwritten by National Western Life Insurance Company, of which Robert L. Moody is Chairman of
the Board, Chief Executive Officer, and the controlling stockholder. Total premium and fees paid
to National Western Life Insurance Company for all Merit Plan participants in 2008 was $1,173,950.
As there is no individual underwriting
or individual premium assessed in connection with the Merit Plan, the amount shown in the table is
an average premium computed by dividing the total premium for all Merit Plan participants by the
number of participants.
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(3)
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Includes guest travel, lodging, entertainment, and food and beverage at our
business conferences or other events.
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(4)
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Includes an automobile allowance.
|
108
Grants of Plan-Based Awards
The following table has additional information about:
|
|
|
The stock and SAR awards shown in columns (c) and (d) of the Summary Compensation Table,
and
|
|
|
|
|
The Executive Incentive Compensation Program opportunities granted for 2008, which were
paid in 2009 and are shown in column (e) of the Summary Compensation Table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
All Other
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
SAR
|
|
|
or
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Awards:
|
|
|
Base
|
|
|
Date Fair
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
Shares of
|
|
|
Number
|
|
|
Price of
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity Incentive Plan
|
|
|
Stock
|
|
|
of Securities
|
|
|
SAR
|
|
|
Stock
|
|
|
|
Grant
|
|
|
Meeting
|
|
|
Awards
|
|
|
or
|
|
|
Underlying
|
|
|
Awards
|
|
|
and SAR
|
|
|
|
Date
|
|
|
Date
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Units
|
|
|
SARS
|
|
|
($/share)
|
|
|
Awards
|
|
Name
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
Robert L. Moody
,
|
|
|
5/1/08
|
|
|
|
4/24/08
|
|
|
$
|
4,400,000
|
|
|
$
|
7,700,000
|
|
|
|
*
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
$
|
5,824,000
|
|
Chairman of the Board
and
Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard Ferdinandtsen
,
|
|
|
5/1/08
|
|
|
|
4/24/08
|
|
|
$
|
800,000
|
|
|
$
|
1,600,000
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
$
|
2,329,600
|
|
President and
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Behrens
,
|
|
|
5/1/08
|
|
|
|
4/24/08
|
|
|
$
|
59,023
|
|
|
$
|
118,045
|
|
|
|
*
|
|
|
|
|
|
|
|
5,000
|
|
|
$
|
116.48
|
|
|
$
|
582,400
|
|
Executive Vice
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
368,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President, Independent
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory V. Ostergren
,
|
|
|
5/1/08
|
|
|
|
4/24/08
|
|
|
$
|
266,620
|
|
|
$
|
533,240
|
|
|
|
*
|
|
|
|
|
|
|
|
5,000
|
|
|
$
|
116.48
|
|
|
$
|
582,400
|
|
Executive Vice
President, Director of
Multiple Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
All Other
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
SAR
|
|
|
or
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Awards:
|
|
|
Base
|
|
|
Date Fair
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
Shares of
|
|
|
Number
|
|
|
Price of
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity Incentive Plan
|
|
|
Stock
|
|
|
of Securities
|
|
|
SAR
|
|
|
Stock
|
|
|
|
Grant
|
|
|
Meeting
|
|
|
Awards
|
|
|
or
|
|
|
Underlying
|
|
|
Awards
|
|
|
and SAR
|
|
|
|
Date
|
|
|
Date
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Units
|
|
|
SARS
|
|
|
($/share)
|
|
|
Awards
|
|
Name
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
Stephen E. Pavlicek
,
|
|
|
5/1/08
|
|
|
|
4/24/08
|
|
|
$
|
62,123
|
|
|
$
|
124,246
|
|
|
|
*
|
|
|
|
|
|
|
|
3,000
|
|
|
$
|
116.48
|
|
|
$
|
349,440
|
|
Senior Vice President
and Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
For 2009, non-equity incentive compensation is capped at target for each of the Named Executive
Officers.
|
Column (a) Grant Date.
This is the effective date of an award.
Column (b) Meeting Date.
This is the date that our Board of Directors, upon the recommendation
of the Compensation Committee, approved an award.
Column (c) (e) Estimated Future Payouts Under Non-Equity Incentive Plan Awards.
These columns
include the threshold and target award opportunities for the Named Executive Officers under the
2009 Executive Incentive Compensation Program that relate to 2009 performance targets, as described
above in the Compensation Discussion and Analysis section. Under such program, each of the Named
Executive Officers may receive an annual cash incentive award, with final payouts based on actual
performance relative to predetermined performance objectives across a range of performance
measures. Each Named Executive Officers annual incentive compensation is tied to financial and
operational measures that he has the ability to impact. Annual incentive opportunities are based
on a percentage of base salary. For each applicable performance measure, there are generally three
levels of performance objectives, with increased incentive opportunities associated with each
level; however, as noted above, non-equity incentive compensation is capped at target for each of
the Named Executive Officers under the 2009 Executive Incentive Compensation Program. An officer
must fully meet or exceed the applicable performance objective at each particular level in order to
receive the incentive opportunity associated with that level. Incentive awards actually earned by
the Named Executive Officers under the 2008 Executive Annual Incentive Compensation Program are
reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.
In addition to annual bonuses under the Executive Incentive Compensation Program, Mr. Behrens is
eligible for monthly production bonuses payable under the program to officers of our Independent
Marketing Group. Since there is no maximum amount for these monthly bonuses, the estimate of the
payment Mr. Behrens will receive in 2009 is included as a target amount, based on an average of
such amounts for the past three fiscal years as follows: 2008 $764,578; 2007 $256,759; 2006
$84,814. Management does not believe that the 2008 monthly bonus amount alone provides a fair and
meaningful estimate.
Column (f) All Other Stock Awards: Number of Shares of Stock or Units.
This column shows the
number of shares of restricted stock granted to Mr. Moody and Mr. Ferdinandtsen during 2008
pursuant to the American National Insurance Company 1999 Stock and Incentive Plan. Such shares may
not be sold during the time of restriction specified in the grant of the shares, but the owner has
the right to receive dividends and the right to vote the shares of restricted stock during the time
of the restriction. Further information regarding the American National Insurance Company 1999
Stock and Incentive Plan is provided below.
Column (g) All Other SAR Awards: Number of Securities Underlying SARs.
This column shows the
number of stock appreciation rights (SARs) granted to certain of our Named Executive Officers
during 2008 pursuant to the American National Insurance Company 1999 Stock and Incentive Plan. A
SAR gives its owner the right to exercise the SAR and receive, at such time, an amount equal in
value to the excess, if any, of the then fair market value of one share of our common stock over an
amount (the exercise price) specified in the owners SAR agreement. Further information
regarding the American National Insurance Company 1999 Stock and Incentive Plan is provided below.
Column (h) Exercise or Base Price of SAR Awards.
The exercise price of each SAR is equal to the
closing price of our common stock on the date of the grant.
110
Column (i) Grant Date Fair Value of Stock and SAR Awards.
This column shows the aggregate grant
date fair value of restricted stock and SAR awards for 2008. As discussed above in connection with
the Summary Compensation Table, such value is computed based on FAS 123R.
The American National Insurance Company 1999 Stock and Incentive Plan
All of our employees, as well as directors and consultants of American National Insurance
Company, are eligible to participate in the American National Insurance Company 1999 Stock and
Incentive Plan (the 1999 Plan). The purposes of the Plan are to align the personal financial
incentives of key personnel and consultants with the long-term growth of our company and the
interests of our stockholders through ownership and performance of
our common stock; to enhance our ability to retain key personnel and consultants; and to attract
outstanding prospective employees and directors. Grants of awards to the Named Executive Officers
are approved by the Compensation Committee of the Board of Directors.
The 1999 Plan provides for the grant of any or all of the following types of awards: (1) stock
options, including incentive stock options and non-qualified stock options; (2) stock appreciation
rights (SARs), in tandem with stock options or freestanding; (3) restricted stock; (4)
performance awards; and (5) incentive awards. To date, we have made grants only of restricted
stock and SARs.
In 2008, Mr. Moody and Mr. Ferdinandtsen received service-based restricted stock grants
pursuant to the 1999 Plan. Mr. Moody was awarded 50,000 shares of restricted stock, and Mr.
Ferdinandtsen was awarded 20,000 shares. These grants were effective on May 1, 2008, and on that
date our common stock closed at $116.48 per share. Such restricted stock will vest in 2018
provided that the recipient remains in our employ continuously until such time. In addition, such
restricted stock will vest upon the death or disability of the recipient or, with the Board of
Directors consent, upon the recipients retirement.
Messrs. Pavlicek, Ostergren and Behrens were granted SARs during 2008. The Board Compensation
Committee believes that SARs align Named Executive Officer efforts with shareholder value creation.
The SARs pay out only if our stock price appreciates relative to grant date value. SARs grants
vest 20% per year over a five-year period beginning the first anniversary of the grant. Vested SARs
expire five years from the date of vesting.
The 2009 Executive Incentive Compensation Program is described in the Compensation Discussion
and Analysis section above under the caption
2009 Program
.
111
Outstanding Equity Awards at Fiscal Year End
The following table has information about the Named Executive Officers outstanding equity awards
at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAR Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market Value
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
of Shares of
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
SAR
|
|
|
SAR
|
|
|
Stock That
|
|
|
Stock That
|
|
|
|
SARs
|
|
|
SARs
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Vested*
|
|
Name
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert L. Moody
,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
1
|
|
$
|
3,686,500
|
|
Chairman of the Board and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
2
|
|
$
|
3,686,500
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
3
|
|
$
|
3,686,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
4
|
|
$
|
3,686,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard Ferdinandtsen
,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
5
|
|
$
|
737,300
|
|
President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
2
|
|
$
|
737,300
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
3
|
|
$
|
1,474,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
4
|
|
$
|
1,474,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Behrens
,
|
|
|
0
|
|
|
|
5,000
|
6
|
|
$
|
116.48
|
|
|
|
5/1/2018
|
8
|
|
|
|
|
|
|
|
|
Executive Vice President,
|
|
|
1,000
|
|
|
|
2,000
|
7
|
|
$
|
100.46
|
|
|
|
5/1/2015
|
8
|
|
|
|
|
|
|
|
|
Independent Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory V. Ostergren
,
|
|
|
0
|
|
|
|
5,000
|
6
|
|
$
|
116.48
|
|
|
|
5/1/2018
|
8
|
|
|
|
|
|
|
|
|
Executive Vice President,
|
|
|
3,000
|
|
|
|
2,000
|
7
|
|
$
|
100.46
|
|
|
|
5/1/2015
|
8
|
|
|
|
|
|
|
|
|
Director of Multiple Line
|
|
|
3,000
|
|
|
|
0
|
|
|
$
|
88.00
|
|
|
|
8/1/2012
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen E. Pavlicek
,
|
|
|
0
|
|
|
|
3,000
|
6
|
|
$
|
116.48
|
|
|
|
5/1/2018
|
8
|
|
|
|
|
|
|
|
|
Senior Vice President and
|
|
|
600
|
|
|
|
1,200
|
7
|
|
$
|
100.46
|
|
|
|
5/1/2015
|
8
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
400
|
|
|
|
0
|
|
|
$
|
88.00
|
|
|
|
8/1/2012
|
8
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Based on an assumed stock price of $73.73 per share, which was the closing price of the Companys
common stock on December 31, 2008.
|
|
1
|
|
These restricted shares were transferred by Robert L. Moody to the RLMFLP Limited
Partnership (the RLMFLP Partnership), of which Mr. Moody is the 1% general partner. As the sole
general partner of the RLMFLP Partnership, Mr. Moody has the power to manage the assets of the
RLMFLP Partnership, including voting these shares of restricted stock. Restrictions with respect
to these shares lapse on August 1, 2009.
|
|
2
|
|
Restrictions with respect to these shares lapse on August 1, 2012.
|
|
3
|
|
Restrictions with respect to these shares lapse on May 1, 2015.
|
|
4
|
|
Restrictions with respect to these shares lapse on May 1, 2018.
|
|
5
|
|
Restrictions with respect to these shares lapse on August 1, 2009.
|
|
6
|
|
These SARs become exercisable in five equal annual installments beginning May 1,
2009.
|
|
7
|
|
These SARs become exercisable in five equal annual installments beginning May 1,
2006.
|
|
8
|
|
SARs expire five years from the date they become exercisable. The date shown
represents the expiration of the final SARs to become exercisable under the particular award shown.
|
112
Option Exercises and Stock Vested
None of the named officers exercised any SARs during 2008. In addition, no restrictions expired
during 2008 with respect to any shares of restricted stock held by the Named Executive Officers.
Pension Benefits
The following table provides information regarding benefits under the American
National Employees
Retirement Plan, the American National Insurance Company (ANICO) Nonqualified Retirement Plan,
and the ANICO Nonqualified Retirement Plan for Certain Salaried Employees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Years of
|
|
|
Present Value
|
|
|
Payments
|
|
|
|
|
|
Credited
|
|
|
of Accumulated
|
|
|
During Last
|
|
|
|
Plan Name
|
|
Service
|
|
|
Benefit
|
|
|
Fiscal Year
|
|
Name
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
Robert L. Moody
,
|
|
American National
|
|
|
26.6
|
|
|
$
|
1,069,776
|
|
|
$
|
106,771
|
|
Chairman of the Board and
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
Retirement Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANICO Nonqualified
Retirement Plan
|
|
|
45.0
|
|
|
$
|
51,310,424
|
|
|
$
|
5,009,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard Ferdinandtsen
,
|
|
American National
|
|
|
18.51
|
|
|
$
|
52,866
|
|
|
$
|
4,901
|
|
President and
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Operating Officer
|
|
Retirement Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANICO Nonqualified
Retirement Plan
|
|
|
45.0
|
|
|
$
|
9,976,171
|
|
|
$
|
919,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Behrens
,
|
|
American National
|
|
|
9.92
|
|
|
$
|
99,612
|
|
|
$
|
0
|
|
Executive Vice President,
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent Marketing
|
|
Retirement Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANICO Nonqualified
Retirement Plan for
Certain Salaried
Employees
|
|
|
9.92
|
|
|
$
|
176,449
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory V. Ostergren
,
|
|
American National
|
|
|
18.18
|
|
|
$
|
295,984
|
|
|
$
|
0
|
|
Executive Vice President,
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Director of Multiple Line
|
|
Retirement Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANICO Nonqualified
Retirement Plan for
Certain Salaried
Employees
|
|
|
18.18
|
|
|
$
|
924,145
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen E. Pavlicek
,
|
|
American National
|
|
|
32.61
|
|
|
$
|
913,631
|
|
|
$
|
0
|
|
Senior Vice President and
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
Retirement Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANICO Nonqualified
Retirement Plan for
Certain Salaried
Employees
|
|
|
32.61
|
|
|
$
|
371,118
|
|
|
$
|
0
|
|
113
Column (a) Plan Name.
This column identifies the pension plans in which each Named Executive
Officer participates. Further information regarding each plan is provided below in this section.
Column (b) Number of Years of Credited Service.
This column represents the number of years of
service that are used to calculate the Named Executive Officers benefit under each plan, as of
December 31, 2008.
Column (c) Present Value of Accumulated Benefit.
The present value of accumulated
benefit under each plan is calculated using the December 31, 2007 FAS 87 disclosure assumptions as
follows: (a) discount rate of 6.17%, (b) 1994 Group Annuity Mortality table, and (c) the calculated
present value at age 65 is discounted with interest only to the current age. In 2007, Mr.
Ferdinandtsen, based on his age, elected to receive a lump sum distribution of all prior accrued
benefits under the American National Employees Retirement Plan. The Present Value of his
Accumulated Benefit for such plan shown above, therefore, represents only benefits accrued during
2008.
Column (d) Payments During Last Fiscal Year.
This column represents in-service distributions of
benefits paid from the plans shown. The amount of such distributions was determined according to
the terms of the plan for a life payout.
American National Employees Retirement Plan (the Qualified Plan).
The Qualified Plan covers
substantially all employees and officers of American National Insurance Company and provides
benefits based on the participants years of service and compensation. The monthly benefit payable
under the plan at normal retirement age (usually age 65) equals:
|
|
|
1.667 % of the employees final average pay times years of service (up to 35 years),
|
|
|
|
|
Less a social security offset amount equal to 0.7% (0.65% for Year of Birth after
1954) times the Social Security covered pay
|
For purposes of this calculation, final average pay is the average of the employees pay for the
sixty consecutive months that produces the highest average (out of the prior ten years). Pay
includes base salary, overtime, bonus incentives, and gains on SAR exercises on or after July 25,
2002. Pay does not include gains on SAR exercises prior to July 25, 2002, vesting of restricted
stock, or other extraordinary items. In addition, Social Security covered pay is one-twelfth of
the average of the Social Security wage bases for the thirty-five year period ending when the
employee reaches Social Security retirement age. The wage base is the maximum amount of pay for a
year for which Social Security taxes are paid. Social Security retirement age is between age 65 and
67, depending on the employees date of birth.
The benefit formula determines the employees monthly benefit as a life annuity (that is, monthly
payments until the employee dies). Unless special IRS rules apply, benefits are not paid before
employment ends, or age 70
1
/
2
if sooner and if elected by the employee. Instead of taking a life
annuity, the employee may elect to receive:
|
|
|
a 50%, 66 2/3%, 75% or 100% joint and survivor annuity (the employee receives a smaller
benefit for life, and the employees designated survivor receives a benefit of 50%, 66
2/3%, 75% or 100% of the reduced amount for life), or
|
|
|
|
|
a 10, 15 or 20 year period certain and life annuity benefit (the employee receives a
smaller benefit for life and, if the employee dies before the selected period, the
employees designated survivor receives the reduced amount until the end of the period), or
|
|
|
|
|
a lump sum benefit, if eligible under the plan (most management/professional employees
would be).
|
If an employee chooses one of these benefit options, the plan actuary uses the interest rate
assumptions and mortality tables specified in the plan to adjust the benefit so it has the same
value as the life annuity, as determined on an actuarial basis.
An employee whose employment ends before age 65 may begin benefit payments as early as age 55, if
the employee had at least twenty years of vesting service; however, benefits may not begin before
employment terminates. The plan actuary reduces this vested benefit below the level of the age 65
benefit to account for early commencement, so the benefit remains the actuarial equivalent of a
benefit beginning at age 65.
114
If an employee retires after age 55 with at least twenty years of service, the employee may take an
early retirement benefit, beginning immediately after employment ends. Mr. Pavlicek is eligible
for early retirement. The early retirement benefit is based on the pension plan formula. The
benefit is reduced below the level of the age 65 benefit, similar in magnitude to the reductions
Social Security exacts for early commencement. Mr. Moody and Mr. Ferdinandtsen are over 70
1
/
2
and
are receiving in-service retirement benefits.
ANICO Nonqualified Retirement Plan for Certain Salaried Employees and the ANICO Nonqualified
Retirement Plan (together, the Excess Benefit Plans).
Benefits under the Qualified Plan are
limited by the Internal Revenue Code. Our Board of Directors believes we should pay our employees
the total pension benefit they have earned, without imposing these Code limits. Therefore, like
many large companies, we have nonqualified excess benefit plans that make up the difference
between the benefit determined under the Qualified Plan formula, without applying these limits, and
the benefit actually payable under the Qualified Plan, taking these limits into account. To the
extent that any individuals annual retirement income benefit exceeds the maximum amount payable
from the Qualified Plan, it shall be paid from one of the Excess Benefit Plans, provided the
individual is covered by one of such plans. Payment is made from our general assets and not from
the assets of the Qualified Plan.
Mr. Moody and Mr. Ferdinandtsen are the only participants in the ANICO Nonqualified Retirement
Plan. As participants in the ANICO Nonqualified Retirement Plan, Mr. Moody and Mr. Ferdinandtsen
are provided benefits not provided to the other Named Executive Officers under the ANICO
Nonqualified Retirement Plan for Certain Salaried Employees. Such benefits are: a higher maximum
on years of service counted for benefit service (45 years for these two individuals versus 35 years
for other plan participants) which could potentially increase benefits by as much as 28.5%; a
guarantee of benefit continuation for 21 years after retirement benefits commence, in the event of
death during that period; inclusion of service on our Board of Directors or service with a company
acquired by us for pension benefit purposes; and the right to receive retirement benefits beginning
at age 65 while in service as our employee, in lieu of an actuarially enhanced benefit deferred
until the actual service termination date.
If an employee retires after age 55 with at least twenty years of service, the employee may take an
early retirement benefit, beginning immediately after employment ends. Mr. Pavlicek is eligible
for early retirement under the Excess Benefit Plan in which he participates. The early retirement
benefit is based on the pension plan formula. The benefit is reduced below the level of the age 65
benefit, similar in magnitude to the reductions Social Security exacts for early commencement. Mr.
Moody and Mr. Ferdinandtsen are over 70
1
/
2
and are receiving in-service retirement benefits from the
Excess Benefit Plan in which they participate.
115
Nonqualified Deferred Compensation
Directors of certain of our Farm Family subsidiaries are eligible to participate in the Farm Family
Holdings, Inc. 409A Directors Deferred Compensation Plan (the Current Farm Family Plan), which
became effective on January 1, 2005. Such subsidiaries consist of American National Property and
Casualty Holdings, Inc. (formerly Farm Family Holdings, Inc.), Farm Family Life Insurance Company,
Farm Family Casualty Insurance Company, and United Farm Family Insurance Company. Prior to the
effectiveness of the Current Farm Family Plan, the Farm Family subsidiary directors were eligible
to participate in the Farm Family Holdings, Inc. Directors Deferred Compensation Plan, which was
frozen as of December 31, 2004 (the Frozen Farm Family Plan). Mr. Ferdinandtsen, Mr. Ostergren,
and Mr. Pavlicek are the only named executives eligible to participate in such plans; however, only
Mr. Ostergren has elected to participate in such plans. Mr. Ostergren, as Chairman of the Board
of each of the Farm Family insurance companies, is the only one of our officers who receives
compensation for his service as a director of such subsidiaries. There are no other nonqualified
deferred compensation plans in which any of the named executives participates.
Amounts deferred under both the Current Farm Family Plan and the Frozen Farm Family Plan consist of
the annual retainer and meeting fees earned for service as a director of the applicable Farm Family
subsidiaries, or such portion thereof as is elected to be deferred by a director. A director who
has elected to defer compensation does not pay taxes on deferred amounts, or on any earnings on
such deferred amounts, until the director receives a distribution of compensation and earnings from
the plan. We do not contribute any amounts to these plans other than amounts elected to be
deferred by a director.
Deferred compensation under both the Current Farm Family Plan and the Frozen Farm Family Plan
accrues interest each month at the Prime Rate published in the Money Rates section of the
Wall
Street Journal
on the first day of the calendar quarter containing such month. Under the Current
Farm Family Plan, a director may elect to receive distributions from the plan only in a single lump
sum. Under the Frozen Farm Family Plan, a director may elect to receive distributions from the
plan in a lump sum or in five, ten or fifteen equal annual installments.
The following table provides information regarding Mr. Ostergrens participation in the Current
Farm Family Plan and the Frozen Farm Family Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Contributions
|
|
|
Contributions
|
|
|
Earnings in
|
|
|
Withdrawals/
|
|
|
Balance at
|
|
|
|
in Last Fiscal
|
|
|
in Last Fiscal
|
|
|
Last Fiscal
|
|
|
Distributions in
|
|
|
Last Fiscal
|
|
Plan
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Last Fiscal Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frozen Farm Family Plan
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,788
|
|
|
$
|
0
|
|
|
$
|
84,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Farm Family Plan
|
|
$
|
20,000
|
(1)
|
|
$
|
0
|
|
|
$
|
4,524
|
|
|
$
|
0
|
|
|
$
|
91,983
|
|
(1)
This amount is included in column (c) (Salary) of the Summary Compensation
Table for Mr. Ostergren.
Potential Payments Upon Termination or Change in Control
We do not have employment contracts, severance agreements, salary continuation agreements or
severance plans with the Named Executive Officers. This section describes and quantifies certain
compensation that would become payable under existing plans and arrangements if a Named Executive
Officers employment had terminated on December 31, 2008, given each Named Executive Officers
compensation and service levels as of such date and, if applicable, based on our closing stock
price on that date, which was $73.73.
116
Restricted Stock and Termination of Employment
Pursuant to the 1999 Plan and award terms approved by the Board of Directors, shares of restricted
stock issued to Mr. Moody and Mr. Ferdinandtsen vest upon death, disability, or upon retirement
with the consent of the Board of Directors. Such shares are forfeited upon other termination of
employment. In addition, such shares vest upon a change of control of our company. For purposes
of the 1999 Plan, a change of control occurs if (i) there is a change in ownership of our
outstanding securities which causes any person other than The Moody Foundation to become the
beneficial owner, directly or indirectly, of securities representing fifty percent (50%) or more of
the combined voting power of our outstanding securities then entitled to vote for the election of
directors; (ii) the Board of Directors approves the sale of all or substantially all of our assets;
or (iii) the Board of Directors approves any merger, consolidation, issuance of securities or
purchase of assets, the result of which would be the occurrence of an event described in clause (i)
above.
The aggregate value of unvested restricted stock as of December 31, 2008 for Mr. Moody was
$3,686,500 and for Mr. Ferdinandtsen was $737,300.
SARs and Termination of Employment
Pursuant to the 1999 Plan and award terms approved by the Board of Directors, SARs have a reduced
vesting period upon death or retirement at or after attaining the age of 65. SARs are no longer
exercisable in the event of any other termination of employment. In addition, all SARs vest
immediately upon a change of control of our company. The events constituting a change of control
are described immediately above under Restricted Stock and Termination of Employment.
Upon an officers death or retirement at or after attaining age 65, the five year vesting period
for SARs is reduced. The officer, or in the case of his deathhis estate or heirs, has one year
following the date of death or retirement to exercise a percentage of the officers SARs equal to
the sum of (i) the percentage of the SARs the officer was entitled to exercise as of the date of
death or retirement, plus (ii) the pro rata portion based upon the period included between the date
of death or retirement and the preceding May 1, of any additional 20% of the SARs which would have
become exercisable had the officer remained in our employ until the following May 1. SARs not
exercised within such one-year period terminate and are no longer exercisable.
Assuming a change of control of our company or a termination by reason of death or retirement on
December 31, 2008 for Mr. Pavlicek, Mr. Ostergren, and Mr. Behrens, none of such individuals would
have been entitled to receive any amounts from us upon the exercise of any SARs, as the closing
price of our stock on such date ($73.73) was less than the exercise price of all SARs held by these
Named Executive Officers.
Pension Benefits
The Pension Benefits table above describes the general terms of each pension plan in which the
Named Executive Officers participate, the years of credited service, and the present value of
accumulated benefits under these plans as of December 31, 2008. The following table describes the
estimated benefits that would have been due to our Named Executive Officers under the Qualified
Plan and under the Excess Benefit Plans in the event of any of such executives termination of
employment as of December 31, 2008:
117
Qualified Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Payout on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement or
|
|
|
Potential Payout if
|
|
|
|
|
|
|
Potential Payout if
|
|
|
|
Voluntary
|
|
|
Terminated Upon
|
|
|
Potential Payout if
|
|
|
Terminated
|
|
|
|
Termination
|
|
|
Disability
|
|
|
Terminated Upon Death
|
|
|
Involuntarily
|
|
|
|
12/31/08
|
|
|
12/31/08
|
|
|
12/31/08
|
|
|
12/31/08
|
|
Name
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
Robert L. Moody
,
|
|
$
|
1,069,776
|
|
|
$
|
1,069,776
|
|
|
$
|
551,941
|
|
|
$
|
1,069,776
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard Ferdinandtsen
,
|
|
$
|
52,866
|
|
|
$
|
52,866
|
|
|
|
N/A
|
|
|
$
|
52,866
|
|
President and
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Behrens
,
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
342,075
|
|
|
|
N/A
|
|
Executive Vice President,
Independent Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory V. Ostergren
,
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
538,629
|
|
|
|
N/A
|
|
Executive Vice President,
Director of Multiple Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen E. Pavlicek
,
|
|
$
|
860,184
|
|
|
$
|
860,184
|
|
|
$
|
948,118
|
|
|
$
|
860,184
|
|
Senior Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Payout on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement or
|
|
|
Potential Payout if
|
|
|
|
|
|
|
Potential Payout if
|
|
|
|
Voluntary
|
|
|
Terminated Upon
|
|
|
Potential Payout if
|
|
|
Terminated
|
|
|
|
Termination
|
|
|
Disability
|
|
|
Terminated Upon Death
|
|
|
Involuntarily
|
|
|
|
12/31/08
|
|
|
12/31/08
|
|
|
12/31/08
|
|
|
12/31/08
|
|
Name
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
Robert L. Moody
,
|
|
$
|
51,310,424
|
|
|
$
|
51,310,424
|
|
|
$
|
47,061,331
|
|
|
$
|
51,310,424
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Richard Ferdinandtsen
,
|
|
$
|
9,976,171
|
|
|
$
|
9,976,171
|
|
|
$
|
9,143,290
|
|
|
$
|
9,976,171
|
|
President and
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Behrens
,
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
605,937
|
|
|
|
N/A
|
|
Executive Vice President,
Independent Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory V. Ostergren
,
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
1,681,753
|
|
|
|
N/A
|
|
Executive Vice President,
Director of Multiple Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen E. Pavlicek
,
|
|
$
|
348,747
|
|
|
$
|
348,747
|
|
|
$
|
385,126
|
|
|
$
|
348,747
|
|
Senior Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
Column (a) Potential Payout on Retirement or Voluntary Termination
This column shows the potential payout that would have been made upon the retirement or voluntary
termination of any the Named Executive Officers on December 31, 2008. The potential payout
refers to the actuarial present value of the benefit payable. As explained in connection with the
Pension Benefits table above, Mr. Moody and Mr. Ferdinandtsen are currently receiving in-service
distributions under both the Qualified Plan and the Excess Benefit Plan in which they participate,
and Mr. Pavlicek is currently eligible for early retirement under both the Qualified Plan and the
Excess Benefit Plan in which he participates. In the case of Mr. Moody and Mr. Ferdinandtsen, each
of them would have been eligible to receive their accumulated benefit upon retirement or voluntary
termination on December 31, 2008. Mr. Pavlicek would have been eligible to receive the early
retirement benefit disclosed in column (a). The early retirement benefit represents an actuarially
reduced value of Mr. Pavliceks accumulated benefit, calculated based upon a reduced percentage of
his deferred benefit at age 65, as specified under the applicable plans, which percentage varies
depending on the number of years of age prior to 65. In Mr. Pavliceks case, the applicable
reduction of his deferred benefit was 81.5% at December 31, 2008. For Mr. Behrens and Mr.
Ostergren, payment of accrued benefits would have been deferred until age 65, as they are not
currently eligible for early retirement. The values of their deferred benefits are shown in the
values of accumulated benefits in the Pension Benefits table above.
Column (b) Potential Payout if Terminated Upon Disability
This column shows the potential payout that would have been made upon the disability of any of the
Named Executive Officers on December 31, 2008. The potential payout refers to the actuarial
present value of the benefit payable. In the event of total disability prior to age 65, no
additional benefits become immediately payable, unless the individual is entitled to retirement at
the time of disability. Otherwise, we will continue granting credited service from the date of
disability to age 65 under the terms of the applicable plan for the duration of the disability.
Total disability must be validated by approval for Social Security disability. Had the employment
of Mr. Moody or Mr. Ferdinandtsen been terminated by disability on December 31, 2008, each would be
entitled to his accumulated benefit. In the case of Mr. Pavliceks disability on December 31,
2008, he would have been entitled to his early retirement benefit. Mr. Behrens and Mr. Ostergren
would not have been entitled to any payment in the event of their disability on December 31, 2008.
Column (c) Potential Payout if Terminated Upon Death
This column shows the potential payout that would have been made upon the death of any of the Named
Executive Officers on December 31, 2008. The potential payout refers to the actuarial present
value of the benefit payable. This amount represents the value of a widows benefit as determined
based upon a percentage of the accrued or projected benefit at age 65, as specified in the
applicable plans. In the case of an individual who has already commenced receiving benefits under
the plans, any widows benefit would be according to the form of payment elected at retirement.
Mr. Moody and Mr. Ferdinandtsen have a guaranteed period of twenty-one years under the applicable
Excess Benefit Plan that would provide a widows benefit based on the remaining portion of such
period since benefit commencement. No payment under the Qualified Plan would have been available
to Mr. Ferdinandtsen in the event of his death on December 31, 2008, as he elected to receive a
lump sum distribution of all prior accrued benefits under such plan in 2007. In the event of death
prior to retirement, a pension is available for the surviving spouse for the life of the spouse
that would be at most 75% of the Named Executive Officers
projected monthly pension at age 65. Eligibility for this death benefit requires that the
executive have been at least age 45 at the time of death and have age plus years of service equal
to at least 55.
Column (d) Potential Payout if Terminated Voluntarily
This column shows the potential payout that would have been made upon the involuntary termination
of any the Named Executive Officers on December 31, 2008. The potential payout refers to the
actuarial present value of the benefit payable. Please see the explanation provided above in
connection with
Column A Potential Payout on Retirement or Voluntary Termination.
No special
benefits are triggered by involuntary termination.
119
Medical Benefits
Mr. Moody and Mr. Ferdinandtsen, upon retirement, are eligible for lifetime participation in our
Merit Plan and core medical insurance plan. Such coverage also is available to their spouses for
life. The Merit Plan is discussed above in connection with the All Other Compensation Table -
Named Executive Officers. Based on the average claim costs of the employees and dependents in the
core medical insurance plan and the Merit Plan, the value of lifetime coverage is approximately
$516,715 for Mr. Moody and approximately $540,865 for Mr. Ferdinandtsen. Such calculations were
made using assumptions in accordance with GAAP as follows: (a) 1994 Group Annuity Reserving table,
(b) a health care cost trend rate of 5.8%, and (c) an interest rate of 5.54%. The other Named
Executive Officers are not eligible for such benefits.
120
Director Compensation
The following table has information about the 2008 compensation of our non-employee directors and
advisory directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Stock Awards
|
|
|
Compensation
|
|
|
|
|
Name
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Total
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur O. Dummer
|
|
$
|
43,250
|
|
|
$
|
52,085
|
|
|
$
|
32,628
|
|
|
$
|
127,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shelby M. Elliott
|
|
$
|
42,750
|
|
|
$
|
52,085
|
|
|
$
|
30,023
|
|
|
$
|
124,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell S. Moody
|
|
$
|
41,250
|
|
|
$
|
61,416
|
|
|
$
|
70,055
|
|
|
$
|
172,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William L. Moody, IV
|
|
$
|
42,500
|
|
|
$
|
61,416
|
|
|
$
|
78,586
|
|
|
$
|
182,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frances A. Moody-Dahlberg
|
|
$
|
41,250
|
|
|
$
|
61,416
|
|
|
$
|
25,253
|
|
|
$
|
127,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank P. Williamson
|
|
$
|
44,750
|
|
|
$
|
52,085
|
|
|
$
|
26,779
|
|
|
$
|
123,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James D. Yarbrough
|
|
$
|
44,250
|
|
|
$
|
61,416
|
|
|
$
|
59,672
|
|
|
$
|
165,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory Directors*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin M. Herz, Jr.
|
|
$
|
41,250
|
|
|
$
|
61,416
|
|
|
$
|
42,503
|
|
|
$
|
145,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Eugene Lucas
|
|
$
|
41,250
|
|
|
$
|
61,416
|
|
|
$
|
23,100
|
|
|
$
|
125,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E. Douglas McLeod
|
|
$
|
41,250
|
|
|
$
|
61,416
|
|
|
$
|
23,513
|
|
|
$
|
126,179
|
|
|
|
|
*
|
|
Robert L. Moody, Jr. was appointed an advisory director during 2009; therefore, no compensation
was paid to him for such service during 2008.
|
Column (a) Fees Earned or Paid in Cash.
We pay director compensation only to those directors who
are not our employees. Such directors and our advisory directors each receive $35,000 per year
directors fees, plus $1,250 per meeting attended. Such directors also receive $1,250 for each
Executive Committee meeting attended and $500 for Audit, Compensation, and Nominating Committee
meetings attended. Directors may elect to defer their compensation, with interest accrued at the
Wall Street Journal
prime rate published on the first business day of each quarter. We do not
provide any above-market or preferential earnings rates on compensation that is deferred.
Column (b) Stock Awards.
These values represent grants of restricted stock to our directors and
advisory directors pursuant to the American National Insurance Company 1999 Stock and Incentive
Plan. The numbers in Column (b) show the amount recognized as expense during 2008 for financial
statement reporting purposes, calculated in accordance with Financial Accounting Standards Board
Statement No. 123R, Share-Based Payment, based on the stock price at the time of the grant.
Ms. Moody-Dahlberg and Messrs. Herz, Lucas, McLeod, R. S. Moody, and W. L. Moody IV each received a
grant of 2,000 shares of restricted stock during 2008. Messrs. Dummer, Elliott, and Williamson
each received a grant of 667 shares of restricted stock during 2008. Such restricted stock will
vest in 2018 provided that the recipient continues in our service as a director or advisory
director continuously until such time. In addition, such stock will vest upon the death or
disability of the recipient. Furthermore, if the recipient retires as a director or advisory
121
director at or after attaining the age of 65, and the Board of Directors consents to such
retirement, such restricted stock will vest at the rate of 20% for each year and pro rata for any
partial year included in the period of the recipients service as a director or advisory
director from the date of grant through the date of such retirement. Dividends on restricted stock are
included in Column (c) All Other Compensation.
Column (c) All Other Compensation.
These amounts include the following:
All Other Compensation Table Directors and Advisory Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
|
|
|
|
Name
|
|
Dividends
|
|
|
Perquisites
|
|
|
Total
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur O. Dummer
|
|
$
|
13,861
|
|
|
$
|
18,767
|
(1)(2)
|
|
$
|
32,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shelby M. Elliott
|
|
$
|
13,861
|
|
|
$
|
16,162
|
(1)(2)
|
|
$
|
30,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell S. Moody
|
|
$
|
23,100
|
|
|
$
|
46,955
|
(1)(2)
|
|
$
|
70,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William L. Moody, IV
|
|
$
|
23,100
|
|
|
$
|
55,486
|
(1)(2)
|
|
$
|
78,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frances A. Moody-Dahlberg
|
|
$
|
23,100
|
|
|
$
|
2,153
|
(2)
|
|
$
|
25,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank P. Williamson
|
|
$
|
13,861
|
|
|
$
|
12,918
|
(1)
|
|
$
|
26,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James D. Yarbrough
|
|
$
|
23,100
|
|
|
$
|
36,572
|
(1)(2)
|
|
$
|
59,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin M. Herz, Jr.
|
|
$
|
23,100
|
|
|
$
|
19,403
|
(1)(2)
|
|
$
|
42,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Eugene Lucas
|
|
$
|
23,100
|
|
|
$
|
0
|
|
|
$
|
23,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E. Douglas McLeod
|
|
$
|
23,100
|
|
|
$
|
413
|
(2)
|
|
$
|
23,513
|
|
|
|
|
(1)
|
|
Includes medical reimbursement plan benefit. We provide a medical
reimbursement plan designed to reimburse certain medical expenses that are not covered by an
underlying insurance policy for the benefit of (1) directors who are not current or former
common law employees, (2) retired directors who have at least twenty (20) years of service who
are not current or former common law employees, (3) designated consultants who are not current
or former common law employees, (4) advisory directors who are not current or former common
law employees, and (5) the spouses and any dependents of the foregoing. The amount of such
benefit during 2008 for William L. Moody, IV and James D. Yarbrough was $50,542 and $30,764,
respectively. The amount of such benefit to the other directors and advisory directors did
not exceed thresholds for specific numerical disclosure under applicable proxy disclosure
rules, although the value of such benefit is included in the Perquisites column.
|
|
(2)
|
|
Includes guest travel, lodging, entertainment, and food and beverage at our
business conferences or other events. The amount of such benefit during 2008 for Russell S.
Moody was $29,040. The amount of such benefit to the other directors and advisory directors
did not exceed thresholds for specific numerical disclosure under applicable proxy disclosure
rules, although the value of such benefit is included in the Perquisites column.
|
122
Compensation Committee Interlocks and Insider Participation
No member of our Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers serving as a member of
our Board of Directors or Compensation Committee.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The following is a description of certain transactions and relationships existing since the
beginning of fiscal year 2008 between us and certain related parties.
Mortgage Loans to Gal-Tex Hotel Corporation
: The Moody Foundation and the Libbie Shearn Moody
Trust own 34% and 50.2%, respectively, of Gal-Tex Hotel Corporation (Gal-Tex). As of December
31, 2008, we held a first mortgage loan issued to Gal-Tex secured by hotel property in San Antonio,
Texas. This loan was originated in 1999, had a balance of $12,735,358 as of December 31, 2008, has
a current interest rate of 7.250%, and has a final maturity date of April 1, 2019. During 2008,
Gal-Tex paid $798,752 in principal and $955,888 in interest with respect to this loan, which is
current as to principal and interest payments.
Management Contracts with Gal-Tex Hotel Corporation
: We have entered into management
contracts with Gal-Tex for the management of a hotel and adjacent fitness center owned by us, as
well as for a nearby golf course owned by a limited partnership between two of our wholly-owned
subsidiaries. During our fiscal year ended December 31, 2008, we paid Gal-Tex $295,698, $62,453
and $48,000, respectively, for services rendered under such contracts for these three facilities.
All of such contracts are terminable by us upon thirty days prior written notice.
Transactions with Robert L. Moody, Jr.
: Robert L. Moody, Jr. (RLM Jr.) is the son of our
Chairman and Chief Executive Officer, brother of two of our directors, and one of our advisory
directors. RLM Jr., mainly through his wholly-owned insurance agency, Moody Insurance Group, Inc.
(MIG), has entered into a number of agency agreements with us and some of our subsidiaries. In
2008, total commissions paid under such agency contracts, primarily from the marketing of health
insurance products, were $1,491,626. MIG and we are also parties to a Consulting and Special
Marketing Agreement concerning development and marketing of new products. During 2008, we paid
compensation of $222,759 under this agreement and a predecessor agreement. Such amount includes
medical reimbursements to RLM Jr. as a consultant pursuant to our medical reimbursement plan (see
Remuneration of Directors and Officers above) and dividends on 9,000 shares of our Restricted
Stock (see Incentive Compensation Plan Awards above) granted to MIG as a consultant. MIG and we
entered into a National Marketing Directors Contract in 1994, which gave MIG the exclusive right
to sell annuities in the financial institutions market. In a subsequent restructuring of such
contract, MIG gave up such exclusive right, and we assumed all responsibilities for sales and
service in such market. During 2008, MIG received $923,370 in commissions under such restructured
contract. As agreed by us and certain of our subsidiaries, MIG markets products of unrelated
companies through certain of our agents. MIG receives commissions from the companies issuing such
products. In 1994, MIG provided brokerage and business development services to an unrelated
marketing company which has had a marketing agreement with us since such time. MIG has advised us
that, during 2008, commissions received from such marketing company related to sales of our
products aggregated $158,907. MIG and we entered into an agreement in 2006 pursuant to which our
Systems Planning and Computing division provides certain software and related computer services to
MIG and its agents in connection with sales of health insurance products issued by one of our
subsidiaries. MIG paid us $7,920 for such services during 2008, based on the same rates charged to
our internal departments.
In addition, RLM Jr. serves as a director of certain of our subsidiaries. He served as an
alternate director of American National de Mexico, Compania de Seguros de Vida, S.A. de C.V., a
subsidiary that was sold during 2008. As an alternate director of such company, Robert L. Moody,
Jr. received $1,293 for attending one (1) board meeting during 2008. He also is a director of
ANREM Corporation (ANREM), for which he earned an aggregate of $2,250 for attending three (3)
ANREM board meetings during 2008.
123
Transactions with Moody National Bank
: We have executed an advancing promissory note to Moody
National Bank (the Bank) in the amount of $25,518,605.20. Such promissory note supports a letter
of credit issued by the Bank on behalf of us for the benefit of an unrelated party in a reinsurance
transaction. No amounts have been drawn under the letter of credit; therefore, no amounts have
been advanced by the Bank to us under the promissory note. Any amounts advanced under the
promissory note will be secured by a custody account maintained by us at the Bank. In addition, we
and some of our subsidiaries have entered into various depository, custodian and safekeeping
arrangements with the Bank in the ordinary course of our business.
Health Insurance Contracts with Certain Affiliates
: Our Merit Plan is insured by National
Western Life Insurance Company (National Western). Further information regarding the Merit Plan
is provided above in connection with the All Other Compensation Table Named Executives. Robert
L. Moody, our Chairman of the Board and Chief Executive Officer, is also the Chairman of the Board,
Chief Executive Officer, and controlling stockholder of National Western. During 2008, we paid
National Western $1,173,950 in premium and fees with respect to the Merit Plan. In addition, we
insure substantially similar plans offered by National Western, Gal-Tex, and The Moody Foundation
to certain of their officers. During 2008, National Western, Gal-Tex, and The Moody Foundation
paid us premium and fees with respect to such plans in the amounts of $244,818; $55,995; and
$107,944, respectively. We also insure The Moody Foundations basic health insurance plan, for
which we received $264,658 in premium during 2008.
Transactions with Greer, Herz & Adams, L.L.P
.: Irwin M. Herz, Jr. is an advisory director of
ours and a Partner with Greer, Herz Adams, L.L.P. which acts as our General Counsel. In the fiscal
year ending December 31, 2008, it received $7,787,257 in legal fees and reimbursements of expenses
in connection with its services as our General Counsel and all of our subsidiaries. We also
furnished offices, telephones and the use of certain office decorations to the law firm, the value
of which was credited against additional fees due to such firm.
Other Family Relationships
: E. Vince Matthews III, a step-son of Robert L. Moody, is a
director of a mutual insurer managed by us and an advisory director of one of our subsidiaries. He
is also employed as one of our officers, for which he received total compensation during 2008 in
excess of $120,000, but less than $150,000.
Procedure for Review, Approval or Ratification of Related Persons Transactions
The Audit Committee reviews, approves or ratifies any related party transactions in which we
do or will have an amount involved exceeding $120,000 and a related person has or will have a
direct or indirect material interest. The Audit Committee will approve or ratify the transaction
only if it determines that the transaction is in our best interests. In considering the
transaction, the Audit Committee will consider all relevant factors, including (as applicable) the
business rationale for entering into the transaction; the alternatives to entering into the
transaction; whether the transaction is on terms comparable to those that could be obtained in
arms-length dealings with an unrelated third party; and the overall fairness of the transaction to
us. We have not adopted formal written procedures for the review of related party transactions.
Rather, we are guided by the corporate governance rules of the NASDAQ, the requirements of Item
404(a) of Regulation S-K promulgated by the Securities and Exchange Commission (SEC), and other
SEC guidance on related party transactions.
Director Independence
The Board has determined, after considering all of the relevant facts and circumstances, that
W. L. Moody IV, James D. Yarbrough, Arthur O. Dummer, Dr. Shelby M. Elliott and Frank P.
Williamson, are independent from management in accordance with the NASDAQ Stock Market LLC
(NASDAQ) listing standards. To be considered independent, the Board must determine that a
director does not have any direct or indirect material relationships with us. In making this
determination, the Board considered the fact that W. L. Moody IV is related to other members of the
Board and determined that the familial relationship did not impair his independence.
In addition, after considering all of the relevant facts and circumstances, the Board has
determined that each member of the Audit Committee of the Board qualifies under the Audit Committee
independence standards established by the SEC and that Arthur O. Dummer qualifies as a financial
expert as defined and required by NASDAQs rules and by the Securities Exchange Act of 1934. The
Audit Committee, the Compensation Committee and the Nominating Committee are composed entirely of
independent directors.
124
The following sets forth Committee memberships as of the date hereof:
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Audit
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Compensation
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Nominating
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Executive
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Director
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Committee
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Committee
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Committee
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Committee
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James D. Yarbrough
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X
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XX
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Arthur O. Dummer
1
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XX
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Dr. Shelby M. Elliott
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X
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XX
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Frank P. Williamson
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X
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X
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X
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William L. Moody IV
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X
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X =
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Member
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XX =
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Committee Chair
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1
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Mr. Dummer is the financial expert on the Audit Committee.
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ITEM 8. LEGAL PROCEEDINGS
Information required for Item 8 is incorporated by reference to the discussion under the
heading Litigation in Note 16 to the Consolidated Financial Statements.
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ITEM 9.
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MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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STOCKHOLDER INFORMATION
Our common stock is traded on the NASDAQ Global Select Market under the symbol ANAT. The
following table presents the high and low prices for our common stock for the periods indicated and
the quarterly dividends declared per share during such periods.
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Dividend
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High
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Low
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Paid per Share
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(per share)
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2009:
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First Quarter
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$
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74.59
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$
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33.74
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$
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0.77
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2008:
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Fourth quarter
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$
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94.40
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$
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55.00
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$
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0.77
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Third quarter
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111.76
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81.68
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|
|
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0.77
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|
Second quarter
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|
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119.65
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|
|
|
97.50
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|
|
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0.77
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First quarter
|
|
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133.60
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|
|
|
100.00
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|
|
0.77
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$
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3.08
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2007:
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Fourth quarter
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$
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145.99
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|
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$
|
109.28
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|
|
$
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0.77
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Third quarter
|
|
|
159.34
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|
|
|
116.52
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|
|
|
0.76
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Second quarter
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155.70
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|
|
|
126.39
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|
|
|
0.76
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|
First quarter
|
|
|
129.85
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|
|
|
122.04
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|
|
|
0.76
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|
|
|
|
|
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|
|
|
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$
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3.05
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Our stock closed at $52.41 per share on March 31, 2009.
125
Security Holders
As of March 6, 2009 there were approximately 978 holders of record of our issued and
outstanding shares of common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information regarding our common stock that is authorized for
issuance under the American National Insurance Company 1999 Stock and Incentive Plan as of December
31, 2008.
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Equity Compensation Plan Information
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Number of securities
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Number of securities
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remaining available for
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to be issued upon
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future issuance under
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exercise of
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Weighted-average
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equity compensation
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outstanding
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exercise price of
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plans
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options, warrants
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outstanding options,
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(excluding securities
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Plan category
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and rights
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warrants and rights
(1)
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reflected in column (a))
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Equity compensation plans approved by security holders
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0
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107.44
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2,385,906
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Equity compensation plans not approved by security holders
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N/A
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N/A
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N/A
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Total
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0
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107.44
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2,385,906
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(1)
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Based on exercise prices of outstanding stock appreciation rights.
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ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 11. DESCRIPTION OF REGISTRANTS SECURITIES TO BE REGISTERED
We are a Texas stock life insurance company. Our articles of incorporation authorizes
50,000,000 shares, $1.00 par value common stock. As of March 31, 2009, we had 26,820,166 shares of
common stock issued and outstanding and 4,012,283 shares were held as treasury stock.
The following summary describes the terms of our capital stock that we consider to be
material, but does not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of our Restated and Amended Articles of Incorporation, our
Bylaws and applicable Texas law.
Common Stock
Our stock has been traded on the NASDAQ Global Select Market under the symbol ANAT. We have
a pending listing application to formalize our status as a registered stock on the NASDAQ Stock
Market LLC, a national securities exchange. We have one class of common stock, $1.00 par value.
Voting and Other Rights
. Each share of common stock entitles the holder thereof to one vote
on all matters on which holders are permitted to vote. Because holders of common stock do not have
cumulative voting rights, the holders of a majority of the shares of common stock can elect all of
the members of the board of directors standing for election. No shareholder has any preemptive
right or other similar right to purchase or subscribe for any additional securities issued by us,
and no shareholder has any right to convert common stock into other securities.
126
No shares of common
stock are subject to redemption or to any sinking fund provisions. All of the outstanding shares of
common stock are fully paid and nonassessable.
Dividend and Distribution Rights
. The holders of shares of common stock are entitled to
dividends when, as and if declared by our board of directors from funds legally available for the
payment of dividends and, upon liquidation, to a pro rata share in any distribution to
shareholders.
Anti-Takeover Provisions of Texas Law, Our Articles of Incorporation and Bylaws
Certain provisions of Texas law, our Articles of Incorporation and our Bylaws are intended to
enhance the likelihood of continuity and stability in our Board of Directors and its policies, but
might have the effect of delaying or preventing a change in control or takeover attempt and may
make more difficult the removal of incumbent management that a shareholder might consider in his or
her best interest, including attempts that might result in a premium over the market price for our
common stock.
Texas Business Corporation Act
. We are subject to Part 13 of the Texas Business Corporation
Act. In general, that statute prohibits a publicly held Texas corporation from engaging in a
business combination with any affiliated shareholder for a period of three years following the
date that the shareholder became an affiliated shareholder unless:
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prior to that date, the corporations board of directors approved either the
business combination or the transaction that resulted in the shareholder becoming an
affiliated shareholder; or
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|
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not less than six months after that date, the business combination is approved at a
meeting of shareholders duly called for that purpose, and not by written consent, by
the affirmative vote of at least two-thirds of the outstanding voting shares that are
not beneficially owned by the affiliated shareholder.
|
Generally, a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to our shareholders.
Subject to certain exceptions, an affiliated shareholder is any shareholder who beneficially
owns 20% or more of the corporations outstanding voting shares, as well as any entity or person
affiliated with or controlling or controlled by the shareholder.
Authorized Shares
. Our authorized but unissued shares of common stock are available for
future issuance without shareholder approval. These additional shares may be utilized for a variety
of corporate purposes, including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but unissued shares could
render more difficult or discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Vacancies on the Board of Directors
. Our Bylaws provide that any vacancy occurring in the
board of directors may be filled by the affirmative vote of a majority of the directors then in
office. A director elected to fill a vacancy will serve for the remainder of the term to which the
director has been elected and until the directors successor has been elected and duly qualified.
Amendment of Articles of Incorporation and Bylaws
. Our Articles of Incorporation may be
amended by the affirmative vote of the holders of not less than two-thirds of our capital stock
then outstanding and entitled to vote. Our Bylaws may be amended by the affirmative vote of a
majority of the members of our full board of directors at any regular or special meeting of the
board or by our stockholders at any annual or special meeting of stockholders.
127
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act (the Miscellaneous Laws)
authorizes corporations to include a provision in their articles of incorporation limiting or
eliminating the personal liability of directors to corporations or shareholders for monetary
damages for an act or omission in the directors capacity as a director. Our Restated and Amended
Articles of Incorporation limit the liability of our directors to the fullest extent permitted by
the Miscellaneous Laws. Specifically, our directors shall not be liable except for:
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a breach of the directors duty of loyalty to us or our shareholders;
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|
|
an act or omission not in good faith or that involves intentional misconduct or a
knowing violation of the law;
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a transaction from which the director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the directors office;
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|
|
|
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an act or omission for which the liability of the director is expressly provided by
an applicable statute; or
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|
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an act related to an unlawful stock repurchase or payment of a dividend.
|
The inclusion of this provision in our Restated and Amended Articles of Incorporation may have
the effect of reducing the likelihood of derivative litigation against directors and may discourage
or deter shareholders or management from bringing a lawsuit against directors for breach of their
duty of care, even though such an action, if successful, might otherwise have benefited us and our
shareholders.
Article 2.02-1 of the Texas Business Corporation Act (the TBCA) provides that a corporation
may indemnify any director or officer who was, is or is threatened to be made, a named defendant or
respondent in a proceeding because he is or was a director or officer, provided that the director
or officer (i) conducted himself in good faith, (ii) reasonably believed (a) in the case of conduct
in his official capacity, that his conduct was in the corporations best interests or (b) in all
other cases, that his conduct was at least not opposed to the corporations best interests and
(iii) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Subject to certain exceptions, a director or officer may not be indemnified if the person
is found liable to the corporation or if the person is found liable on the basis that he improperly
received a personal benefit. Under Texas law, reasonable expenses incurred by a director or officer
may be paid or reimbursed by the corporation in advance of a final disposition of the proceeding
after the corporation receives a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification and a written
undertaking by or on behalf of the director or officer to repay the amount if it is ultimately
determined that the director or officer is not entitled to indemnification by the corporation.
Texas law requires a corporation to indemnify an officer or director against reasonable expenses
incurred in connection with a proceeding in which he is named a defendant or respondent because he
is or was a director or officer if he is wholly successful in defense of the proceeding.
Our Bylaws also require indemnification of our officers and directors, and the advancement to
them of expenses in connection with proceedings and claims, to the fullest extent permitted under
the TBCA.
Texas law permits a corporation to purchase and maintain insurance or another arrangement on
behalf of any person who is or was a director or officer against any liability asserted against him
and incurred by him in such a capacity or arising out of his status as such a person, whether or
not the corporation would have the power to indemnify him against that liability under Article
2.02-1 of the TBCA. We maintain directors and officers liability insurance policies to cover
certain liabilities of directors and officers arising out of claims based on certain acts or
omissions by them in their capacity as directors or officers.
128
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS REPORT
To the Stockholders and Board of Directors of
American National Insurance Company:
We have audited the accompanying consolidated statements of financial position of American National
Insurance Company and subsidiaries (The Company) as of December 31, 2008 and 2007, and the related
consolidated statements of income, changes in stockholders equity, comprehensive income (loss),
and cash flows for each of the years in the three-year period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of American National Insurance Company and subsidiaries
as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2008 in conformity with U.S. generally
accepted accounting principles.
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KPMG LLP
|
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|
|
March 30, 2009
|
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HOUSTON, TEXAS
|
|
|
129
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Premiums and Other Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
$
|
299,338
|
|
|
$
|
315,893
|
|
|
$
|
327,594
|
|
Annuity
|
|
|
116,248
|
|
|
|
222,748
|
|
|
|
112,455
|
|
Accident & Health
|
|
|
290,883
|
|
|
|
283,765
|
|
|
|
303,285
|
|
Property & Casualty
|
|
|
1,182,026
|
|
|
|
1,177,217
|
|
|
|
1,234,300
|
|
Other Policy Revenues
|
|
|
174,899
|
|
|
|
155,230
|
|
|
|
139,605
|
|
Net Investment Income
|
|
|
796,177
|
|
|
|
812,969
|
|
|
|
836,017
|
|
Realized gains (losses) on investments
|
|
|
(379,709
|
)
|
|
|
41,027
|
|
|
|
100,256
|
|
Other Income
|
|
|
38,779
|
|
|
|
47,224
|
|
|
|
51,107
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
2,518,641
|
|
|
|
3,056,073
|
|
|
|
3,104,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and Other Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
251,992
|
|
|
|
239,598
|
|
|
|
248,428
|
|
Annuity
|
|
|
157,102
|
|
|
|
150,318
|
|
|
|
130,830
|
|
Accident & Health
|
|
|
220,848
|
|
|
|
212,692
|
|
|
|
227,329
|
|
Property & Casualty
|
|
|
939,854
|
|
|
|
818,230
|
|
|
|
881,806
|
|
Increase (decrease) in liability for future policy benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
44,086
|
|
|
|
34,152
|
|
|
|
31,775
|
|
Annuity
|
|
|
(14,235
|
)
|
|
|
99,560
|
|
|
|
4,554
|
|
Accident & Health
|
|
|
2,207
|
|
|
|
(2,852
|
)
|
|
|
(10,554
|
)
|
Interest Credited to Policy Account Balances
|
|
|
299,833
|
|
|
|
295,894
|
|
|
|
297,551
|
|
Commissions for acquiring and servicing policies
|
|
|
475,345
|
|
|
|
456,537
|
|
|
|
423,291
|
|
Other Operating Costs and Expenses
|
|
|
508,800
|
|
|
|
465,140
|
|
|
|
455,937
|
|
Decrease (increase) in deferred policy acquisition costs
|
|
|
(67,439
|
)
|
|
|
(60,442
|
)
|
|
|
8,385
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits, Losses and Expenses
|
|
|
2,818,393
|
|
|
|
2,708,827
|
|
|
|
2,699,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
federal income tax, minority interest and equity in
earnings of unconsolidated affiliates
|
|
|
(299,752
|
)
|
|
|
347,246
|
|
|
|
405,287
|
|
Provision (benefit) for Federal Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(34,642
|
)
|
|
|
80,324
|
|
|
|
119,255
|
|
Deferred
|
|
|
(87,388
|
)
|
|
|
25,539
|
|
|
|
10,584
|
|
Minority Interest in income (loss) of consolidated subsidiaries
|
|
|
31
|
|
|
|
482
|
|
|
|
(1,300
|
)
|
Equity in earnings of unconsolidated affiliates
|
|
|
4,965
|
|
|
|
3,866
|
|
|
|
4,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(172,726
|
)
|
|
|
245,731
|
|
|
|
278,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
18,728
|
|
|
|
(4,958
|
)
|
|
|
(5,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(153,998
|
)
|
|
$
|
240,773
|
|
|
$
|
273,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(5.82
|
)
|
|
$
|
9.09
|
|
|
$
|
10.32
|
|
Diluted
|
|
$
|
(5.82
|
)
|
|
$
|
9.04
|
|
|
$
|
10.27
|
|
Weighted average common shares outstanding
|
|
|
26,479,832
|
|
|
|
26,479,832
|
|
|
|
26,479,832
|
|
Weighted average common shares outstanding and
dilutive potential common shares
|
|
|
26,617,457
|
|
|
|
26,638,219
|
|
|
|
26,612,464
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
130
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments, other than investments in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
Fixed Securities:
|
|
|
|
|
|
|
|
|
Bonds held-to-maturity, at amortized cost
|
|
$
|
6,681,837
|
|
|
$
|
6,692,447
|
|
Bonds available-for-sale, at market
|
|
|
3,820,837
|
|
|
|
3,837,988
|
|
Preferred stocks, at market
|
|
|
48,822
|
|
|
|
78,885
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stocks, at market
|
|
|
853,530
|
|
|
|
1,194,982
|
|
Mortgage loans on real estate
|
|
|
1,877,053
|
|
|
|
1,540,081
|
|
Policy loans
|
|
|
354,398
|
|
|
|
346,002
|
|
Investment real estate, net of
accumulated depreciation of $191,435 and $173,520
|
|
|
528,905
|
|
|
|
477,458
|
|
Short-term investments
|
|
|
295,170
|
|
|
|
698,262
|
|
Other invested assets
|
|
|
85,151
|
|
|
|
89,791
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
14,545,703
|
|
|
|
14,955,896
|
|
|
|
|
|
|
|
|
Cash
|
|
|
66,096
|
|
|
|
134,069
|
|
Investments in unconsolidated affiliates
|
|
|
154,309
|
|
|
|
119,856
|
|
Accrued investment income
|
|
|
184,801
|
|
|
|
182,849
|
|
Reinsurance ceded receivables
|
|
|
482,846
|
|
|
|
438,066
|
|
Prepaid reinsurance premiums
|
|
|
61,433
|
|
|
|
66,772
|
|
Premiums due and other receivables
|
|
|
325,019
|
|
|
|
286,600
|
|
Deferred policy acquisition costs
|
|
|
1,482,664
|
|
|
|
1,251,285
|
|
Property and equipment, net
|
|
|
92,458
|
|
|
|
84,403
|
|
Current federal income taxes
|
|
|
68,327
|
|
|
|
3,145
|
|
Deferred federal income taxes
|
|
|
195,508
|
|
|
|
|
|
Other assets
|
|
|
159,254
|
|
|
|
156,787
|
|
Separate account assets
|
|
|
561,021
|
|
|
|
781,160
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
18,379,439
|
|
|
$
|
18,460,888
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Policyholder funds
|
|
|
|
|
|
|
|
|
Future policy benefits:
|
|
|
|
|
|
|
|
|
Life
|
|
$
|
2,436,001
|
|
|
$
|
2,384,818
|
|
Annuity
|
|
|
664,136
|
|
|
|
654,595
|
|
Accident and health
|
|
|
96,548
|
|
|
|
94,072
|
|
Policy account balances
|
|
|
8,295,527
|
|
|
|
7,636,617
|
|
Policy and contract claims
|
|
|
1,401,960
|
|
|
|
1,335,742
|
|
Participating policyholder share
|
|
|
149,970
|
|
|
|
172,206
|
|
Other policyholder funds
|
|
|
959,134
|
|
|
|
977,408
|
|
|
|
|
|
|
|
|
Total policyholder liabilities
|
|
|
14,003,276
|
|
|
|
13,255,458
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
|
|
|
|
96,104
|
|
Liability for Retirement Benefits
|
|
|
184,124
|
|
|
|
125,664
|
|
Notes payable
|
|
|
111,922
|
|
|
|
128,799
|
|
Other liabilities
|
|
|
376,863
|
|
|
|
332,380
|
|
Minority interests in subsidiaries
|
|
|
8,377
|
|
|
|
4,539
|
|
Separate account liabilities
|
|
|
561,021
|
|
|
|
781,160
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,245,583
|
|
|
|
14,724,104
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $1.00 par value, Authorized 50,000,000
Issued 30,832,449, Outstanding 26,818,833 shares
|
|
|
30,832
|
|
|
|
30,832
|
|
Additional paid-in capital
|
|
|
7,552
|
|
|
|
6,080
|
|
Accumulated other comprehensive income (loss)
|
|
|
(221,148
|
)
|
|
|
145,972
|
|
Retained earnings
|
|
|
3,414,946
|
|
|
|
3,653,365
|
|
Treasury stock, at cost
|
|
|
(98,326
|
)
|
|
|
(99,465
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,133,856
|
|
|
|
3,736,784
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
18,379,439
|
|
|
$
|
18,460,888
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
131
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of
year
|
|
|
30,832
|
|
|
|
30,832
|
|
|
|
30,832
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
6,080
|
|
|
|
4,160
|
|
|
|
2,212
|
|
Issuance of treasury shares as restricted stock
|
|
|
(1,139
|
)
|
|
|
(79
|
)
|
|
|
|
|
Amortization of restricted stock
|
|
|
2,611
|
|
|
|
1,999
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
7,552
|
|
|
|
6,080
|
|
|
|
4,160
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
145,972
|
|
|
|
141,869
|
|
|
|
139,024
|
|
Change in unrealized gains on marketable securities, net
|
|
|
(331,828
|
)
|
|
|
268
|
|
|
|
28,935
|
|
Foreign exchange adjustments
|
|
|
(247
|
)
|
|
|
(17
|
)
|
|
|
36
|
|
Minimum pension liability adjustment
|
|
|
(35,045
|
)
|
|
|
3,852
|
|
|
|
8,497
|
|
Effect of FAS158 implementation on pension liability, net of tax
|
|
|
|
|
|
|
|
|
|
|
(34,623
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(221,148
|
)
|
|
|
145,972
|
|
|
|
141,869
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
3,653,365
|
|
|
|
3,498,306
|
|
|
|
3,305,523
|
|
Net income (loss)
|
|
|
(153,998
|
)
|
|
|
240,773
|
|
|
|
273,231
|
|
Cash dividends to common stockholders
($3.08, $3.05 and $3.01 per share)
|
|
|
(82,651
|
)
|
|
|
(81,531
|
)
|
|
|
(80,448
|
)
|
FIN 48 Implementation
|
|
|
|
|
|
|
(4,183
|
)
|
|
|
|
|
Effect of FAS 158 Change in Measurement Date
|
|
|
(1,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
3,414,946
|
|
|
|
3,653,365
|
|
|
|
3,498,306
|
|
|
|
|
|
|
|
|
|
|
|
TREASURY STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(99,465
|
)
|
|
|
(99,544
|
)
|
|
|
(99,544
|
)
|
Issuance of restricted stock
|
|
|
1,139
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(98,326
|
)
|
|
|
(99,465
|
)
|
|
|
(99,544
|
)
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
3,133,856
|
|
|
|
3,736,784
|
|
|
|
3,575,623
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
(153,998
|
)
|
|
|
240,773
|
|
|
|
273,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on marketable securities, net
|
|
|
(331,828
|
)
|
|
|
268
|
|
|
|
28,935
|
|
Foreign exchange adjustments
|
|
|
(247
|
)
|
|
|
(17
|
)
|
|
|
36
|
|
Minimum pension liability adjustment
|
|
|
(35,045
|
)
|
|
|
3,852
|
|
|
|
8,497
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income (loss)
|
|
|
(367,120
|
)
|
|
|
4,103
|
|
|
|
37,468
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
(521,118
|
)
|
|
|
244,876
|
|
|
|
310,699
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
132
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(153,998
|
)
|
|
$
|
240,773
|
|
|
$
|
273,231
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses (gains) on investments
|
|
|
379,709
|
|
|
|
(46,499
|
)
|
|
|
(100,295
|
)
|
Amortization of discounts and premiums on bonds
|
|
|
16,654
|
|
|
|
15,619
|
|
|
|
983
|
|
Capitalized interest on policy loans and mortgage loans
|
|
|
3,511
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
26,496
|
|
|
|
35,327
|
|
|
|
38,146
|
|
Interest credited to policy account balances
|
|
|
299,833
|
|
|
|
295,894
|
|
|
|
297,551
|
|
Charges to policy account balances
|
|
|
(191,238
|
)
|
|
|
(146,555
|
)
|
|
|
(137,802
|
)
|
Deferred federal income tax (benefit) expense
|
|
|
(87,388
|
)
|
|
|
25,539
|
|
|
|
10,584
|
|
Deferral of policy acquisition costs
|
|
|
(491,342
|
)
|
|
|
(465,362
|
)
|
|
|
(411,141
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
424,005
|
|
|
|
405,024
|
|
|
|
419,642
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(7,639
|
)
|
|
|
(5,947
|
)
|
|
|
(7,220
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder funds liabilities
|
|
|
88,908
|
|
|
|
72,663
|
|
|
|
94,998
|
|
Reinsurance ceded receivables
|
|
|
(44,780
|
)
|
|
|
30,549
|
|
|
|
25,320
|
|
Premiums due and other receivables
|
|
|
(38,419
|
)
|
|
|
9,552
|
|
|
|
(17,082
|
)
|
Accrued investment income
|
|
|
(1,952
|
)
|
|
|
(8,562
|
)
|
|
|
11,523
|
|
Current federal income tax recoverable
|
|
|
(65,182
|
)
|
|
|
|
|
|
|
|
|
Liability for retirement benefits
|
|
|
6,018
|
|
|
|
5,963
|
|
|
|
22,774
|
|
Prepaid reinsurance premiums
|
|
|
5,339
|
|
|
|
9,298
|
|
|
|
445
|
|
Other, net
|
|
|
3,146
|
|
|
|
(10,363
|
)
|
|
|
(18,164
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
171,681
|
|
|
|
462,913
|
|
|
|
503,493
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale
|
|
|
104,093
|
|
|
|
68,004
|
|
|
|
72,252
|
|
Stocks
|
|
|
129,270
|
|
|
|
277,429
|
|
|
|
191,001
|
|
Real estate
|
|
|
|
|
|
|
84,744
|
|
|
|
153,101
|
|
Mortgage loans
|
|
|
6,794
|
|
|
|
|
|
|
|
|
|
Other invested assets
|
|
|
9,896
|
|
|
|
104,743
|
|
|
|
94,562
|
|
Proceeds from maturity of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale
|
|
|
249,769
|
|
|
|
287,559
|
|
|
|
338,598
|
|
Bonds held-to-maturity
|
|
|
528,781
|
|
|
|
547,416
|
|
|
|
640,787
|
|
Principal payments received on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
138,035
|
|
|
|
223,956
|
|
|
|
157,474
|
|
Policy loans
|
|
|
9,459
|
|
|
|
5,472
|
|
|
|
13,085
|
|
Purchases of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale
|
|
|
(640,403
|
)
|
|
|
(658,731
|
)
|
|
|
(496,858
|
)
|
Bonds held-to-maturity
|
|
|
(656,580
|
)
|
|
|
(483,722
|
)
|
|
|
(151,883
|
)
|
Stocks
|
|
|
(290,979
|
)
|
|
|
(364,352
|
)
|
|
|
(228,292
|
)
|
Real estate
|
|
|
(78,119
|
)
|
|
|
(46,295
|
)
|
|
|
(2,157
|
)
|
Mortgage loans
|
|
|
(513,964
|
)
|
|
|
(386,137
|
)
|
|
|
(323,207
|
)
|
Policy loans
|
|
|
(20,447
|
)
|
|
|
(10,237
|
)
|
|
|
(20,589
|
)
|
Other invested assets
|
|
|
(21,795
|
)
|
|
|
(50,115
|
)
|
|
|
(22,294
|
)
|
Decrease (increase) in short-term investments, net
|
|
|
403,092
|
|
|
|
19,881
|
|
|
|
(558,578
|
)
|
Decrease (increase) in investment in unconsolidated affiliates, net
|
|
|
(34,453
|
)
|
|
|
(44,826
|
)
|
|
|
915
|
|
Increase in property and equipment, net
|
|
|
(12,890
|
)
|
|
|
(11,459
|
)
|
|
|
(6,752
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(690,441
|
)
|
|
|
(436,670
|
)
|
|
|
(148,836
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders deposits to policy account balances
|
|
|
1,996,836
|
|
|
|
1,220,022
|
|
|
|
1,091,608
|
|
Policyholders withdrawals from policy account balances
|
|
|
(1,446,521
|
)
|
|
|
(1,250,266
|
)
|
|
|
(1,195,408
|
)
|
Increase (decrease) in notes payable
|
|
|
(16,877
|
)
|
|
|
4,724
|
|
|
|
(14,959
|
)
|
Dividends to stockholders
|
|
|
(82,651
|
)
|
|
|
(81,531
|
)
|
|
|
(80,448
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
450,787
|
|
|
|
(107,051
|
)
|
|
|
(199,207
|
)
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(67,973
|
)
|
|
|
(80,808
|
)
|
|
|
155,450
|
|
Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of the year
|
|
|
134,069
|
|
|
|
214,877
|
|
|
|
59,427
|
|
|
|
|
|
|
|
|
|
|
|
End of the year
|
|
$
|
66,096
|
|
|
$
|
134,069
|
|
|
$
|
214,877
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
133
1 NATURE OF OPERATIONS
American National Insurance Company and its consolidated subsidiaries (collectively American
National) operate primarily in the insurance industry. Operating on a multiple product line
basis, American National offers a broad line of insurance coverages, including individual and group
life, health, and annuities; personal lines property and casualty; and credit insurance. In
addition, through non-insurance subsidiaries, American National offers mutual funds and invests in
real estate. The majority of revenues are generated by the insurance business. Business is
conducted in all states and the District of Columbia, as well as Puerto Rico, Guam and American
Samoa. Various distribution systems are utilized, including home service, multiple line, group
brokerage, credit, independent third-party marketing organizations and direct sales to the public.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
These consolidated financial statements (Financial Statements) have been prepared in conformity
with (i) U.S. generally accepted accounting principles (GAAP); and (ii) the rules and regulations
of the U. S. Securities and Exchange Commission (SEC) regarding financial reporting. In addition
to GAAP accounting literature, specific SEC regulation is also applied to the financial statements
issued by insurance companies.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Investments in unconsolidated affiliates are shown at cost plus equity in undistributed earnings
since the dates of acquisition.
The preparation of consolidated financial statements in conformity with GAAP requires the use of
estimates and assumptions that affect the reported financial statement balances. Actual results
could differ from those estimates. The following estimates have been identified as critical in that
they involve a high degree of judgment and are subject to a significant degree of variability:
|
|
|
Other-Than-Temporary impairment of investment securities;
|
|
|
|
|
Deferred acquisition costs;
|
|
|
|
|
Reserves;
|
|
|
|
|
Reinsurance recoverable;
|
|
|
|
|
Pension and postretirement benefit plans;
|
|
|
|
|
Litigation contingencies; and
|
|
|
|
|
Federal income taxes.
|
Accounting estimates inherently require the use of judgments relating to a variety of assumptions,
in particular, expectations of current and future mortality, morbidity, persistency, losses and
loss adjustment expenses, recoverability of receivables, investment returns and interest rates. In
developing these estimates, we make subjective and complex judgments that are inherently uncertain
and subject to material changes as facts and circumstances develop. Although variability is
inherent in these estimates, management believes that the amounts provided are appropriate, based
upon the facts available upon compilation of the financial statements. Due to the inherent
uncertainty when using assumptions and estimates, the effect of certain accounting policies under
different conditions or assumptions could be different from those reported in the consolidated
financial statements.
Certain reclassifications have been made to the 2007 and 2006 financial information to conform to
the 2008 presentation.
INVESTMENTS
Debt securities
Bonds that are intended to be held-to-maturity are carried at amortized cost. The carrying value of
these debt securities is expected to be realized, due to American Nationals ability and intent to
hold these securities until maturity. Bonds held as available-for-sale are carried at fair value.
Preferred stocks
All preferred stocks are classified as available-for-sale and are carried at fair value.
134
Common stocks
All common stocks are classified as available-for-sale and are carried at fair value.
Unrealized gains and losses
For all investments carried at fair value (excluding derivative instruments), the unrealized gains
or losses (differences between amortized cost and fair value), net of applicable federal income
taxes, are reflected in stockholders equity as a component of accumulated other comprehensive
income (loss).
Mortgage loans
Mortgage loans on real estate are recorded at carrying value, which is comprised of the original
cost, net of repayments, amortization of premiums, accretion of discounts, unamortized deferred
revenue and valuation allowances. The mortgage loan portfolio is closely monitored through the
review of loan and property information, such as debt service coverage, annual operating statements
and property inspection reports. This information is evaluated in light of current economic
conditions and other factors, such as geographic location and property type. As a result of this
review, impaired loans are identified and valuation allowances are established. The change in
valuation allowances is reported in current period income as a realized loss. Impaired loans are
those which, based on current information and events, it is probable that American National will be
unable to collect all amounts due, according to the contractual terms of the loan agreement.
Policy loans
Policy loans are carried at cost which approximates fair value.
Investment real estate
Investment real estate is carried at cost, less allowance for depreciation. Depreciation is
provided over the estimated useful lives of the properties (15 to 50 years) using straight-line and
accelerated methods. American Nationals real estate portfolio is closely monitored through the
review of operating information and periodic inspections. This information is evaluated in light of
current economic conditions and other factors, such as geographic location and property type. As a
result of this review, if there is any indication of an adverse change in the economic condition of
a property, a complete cash flow analysis is performed to determine whether or not the property is
impaired. If a possible impairment is indicated, the fair value of the property is estimated using
a variety of techniques, including cash flow analysis, appraisals and comparison to the values of
similar properties. If the book value is greater than the estimated fair value, an impairment is
recorded.
Short-term investments
Short-term investments, comprised of commercial paper, are carried at amortized cost which
approximates fair value.
Other invested assets
Other invested assets are carried at cost, less allowance for valuation impairments. Impairments
for other invested assets are considered on an individual basis in accordance with the same
procedures used for investment real estate.
Impairments
All marketable securities, real estate and other invested assets are regularly reviewed for
impairment based on criteria that include the extent to which cost exceeds fair value, the duration
of the market decline, and the financial health of and specific prospects for the issuer. Losses
that are determined to be other than temporary are recognized in current period income as a
realized loss.
135
Derivative instruments and hedging activities
American National purchases derivative instruments only as hedges of a recognized asset or
liability, which are recorded on the consolidated statement of financial position at fair value.
The change in fair value of derivative assets is reported as part of net investment income. The
change in fair value of embedded derivative liabilities is reported through interest credited to
policyholders. Derivative instruments held at December 31, 2008 and 2007 had an immaterial impact
on the consolidated statements of income and consolidated statements of cash flows.
Investments in Unconsolidated Affiliates
These assets are primarily investments in real estate and equity fund joint ventures, and are
accounted for under the equity method of accounting.
CASH AND CASH EQUIVALENTS
American National considers cash on-hand and in-banks plus amounts invested in money market funds
as cash for purposes of the consolidated statements of cash flows.
PROPERTY AND EQUIPMENT
These assets consist of buildings occupied by the companies, electronic data processing equipment,
and furniture and equipment. These assets are carried at cost, less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over the estimated useful
lives of the assets (3 to 50 years).
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the
balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing
during the year. Translation adjustments resulting from this process are charged or credited to
other accumulated comprehensive income (loss).
INSURANCE SPECIFIC ASSETS AND LIABILITIES
Deferred policy acquisition costs
Certain costs of acquiring new insurance business have been deferred. For life, annuity and
accident and health business, such costs consist of inspection report and medical examination fees,
commissions, related fringe benefit costs and the cost of insurance in force gained through
acquisitions. The amount of commissions deferred includes first-year commissions and certain
subsequent year commissions that are in excess of ultimate level commission rates.
The deferred policy acquisition costs on traditional life and health products are amortized with
interest over the anticipated premium-paying period of the related policies, in proportion to the
ratio of annual premium revenue to be received over the life of the policies. Expected premium
revenue is estimated by using the same mortality and withdrawal assumptions used in computing
liabilities for future policy benefits. The amount of deferred policy acquisition costs is reduced
by a provision for possible inflation of maintenance and settlement expenses in the determination
of such amounts by means of grading interest rates.
Costs deferred on universal life, limited pay and investment type contracts are amortized as a
level percentage of the present value of anticipated gross profits from investment yields,
mortality, and surrender charges. The effect on the deferred policy acquisition costs that would
result from realization of unrealized gains (losses) is recognized with an offset to accumulated
other comprehensive income in consolidated stockholders equity as of the balance sheet date. It is
possible that a change in interest rates could have a significant impact on the deferred policy
acquisition costs calculated for these contracts.
Deferred policy acquisition costs associated with property and casualty insurance business consist
principally of commissions, underwriting and issue costs. These costs are amortized over the
coverage period of the related policies, in relation to premium revenue recognized.
136
Future policy benefits
For traditional products, liabilities for future policy benefits have been provided on a net level
premium method based on estimated investment yields, withdrawals, mortality, and other assumptions
that were appropriate at the time that the policies were issued. Estimates used are based on the
companies experience, as adjusted to provide for possible adverse deviation. These estimates are
periodically reviewed and compared with actual experience. When it is determined that future
expected experience differs significantly from existing assumptions, the estimates are revised for
current and future issues.
Future policy benefits for universal life and investment-type contracts reflect the current account
value before applicable surrender charges.
Reserves for Losses and Loss Expenses
American National establishes property and casualty reserves to provide for the estimated costs of
paying claims under insurance policies written by American National. These reserves include
estimates for both, case reserves, reserves for incurred but not reported (IBNR) claims. Case
reserves include the liability for claims that were reported to American National, but not yet
paid. IBNR reserves include a provision for potential development on case reserves, losses on
claims currently closed which may reopen in the future as well as claims which have been incurred
but not yet reported to American National. These reserves also include an estimate of the expense
associated with settling claims, including legal and other fees and the general expenses of
administering the claims adjustment process.
PREMIUM REVENUE AND POLICY BENEFITS
Traditional ordinary life and health
Life and accident and health premiums are recognized as revenue when due. Benefits and expenses are
associated with earned premiums to result in recognition of profits over the life of the policy
contracts. This association is accomplished by means of the provision for liabilities for future
policy benefits and the amortization of deferred policy acquisition costs.
Annuities
Revenues from annuity contracts represent amounts assessed against contract holders. Such
assessments are principally surrender charges and, in the case of variable annuities,
administrative fees. Policy account balances for annuities represent the deposits received plus
accumulated interest less applicable accumulated administrative fees.
Universal life and single premium whole life
Revenues from universal life policies and single premium whole life policies represent amounts
assessed against policy-holders. Included in such assessments are mortality charges, surrender
charges actually paid and earned policy service fees. Policyholder account balances consist of the
premiums received plus credited interest, less accumulated policyholder assessments. Amounts
included in expense represent benefits in excess of account balances returned to policyholders.
Property and casualty
Property and casualty premiums are recognized as revenue proportionately over the contract period.
Policy benefits consist of actual claims and the change in reserves for losses and loss adjustment
expenses.
137
PARTICIPATING INSURANCE POLICIES
A portion of the life insurance portfolio is written on a participating basis. Participating
business comprised approximately 9% of the life insurance in force at December 31, 2008 and 6% of
life premiums in 2008. Of the total participating business, 72% was written by Farm Family Life
Insurance Company (Farm Family Life). For the participating business excluding Farm Family Life,
the allocation of dividends to participating policyowners is based upon a comparison of experienced
rates of mortality, interest and expenses, as determined periodically for representative plans of
insurance, issue ages and policy durations, with the corresponding rates assumed in the calculation
of premiums.
For the Farm Family Life participating business, profits earned on participating business are
reserved for the payment of dividends to policyholders, except for the stockholders share of
profits on participating policies, which is limited to the greater of 10% of the profit on
participating business, or 50 cents per thousand dollars of the face amount of participating life
insurance in force. Participating policyholders interest includes the accumulated net income from
participating policies reserved for payment to such policyholders in the form of dividends (less
net income allocated to stockholders as indicated above) as well as a pro rata portion of
unrealized investment gains (losses), net of tax.
FEDERAL INCOME TAXES
American National and its eligible subsidiaries will file a consolidated life/non-life federal
income tax return for 2008. Certain subsidiaries that are consolidated for financial reporting are
not eligible to be included in the consolidated federal income tax return. Separate provisions for
income taxes have been determined for these entities.
Deferred federal income tax assets and liabilities have been recognized to reflect the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
American National recognizes tax benefits on uncertain tax positions only if it is more likely
than not that the tax position will be sustained by taxing authorities, based on the technical
merits of the position. Tax benefit recognized in the financial statements are measured based on
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. Tax benefits not meeting the more likely than not threshold are included with Other
liabilities in the consolidated statements of financial position.
Interest expense is classified as Other operating costs and expenses in the consolidated
statements of income. Penalties, if applicable, are classified as current federal income taxes in
the consolidated statements of income.
STOCK-BASED COMPENSATION
American National uses the fair value method to account for stock-based compensation.
SEPARATE ACCOUNTS ASSETS AND LIABILITIES
Separate account assets and liabilities represent funds maintained to meet the investment
objectives of contract holders who bear the investment risk. Investment income and investment gains
and losses from these separate funds accrue directly to the contract holders of the policies
supported by the separate accounts. Separate accounts are established in conformity with insurance
laws and are not chargeable with liabilities that arise from any other business of American
National. American National reports separately, as assets and liabilities, investments held in
separate accounts and liabilities of the separate accounts if (i) such separate accounts are
legally recognized; (ii) assets supporting the contract liabilities are legally insulated from
American Nationals general account liabilities; (iii) investments are directed by the contract
holder; and (iv) all investment performance, net of contract fees and assessments, is passed
through to the contract holder. The assets of these accounts are carried at fair value. Deposits,
net investment income and realized investment gains and losses for these accounts are excluded from
revenues, and related liability increases are excluded from benefits and expenses in the
consolidated financial statements.
138
ADOPTION OF NEW ACCOUNTING STANDARDS
In January 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue No. 99-20
, (FSP EITF
99-20-1). The FSP amends the impairment guidance of Emerging Issues Task Force (EITF) Issue
No. 99-20,
Recognition of Interest Income and Impairment of Purchased Beneficial Interest and
Beneficial Interest that Continue to Be Held by a Transferor in Securitized Financial Assets
, by
removing the exclusive reliance upon market participant assumptions about future cash flows when
evaluating impairment of securities within its scope. FSP EITF 99-20-1 requires companies to follow
the impairment guidance in Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting
for Certain Investments in Debt and Equity Securities
(SFAS 115), which permits the use of
reasonable management judgment of the probability that the holder will be unable to collect all
amounts due. The FSP is effective prospectively for interim and annual reporting periods ending
after December 15, 2008. American National adopted the FSP on December 31, 2008 and the adoption
did not have a material effect on American Nationals consolidated financial statements.
On January 1, 2008, American National adopted SFAS No. 157,
Fair Value Measurements
, (SFAS 157)
which was issued by the FASB in September 2006. American National also adopted on January 1, 2008
the SFAS 157 related FASB Staff Positions (FSPs). For financial statement elements currently
required to be measured at fair value, SFAS 157 redefines fair value, establishes a framework for
measuring fair value under U.S. Generally Accepted Accounting Principles and enhances disclosures
about fair value measurements. The new definition of fair value focuses on the price that would be
received to sell an asset or paid to transfer a liability regardless of whether an observable
liquid market price exists (an exit price). An exit price valuation will include margins for risk
even if they are not observable. As a company is released from risk, the margins for risk will also
be released through net realized capital gains or losses in net income. SFAS 157 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels (i.e. Level 1, 2, and 3). Also, SFAS 157 provides guidance on how to measure
fair value, when required, under existing accounting standards. See further disclosure regarding
accounting under FAS 157 in Note 5.
American National has adopted FAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans
(SFAS 158). This statement requires employers to recognize, on the
statement of financial position, the overfunded or underfunded status of a defined benefit
postretirement plan, measured as the difference between the fair value of plan assets and the
benefit obligation. Employers must also recognize as a component of other comprehensive income, net
of tax, the actuarial and experience gains and losses and the prior service costs and credits.
These recognition standards of this statement were effective for public entities for years ending
after December 15, 2006. The statement also required employers to measure plan assets and benefit
obligations as of the date of the employers fiscal year-end statement of financial position with
this date change effective for periods ending after December 15, 2008. American National adopted
the provisions of this statement on the required effective dates and the adoption of this statement
did not have a material impact on American Nationals financial statements.
As of January 1, 2008, American National adopted SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). This statement provides an option, on specified
election dates, to report selected financial assets and liabilities, including insurance contracts,
at fair value. Subsequent changes in fair value for designated items are reported in income in the
current period. The adoption of SFAS 159 did not impact the consolidated financial statements, as
no items were elected for measurement at fair value upon initial adoption. American National will
continue to evaluate eligible financial assets and liabilities on their election dates. Any future
elections will be disclosed in accordance with the provisions outlined in the statement.
In June of 2006, the FASB issued FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109
. This statement clarifies the
criteria for recognizing tax benefits under FASB Statement No. 109,
Accounting for Income Taxes
. It
also requires additional disclosures about uncertain tax positions. This statement was effective
for fiscal years beginning after December 15, 2006. The adoption of FIN 48 and the related FSPs on
January 1, 2007 did not have a material impact on American Nationals financial statements.
139
In September of 2005, the Accounting Standards Executive Committee issued Statement of Position
(SOP) No. 05-01,
Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contracts
(SOP 05-01). This SOP provides guidance on
accounting for deferred acquisition costs on internal replacements of insurance contracts. SOP 05-1
was effective for internal replacements occurring in fiscal years beginning after December 15,
2006. American National adopted SOP 05-01 on January 1, 2007. The adoption of SOP 05-01 did not
have a material impact on American Nationals financial statements.
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51
(SFAS 160). This Statement requires changes to the
reporting of noncontrolling interests in subsidiaries to improve the relevance, comparability, and
transparency of financial information provided in consolidated statements. SFAS 160 is effective
for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The
adoption of SFAS 160 on January 1, 2009, did not have a material effect on American Nationals
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
(SFAS 141R). This
statement, which addresses the accounting for business acquisitions, is effective for fiscal years
beginning on or after December 15, 2008, with early adoption prohibited, and generally applies to
business acquisitions completed after December 31, 2008. Among other things, the new standard
requires that all acquisition-related costs be expensed as incurred, and that all restructuring
costs related to acquired operations be expensed as incurred. This new standard also addresses the
current and subsequent accounting for assets and liabilities arising from contingencies acquired or
assumed and, for acquisitions both prior and subsequent to December 31, 2008, requires the acquirer
to recognize changes in the amount of its deferred tax benefits that are recognizable because of a
business combination either in income from continuing operations in the period of the combination
or directly in contributed capital, depending on the circumstances. The adoption of SFAS 141R on
January 1, 2009, did not have a material effect on American Nationals consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 amends and expands
disclosures about an entitys derivative and hedging activities with the intent of providing users
of financial statements with an enhanced understanding of (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance, and cash flows. SFAS 161 is effective
for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative
disclosures. American National adopted SFAS 161 on January 1, 2009. The adoption of SFAS 161 is
expected to result in expanded disclosures related to derivative instruments and hedging
activities.
In April 2008, the FASB issued FSP No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP 142-3). This FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life a recognized intangible asset under SFAS
No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). This change is intended to improve the
consistency between the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flowed used to measure the fair value of the asset under SFAS 141(R) and other
GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. American National will apply FSP
142-3 prospectively to and intangible assets acquired as of, and subsequent to, January 1, 2009.
In November 2008, the FASB issued EITF 08-6,
Equity Method Investment Accounting Considerations
(EITF 08-6). EITF 08-6 addresses the effects of the issuances of SFAS 141(R) and SFAS 160 on the
application of the equity method under Accounting Principles Board (APB) Opinion 18,
The Equity
Method of Accounting for Investments in Common Stock
. EITF 08-6 requires that (a) an entity
determine the initial carrying value of an equity method investment by applying the cost
accumulation model; (b) an entity shall use the other-than-temporary impairment model of APB
Opinion 18; however, investors should adjust any impairments recorded by an investee for existing
differences between the investors basis and the underlying investees basis in such impaired
assets; (c) share issuances by an investee should be accounted for as if the equity method investor
had sold a proportionate share of
140
its investment; and (d) when an investment is no longer within the scope of equity method
accounting and instead is within the scope of cost method accounting or SFAS 115,
Accounting for
Certain Investments in Debt and Equity Securities
(SFAS 115), the investor should prospectively
apply the provisions of APB Opinion 18 or SFAS 115 and use the current carrying amount of the
investment as its initial cost. The EITF is effective on a prospective basis in fiscal years
beginning on or after December 15, 2008 and interim periods within those fiscal years, consistent
with the effective dates of SFAS No. 141(R) and SFAS No. 160. The adoption of EITF 08-6 on
January 1, 2009 is not expected to have a material effect on American Nationals consolidated
financial statements.
In December 2008, the FASB issued FSP No. FAS 132(R)-1,
Employers Disclosures about Postretirement
Benefit Plan Assets
(FSP 132(R)-1). FSP 132(R)-1 amends SFAS No. 132(R),
Employers Disclosures
about Pensions and Other Postretirement Benefits
, to enhance the transparency surrounding the types
of assets and associated risks in an employers defined benefit pension or other postretirement
plan. FSP 132(R)-1 requires an employer to disclose information about the valuation of plan assets
similar to that required under SFAS 157. This FSP is effective for fiscal years ending after
December 15, 2009. American National will provide the required disclosure in accordance with the
effective date.
141
3 INVESTMENTS
The amortized cost and estimated fair values of investments in held-to-maturity and
available-for-sale securities are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
agencies
|
|
|
166,010
|
|
|
|
2,292
|
|
|
|
(3
|
)
|
|
|
168,299
|
|
States and political
subdivisions
|
|
|
157,907
|
|
|
|
4,662
|
|
|
|
(1,611
|
)
|
|
|
160,958
|
|
Foreign governments
|
|
|
4,338
|
|
|
|
1,618
|
|
|
|
|
|
|
|
5,956
|
|
Public utilities
|
|
|
380,766
|
|
|
|
1,218
|
|
|
|
(25,877
|
)
|
|
|
356,107
|
|
All other corporate bonds
|
|
|
5,173,926
|
|
|
|
47,954
|
|
|
|
(507,577
|
)
|
|
|
4,714,303
|
|
Other
|
|
|
30,130
|
|
|
|
|
|
|
|
(4,932
|
)
|
|
|
25,198
|
|
Mortgage-backed securities
|
|
|
768,760
|
|
|
|
13,499
|
|
|
|
(64,377
|
)
|
|
|
717,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
|
6,681,837
|
|
|
|
71,243
|
|
|
|
(604,377
|
)
|
|
|
6,148,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
agencies
|
|
|
8,027
|
|
|
|
1,063
|
|
|
|
|
|
|
|
9,090
|
|
States and political
subdivisions
|
|
|
584,268
|
|
|
|
6,278
|
|
|
|
(18,311
|
)
|
|
|
572,235
|
|
Foreign governments
|
|
|
916
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
829
|
|
Public utilities
|
|
|
206,499
|
|
|
|
7,222
|
|
|
|
(9,791
|
)
|
|
|
203,930
|
|
All other corporate bonds
|
|
|
3,023,131
|
|
|
|
24,014
|
|
|
|
(435,847
|
)
|
|
|
2,611,298
|
|
Other
|
|
|
100
|
|
|
|
2
|
|
|
|
|
|
|
|
102
|
|
Mortgage-backed securities
|
|
|
436,619
|
|
|
|
4,475
|
|
|
|
(17,741
|
)
|
|
|
423,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
4,259,560
|
|
|
|
43,054
|
|
|
|
(481,777
|
)
|
|
|
3,820,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
10,941,397
|
|
|
|
114,297
|
|
|
|
(1,086,154
|
)
|
|
|
9,969,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
60,718
|
|
|
|
3,609
|
|
|
|
(15,505
|
)
|
|
|
48,822
|
|
Common stock
|
|
|
820,908
|
|
|
|
115,692
|
|
|
|
(83,070
|
)
|
|
|
853,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
881,626
|
|
|
|
119,301
|
|
|
|
(98,575
|
)
|
|
|
902,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
11,823,023
|
|
|
|
233,598
|
|
|
|
(1,184,729
|
)
|
|
|
10,871,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
agencies
|
|
|
219,804
|
|
|
|
1,444
|
|
|
|
(312
|
)
|
|
|
220,936
|
|
States and political
subdivisions
|
|
|
228,122
|
|
|
|
4,052
|
|
|
|
(469
|
)
|
|
|
231,705
|
|
Foreign governments
|
|
|
5,868
|
|
|
|
664
|
|
|
|
|
|
|
|
6,532
|
|
Public utilities
|
|
|
411,353
|
|
|
|
5,985
|
|
|
|
(4,457
|
)
|
|
|
412,881
|
|
All other corporate bonds
|
|
|
5,122,513
|
|
|
|
89,488
|
|
|
|
(96,508
|
)
|
|
|
5,115,493
|
|
Mortgage-backed securities
|
|
|
704,787
|
|
|
|
4,542
|
|
|
|
(11,703
|
)
|
|
|
697,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
|
6,692,447
|
|
|
|
106,175
|
|
|
|
(113,449
|
)
|
|
|
6,685,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
agencies
|
|
|
30,616
|
|
|
|
501
|
|
|
|
|
|
|
|
31,117
|
|
States and political
subdivisions
|
|
|
416,425
|
|
|
|
3,830
|
|
|
|
(512
|
)
|
|
|
419,743
|
|
Foreign governments
|
|
|
800
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
777
|
|
Public utilities
|
|
|
192,333
|
|
|
|
8,714
|
|
|
|
(1,604
|
)
|
|
|
199,443
|
|
All other corporate bonds
|
|
|
2,784,555
|
|
|
|
35,486
|
|
|
|
(83,992
|
)
|
|
|
2,736,049
|
|
Mortgage-backed securities
|
|
|
458,553
|
|
|
|
2,966
|
|
|
|
(10,660
|
)
|
|
|
450,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
3,883,282
|
|
|
|
51,497
|
|
|
|
(96,791
|
)
|
|
|
3,837,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
10,575,729
|
|
|
|
157,672
|
|
|
|
(210,240
|
)
|
|
|
10,523,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
87,422
|
|
|
|
1,742
|
|
|
|
(10,279
|
)
|
|
|
78,885
|
|
Common stock
|
|
|
866,371
|
|
|
|
375,402
|
|
|
|
(46,791
|
)
|
|
|
1,194,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
953,793
|
|
|
|
377,144
|
|
|
|
(57,070
|
)
|
|
|
1,273,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
11,529,522
|
|
|
|
534,816
|
|
|
|
(267,310
|
)
|
|
|
11,797,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142
DEBT SECURITIES
The amortized cost and estimated fair value, by contractual maturity, of debt securities at
December 31, 2008, are shown below (in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds Held-to-Maturity
|
|
|
Bonds Available-for-Sale
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
Amortized Cost
|
|
|
Value
|
|
|
Amortized Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
335,885
|
|
|
|
334,044
|
|
|
|
154,877
|
|
|
|
153,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
|
2,880,344
|
|
|
|
2,674,238
|
|
|
|
1,359,792
|
|
|
|
1,237,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years
|
|
|
2,722,138
|
|
|
|
2,436,099
|
|
|
|
2,012,462
|
|
|
|
1,733,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
737,619
|
|
|
|
700,052
|
|
|
|
722,153
|
|
|
|
689,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,675,986
|
|
|
$
|
6,144,433
|
|
|
$
|
4,249,284
|
|
|
$
|
3,813,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without single maturity date
|
|
|
5,851
|
|
|
|
4,270
|
|
|
|
10,276
|
|
|
|
7,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,681,837
|
|
|
$
|
6,148,703
|
|
|
$
|
4,259,560
|
|
|
$
|
3,820,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities are sold throughout the year for various reasons. Proceeds from the
disposals of these securities, with the gains and losses realized, are shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Proceeds from sales of
available-for-sale securities
|
|
$
|
118,905
|
|
|
$
|
166,493
|
|
|
$
|
425,033
|
|
Gross gains realized
|
|
|
22,478
|
|
|
|
34,033
|
|
|
|
73,541
|
|
Gross losses realized
|
|
|
30,388
|
|
|
|
2,069
|
|
|
|
8,040
|
|
In 2008, securities with an amortized cost of $91,418,000 were transferred from held-to-maturity to
available-for-sale due to evidence of a significant deterioration in the issuers creditworthiness.
An unrealized loss of $67,383,000 was established at the time of the transfer.
In 2007, securities with an amortized cost of $27,239,000 were transferred from held-to-maturity to
available-for-sale due to evidence of a significant deterioration in the issuers creditworthiness.
An unrealized loss of $98,000 was established at the time of the transfer.
In 2006, securities with an amortized cost of $69,631,000 were transferred from held-to-maturity to
available-for-sale due to evidence of a significant deterioration in the issuers creditworthiness.
An unrealized loss of $6,822,000 was established at the time of the transfer.
All gains and losses were determined using specific identification of the securities sold.
In accordance with various government and state regulations, American National and its insurance
subsidiaries had bonds with an amortized value of $53,941,000 at December 31, 2008, on deposit with
appropriate regulatory authorities.
143
UNREALIZED GAINS AND LOSSES ON SECURITIES
Unrealized gains (losses) on marketable equity securities and bonds available-for-sale, presented
in the stockholders equity section of the consolidated statements of financial position, are net
of deferred tax liabilities or (assets) of $(84,029,000), $101,244,000, and $101,114,000 for 2008,
2007, and 2006, respectively.
The change in the net unrealized gains (losses) on investments for the years ended December 31 are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale
|
|
|
(393,429
|
)
|
|
|
(4,443
|
)
|
|
|
(38,062
|
)
|
Preferred stocks
|
|
|
(3,359
|
)
|
|
|
(9,544
|
)
|
|
|
150
|
|
Common stocks
|
|
|
(295,988
|
)
|
|
|
11,161
|
|
|
|
70,520
|
|
Amortization of deferred policy acquisition costs
|
|
|
164,937
|
|
|
|
3,080
|
|
|
|
13,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527,839
|
)
|
|
|
254
|
|
|
|
46,283
|
|
Provision for federal income taxes
|
|
|
185,273
|
|
|
|
(130
|
)
|
|
|
(16,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342,566
|
)
|
|
|
124
|
|
|
|
30,094
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains of investments
attributable to participating policyholders
interest
|
|
|
10,738
|
|
|
|
144
|
|
|
|
(1,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(331,828
|
)
|
|
|
268
|
|
|
|
28,935
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses on investment securities and the fair value of the related securities,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, as of December 31, 2008, are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
|
3
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3,181
|
|
States and political subdivisions
|
|
|
1,571
|
|
|
|
21,104
|
|
|
|
40
|
|
|
|
383
|
|
|
|
1,611
|
|
|
|
21,487
|
|
Public utilities
|
|
|
13,951
|
|
|
|
249,289
|
|
|
|
11,926
|
|
|
|
67,505
|
|
|
|
25,877
|
|
|
|
316,794
|
|
All other corporate bonds
|
|
|
267,069
|
|
|
|
2,443,246
|
|
|
|
240,508
|
|
|
|
860,680
|
|
|
|
507,577
|
|
|
|
3,303,926
|
|
Other
|
|
|
4,932
|
|
|
|
25,197
|
|
|
|
|
|
|
|
|
|
|
|
4,932
|
|
|
|
25,197
|
|
Mortgage-backed securities
|
|
|
51,899
|
|
|
|
173,371
|
|
|
|
12,478
|
|
|
|
74,270
|
|
|
|
64,377
|
|
|
|
247,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
held-to-maturity
|
|
|
339,425
|
|
|
|
2,915,388
|
|
|
|
264,952
|
|
|
|
1,002,838
|
|
|
|
604,377
|
|
|
|
3,918,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
|
14,285
|
|
|
|
269,042
|
|
|
|
4,026
|
|
|
|
34,572
|
|
|
|
18,311
|
|
|
|
303,614
|
|
Foreign governments
|
|
|
19
|
|
|
|
107
|
|
|
|
67
|
|
|
|
723
|
|
|
|
87
|
|
|
|
830
|
|
Public utilities
|
|
|
5,052
|
|
|
|
80,772
|
|
|
|
4,739
|
|
|
|
46,342
|
|
|
|
9,791
|
|
|
|
127,114
|
|
All other corporate bonds
|
|
|
245,231
|
|
|
|
1,618,374
|
|
|
|
190,616
|
|
|
|
610,305
|
|
|
|
435,847
|
|
|
|
2,228,679
|
|
Mortgage-backed securities
|
|
|
9,847
|
|
|
|
111,517
|
|
|
|
7,895
|
|
|
|
46,536
|
|
|
|
17,741
|
|
|
|
158,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
available-for-sale
|
|
|
274,434
|
|
|
|
2,079,812
|
|
|
|
207,343
|
|
|
|
738,478
|
|
|
|
481,777
|
|
|
|
2,818,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
613,859
|
|
|
|
4,995,200
|
|
|
|
472,295
|
|
|
|
1,741,316
|
|
|
|
1,086,154
|
|
|
|
6,736,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
1,238
|
|
|
|
7,853
|
|
|
|
14,267
|
|
|
|
31,835
|
|
|
|
15,505
|
|
|
|
39,688
|
|
Common stock
|
|
|
77,791
|
|
|
|
299,512
|
|
|
|
5,279
|
|
|
|
18,493
|
|
|
|
83,070
|
|
|
|
318,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
|
79,029
|
|
|
|
307,365
|
|
|
|
19,546
|
|
|
|
50,328
|
|
|
|
98,575
|
|
|
|
357,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
692,888
|
|
|
|
5,302,565
|
|
|
|
491,841
|
|
|
|
1,791,644
|
|
|
|
1,184,729
|
|
|
|
7,094,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
|
110
|
|
|
|
110,254
|
|
|
|
202
|
|
|
|
38,697
|
|
|
|
312
|
|
|
|
148,951
|
|
States and political subdivisions
|
|
|
252
|
|
|
|
217,143
|
|
|
|
217
|
|
|
|
19,208
|
|
|
|
469
|
|
|
|
236,351
|
|
Public Utilities
|
|
|
12
|
|
|
|
17,070
|
|
|
|
4,445
|
|
|
|
185,592
|
|
|
|
4,457
|
|
|
|
202,662
|
|
All other corporate bonds
|
|
|
12,911
|
|
|
|
262,789
|
|
|
|
83,597
|
|
|
|
2,612,728
|
|
|
|
96,508
|
|
|
|
2,875,517
|
|
Mortgage-backed securities
|
|
|
813
|
|
|
|
66,636
|
|
|
|
10,890
|
|
|
|
478,611
|
|
|
|
11,703
|
|
|
|
545,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
held-to-maturity
|
|
|
14,098
|
|
|
|
673,892
|
|
|
|
99,351
|
|
|
|
3,334,836
|
|
|
|
113,449
|
|
|
|
4,008,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
|
|
|
|
|
8,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,053
|
|
States and political subdivisions
|
|
|
336
|
|
|
|
366,116
|
|
|
|
176
|
|
|
|
38,309
|
|
|
|
512
|
|
|
|
404,425
|
|
Foreign governments
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
777
|
|
|
|
23
|
|
|
|
777
|
|
Public utilities
|
|
|
(1,953
|
)
|
|
|
4,604
|
|
|
|
3,557
|
|
|
|
129,595
|
|
|
|
1,604
|
|
|
|
134,199
|
|
All other corporate bonds
|
|
|
7,728
|
|
|
|
164,151
|
|
|
|
76,264
|
|
|
|
1,469,709
|
|
|
|
83,992
|
|
|
|
1,633,860
|
|
Mortgage-backed securities
|
|
|
185
|
|
|
|
1,381,105
|
|
|
|
10,475
|
|
|
|
338,970
|
|
|
|
10,660
|
|
|
|
1,720,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
available-for-sale
|
|
|
6,296
|
|
|
|
1,924,029
|
|
|
|
90,495
|
|
|
|
1,977,360
|
|
|
|
96,791
|
|
|
|
3,901,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
20,394
|
|
|
|
2,597,921
|
|
|
|
189,846
|
|
|
|
5,312,196
|
|
|
|
210,240
|
|
|
|
7,910,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
10,279
|
|
|
|
64,223
|
|
|
|
|
|
|
|
|
|
|
|
10,279
|
|
|
|
64,223
|
|
Common stock
|
|
|
46,791
|
|
|
|
472,595
|
|
|
|
|
|
|
|
|
|
|
|
46,791
|
|
|
|
472,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
|
57,070
|
|
|
|
536,818
|
|
|
|
|
|
|
|
|
|
|
|
57,070
|
|
|
|
536,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
77,464
|
|
|
|
3,134,739
|
|
|
|
189,846
|
|
|
|
5,312,196
|
|
|
|
267,310
|
|
|
|
8,446,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
American National evaluates all bonds that have unrealized losses on a quarterly basis to determine
if the creditworthiness of any of the bonds have deteriorated to a point that would prevent
American National from realizing the full amount at maturity. For those bonds where management
believes that the full amount will not be realized, an other-than-temporary impairment is recorded.
On all other bonds where management does not believe there is a credit problem, American National
has the ability and intent to hold these bonds until a market price recovery or maturity and,
therefore, these bonds are not considered to be other-than-temporarily impaired. However, it is
possible that the investees ability to meet future contractual obligations may be different than
what the Company determined during its analysis, which may lead to a different impairment
conclusion in future periods.
Marketable equity securities
American National evaluates all marketable equity securities on a quarterly basis and recognizes an
other-than-temporary impairment on all of those where a market price recovery is not expected in
the near term. All securities
which have an unrealized loss are also evaluated for credit quality, and impairments are recognized
for any securities, regardless of the length of time that they have had an unrealized loss, where
management believes the carrying value will not be realized. For the remaining securities with
unrealized losses, management believes the losses are temporary, and American National has the
ability and intent to hold these securities until a market price recovery. However, it is possible
that the investees ability to perform in the future may be different than what the Company
determined during its analysis, which may lead to a different impairment conclusion in future
periods.
MORTGAGE LOANS
In general, mortgage loans are secured by first liens on income-producing real estate. The loans
are expected to be repaid from the cash flows or proceeds from the sale of real estate. American
National generally allows a maximum loan-to-collateral-value ratio of 75% to 90% on newly funded
mortgage loans. As of December 31, 2008, mortgage loans have fixed rates from 5.00% to 12.00% and
variable rates from 2.48% to 9.00%. The majority of the mortgage loan contracts require periodic
payments of both principal and interest, and have amortization periods of 6 months to 30 years.
American National has investments in first lien mortgage loans on real estate with carried values
of $1,877,053,000 and $1,540,081,000 at December 31, 2008 and 2007, respectively. Problem loans, on
which valuation allowances were established, totaled $13,824,000 and $9,693,000 at December 31,
2008 and 2007, respectively. The valuation allowances on those loans totaled $1,793,000 at
December 31, 2008 and $1,053,000 at December 31, 2007.
145
POLICY LOANS
All of American Nationals policy loans carried interest rates ranging from 3.00% to 8.00% at
December 31, 2008.
INVESTMENT INCOME AND REALIZED GAINS (LOSSES)
Investment income and realized gains (losses) on investments, before federal income taxes, for the
years ended December 31 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
Gains (Losses) on Investments
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
623,356
|
|
|
|
620,035
|
|
|
|
610,268
|
|
|
|
(157,272
|
)
|
|
|
366
|
|
|
|
3,192
|
|
Preferred stocks
|
|
|
5,687
|
|
|
|
4,561
|
|
|
|
3,356
|
|
|
|
(49,172
|
)
|
|
|
|
|
|
|
(6
|
)
|
Common stocks
|
|
|
28,977
|
|
|
|
27,002
|
|
|
|
28,641
|
|
|
|
(164,407
|
)
|
|
|
23,913
|
|
|
|
62,872
|
|
Mortgage loans
|
|
|
118,067
|
|
|
|
103,627
|
|
|
|
104,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
114,198
|
|
|
|
126,926
|
|
|
|
151,099
|
|
|
|
1,005
|
|
|
|
18,563
|
|
|
|
26,888
|
|
Other invested assets
|
|
|
12,123
|
|
|
|
40,994
|
|
|
|
56,386
|
|
|
|
(5,977
|
)
|
|
|
(40
|
)
|
|
|
53
|
|
Investment in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
902,408
|
|
|
|
923,145
|
|
|
|
953,802
|
|
|
|
(375,823
|
)
|
|
|
42,802
|
|
|
|
92,999
|
|
Investment expenses
|
|
|
(106,231
|
)
|
|
|
(110,176
|
)
|
|
|
(117,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in valuation allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,886
|
)
|
|
|
(1,775
|
)
|
|
|
7,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
796,177
|
|
|
|
812,969
|
|
|
|
836,017
|
|
|
|
(379,709
|
)
|
|
|
41,027
|
|
|
|
100,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the realized losses are write-downs, before federal income taxes, of available-for-sale
securities due to other-than-temporary declines in the value of the securities. The write-downs,
before tax, totaled $367,036,000 in 2008, $7,166,000 in 2007, and $8,667,000 in 2006.
4 CREDIT RISK MANAGEMENT
American National employs a strategy to invest funds at the highest return possible commensurate
with sound and prudent underwriting practices to ensure a well-diversified investment portfolio.
BONDS
Management believes American Nationals bond portfolio is diversified and of investment grade. The
bond portfolio distributed by quality rating at December 31, 2008 and 2007 is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
AAA
|
|
|
16
|
%
|
|
|
20
|
%
|
AA
|
|
|
10
|
%
|
|
|
10
|
%
|
A
|
|
|
40
|
%
|
|
|
36
|
%
|
BBB
|
|
|
29
|
%
|
|
|
29
|
%
|
BB
|
|
|
2
|
%
|
|
|
2
|
%
|
Below BB
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
146
COMMON STOCK
American Nationals stock portfolio by market sector distribution at December 31 is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Consumer Goods
|
|
|
20
|
%
|
|
|
19
|
%
|
Financials
|
|
|
16
|
%
|
|
|
24
|
%
|
Energy & Utilities
|
|
|
13
|
%
|
|
|
13
|
%
|
Information Technology
|
|
|
13
|
%
|
|
|
13
|
%
|
Health Care
|
|
|
13
|
%
|
|
|
11
|
%
|
Mutual Funds
|
|
|
10
|
%
|
|
|
6
|
%
|
Industrials
|
|
|
8
|
%
|
|
|
8
|
%
|
Communications
|
|
|
5
|
%
|
|
|
3
|
%
|
Materials
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
MORTGAGE LOANS AND INVESTMENT REAL ESTATE
American National invests primarily in the commercial sector in areas that offer the potential for
property value appreciation. Generally, mortgage loans are secured by first liens on
income-producing real estate.
Mortgage loans and investment real estate by property type distribution at December 31 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
|
|
Investment Real Estate
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Office Buildings
|
|
|
30
|
%
|
|
|
25
|
%
|
|
|
18
|
%
|
|
|
20
|
%
|
Industrial
|
|
|
25
|
%
|
|
|
24
|
%
|
|
|
45
|
%
|
|
|
43
|
%
|
Shopping Centers
|
|
|
21
|
%
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
23
|
%
|
Hotels/Motels
|
|
|
17
|
%
|
|
|
15
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Other
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
Commercial
|
|
|
3
|
%
|
|
|
9
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American National has a diversified portfolio of mortgage loans and real estate properties.
Mortgage loans and real estate investments by geographic distribution at December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
|
|
Investment Real Estate
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
West South Central
|
|
|
22
|
%
|
|
|
23
|
%
|
|
|
64
|
%
|
|
|
60
|
%
|
East North Central
|
|
|
22
|
%
|
|
|
15
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
South Atlantic
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
17
|
%
|
Pacific
|
|
|
13
|
%
|
|
|
16
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
Middle Atlantic
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Mountain
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
New England
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
East South Central
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
10
|
%
|
|
|
11
|
%
|
West North Central
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
5 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments at December 31 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
Carrying Amount
|
|
|
Value
|
|
|
Carrying Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
$
|
6,681,837
|
|
|
$
|
6,148,703
|
|
|
$
|
6,692,447
|
|
|
$
|
6,685,173
|
|
Available-for-Sale
|
|
|
3,820,837
|
|
|
|
3,820,837
|
|
|
|
3,837,988
|
|
|
|
3,837,988
|
|
Preferred Stock
|
|
|
48,822
|
|
|
|
48,822
|
|
|
|
78,885
|
|
|
|
78,885
|
|
Common Stock
|
|
|
853,530
|
|
|
|
853,530
|
|
|
|
1,194,982
|
|
|
|
1,194,982
|
|
Options
|
|
|
6,157
|
|
|
|
6,157
|
|
|
|
23,071
|
|
|
|
23,071
|
|
Mortgage Loans on real estate
|
|
|
1,877,053
|
|
|
|
1,891,895
|
|
|
|
1,540,081
|
|
|
|
1,549,488
|
|
Policy Loans
|
|
|
354,398
|
|
|
|
354,398
|
|
|
|
346,002
|
|
|
|
346,002
|
|
Short-term Investments
|
|
|
295,170
|
|
|
|
295,170
|
|
|
|
698,262
|
|
|
|
698,262
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contracts
|
|
|
6,626,561
|
|
|
|
6,626,561
|
|
|
|
5,927,300
|
|
|
|
5,927,300
|
|
Liability for embedded
derivatives of equity
indexed annuities
|
|
|
6,208
|
|
|
|
6,208
|
|
|
|
22,758
|
|
|
|
22,758
|
|
Notes Payable
|
|
|
111,922
|
|
|
|
111,922
|
|
|
|
128,799
|
|
|
|
128,799
|
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability. A fair value hierarchy is used to determine fair value based on a hypothetical
transaction at the measurement date from the perspective of a market participant. An asset or
liabilitys classification within the fair value hierarchy is based on the lowest level of
significant input to its valuation. The input levels are defined as follows:
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets
or liabilities. American National defines active markets based
on average trading volume for equity securities. The size of the
bid/ask spread is used as an indicator of market activity for
fixed maturity securities.
|
|
|
Level 2
|
|
Quoted prices in markets that are not active or inputs that are
observable either directly or indirectly. Level 2 inputs include
quoted prices for similar assets or liabilities other than
quoted prices in Level 1; quoted prices in markets that are not
active; or other inputs that are observable or can be derived
principally from or corroborated by observable market data for
substantially the full term of the assets or liabilities.
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market
activity and are significant to the fair value of the assets or
liabilities. Unobservable inputs reflect American Nationals own
assumptions about the assumptions that market participants would
use in pricing the asset or liability. Level 3 assets and
liabilities include financial instruments whose values are
determined using pricing models and third-party evaluation, as
well as instruments for which the determination of fair value
requires significant management judgment or estimation.
|
American National has analyzed the third-party pricing services valuation methodologies and related
inputs, and has also evaluated the various types of securities in its investment portfolio to
determine an appropriate fair value hierarchy level based upon trading activity and the
observability of market inputs. Based on the results of this evaluation and investment class
analysis, each price was classified into Level 1, 2, or 3. Most prices provided by
third-party pricing services are classified into Level 2 because the inputs used in pricing the
securities, such as available trade, bid, cash flow, and loan performance data are market
observable.
Due to a general lack of transparency in the process that brokers use to develop prices, most
valuations that are based on brokers prices are classified as Level 3. Some valuations may be
classified as Level 2 if the price can be
148
corroborated. Internally priced securities, primarily
consisting of certain private placement debt, are classified as Level 3. The pricing of certain
private placement debt includes significant non-observable inputs, the internally determined credit
rating of the security and an externally provided credit spread.
Some assets and liabilities do not fit the hierarchical model for determining fair value. For
policy loans, the carrying amount approximates their fair value, because the policy loans cannot be
separated from the policy contract. The fair value of investment contract liabilities is
determined in accordance with GAAP rules on insurance products and is estimated using a discounted
cash flow model, assuming the companies current interest rates on new products. The carrying
value for these contracts approximates their fair value. The carrying amount for notes payable
approximates their fair value.
The following table provides quantitative disclosures regarding fair value hierarchy measurements
of our financial assets and liabilities at December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2008
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
December 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
$
|
9,969,539
|
|
|
$
|
|
|
|
$
|
9,900,796
|
|
|
$
|
68,743
|
|
Preferred stocks
|
|
|
48,822
|
|
|
|
33,366
|
|
|
|
|
|
|
|
15,456
|
|
Common stocks
|
|
|
853,530
|
|
|
|
853,530
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
6,157
|
|
|
|
|
|
|
|
|
|
|
|
6,157
|
|
Short-term investments
|
|
|
295,170
|
|
|
|
|
|
|
|
295,170
|
|
|
|
|
|
Mortgage Loans
|
|
|
1,891,895
|
|
|
|
|
|
|
|
1,891,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,065,113
|
|
|
$
|
886,896
|
|
|
$
|
12,087,861
|
|
|
$
|
90,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for embedded derivatives of
equity indexed annuities
|
|
$
|
6,208
|
|
|
|
|
|
|
|
|
|
|
$
|
6,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the period, a reconciliation of the beginning and ending
balances, is as follows (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs
|
|
|
|
Level 3 Totals
|
|
Beginning Balance
|
|
$
|
98,519
|
|
Net losses included in other comprehensive income (loss)
|
|
|
(30,658
|
)
|
Net fair value change for derivatives included in net income (loss)
|
|
|
(11,932
|
)
|
Purchases, sales, and settlements of derivatives (net)
|
|
|
11,568
|
|
Transfers in (out) of Level 3
|
|
|
16,651
|
|
|
|
|
|
Ending balance
|
|
$
|
84,148
|
|
|
|
|
|
149
The unrealized losses for the year ended December 31, 2008 of Level 3 assets were $30,658,000.
There were no unrealized gains in Level 3 assets at December 31, 2008.
The following table lists each major category of assets and liabilities measured at fair value on a
nonrecurring basis during the period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds held-to-maturity
|
|
$
|
24,035
|
|
|
$
|
|
|
|
$
|
24,035
|
|
|
$
|
|
|
Mortgage Loans
|
|
|
3,743
|
|
|
|
|
|
|
|
3,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,778
|
|
|
|
|
|
|
|
27,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain assets and liabilities are measured at fair value on a non-recurring basis. The assets
subject to non-recurring fair value adjustment usually result from application of lower of cost or
fair value accounting or recognition of other-than-temporary-impairment of assets.
As of December, 31 2008 American National impaired bonds held-to-maturity that were initially
measured at cost and were written down to fair value as a result of impairment. These assets were
transferred to available-for-sale bonds and were measured at fair value of $24 million on a
non-recurring basis. American National also recorded non-recurring fair value adjustments of $3.7
million to mortgage loans that were deemed impaired. Both these instruments were classified in
Level 2, based on the observable inputs.
150
6 DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs and premiums for the years ended December 31, 2008, 2007, and
2006 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life &
|
|
|
Accident &
|
|
|
Property &
|
|
|
|
|
|
|
Annuity
|
|
|
Health
|
|
|
Casualty
|
|
|
Total
|
|
Balance at December 31, 2005
|
|
$
|
975,193
|
|
|
$
|
91,796
|
|
|
$
|
115,724
|
|
|
$
|
1,182,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
151,023
|
|
|
|
16,799
|
|
|
|
243,319
|
|
|
|
411,141
|
|
Amortization
|
|
|
(158,848
|
)
|
|
|
(22,929
|
)
|
|
|
(237,865
|
)
|
|
|
(419,642
|
)
|
Effect of change in unrealized
gains
on available-for-sale securities
|
|
|
13,675
|
|
|
|
|
|
|
|
|
|
|
|
13,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
5,850
|
|
|
|
(6,130
|
)
|
|
|
5,454
|
|
|
|
5,174
|
|
Foreign exchange effect
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
981,035
|
|
|
$
|
85,666
|
|
|
$
|
121,178
|
|
|
$
|
1,187,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
216,660
|
|
|
|
18,735
|
|
|
|
232,138
|
|
|
|
467,533
|
|
Amortization
|
|
|
(156,017
|
)
|
|
|
(24,508
|
)
|
|
|
(224,499
|
)
|
|
|
(405,024
|
)
|
Effect of change in unrealized
gains
on available-for-sale securities
|
|
|
3,080
|
|
|
|
|
|
|
|
|
|
|
|
3,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
63,723
|
|
|
|
(5,773
|
)
|
|
|
7,639
|
|
|
|
65,589
|
|
Acquisitions
|
|
|
(2,170
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,170
|
)
|
Foreign exchange effect
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,042,575
|
|
|
$
|
79,893
|
|
|
$
|
128,817
|
|
|
$
|
1,251,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
225,575
|
|
|
|
22,762
|
|
|
|
243,005
|
|
|
|
491,342
|
|
Amortization
|
|
|
(162,884
|
)
|
|
|
(27,785
|
)
|
|
|
(233,336
|
)
|
|
|
(424,005
|
)
|
Effect of change in unrealized
gains
on available-for-sale securities
|
|
|
164,937
|
|
|
|
|
|
|
|
|
|
|
|
164,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
227,628
|
|
|
|
(5,023
|
)
|
|
|
9,669
|
|
|
|
232,274
|
|
Acquisitions
|
|
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
(729
|
)
|
Foreign exchange effect
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,269,308
|
|
|
$
|
74,870
|
|
|
$
|
138,486
|
|
|
$
|
1,482,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Premiums
|
|
$
|
415,586
|
|
|
$
|
290,883
|
|
|
$
|
1,182,026
|
|
|
$
|
1,888,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Premiums
|
|
$
|
538,641
|
|
|
$
|
283,765
|
|
|
$
|
1,177,217
|
|
|
$
|
1,999,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Premiums
|
|
$
|
440,049
|
|
|
$
|
303,285
|
|
|
$
|
1,234,300
|
|
|
$
|
1,977,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions comprise the majority of the additions to deferred policy acquisition costs for each
year.
Acquisitions relate to the purchase of various insurance portfolios under assumption reinsurance
agreements.
Prior to its sale (see Note 17), acquisition costs for American Nationals Mexican subsidiary were
maintained in their functional currency of Mexican pesos, and translated into U.S. dollars for
reporting purposes. Part of the change in deferred acquisition cost balance was due to differences
in the exchange rate applied to the balance from period to period. The entire amount of this
difference was reported in the shareholders equity section of the consolidated statement of
financial position.
151
7 LIABILITY FOR FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES
American National establishes liabilities for amounts payable under insurance policies, including
traditional life insurance, traditional annuities and non-medical health insurance. Generally,
amounts are payable over an extended period of time and related liabilities are calculated as the
present value of future expected benefits to be paid reduced by the present value of future
expected premiums. Such liabilities are established based on methods and underlying assumptions in
accordance with GAAP and applicable actuarial standards. Principal assumptions used in the
establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse,
renewal, retirement, disability incidence, disability terminations, investment returns, inflation,
expenses and other contingent events as appropriate to the respective product type. Utilizing these
assumptions, liabilities are established on a block of business basis.
Future policy benefits for non-participating traditional life insurance policies are equal to the
aggregate of the present value of expected future benefit payments and related expenses less the
present value of expected future net premiums. Assumptions as to mortality and persistency are
based upon American Nationals experience when the basis of the liability is established. Interest
rates for the aggregate future policy benefit liabilities range from 3% to 8%.
Future policy benefit liabilities for acquired participating traditional life insurance policies
are equal to the aggregate of (i) net level premium reserves for death and endowment policy
benefits (calculated based upon the non-forfeiture interest rate, ranging from 2.5% to 6%) and
mortality rates guaranteed in calculating the cash surrender values described in such contracts;
and (ii) the liability for terminal dividends. Participating business represented approximately 9%
of American Nationals life insurance in force at December 31, 2008.
Future policy benefit liabilities for individual fixed annuities after annuitization are equal to
the present value of expected future payments. The interest rate used in establishing such
liabilities is 5% for all policies inforce.
Future policy benefit liabilities for non-medical health insurance are calculated using the net
level premium method and assumptions as to future morbidity, withdrawals and interest, which
provide a margin for adverse deviation. Interest rates used in establishing such liabilities range
from 3.5% to 8%.
Future policy benefit liabilities for disabled lives are estimated using the present value of
benefits method and experience assumptions as to claim terminations, expenses and interest.
Interest rates used in establishing such liabilities range from 3% to 7.5%.
Liabilities for unpaid claims and claim expenses for property and casualty insurance are included
in the liability for policy and contract claims and represent the amount estimated for claims that
have been reported but not settled and claims incurred but not reported. Liabilities for unpaid
claims are estimated based upon American Nationals historical experience and other actuarial
assumptions that consider the effects of current developments, anticipated trends and risk
management programs, reduced for anticipated salvage and subrogation. The effects of changes in
such estimated liabilities are included in the results of operations in the period in which the
changes occur.
Liabilities for universal life secondary guarantees and paid-up guarantees are determined by
estimating the expected value of death benefits payable when the account balance is projected to be
zero and recognizing those benefits ratably over the accumulation period based on total expected
assessments. American National regularly evaluates estimates used and adjusts the additional
liability balances, with a related charge or credit to benefit expense, if actual experience or
other evidence suggests that earlier assumptions should be revised. The assumptions used in
estimating the secondary and paid-up guarantee liabilities are consistent with those used for
amortizing DAC, and are thus subject to the same variability and risk. The assumptions of
investment performance and volatility for variable products are consistent with historical S&P
experience. The benefits used in calculating the liabilities are based on the average benefits
payable over a range of scenarios.
American National periodically reviews its estimates of actuarial liabilities for future policy
benefits and compares them with its actual experience. Differences between actual experience and
the assumptions used in pricing these policies, guarantees and riders and in the establishment of
the related liabilities result in variances in profit and could
152
result in losses. The effects of changes in such estimated liabilities are included in the results
of operations in the period in which the changes occur.
Policyholder account balances relate to investment-type contracts and universal life-type policies.
Investment-type contracts principally include traditional individual fixed annuities in the
accumulation phase and non-variable group annuity contracts. Policyholder account balances are
equal to (i) policy account values, which consist of an accumulation of gross premium payments;
(ii) credited interest, ranging from 2.1% to 6.5% (some annuities also offer a first year bonus
ranging from 1% to 8%), less expenses, mortality charges, and withdrawals; and (iii) fair value
adjustments relating to business combinations.
8 LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for accident and health and property and casualty unpaid claims and claim
adjustment expenses is summarized as shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance at January 1
|
|
$
|
1,256,698
|
|
|
$
|
1,308,603
|
|
|
$
|
1,359,452
|
|
Less reinsurance
recoverables
|
|
|
363,140
|
|
|
|
421,737
|
|
|
|
454,872
|
|
|
|
|
|
|
|
|
|
|
|
Net beginning balance
|
|
|
893,558
|
|
|
|
886,866
|
|
|
|
904,580
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,158,452
|
|
|
|
1,073,249
|
|
|
|
1,085,736
|
|
Prior years
|
|
|
(43,045
|
)
|
|
|
(93,524
|
)
|
|
|
(29,238
|
)
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
1,115,407
|
|
|
|
979,725
|
|
|
|
1,056,498
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
709,705
|
|
|
|
636,234
|
|
|
|
645,777
|
|
Prior years
|
|
|
366,680
|
|
|
|
336,799
|
|
|
|
428,435
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
1,076,385
|
|
|
|
973,033
|
|
|
|
1,074,212
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at December 31
|
|
|
932,580
|
|
|
|
893,558
|
|
|
|
886,866
|
|
Plus reinsurance
recoverables
|
|
|
377,692
|
|
|
|
363,140
|
|
|
|
421,737
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
1,310,272
|
|
|
$
|
1,256,698
|
|
|
$
|
1,308,603
|
|
|
|
|
|
|
|
|
|
|
|
The balances at December 31 are included in policy and contract claims in the consolidated
statements of financial position.
Estimates for ultimate incurred losses and loss adjustment expenses attributable to insured events
of prior years decreased by approximately $43,000,000 in 2008 and $94,000,000 in 2007 as a result
of re-estimation of unpaid losses and loss adjustment expenses. These changes were generally the
result of ongoing analysis of loss development trends. Original estimates are increased or
decreased as additional information becomes known regarding individual claims.
153
9 REINSURANCE
As is customary in the insurance industry, American National reinsures portions of certain
insurance policies written, thereby providing a greater diversification of risk and managing
exposure on larger risks. The maximum amount that would be retained by one life insurance company
(American National) would be $700,000 individual life, $250,000 individual accidental death,
$100,000 group life and $125,000 credit life (total $1,175,000). If individual, group and credit
were in force in all companies at the same time, the maximum risk on any one life could be
$2,325,000.
For Property and Casualty, American National retains the first $1 million of loss per risk,
reinsurance then covers the next $5 million of property and liability losses per risk. Additional
excess property per risk coverage is purchased to cover risks up to $15 million, and excess
casualty clash coverage is maintained to cover losses up to $50 million. Corporate catastrophe
coverage is also in place for up to a $500 million event.
American National remains primarily liable with respect to any reinsurance ceded, and would bear
the entire loss if the assuming companies were to be unable to meet their obligations under any
reinsurance treaties.
To minimize its exposure to significant losses from reinsurer insolvencies, American National
evaluates the financial condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic characteristics of the reinsurers.
At December 31, 2008, amounts recoverable from reinsurers with a carrying value of $33,271,997 were
associated with various auto dealer credit insurance program reinsurers domiciled in the Caribbean
islands of Nevis or the Turks and Caicos Islands. American National holds collateral related to
these reinsurers totaling $30,033,333. This collateral is in the form of custodial accounts
controlled by the company, which can be drawn on for amounts that remain unpaid for more than 90
days. American National believes that the failure of any single reinsurer to meet its obligations
would not have a significant effect on its financial position or results of operations.
American National had amounts receivable from reinsurers totaling $482,846,000 at December 31,
2008. None of the total amount receivable is the subject of litigation or is in dispute with the
reinsurers involved. Management believes that any dispute that may arise would not have a material
impact on American Nationals consolidated financial position.
Premiums, premium-related reinsurance amounts and reinsurance recoveries for the years ended
December 31 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Direct premiums
|
|
$
|
2,117,400
|
|
|
$
|
2,134,669
|
|
|
$
|
2,117,722
|
|
Reinsurance premiums assumed from other companies
|
|
|
215,189
|
|
|
|
176,357
|
|
|
|
198,116
|
|
Reinsurance premiums ceded to other companies
|
|
|
(444,094
|
)
|
|
|
(302,650
|
)
|
|
|
(329,108
|
)
|
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
1,888,495
|
|
|
$
|
2,008,376
|
|
|
$
|
1,986,730
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoveries
|
|
$
|
301,397
|
|
|
$
|
198,553
|
|
|
$
|
591,731
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force and related reinsurance amounts at December 31 are summarized as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Direct life insurance in force
|
|
$
|
68,820,212
|
|
|
$
|
67,604,695
|
|
|
$
|
65,008,408
|
|
Reinsurance risks assumed from other companies
|
|
|
1,050,645
|
|
|
|
1,078,371
|
|
|
|
982,412
|
|
|
|
|
|
|
|
|
|
|
|
Total life insurance in force
|
|
|
69,870,857
|
|
|
|
68,683,066
|
|
|
|
65,990,820
|
|
Reinsurance risks ceded to other companies
|
|
$
|
(31,241,255
|
)
|
|
$
|
(29,635,648
|
)
|
|
$
|
(26,557,877
|
)
|
|
|
|
|
|
|
|
|
|
|
Net life insurance in force
|
|
$
|
38,629,602
|
|
|
$
|
39,047,418
|
|
|
$
|
39,432,943
|
|
|
|
|
|
|
|
|
|
|
|
154
10 NOTES PAYABLE
At December 31, 2008, American Nationals real estate holding companies were partners in affiliates
that had notes payable to third-party lenders totaling $111,922,000. These notes have interest
rates ranging from 5.15% to 8.07% and maturities from 2010 to 2014. Each of these notes are
secured by the real estate owned through the respective affiliated entity, and American Nationals
liability for these notes are limited to the amount of its investment in the respective affiliate,
which totaled $13,226,000 at December 31, 2008.
11 FEDERAL INCOME TAXES
The federal income tax provisions vary from the amounts computed when applying the statutory
federal income tax rate. A reconciliation of the effective tax rate of the companies to the
statutory federal income tax rate follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Income tax on pre-tax income
|
|
$
|
(105,021
|
)
|
|
|
(35.0
|
)%
|
|
$
|
121,536
|
|
|
|
35.0
|
%
|
|
$
|
141,850
|
|
|
|
35.0
|
%
|
Tax-exempt investment income
|
|
|
(8,791
|
)
|
|
|
(2.9
|
)
|
|
|
(6,360
|
)
|
|
|
(1.8
|
)
|
|
|
(5,187
|
)
|
|
|
(1.3
|
)
|
Dividend exclusion
|
|
|
(12,028
|
)
|
|
|
(4.0
|
)
|
|
|
(6,589
|
)
|
|
|
(1.9
|
)
|
|
|
(7,028
|
)
|
|
|
(1.7
|
)
|
Miscellaneous tax credits, net
|
|
|
(5,835
|
)
|
|
|
(1.9
|
)
|
|
|
(3,862
|
)
|
|
|
(1.1
|
)
|
|
|
(2,284
|
)
|
|
|
(0.5
|
)
|
Foreign operations
|
|
|
|
|
|
|
|
|
|
|
1,735
|
|
|
|
0.5
|
|
|
|
1,967
|
|
|
|
0.5
|
|
Other items, net
|
|
|
9,645
|
|
|
|
3.1
|
|
|
|
(597
|
)
|
|
|
(0.2
|
)
|
|
|
521
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(122,030
|
)
|
|
|
(40.7
|
)%
|
|
$
|
105,863
|
|
|
|
30.5
|
%
|
|
$
|
129,839
|
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that gave rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2008 and December 31, 2007 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Marketable securities, principally due to net unrealized losses (gains)
|
|
$
|
146,191
|
|
|
$
|
(96,441
|
)
|
Marketable securities, principally due to impairment losses
|
|
|
138,487
|
|
|
|
25,661
|
|
Investment in real estate and other invested assets, principally due to
investment valuation allowances
|
|
|
1,279
|
|
|
|
9,614
|
|
Policyholder funds, principally due to policy reserve discount
|
|
|
187,277
|
|
|
|
190,778
|
|
Policyholder funds, principally due to unearned premium reserve
|
|
|
30,716
|
|
|
|
31,066
|
|
Non-qualified pension
|
|
|
27,630
|
|
|
|
25,693
|
|
Participating policyholders surplus
|
|
|
28,615
|
|
|
|
32,198
|
|
Pension
|
|
|
36,968
|
|
|
|
18,127
|
|
Commissions and other expenses
|
|
|
24,395
|
|
|
|
15,850
|
|
Other assets
|
|
|
8,518
|
|
|
|
3,306
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
630,076
|
|
|
$
|
255,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Investment in bonds, principally due to accrual of discount on bonds
|
|
$
|
(18,221
|
)
|
|
$
|
(13,395
|
)
|
Deferred policy acquisition costs, due to difference between GAAP
and tax amortization methods
|
|
|
(410,970
|
)
|
|
|
(332,328
|
)
|
Property, plant and equipment, principally due to difference between
GAAP and tax depreciation method
|
|
|
(5,377
|
)
|
|
|
(6,233
|
)
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(434,568
|
)
|
|
|
(351,956
|
)
|
|
|
|
|
|
|
|
Total deferred tax
|
|
$
|
195,508
|
|
|
$
|
(96,104
|
)
|
|
|
|
|
|
|
|
155
Management believes that a sufficient level of taxable income will be achieved to utilize the net
deferred tax assets and therefore no material valuation allowance is necessary.
In accordance with FIN No. 48, Accounting for Uncertainty in Income Taxes, American National
maintains a reserve for unrecognized tax benefits. The reserve is included with the Other
liabilities in the Consolidated Statements of Financial Position. The change in the reserve during
the year is as follows (in thousands):
|
|
|
|
|
|
|
2008
|
|
Unrecognized Tax Positions
|
|
|
|
|
Balance at beginning of year
|
|
$
|
4,618
|
|
Tax positions related to prior years
|
|
|
|
|
Current year tax positions
|
|
|
|
|
Settlements during the year
|
|
|
(3,564
|
)
|
Lapse in statute of limitations
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,054
|
|
|
|
|
|
American National recognizes penalties and interest as appropriate related to uncertain tax
positions, however no such provisions have been recognized on the unrecognized tax positions.
Within the next twelve months, the reserve for unrecognized tax benefits is expected to decrease by
approximately $1,054,000 due to settlements, and will have no impact on the companys effective tax
rate. However, management believes that it is possible that certain tax benefits could be
recognized within the next twelve months that would decrease the companys effective tax rate. The
amount of such tax benefits is undeterminable at this time but would be immaterial to the companys
financial position.
The statute of limitations for the examination of federal income tax returns by the Internal
Revenue Service for years 2002 to 2007 has either been extended or has not expired. In the opinion
of management, all prior year deficiencies have been paid or adequate provisions have been made for
any tax deficiencies that may be upheld.
Federal income taxes totaling approximately $14,572,000, $101,333,000, and $126,494,000 were paid
to the Internal Revenue Service in 2008, 2007 and 2006, respectively.
156
12 COMPONENTS OF COMPREHENSIVE INCOME (LOSS)
The items included in comprehensive income (loss), other than net income (loss), are unrealized
gains and losses on available-for-sale securities (net of deferred acquisition costs), foreign
exchange adjustments and pension liability adjustments. The details on the unrealized gains and
losses included in comprehensive income (loss), and the related tax effects thereon, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
Federal
|
|
|
|
|
|
|
Federal
|
|
|
Income Tax
|
|
|
Net of Federal
|
|
|
|
Income Tax
|
|
|
Expense
|
|
|
Income Tax
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
|
|
$
|
(138,311
|
)
|
|
$
|
(48,409
|
)
|
|
$
|
(89,902
|
)
|
Less: reclassification adjustment for
net losses realized in net income
|
|
|
(372,194
|
)
|
|
|
(130,268
|
)
|
|
|
(241,926
|
)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss component of comprehensive income
|
|
$
|
(510,505
|
)
|
|
$
|
(178,677
|
)
|
|
$
|
(331,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
|
|
$
|
(20,082
|
)
|
|
$
|
(7,029
|
)
|
|
$
|
(13,053
|
)
|
Less: reclassification adjustment for
net gains realized in net income
|
|
|
20,494
|
|
|
|
7,173
|
|
|
|
13,321
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain component of comprehensive income
|
|
$
|
412
|
|
|
$
|
144
|
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
|
|
$
|
(21,145
|
)
|
|
$
|
(7,401
|
)
|
|
$
|
(13,744
|
)
|
Less: reclassification adjustment for
net gains realized in net income
|
|
|
65,660
|
|
|
|
22,981
|
|
|
|
42,679
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain component of comprehensive income
|
|
$
|
44,515
|
|
|
$
|
15,580
|
|
|
$
|
28,935
|
|
|
|
|
|
|
|
|
|
|
|
13 STOCKHOLDERS EQUITY AND MINORITY INTERESTS
Common Stock
American National has only one class of common stock with a par value of $1.00 per share and
50,000,000 authorized shares. The amounts outstanding at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
|
30,832,449
|
|
|
|
30,832,449
|
|
|
|
30,832,449
|
|
Treasury shares
|
|
|
4,013,616
|
|
|
|
4,099,617
|
|
|
|
4,105,617
|
|
Restricted shares
|
|
|
339,001
|
|
|
|
253,000
|
|
|
|
247,000
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted outstanding shares
|
|
|
26,479,832
|
|
|
|
26,479,832
|
|
|
|
26,479,832
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
American National has one stock-based compensation plan. Under this plan, American National can
grant Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Performance
Rewards, Incentive Awards and any combination of these. The number of shares available for grants
under the plan cannot exceed 2,900,000 shares, and no more than 200,000 shares may be granted to
any one individual in any calendar year.
The plan provides for the award of Restricted Stock. Restricted Stock Awards entitle the
participant to full dividend and voting rights. Unvested shares are restricted as to disposition,
and are subject to forfeiture under certain circumstances. Compensation expense is recognized over
the vesting period. The restrictions on these awards lapse after 10 years, and feature a graded
vesting schedule in the case of the retirement of an award holder. Six awards of restricted stock
have been granted, with a total of 234,000 shares granted at an exercise price of zero. These
awards result in compensation expense to American National over the vesting period. The amount of
compensation expense recorded was $2,694,000 in 2008, $2,000,000 in 2007, and $1,948,000 in 2006.
157
The plan provides for the award of Stock Appreciation Rights (SAR). The SARs give the holder the
right to compensation based on the difference between the price of a share of stock on the grant
date and the price on the exercise date. The SARs vest at a rate of 20% per year for 5 years and
expire 5 years after the vesting period. American National uses the average of the high and low
price on the last trading day of the period to calculate the fair value and compensation expense
for SARs. The fair value of the SARs was $16,000 and $1,874,000 at December 31, 2008 and 2007
respectively. Compensation expense or (income) was recorded totaling ($1,777,000), $1,376,000, and
$560,000 for the years ended December 31, 2008, 2007, and 2006, respectively.
SAR and Restricted Stock (RS) information for 2008, 2007 and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAR Weighted-
|
|
|
|
|
|
|
RS Weighted-
|
|
|
|
|
|
|
|
Average Price
|
|
|
|
|
|
|
Average Price
|
|
|
|
SAR Shares
|
|
|
per Share
|
|
|
RS Shares
|
|
|
per Share
|
|
Outstanding at December 31, 2005
|
|
|
157,375
|
|
|
$
|
94.04
|
|
|
|
247,000
|
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,500
|
|
|
|
119.25
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(22,713
|
)
|
|
|
90.18
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(4,463
|
)
|
|
|
97.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
132,699
|
|
|
$
|
95.05
|
|
|
|
247,000
|
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,500
|
|
|
|
130.52
|
|
|
|
6,000
|
|
|
|
|
|
Exercised
|
|
|
(34,795
|
)
|
|
|
91.36
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(5,680
|
)
|
|
|
98.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
96,724
|
|
|
$
|
97.84
|
|
|
|
253,000
|
|
|
$
|
4.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
96,917
|
|
|
|
115.92
|
|
|
|
86,001
|
|
|
|
|
|
Exercised
|
|
|
(4,109
|
)
|
|
|
81.30
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
189,532
|
|
|
$
|
107.44
|
|
|
|
339,001
|
|
|
$
|
3.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average contractual remaining life for the 189,532 SAR shares outstanding as of
December 31, 2008, is 7.6 years. The weighted-average exercise price for these shares is $107.44
per share. Of the shares outstanding, 55,018 are exercisable at a weighted-average exercise price
of $94.79 per share.
The weighted-average contractual remaining life for the 339,001 Restricted Stock shares outstanding
as of December 31, 2008, is 5.6 years. The weighted-average exercise price for these shares is
$3.28 per share. None of the shares outstanding was exercisable.
Earnings (Loss) Per Share
Basic earnings per share was calculated using a weighted average number of shares outstanding of
26,479,832. The Restricted Stock resulted in diluted earnings per share as follows for years 2007
and 2006. Due to the net losses incurred in 2008, diluted earnings per share are equal to basic
earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Unrestricted shares outstanding
|
|
|
26,479,832
|
|
|
|
26,479,832
|
|
|
|
26,479,832
|
|
Incremental shares from restricted stock
|
|
|
137,625
|
|
|
|
158,387
|
|
|
|
132,632
|
|
|
|
|
|
|
|
|
|
|
|
Total shares for diluted calculations
|
|
|
26,617,457
|
|
|
|
26,638,219
|
|
|
|
26,612,464
|
|
Diluted earnings (losses) per share
|
|
$
|
(5.82
|
)
|
|
$
|
9.04
|
|
|
$
|
10.27
|
|
|
|
|
|
|
|
|
|
|
|
158
Dividends
American Nationals payment of dividends to stockholders is restricted by statutory regulations.
Generally, the restrictions require life insurance companies to maintain minimum amounts of capital
and surplus, and in the absence of special approval, limit the payment of dividends to statutory
net gain from operations on an annual, non-cumulative basis. Additionally, insurance companies are
not permitted to distribute the excess of stockholders equity, as determined on a GAAP basis over
that determined on a statutory basis. At December 31, 2008 American Nationals statutory capital
and surplus was $1,804,712,000.
Generally, the same restrictions on amounts that can transfer in the form of dividends, loans, or
advances to the parent company apply to American Nationals insurance subsidiaries.
At December 31, 2008, approximately $1,297,226,000 of American Nationals consolidated
stockholders equity represents net assets of its insurance subsidiaries. Any transfer of these net
assets to American National would be subject to statutory restrictions and approval.
Minority Interests
American National County Mutual Insurance Company (County Mutual) is a mutual insurance company
that is owned by its policyholders. However, the company has a management agreement, which
effectively gives complete control of County Mutual to American National. As a result, County
Mutual is included in the consolidated financial statements. The interest that the policyholders
of County Mutual have in the financial position of County Mutual is reflected as a minority
interest totaling $6,750,000 at December 31, 2008 and 2007.
American Nationals subsidiary, ANTAC, Inc., is a partner in various joint ventures. ANTAC
exercises significant control or ownership of these joint ventures, resulting in their
consolidation into the American National consolidated financial statements. As a result of the
consolidation, the interest of the other partners of the joint ventures is shown as a minority
interest. Minority interests were a net liability of $1,627,000 and a net asset of $2,211,000 in
2008 and 2007, respectively.
14 SEGMENT INFORMATION
American National and its subsidiaries are engaged principally in the insurance business.
Management organizes the business into five operating segments:
|
|
|
The Life segment markets whole, term, universal and variable life insurance on a
national basis primarily through employee and multiple line agents, direct marketing
channels and independent third-party marketing organizations.
|
|
|
|
|
The Annuity segment develops, sells and supports fixed, equity-indexed, and variable
annuity products. These products are primarily sold through independent agents and
brokers, but are also sold through financial institutions and multiple line agents.
|
|
|
|
|
The Health segments primary lines of business are Medicare Supplement, medical expense,
employer medical stop loss, true group, other supplemental health products and credit
disability insurance. Health products are typically distributed through independent agents
and Managing General Underwriters.
|
|
|
|
|
The Property and Casualty segment writes auto, homeowners, agribusiness and credit
related property insurance. These products are primarily sold through multiple line agents
and independent agents.
|
|
|
|
|
The Corporate and Other business segment consists of net investment income on the
capital not allocated to the insurance lines and the operations of non-insurance lines of
business. This segment also provides mutual fund products.
|
159
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. Many of the principal factors that drive the profitability of each
operating segment are separate and distinct. All income and expense amounts specifically
attributable to policy transactions are recorded directly to the appropriate operating segment.
Income and expenses not specifically attributable to policy transactions are allocated to each
segment as follows:
|
|
|
Net investment income from fixed income assets (bonds and mortgage loans) is allocated
based on the funds generated by each line of business at the average yield available from
these fixed income assets at the time such funds become available.
|
|
|
|
|
Net investment income from all other assets is allocated to the operating segments in
accordance with the amount of equity invested in each segment, with the remainder going to
Corporate and Other.
|
|
|
|
|
Expenses are allocated to the lines based upon various factors, including premium and
commission ratios within the respective operating segments.
|
|
|
|
|
Realized gains or losses on investments are allocated to Corporate and Other.
|
|
|
|
|
Equity in earnings of unconsolidated affiliates are allocated to Corporate and Other.
|
|
|
|
|
Federal income taxes have been applied to the net earnings of each segment based on a
fixed tax rate. Any difference between the amount allocated to the segments and the total
federal income tax amount is allocated to Corporate and Other.
|
Segment operating income provides pertinent and advantageous information to investors, as it
represents the basis on which American Nationals business performance is internally assessed by
its chief operating decision makers. During the third quarter of 2008, the chief operating decision
makers redefined the segment reporting structure to better align it with their current processes
for assessing business performance and allocating resources. In previous financial reporting
periods, operating segments were aggregated based on marketing distribution channels. In accordance
with the performance measurements used by the chief operating decision makers, the segment
reporting has been reorganized into five operating segments according to the type of insurance
products sold or services rendered. The segment reporting for prior periods has been restated to
reflect the change in business segments.
160
The following tables summarizes American Nationals key financial measures used by the chief
operating decision makers, including operating results and allocation of assets as of and for the
years ended December 31, 2008, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property &
|
|
|
Corporate &
|
|
|
|
|
2008
|
|
Life
|
|
|
Annuity
|
|
|
Health
|
|
|
Casualty
|
|
|
Other
|
|
|
TOTAL
|
|
Premiums and other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
299,338
|
|
|
$
|
116,248
|
|
|
$
|
290,883
|
|
|
$
|
1,182,026
|
|
|
$
|
|
|
|
$
|
1,888,495
|
|
Other policy revenues
|
|
|
154,984
|
|
|
|
19,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,899
|
|
Net investment income
|
|
|
226,643
|
|
|
|
374,023
|
|
|
|
16,566
|
|
|
|
69,348
|
|
|
|
109,597
|
|
|
|
796,177
|
|
Other income
|
|
|
3,767
|
|
|
|
(5,718
|
)
|
|
|
13,252
|
|
|
|
8,973
|
|
|
|
18,505
|
|
|
|
38,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
684,732
|
|
|
|
504,468
|
|
|
|
320,701
|
|
|
|
1,260,347
|
|
|
|
128,102
|
|
|
|
2,898,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(379,709
|
)
|
|
|
(379,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
684,732
|
|
|
|
504,468
|
|
|
|
320,701
|
|
|
|
1,260,347
|
|
|
|
(251,607
|
)
|
|
|
2,518,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits
|
|
|
296,078
|
|
|
|
142,867
|
|
|
|
223,055
|
|
|
|
939,854
|
|
|
|
|
|
|
|
1,601,854
|
|
Interest credited to policy account balances
|
|
|
62,221
|
|
|
|
237,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,833
|
|
Commissions for acquiring and servicing policies
|
|
|
126,813
|
|
|
|
79,213
|
|
|
|
43,219
|
|
|
|
226,100
|
|
|
|
|
|
|
|
475,345
|
|
Other operating costs and expenses
|
|
|
222,908
|
|
|
|
45,491
|
|
|
|
69,961
|
|
|
|
132,601
|
|
|
|
37,839
|
|
|
|
508,800
|
|
Decrease (increase) in deferred policy acquisition costs
|
|
|
(42,103
|
)
|
|
|
(20,690
|
)
|
|
|
5,023
|
|
|
|
(9,669
|
)
|
|
|
|
|
|
|
(67,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
665,917
|
|
|
|
484,493
|
|
|
|
341,258
|
|
|
|
1,288,886
|
|
|
|
37,839
|
|
|
|
2,818,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
|
18,815
|
|
|
|
19,975
|
|
|
|
(20,557
|
)
|
|
|
(28,539
|
)
|
|
|
(289,446
|
)
|
|
|
(299,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for federal income taxes
|
|
|
(6,209
|
)
|
|
|
(6,592
|
)
|
|
|
6,784
|
|
|
|
9,418
|
|
|
|
118,629
|
|
|
|
122,030
|
|
Minority interest in income (loss) of consolidated
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
31
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,965
|
|
|
|
4,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
12,606
|
|
|
|
13,383
|
|
|
|
(13,773
|
)
|
|
|
(19,121
|
)
|
|
|
(165,821
|
)
|
|
|
(172,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of
income tax
|
|
|
18,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
31,334
|
|
|
$
|
13,383
|
|
|
$
|
(13,773
|
)
|
|
$
|
(19,121
|
)
|
|
$
|
(165,821
|
)
|
|
$
|
(153,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,823,465
|
|
|
$
|
8,265,270
|
|
|
$
|
759,089
|
|
|
$
|
2,248,514
|
|
|
$
|
2,283,101
|
|
|
$
|
18,379,439
|
|
Return on equity
|
|
|
4.36
|
%
|
|
|
2.67
|
%
|
|
|
(9.67
|
%)
|
|
|
(3.95
|
%)
|
|
|
(28.17
|
%)
|
|
|
(13.99
|
%)
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property &
|
|
|
Corporate &
|
|
|
|
|
2007
|
|
Life
|
|
|
Annuity
|
|
|
Health
|
|
|
Casualty
|
|
|
Other
|
|
|
TOTAL
|
|
Premiums and other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
315,893
|
|
|
$
|
222,748
|
|
|
$
|
283,765
|
|
|
$
|
1,177,217
|
|
|
$
|
|
|
|
$
|
1,999,623
|
|
Other policy revenues
|
|
|
130,744
|
|
|
|
24,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,230
|
|
Net investment income
|
|
|
229,092
|
|
|
|
364,607
|
|
|
|
16,710
|
|
|
|
75,041
|
|
|
|
127,519
|
|
|
|
812,969
|
|
Other income
|
|
|
3,967
|
|
|
|
345
|
|
|
|
13,048
|
|
|
|
8,623
|
|
|
|
21,241
|
|
|
|
47,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
679,696
|
|
|
|
612,186
|
|
|
|
313,523
|
|
|
|
1,260,881
|
|
|
|
148,760
|
|
|
|
3,015,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,027
|
|
|
|
41,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
679,696
|
|
|
|
612,186
|
|
|
|
313,523
|
|
|
|
1,260,881
|
|
|
|
189,787
|
|
|
|
3,056,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits
|
|
|
273,750
|
|
|
|
249,878
|
|
|
|
209,840
|
|
|
|
818,230
|
|
|
|
|
|
|
|
1,551,698
|
|
Interest credited to policy account balances
|
|
|
63,289
|
|
|
|
232,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,894
|
|
Commissions for acquiring and servicing policies
|
|
|
141,517
|
|
|
|
58,635
|
|
|
|
39,342
|
|
|
|
217,043
|
|
|
|
|
|
|
|
456,537
|
|
Other operating costs and expenses
|
|
|
200,361
|
|
|
|
35,030
|
|
|
|
57,975
|
|
|
|
110,705
|
|
|
|
61,069
|
|
|
|
465,140
|
|
Decrease (increase) in deferred policy acquisition costs
|
|
|
(57,666
|
)
|
|
|
(911
|
)
|
|
|
5,774
|
|
|
|
(7,639
|
)
|
|
|
|
|
|
|
(60,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
621,251
|
|
|
|
575,237
|
|
|
|
312,931
|
|
|
|
1,138,339
|
|
|
|
61,069
|
|
|
|
2,708,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
|
58,445
|
|
|
|
36,949
|
|
|
|
592
|
|
|
|
122,542
|
|
|
|
128,718
|
|
|
|
347,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for federal income taxes
|
|
|
(19,287
|
)
|
|
|
(12,193
|
)
|
|
|
(195
|
)
|
|
|
(40,439
|
)
|
|
|
(33,749
|
)
|
|
|
(105,863
|
)
|
Minority interest in income (loss) of consolidated
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
482
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,866
|
|
|
|
3,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
39,158
|
|
|
|
24,756
|
|
|
|
397
|
|
|
|
82,103
|
|
|
|
99,317
|
|
|
|
245,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of
income tax
|
|
|
(4,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
34,200
|
|
|
$
|
24,756
|
|
|
$
|
397
|
|
|
$
|
82,103
|
|
|
$
|
99,317
|
|
|
$
|
240,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,836,221
|
|
|
$
|
7,464,512
|
|
|
$
|
752,863
|
|
|
$
|
2,036,372
|
|
|
$
|
3,370,920
|
|
|
$
|
18,460,888
|
|
Return on equity
|
|
|
6.44
|
%
|
|
|
5.29
|
%
|
|
|
0.28
|
%
|
|
|
16.40
|
%
|
|
|
5.81
|
%
|
|
|
6.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property &
|
|
|
Corporate &
|
|
|
|
|
2006
|
|
Life
|
|
|
Annuity
|
|
|
Health
|
|
|
Casualty
|
|
|
Other
|
|
|
TOTAL
|
|
Premiums and other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
327,594
|
|
|
$
|
112,455
|
|
|
$
|
303,285
|
|
|
$
|
1,234,300
|
|
|
$
|
|
|
|
$
|
1,977,634
|
|
Other policy revenues
|
|
|
115,082
|
|
|
|
24,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,605
|
|
Net investment income
|
|
|
231,414
|
|
|
|
353,157
|
|
|
|
18,964
|
|
|
|
72,759
|
|
|
|
159,723
|
|
|
|
836,017
|
|
Other income
|
|
|
4,577
|
|
|
|
(595
|
)
|
|
|
17,204
|
|
|
|
7,524
|
|
|
|
22,397
|
|
|
|
51,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
678,667
|
|
|
|
489,540
|
|
|
|
339,453
|
|
|
|
1,314,583
|
|
|
|
182,120
|
|
|
|
3,004,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,256
|
|
|
|
100,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
678,667
|
|
|
|
489,540
|
|
|
|
339,453
|
|
|
|
1,314,583
|
|
|
|
282,376
|
|
|
|
3,104,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits
|
|
|
280,203
|
|
|
|
135,384
|
|
|
|
216,775
|
|
|
|
881,806
|
|
|
|
|
|
|
|
1,514,168
|
|
Interest credited to policy account balances
|
|
|
66,910
|
|
|
|
230,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,551
|
|
Commissions for acquiring and servicing policies
|
|
|
96,612
|
|
|
|
53,966
|
|
|
|
42,097
|
|
|
|
230,616
|
|
|
|
|
|
|
|
423,291
|
|
Other operating costs and expenses
|
|
|
185,752
|
|
|
|
33,139
|
|
|
|
61,699
|
|
|
|
109,940
|
|
|
|
65,407
|
|
|
|
455,937
|
|
Decrease (increase) in deferred policy acquisition costs
|
|
|
4,233
|
|
|
|
3,475
|
|
|
|
6,131
|
|
|
|
(5,454
|
)
|
|
|
|
|
|
|
8,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
633,710
|
|
|
|
456,605
|
|
|
|
326,702
|
|
|
|
1,216,908
|
|
|
|
65,407
|
|
|
|
2,699,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
|
44,957
|
|
|
|
32,935
|
|
|
|
12,751
|
|
|
|
97,675
|
|
|
|
216,969
|
|
|
|
405,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for federal income taxes
|
|
|
(14,835
|
)
|
|
|
(10,869
|
)
|
|
|
(4,208
|
)
|
|
|
(32,234
|
)
|
|
|
(67,694
|
)
|
|
|
(129,839
|
)
|
Minority interest in income (loss)of consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,300
|
)
|
|
|
(1,300
|
)
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,693
|
|
|
|
4,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
30,122
|
|
|
|
22,066
|
|
|
|
8,543
|
|
|
|
65,441
|
|
|
|
152,669
|
|
|
|
278,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income tax
|
|
|
(5,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
24,512
|
|
|
$
|
22,066
|
|
|
$
|
8,543
|
|
|
$
|
65,441
|
|
|
$
|
152,669
|
|
|
$
|
273,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,736,711
|
|
|
$
|
7,210,400
|
|
|
$
|
791,052
|
|
|
$
|
2,064,943
|
|
|
$
|
3,129,065
|
|
|
$
|
17,932,171
|
|
Return on equity
|
|
|
5.10
|
%
|
|
|
4.95
|
%
|
|
|
5.08
|
%
|
|
|
13.21
|
%
|
|
|
9.92
|
%
|
|
|
8.17
|
%
|
162
15 RETIREMENT BENEFITS
Pension Benefits
American National and its subsidiaries have one active, tax-qualified, defined-benefit pension plan
and one inactive plan. The active plan has three separate programs. One of the programs is
contributory and covers Career Sales & Service Division agents and managers. The other two
programs are noncontributory, with one covering salaried and management employees and the other
covering home office clerical employees subject to a collective bargaining agreement. The program
covering salaried and management employees provides pension benefits that are based on years of
service and the employees compensation during the five years before retirement. The programs
covering hourly employees and agents generally provide benefits that are based on the employees
career average earnings and years of service.
The inactive tax-qualified defined-benefit pension plan covers employees of the Farm Family
companies hired prior to January 1, 1997. Effective January 1, 1997, benefits through this plan
were frozen, and no new participants have been added.
American National also sponsors for key executives three non-tax-qualified pension plans that
restore benefits that would otherwise be curtailed by statutory limits on qualified plan benefits.
As discussed in Note 2, effective December 31, 2006, American National adopted the recognition and
disclosure provisions of FAS 158. Statement 158 requires companies to recognize the funded status
of defined benefit pension
and other postretirement plans as a net asset or liability on its consolidated statement of
financial position. Effective with the financial statements for 2008, Statement 158 also requires
companies to use a measurement date for their defined benefit plans that is the same as their
fiscal year end. As a result of this requirement, American National changed its measurement date
from September 30 to December 31, using the alternative method specified in Statement 158, for the
one qualified plan that was not already using a December 31 date. The effect of the change was an
additional periodic benefit cost of $1,770,000 (net of tax) which was charged directly to retained
earnings.
Combined activity in the defined benefit pension plans was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Reconciliation of benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at beginning of year
|
|
$
|
302,657
|
|
|
$
|
283,344
|
|
|
$
|
277,877
|
|
Service cost benefits earned during period
|
|
|
12,319
|
|
|
|
9,326
|
|
|
|
9,633
|
|
Interest cost on projected benefit obligation
|
|
|
22,077
|
|
|
|
16,483
|
|
|
|
15,474
|
|
Participant contributions
|
|
|
746
|
|
|
|
730
|
|
|
|
751
|
|
Actuarial gain (loss)
|
|
|
6,015
|
|
|
|
8,461
|
|
|
|
(6,247
|
)
|
Benefits paid
|
|
|
(15,031
|
)
|
|
|
(15,687
|
)
|
|
|
(14,144
|
)
|
|
|
|
|
|
|
|
|
|
|
Obligation at end of year
|
|
$
|
328,783
|
|
|
$
|
302,657
|
|
|
$
|
283,344
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
183,018
|
|
|
$
|
167,478
|
|
|
$
|
158,141
|
|
Actual return on plan assets
|
|
|
(38,552
|
)
|
|
|
15,979
|
|
|
|
9,231
|
|
Employer contributions
|
|
|
19,689
|
|
|
|
14,580
|
|
|
|
13,499
|
|
Participant contributions
|
|
|
746
|
|
|
|
731
|
|
|
|
751
|
|
Benefits paid
|
|
|
(15,027
|
)
|
|
|
(15,750
|
)
|
|
|
(14,144
|
)
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
149,874
|
|
|
$
|
183,018
|
|
|
$
|
167,478
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(178,909
|
)
|
|
$
|
(119,639
|
)
|
|
$
|
(115,866
|
)
|
|
|
|
|
|
|
|
|
|
|
163
Amounts recognized in the consolidated statement of financial position consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
$
|
|
|
|
$
|
|
|
Liabilities
|
|
|
(178,909
|
)
|
|
|
(119,639
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(178,909
|
)
|
|
$
|
(119,639
|
)
|
|
|
|
|
|
|
|
The components of the combined net periodic benefit cost for the defined benefit pension plans were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Service cost
|
|
$
|
9,974
|
|
|
$
|
9,366
|
|
|
$
|
9,664
|
|
Interest cost
|
|
|
19,003
|
|
|
|
16,483
|
|
|
|
15,474
|
|
Expected return on plan assets
|
|
|
(13,571
|
)
|
|
|
(12,375
|
)
|
|
|
(11,808
|
)
|
Amortization of prior service cost
|
|
|
3,469
|
|
|
|
3,666
|
|
|
|
4,613
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
117
|
|
|
|
47
|
|
Amortization of net gain / (loss)
|
|
|
4,412
|
|
|
|
6,197
|
|
|
|
4,784
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
23,287
|
|
|
$
|
23,454
|
|
|
$
|
22,774
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to the defined benefit pension plans recognized as a component of other
comprehensive income (loss) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Prior service cost
|
|
$
|
3,469
|
|
|
$
|
3,711
|
|
|
$
|
(12,973
|
)
|
Net actuarial loss
|
|
|
(57,385
|
)
|
|
|
2,215
|
|
|
|
26,045
|
|
Deferred tax benefit (expense)
|
|
|
18,871
|
|
|
|
(2,074
|
)
|
|
|
(4,575
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
$
|
(35,045
|
)
|
|
$
|
3,852
|
|
|
$
|
8,497
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized as a component of accumulated other comprehensive income (loss) as of year end
that have not been recognized as a component of the combined net periodic benefit cost of the
defined benefit pension plans are presented in the following table (in thousands). The estimated
net loss and prior service cost for the plan that will be amortized from accumulated other
comprehensive income into the net periodic benefit cost over the next fiscal year are $11,700,000
and $3,500,000 respectively.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Prior service cost
|
|
$
|
(5,793
|
)
|
|
$
|
(9,262
|
)
|
Net actuarial loss
|
|
|
(100,759
|
)
|
|
|
(43,374
|
)
|
Deferred tax benefit
|
|
|
37,293
|
|
|
|
18,423
|
|
|
|
|
|
|
|
|
Amounts included in accumulated other comprehensive income (loss)
|
|
$
|
(69,259
|
)
|
|
$
|
(34,213
|
)
|
|
|
|
|
|
|
|
164
The assumptions used in the measurement of the companys benefit obligation are shown in the
following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Used for Net
|
|
|
Used for Benefit
|
|
|
|
Benefit Cost in Fiscal Year
|
|
|
Obligations
|
|
|
|
1/1/2008 to 12/31/2008
|
|
|
as of 12/31/2008
|
|
Discount rate
|
|
|
6.10
|
%
|
|
|
6.17
|
%
|
Rate of compensation increase
|
|
|
4.20
|
%
|
|
|
4.20
|
%
|
Long-term rate of return
|
|
|
7.65
|
%
|
|
|
7.65
|
%
|
American Nationals funding policy for the pension plans is to make annual contributions in
accordance with the minimum funding standards of the Employee Retirement Income Security Act of
1974. The unfunded plans will be funded out of general corporate assets when necessary. American
National contributed $19,700,000 and $14,600,000 to the qualified retirement plan in 2008 and 2007,
respectively.
American National and its affiliates expect to contribute $10,400,000 to its qualified pension plan
in fiscal year 2009.
The following table shows benefit payments, which reflect expected future service as appropriate,
that are expected to be paid (in thousands):
|
|
|
|
|
Year
|
|
Pension Benefits
|
|
2009
|
|
$
|
17,983
|
|
2010
|
|
|
20,997
|
|
2011
|
|
|
25,024
|
|
2012
|
|
|
24,787
|
|
2013
|
|
|
28,593
|
|
2014 - 2018
|
|
|
164,030
|
|
The pension plan asset allocations at December 31, 2008 and December 31, 2007 by asset category are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Asset category
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
33.8
|
%
|
|
|
36.5
|
%
|
Debt securities
|
|
|
47.6
|
%
|
|
|
48.0
|
%
|
Other
|
|
|
18.6
|
%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
The investment policy for the qualified retirement plan assets is designed to provide the highest
return possible commensurate with sound and prudent underwriting practices. The investment
diversification goals are to have investments in cash from zero to 15%, debt securities from 40% to
80% and equity securities from 20% to 60% of
the total invested plan assets. The amount invested in any particular investment is limited based
on credit quality, and no single investment is allowed to be more than 5% of the total invested
assets.
The overall expected long-term rate of return on assets assumption is based upon a building-block
method, whereby the expected rate of return on each asset class is broken down into three
components: (1) inflation, (2) the real risk-
165
free rate of return (i.e., the long-term estimate of future returns on default-free U.S. government
securities), and (3) the risk premium for each asset class (i.e., the expected return in excess of
the risk-free rate). All three components are based primarily on historical data.
While the precise expected return derived using the above approach will fluctuate somewhat from
year to year, American Nationals policy is to hold this long-term assumption constant as long as
it remains within a reasonable tolerance from the derived rate.
Postretirement Life and Health Benefits
American National and its subsidiaries provide certain health and/or dental benefits to retirees.
Participation in these plans is limited to current retirees and their dependents who met certain
age and length of service requirements. No new participants will be added to these plans in the
future.
The primary retiree health benefit plan provides major medical benefits for participants under the
age of 65 and Medicare supplemental benefits for those over 65. Prescription drug benefits are
provided to both age groups. The plan is contributory, with the companys contribution limited to
$80 per month for retirees and spouses under the age of 65 and $40 per month for retirees and
spouses over the age of 65. All additional contributions necessary, over the amount to be
contributed by American National, are to be contributed by the retirees.
The accrued postretirement benefit obligation, included in the liability for retirement benefits,
was $5,200,000 and $6,000,000 at December 31, 2008 and 2007, respectively. These amounts were
approximately equal to the unfunded accumulated postretirement benefit obligation. Since American
Nationals contributions to the cost of the retiree benefit plans are fixed, the health care cost
trend rate will have no effect on the future expense or the accumulated postretirement benefit
obligation.
Under American National and its subsidiaries various group benefit plans for active employees,
life insurance benefits are provided upon retirement for eligible participants who meet certain age
and length of service requirements.
Savings Plans
In addition to the defined benefit pension plans, American National sponsors one defined
contribution plan for all employees excluding those of the Farm Family companies, and an incentive
savings plan for employees of the Farm Family companies. The defined contribution plan (401(k)
plan) allows employees to contribute up to the maximum allowable amount as determined by the
Internal Revenue Service. American National does not contribute to the defined contribution plan.
Company contributions are made under the incentive savings plan for the Farm Family companies, with
a discretionary portion based on the profits earned by the Farm Family companies. The expense
associated with this plan was $2,800,000 for 2008, $2,700,000 for 2007 and $2,800,000 for 2006.
16 COMMITMENTS AND CONTINGENCIES
Commitments
American National and its subsidiaries lease insurance sales office space in various cities. The
remaining long-term lease commitments at December 31, 2008, were approximately $3,844,000.
In the ordinary course of their operations, the companies also had commitments outstanding at
December 31, 2008, to purchase, expand or improve real estate, to fund mortgage loans, and to
purchase other invested assets aggregating $203,710,000, of which $182,463,000 is expected to be
funded in 2009. The remaining balance of $21,247,000 will be funded in 2010 and beyond. As of
December 31, 2008, all of the mortgage loan commitments have interest rates that are fixed.
166
Guarantees
In the normal course of business, American National has guaranteed bank loans for customers of a
third-party marketing operation. The bank loans are used to fund premium payments on life
insurance policies issued by American National. The loans are secured by the cash values of the
life insurance policies. If the customer were to default on the bank loan, American National would
be obligated to pay off the loan. However, since the cash value of the life insurance policies
always equals or exceeds the balance of the loans, management does not foresee any loss on the
guarantees. The total amount of the guarantees outstanding as of December 31, 2008, was
approximately $206,513,000, while the total cash values of the related life insurance policies was
approximately $212,028,000.
Litigation
American National is the defendant in a class action lawsuit which contends that American National
allegedly failed to refund credit life and disability insurance premiums to persons who paid the
underlying indebtedness prior to the insured loans maturity. A settlement class has been
certified. Additionally, American National has reached a settlement with the State of Texas in a
similar action regarding this situation. American National has reserved $27 million for settlement
of these cases, including payment of attorneys fees, and believes that any additional amounts that
may be necessary will not be material to the consolidated financial statements.
American National is a defendant in a lawsuit related to the defection of another companys
insurance agents. The jury reached a verdict adverse to American National, and the court reduced
the amount of such verdict to approximately $7.6 million. Post-trial motions are being filed, with
appeal to be taken thereafter. American National has accrued an appropriate amount for resolution
of this case, including attorneys fees, and believes that any additional amounts that may be
necessary will not be material to the consolidated financial statements.
American National is a defendant in a lawsuit which proposes to certify one or more classes of
persons who contend that American National allegedly violated various provisions of the California
Labor Code, engaged in unfair business practices, fraud and deceit, conversion, and negligent
misrepresentation with respect to certain of its sales agents. The plaintiff has posited that she
may seek a nationwide class for alleged violations of the Federal Fair Labor Standards Act at some
point in the future. Currently, the plaintiff seeks statutory penalties, restitution, interest,
penalties, attorneys fees, punitive damages and injunctive relief in an unspecified amount.
American National believes that it has meritorious defenses; however, no determination can be made
as to the probability of any recovery against American National.
American National and subsidiaries are also defendants in various other lawsuits concerning alleged
failure to honor certain loan commitments, alleged breach of certain agency and real estate
contracts, various employment matters, allegedly deceptive insurance sales and marketing practices,
and other litigation arising in the ordinary course of operations. Certain of these lawsuits
include claims for compensatory and punitive damages. After reviewing these matters with legal
counsel, management is of the opinion that the ultimate resultant liability, if any, would not have
a material adverse effect on the companies consolidated financial position or results of
operations. However, these lawsuits are in various stages of development, and future facts and
circumstances could result in managements changing its conclusions.
Based on information currently available, management also believes that amounts ultimately paid, if
any, arising from these cases would not have a material effect on the companys consolidated
results of operations and financial position. However, it should be noted that the frequency of
large damage awards, which bear little or no relation to the economic damages incurred by
plaintiffs in some jurisdictions, continue to create the potential for an unpredictable judgment in
any given lawsuit. It is possible that, if the defenses in these lawsuits are not successful, and
the judgments are greater than management can anticipate, the resulting liability could have a
material impact on the consolidated financial results.
167
17 DISCONTINUED OPERATIONS
On December 4, 2008, our life insurance business in Mexico, American National de Mexico, Compania
de Seguros de Vida, S.A. de C.V., along with non-insurance affiliates Servicios de Administracion
American National S.A. de C.V. and American National Promotora de Ventas S.A. de C.V. were sold to
a third party for approximately $2,400,000. Accordingly, the business is accounted for as a
discontinued operation within the life operating segment, and its results of operations, financial
position and cash flows are separately reported for all periods presented.
Assets sold at the closing date included $8,400,000 of invested assets, $700,000 of deferred policy
acquisition costs, and $500,000 of other assets. The liabilities sold at the closing date included
$5,900,000 of reserves, $400,000 of policy account balances, and $500,000 of other liabilities.
The Mexico operation reported a $3,330,000 in pretax losses for 2008. The sale resulted in a
loss on sale of discontinued operations of $1,890,000 before taxes. As part of the sale, a
$22,059,000 income tax benefit was reported in 2008 because the tax basis of the investment in
American National de Mexico exceeded the financial statement carrying value.
168
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
|
|
|
|
|
|
|
Page
|
|
|
|
Number
|
|
(a)(1) Financial Statements (See Item 13: Financial Statements and Supplementary Data)
|
|
|
129
|
|
|
|
|
|
|
(a)(2) Supplementary Data and Financial Statement Schedules
|
|
|
|
|
|
|
|
|
|
[Schedules are attached hereto at the following pages:
|
|
|
|
|
|
|
Page
|
|
|
|
Number
|
|
|
|
|
171
|
|
|
|
|
|
172
|
|
|
|
|
|
173
|
|
|
|
|
|
177
|
|
|
|
|
|
178
|
|
|
|
|
|
179
|
|
All other schedules are omitted as the required information is inapplicable or the information is
presented in the financial statements or related notes.
(b) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number:
|
|
Basic Documents:
|
|
|
|
|
|
|
3.1
|
|
|
Articles of Incorporation
|
|
|
|
|
|
|
3.2
|
|
|
Bylaws
|
|
|
|
|
|
|
4.1
|
|
|
Specimen copy of Stock Certificate.
|
|
|
|
|
|
|
10.1
|
|
|
Administrative Services Agreement dated October 17, 2007 by and between American
National Insurance Company and Transaction Applications Group, Inc.
|
|
|
|
|
|
|
10.2
|
|
|
American National Insurance Company 1999 Stock and Incentive Plan (the Stock and
Incentive Plan)
|
|
|
|
|
|
|
10.3
|
|
|
Form of Restricted Stock Agreement for Directors under the Stock and Incentive Plan
|
|
|
|
|
|
|
10.4
|
|
|
Form of Restricted Stock Agreement for Employees under the Stock and Incentive Plan
|
|
|
|
|
|
|
10.5
|
|
|
Form of Stock Appreciation Rights Agreement under the Stock and Incentive Plan
|
|
|
|
|
|
|
10.6
|
|
|
American National Insurance Company Nonqualified Retirement Plan for Certain
Salaried Employees
|
|
|
|
|
|
|
10.7
|
|
|
American National Insurance Company Nonqualified Retirement Plan
|
|
|
|
|
|
|
11
|
|
|
Statement re: Computation of Per Share Earnings See Note 13 to the Consolidated
Financial Statements
|
|
|
|
|
|
|
21
|
|
|
Subsidiaries
|
|
|
|
|
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
169
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
American National Insurance Company
|
|
Date: April 6, 2009
|
By:
|
/s/ G. Richard Ferdinandtsen
|
|
|
|
President and Chief Operating Officer
|
|
170
INDEPENDENT AUDITORS REPORT
To the Stockholders and Board of Directors
American National Insurance Company:
Under date of March 30, 2009, we reported on the consolidated balance sheets of American National
Insurance Company and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders equity, comprehensive income (loss), and cash
flows for each of the years in the three-year period ended December 31, 2008. In connection with
our audits of the aforementioned consolidated financial statements, we also audited the related
financial statement schedules I through V in the Form 10 registration statement. These financial
statement schedules are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Houston, Texas
April 9, 2009
171
American National Insurance Company and Subsidiaries
SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
|
|
|
|
|
|
|
|
|
Amount at Which
|
|
|
|
|
|
|
|
Market
|
|
|
Shown in the
|
|
Type of Investment
|
|
Cost (a)
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government and government agencies
and authorities
|
|
$
|
166,010
|
|
|
$
|
168,299
|
|
|
$
|
166,010
|
|
States, municipalities and political subdivisions
|
|
|
157,907
|
|
|
|
160,958
|
|
|
|
157,907
|
|
Foreign governments
|
|
|
4,338
|
|
|
|
5,956
|
|
|
|
4,338
|
|
Public utilities
|
|
|
380,766
|
|
|
|
356,107
|
|
|
|
380,766
|
|
All other corporate bonds
|
|
|
5,972,816
|
|
|
|
5,457,382
|
|
|
|
5,972,816
|
|
Bonds Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government and government agencies
and authorities
|
|
|
8,027
|
|
|
|
9,090
|
|
|
|
9,090
|
|
States, municipalities and political subdivisions
|
|
|
584,268
|
|
|
|
572,235
|
|
|
|
572,235
|
|
Foreign governments
|
|
|
916
|
|
|
|
829
|
|
|
|
829
|
|
Public utilities
|
|
|
206,499
|
|
|
|
203,930
|
|
|
|
203,930
|
|
All other corporate bonds
|
|
|
3,459,850
|
|
|
|
3,034,753
|
|
|
|
3,034,753
|
|
Redeemable preferred stock
|
|
|
60,718
|
|
|
|
48,822
|
|
|
|
48,822
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
11,002,115
|
|
|
$
|
10,018,361
|
|
|
$
|
10,551,496
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities
|
|
$
|
34,640
|
|
|
$
|
35,284
|
|
|
$
|
35,284
|
|
Banks, trust and insurance companies
|
|
|
127,482
|
|
|
|
132,251
|
|
|
|
132,251
|
|
Industrial, miscellaneous and all other
|
|
|
571,954
|
|
|
|
600,883
|
|
|
|
600,883
|
|
Investments in Mutual Funds
|
|
|
86,832
|
|
|
|
85,112
|
|
|
|
85,112
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
820,908
|
|
|
$
|
853,530
|
|
|
$
|
853,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate
|
|
$
|
1,877,053
|
|
|
|
|
|
|
$
|
1,877,053
|
|
Investment real estate
|
|
|
516,224
|
|
|
|
|
|
|
|
516,224
|
|
Real estate acquired in satisfaction of debt
|
|
|
12,681
|
|
|
|
|
|
|
|
12,681
|
|
Policy loans
|
|
|
354,398
|
|
|
|
|
|
|
|
354,398
|
|
Other long-term investments
|
|
|
78,994
|
|
|
$
|
6,157
|
|
|
|
85,151
|
|
Short-term investments
|
|
|
295,170
|
|
|
|
|
|
|
|
295,170
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
14,957,543
|
|
|
$
|
10,878,048
|
|
|
$
|
14,545,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Original cost of equity securities and, as to fixed maturities, original cost reduced by
repayments and valuation write-downs and adjusted for amortization of premiums or accrual of
discounts.
|
172
American National Insurance Company
(Parent Company Only)
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS)
CONDENSED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium and Policy Revenue
|
|
$
|
691,885
|
|
|
$
|
790,666
|
|
|
$
|
675,251
|
|
Net Investment Income
|
|
|
643,855
|
|
|
|
641,951
|
|
|
|
638,870
|
|
Net Realized Investment gains (losses)
|
|
|
(143,239
|
)
|
|
|
1,476
|
|
|
|
10,889
|
|
Other Revenues
|
|
|
6,576
|
|
|
|
11,840
|
|
|
|
15,097
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,199,077
|
|
|
$
|
1,445,933
|
|
|
$
|
1,340,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
$
|
471,590
|
|
|
$
|
556,543
|
|
|
$
|
457,456
|
|
Operating Costs & Other Expenses
|
|
|
771,899
|
|
|
|
704,339
|
|
|
|
703,967
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
$
|
1,243,489
|
|
|
$
|
1,260,882
|
|
|
$
|
1,161,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations before federal income tax,
and equity in earnings of unconsilidated affiliates
|
|
$
|
(44,412
|
)
|
|
$
|
185,051
|
|
|
$
|
178,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit)
|
|
$
|
(30,820
|
)
|
|
$
|
68,612
|
|
|
$
|
67,689
|
|
Equity in net income/(loss) of subsidiaries
|
|
|
(159,134
|
)
|
|
|
129,292
|
|
|
|
167,846
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
$
|
(172,726
|
)
|
|
$
|
245,731
|
|
|
$
|
278,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from discontinued operations
|
|
$
|
18,728
|
|
|
$
|
(4,958
|
)
|
|
$
|
(5,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(153,998
|
)
|
|
$
|
240,773
|
|
|
$
|
273,231
|
|
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes therein
173
American National Insurance Company
(Parent Company Only)
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS)
CONDENSED STATEMENT OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
$
|
7,449,385
|
|
|
$
|
7,419,242
|
|
|
$
|
7,266,062
|
|
Equity Securities
|
|
|
71,925
|
|
|
|
108,319
|
|
|
|
104,382
|
|
Mortgage Loans on Real Estate
|
|
|
1,915,801
|
|
|
|
1,578,164
|
|
|
|
1,421,890
|
|
Other Invested Assets
|
|
|
1,681,122
|
|
|
|
1,963,657
|
|
|
|
1,928,318
|
|
Investment in subsidiaries
|
|
|
1,470,589
|
|
|
|
1,752,785
|
|
|
|
1,644,853
|
|
Deferred Policy Acquisition Costs
|
|
|
1,175,427
|
|
|
|
959,572
|
|
|
|
898,602
|
|
Other Assets
|
|
|
1,266,726
|
|
|
|
1,515,479
|
|
|
|
1,452,778
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,030,975
|
|
|
$
|
15,297,218
|
|
|
$
|
14,716,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyowner Funds
|
|
$
|
2,577,472
|
|
|
$
|
2,523,718
|
|
|
$
|
2,361,716
|
|
Policy Account Balances
|
|
|
7,690,775
|
|
|
|
7,039,341
|
|
|
|
6,913,377
|
|
Separate Account Liabilities
|
|
|
561,021
|
|
|
|
781,160
|
|
|
|
649,571
|
|
Other Liabilities
|
|
|
1,067,851
|
|
|
|
1,216,215
|
|
|
|
1,216,598
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
11,897,119
|
|
|
$
|
11,560,434
|
|
|
$
|
11,141,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock
|
|
$
|
30,832
|
|
|
$
|
30,832
|
|
|
$
|
30,832
|
|
Additional Paid-In Capital
|
|
|
7,552
|
|
|
|
6,080
|
|
|
|
4,160
|
|
Other Accumulated Comprehensive Income
|
|
|
(253,409
|
)
|
|
|
145,972
|
|
|
|
141,869
|
|
Retained Earnings
|
|
|
3,447,207
|
|
|
|
3,653,365
|
|
|
|
3,498,306
|
|
Less: Treasury Stock at Cost
|
|
|
(98,326
|
)
|
|
|
(99,465
|
)
|
|
|
(99,544
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
$
|
3,133,856
|
|
|
$
|
3,736,784
|
|
|
$
|
3,575,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
15,030,975
|
|
|
$
|
15,297,218
|
|
|
$
|
14,716,885
|
|
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes therein
174
American National Insurance Company
(Parent Company Only)
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(153,998
|
)
|
|
|
240,773
|
|
|
|
273,231
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss (gain) on investments
|
|
|
143,239
|
|
|
|
(1,476
|
)
|
|
|
(10,889
|
)
|
Amortization of discounts and premiums on bonds
|
|
|
10,345
|
|
|
|
11,153
|
|
|
|
11,312
|
|
Capitalized interest on policy loans and mortgage loans
|
|
|
5,896
|
|
|
|
190
|
|
|
|
7,231
|
|
Depreciation
|
|
|
16,885
|
|
|
|
18,176
|
|
|
|
22,286
|
|
Interest credited to policy account balances
|
|
|
272,700
|
|
|
|
267,228
|
|
|
|
269,135
|
|
Charges to policy account balances
|
|
|
(165,354
|
)
|
|
|
(145,386
|
)
|
|
|
(130,312
|
)
|
Deferred federal income tax (benefit) expense
|
|
|
(87,389
|
)
|
|
|
25,539
|
|
|
|
10,584
|
|
Deferral of policy acquisition costs
|
|
|
(437,287
|
)
|
|
|
(270,904
|
)
|
|
|
(218,020
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
221,432
|
|
|
|
209,934
|
|
|
|
208,852
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
210,114
|
|
|
|
(164,100
|
)
|
|
|
(223,350
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder fund liabilities
|
|
|
49,821
|
|
|
|
121,284
|
|
|
|
8,920
|
|
Reinsurance ceded receivable
|
|
|
(26,654
|
)
|
|
|
6,270
|
|
|
|
20,294
|
|
Premiums due and other receivables
|
|
|
20,454
|
|
|
|
(21,522
|
)
|
|
|
65,602
|
|
Accrued investment income
|
|
|
(878
|
)
|
|
|
(6,969
|
)
|
|
|
8,590
|
|
Current federal income tax (asset) liability
|
|
|
(94,955
|
)
|
|
|
1,340
|
|
|
|
13,075
|
|
Liability for retirement benefits
|
|
|
52,263
|
|
|
|
900
|
|
|
|
24,267
|
|
Prepaid Reinsurance Premiums
|
|
|
6,682
|
|
|
|
6,203
|
|
|
|
12,793
|
|
Other, net
|
|
|
(21,103
|
)
|
|
|
67,015
|
|
|
|
(24,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
22,213
|
|
|
|
365,648
|
|
|
|
348,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
14,654
|
|
|
|
283,085
|
|
|
|
126,611
|
|
Stocks
|
|
|
55,084
|
|
|
|
4,934
|
|
|
|
246
|
|
Real estate
|
|
|
|
|
|
|
31,810
|
|
|
|
56,120
|
|
Mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets
|
|
|
188,493
|
|
|
|
80,213
|
|
|
|
221,545
|
|
Proceeds from maturity of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
624,288
|
|
|
|
453,765
|
|
|
|
528,293
|
|
Principal payments received on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
145,214
|
|
|
|
234,165
|
|
|
|
158,028
|
|
Policy loans
|
|
|
9,203
|
|
|
|
9,217
|
|
|
|
6,101
|
|
Purchases of :
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
(1,118,416
|
)
|
|
|
(908,103
|
)
|
|
|
(256,884
|
)
|
Stocks
|
|
|
(47,002
|
)
|
|
|
(13,736
|
)
|
|
|
(5,349
|
)
|
Real estate
|
|
|
(15,657
|
)
|
|
|
(22,686
|
)
|
|
|
(10,758
|
)
|
Mortgage loans
|
|
|
(478,429
|
)
|
|
|
(368,223
|
)
|
|
|
(310,778
|
)
|
Policy loans
|
|
|
(18,165
|
)
|
|
|
(16,363
|
)
|
|
|
(14,432
|
)
|
Other invested assets
|
|
|
(216,468
|
)
|
|
|
(118,365
|
)
|
|
|
(119,645
|
)
|
Decrease (increase) in short term investments, net
|
|
|
294,048
|
|
|
|
(17,032
|
)
|
|
|
(531,157
|
)
|
Decrease (increase) in investment in unconsolidated affiliates
|
|
|
72,082
|
|
|
|
56,168
|
|
|
|
24,531
|
|
Increase (decrease) in property & equipment, net
|
|
|
(10,462
|
)
|
|
|
(3,000
|
)
|
|
|
(4,669
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(501,533
|
)
|
|
|
(314,151
|
)
|
|
|
(132,197
|
)
|
|
|
|
|
|
|
|
|
|
|
175
American National Insurance Company
(Parent Company Only)
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders deposits to policy account balances
|
|
|
1,931,709
|
|
|
|
1,164,863
|
|
|
|
1,028,328
|
|
Policyholders withdrawals from policy account balances
|
|
|
(1,385,625
|
)
|
|
|
(1,163,120
|
)
|
|
|
(1,123,691
|
)
|
Dividends to stockholders
|
|
|
(82,651
|
)
|
|
|
(81,531
|
)
|
|
|
(80,448
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
463,433
|
|
|
|
(79,788
|
)
|
|
|
(175,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(15,887
|
)
|
|
|
(28,291
|
)
|
|
|
40,825
|
|
Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of the year
|
|
|
7,908
|
|
|
|
36,199
|
|
|
|
(4,626
|
)
|
End of the year
|
|
|
(7,979
|
)
|
|
|
7,908
|
|
|
|
36,199
|
|
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes therein
176
American National Insurance Company and Subsidiaries
SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
Column G
|
|
|
Column H
|
|
|
Column I
|
|
|
Column J
|
|
|
Column K
|
|
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Benefits,
|
|
|
|
|
|
|
Other Policy
|
|
|
|
|
|
|
|
|
|
|
Claims, Losses
|
|
|
of Deferred
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
Losses, Claims
|
|
|
|
|
|
|
Claims and
|
|
|
|
|
|
|
Net
|
|
|
and
|
|
|
Policy
|
|
|
Other
|
|
|
|
|
|
|
Acquisition
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Benefits
|
|
|
Premium
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
Segment
|
|
Cost
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Payable
|
|
|
Revenue
|
|
|
Income (a)
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses (b)
|
|
|
Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Other
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
109,597
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37,839
|
|
|
$
|
|
|
Life
|
|
|
712,234
|
|
|
|
3,763,207
|
|
|
|
111,846
|
|
|
|
220,691
|
|
|
|
299,338
|
|
|
|
226,643
|
|
|
|
251,992
|
|
|
|
86,956
|
|
|
|
220,662
|
|
|
|
|
|
Annuities
|
|
|
557,061
|
|
|
|
7,631,985
|
|
|
|
13
|
|
|
|
52,126
|
|
|
|
116,248
|
|
|
|
374,023
|
|
|
|
157,102
|
|
|
|
75,826
|
|
|
|
28,188
|
|
|
|
|
|
Health
|
|
|
74,887
|
|
|
|
97,020
|
|
|
|
93,956
|
|
|
|
439,621
|
|
|
|
290,883
|
|
|
|
16,566
|
|
|
|
220,848
|
|
|
|
27,785
|
|
|
|
90,418
|
|
|
|
|
|
Property & Casualty
|
|
|
138,482
|
|
|
|
|
|
|
|
816,249
|
|
|
|
776,562
|
|
|
|
1,182,026
|
|
|
|
69,348
|
|
|
|
939,854
|
|
|
|
233,336
|
|
|
|
115,696
|
|
|
|
1,184,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,482,664
|
|
|
$
|
11,492,212
|
|
|
$
|
1,022,064
|
|
|
$
|
1,489,000
|
|
|
$
|
1,888,495
|
|
|
$
|
796,177
|
|
|
$
|
1,569,796
|
|
|
$
|
423,903
|
|
|
$
|
492,803
|
|
|
$
|
1,184,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Other
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
127,519
|
|
|
$
|
|
|
|
$
|
198
|
|
|
$
|
60,871
|
|
|
$
|
|
|
Life
|
|
|
641,780
|
|
|
|
3,762,745
|
|
|
|
122,052
|
|
|
|
233,691
|
|
|
|
315,893
|
|
|
|
229,092
|
|
|
|
239,598
|
|
|
|
1,040,208
|
|
|
|
(755,996
|
)
|
|
|
|
|
Annuities
|
|
|
400,678
|
|
|
|
6,913,285
|
|
|
|
13
|
|
|
|
51,332
|
|
|
|
222,748
|
|
|
|
364,607
|
|
|
|
150,318
|
|
|
|
70,740
|
|
|
|
22,014
|
|
|
|
|
|
Health
|
|
|
80,012
|
|
|
|
94,072
|
|
|
|
104,005
|
|
|
|
422,948
|
|
|
|
283,765
|
|
|
|
16,710
|
|
|
|
212,692
|
|
|
|
24,508
|
|
|
|
78,583
|
|
|
|
|
|
Property & Casualty
|
|
|
128,815
|
|
|
|
|
|
|
|
698,860
|
|
|
|
852,455
|
|
|
|
1,177,217
|
|
|
|
75,041
|
|
|
|
818,230
|
|
|
|
224,499
|
|
|
|
95,610
|
|
|
|
1,191,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,251,285
|
|
|
$
|
10,770,102
|
|
|
$
|
924,930
|
|
|
$
|
1,560,426
|
|
|
$
|
1,999,623
|
|
|
$
|
812,969
|
|
|
$
|
1,420,838
|
|
|
$
|
1,360,153
|
|
|
$
|
(498,918
|
)
|
|
$
|
1,191,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Other
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
159,723
|
|
|
$
|
|
|
|
$
|
180
|
|
|
$
|
65,227
|
|
|
$
|
|
|
Life
|
|
|
580,616
|
|
|
|
3,686,851
|
|
|
|
129,536
|
|
|
|
248,649
|
|
|
|
327,594
|
|
|
|
231,414
|
|
|
|
248,428
|
|
|
|
89,907
|
|
|
|
196,690
|
|
|
|
|
|
Annuities
|
|
|
399,316
|
|
|
|
6,691,696
|
|
|
|
23
|
|
|
|
51,440
|
|
|
|
112,455
|
|
|
|
353,157
|
|
|
|
130,830
|
|
|
|
68,642
|
|
|
|
21,938
|
|
|
|
|
|
Health
|
|
|
86,771
|
|
|
|
98,034
|
|
|
|
110,460
|
|
|
|
445,011
|
|
|
|
303,285
|
|
|
|
18,964
|
|
|
|
227,329
|
|
|
|
22,929
|
|
|
|
86,998
|
|
|
|
|
|
Property & Casualty
|
|
|
121,176
|
|
|
|
|
|
|
|
701,680
|
|
|
|
863,717
|
|
|
|
1,234,300
|
|
|
|
72,759
|
|
|
|
881,806
|
|
|
|
237,865
|
|
|
|
97,237
|
|
|
|
1,284,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,187,879
|
|
|
$
|
10,476,581
|
|
|
$
|
941,699
|
|
|
$
|
1,608,817
|
|
|
$
|
1,977,634
|
|
|
$
|
836,017
|
|
|
$
|
1,488,393
|
|
|
$
|
419,523
|
|
|
$
|
468,090
|
|
|
$
|
1,284,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Net investment income from fixed income assets (bonds and mortgage loans on real estate) is allocated to insurance lines based on the funds generated by each line at the average
yield available from these fixed income assets at the time such funds become available. Net investment income from policy loans is allocated to the insurance lines according
to the amount of loans made by each line. Net investment income from all other assets is allocated to the insurance lines as necessary to support the equity
assigned to that line with the remainder allocated to capital & surplus.
|
|
(b)
|
|
Identifiable commissions and expenses are charged directly to the appropriate line of business. The remaining expenses are allocated to the lines based upon various factors
including premium and commission ratios within the respective lines.
|
177
American National Insurance Company and Subsidiaries
SCHEDULE IV REINSURANCE
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
|
of Amount
|
|
|
|
Gross
|
|
|
Other
|
|
|
from Other
|
|
|
Net
|
|
|
Assumed
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
to Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
68,820,212
|
|
|
$
|
31,241,255
|
|
|
$
|
1,050,645
|
|
|
$
|
38,629,602
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
492,068
|
|
|
|
84,942
|
|
|
|
8,460
|
|
|
|
415,586
|
|
|
|
2.0
|
%
|
Accident and health insurance
|
|
|
278,907
|
|
|
|
134,904
|
|
|
|
146,880
|
|
|
|
290,883
|
|
|
|
50.5
|
%
|
Property and liability insurance
|
|
|
1,346,425
|
|
|
|
224,248
|
|
|
|
59,849
|
|
|
|
1,182,026
|
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
2,117,400
|
|
|
$
|
444,094
|
|
|
$
|
215,189
|
|
|
$
|
1,888,495
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
67,604,695
|
|
|
$
|
29,635,648
|
|
|
$
|
1,078,371
|
|
|
$
|
39,047,418
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
609,643
|
|
|
|
72,604
|
|
|
|
10,355
|
|
|
|
547,394
|
|
|
|
1.9
|
%
|
Accident and health insurance
|
|
|
255,948
|
|
|
|
126,417
|
|
|
|
154,234
|
|
|
|
283,765
|
|
|
|
54.4
|
%
|
Property and liability insurance
|
|
|
1,269,078
|
|
|
|
103,629
|
|
|
|
11,768
|
|
|
|
1,177,217
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
2,134,669
|
|
|
$
|
302,650
|
|
|
$
|
176,357
|
|
|
$
|
2,008,376
|
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
65,008,408
|
|
|
$
|
26,557,877
|
|
|
$
|
982,412
|
|
|
$
|
39,432,943
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
504,225
|
|
|
|
65,726
|
|
|
|
10,646
|
|
|
|
449,145
|
|
|
|
2.4
|
%
|
Accident and health insurance
|
|
|
312,694
|
|
|
|
178,195
|
|
|
|
168,786
|
|
|
|
303,285
|
|
|
|
55.7
|
%
|
Property and liability insurance
|
|
|
1,300,803
|
|
|
|
85,187
|
|
|
|
18,684
|
|
|
|
1,234,300
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
2,117,722
|
|
|
$
|
329,108
|
|
|
$
|
198,116
|
|
|
$
|
1,986,730
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
American National Insurance Company and Subsidiaries
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
|
|
Deductions - Describe
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
Amounts
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Charged to
|
|
|
Written off Due
|
|
|
Amounts
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expense
|
|
|
to Disposal (a)
|
|
|
Commuted (b)
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment valuation allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate
|
|
$
|
15,610
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,886
|
)
|
|
$
|
19,496
|
|
Investment real estate
|
|
|
11,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,804
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,886
|
)
|
|
$
|
30,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment valuation allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate
|
|
$
|
13,835
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,775
|
)
|
|
$
|
15,610
|
|
Investment real estate
|
|
|
11,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,029
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,775
|
)
|
|
$
|
26,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment valuation allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate
|
|
$
|
14,444
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
581
|
|
|
$
|
13,863
|
|
Investment real estate
|
|
|
17,870
|
|
|
|
(7,049
|
)
|
|
|
|
|
|
|
(373
|
)
|
|
|
11,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,314
|
|
|
$
|
(7,049
|
)
|
|
$
|
|
|
|
$
|
208
|
|
|
$
|
25,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Amounts written off due to disposal represent reductions or (additions) in the balance due to
sales, transfers or other disposals of the asset with which the allowance is associated.
|
|
(b)
|
|
Amounts commuted represent reductions in the allowance balance due to changes in requirements
or investment conditions.
|
179
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number:
|
|
Basic Documents:
|
|
|
|
|
|
|
3.1
|
|
|
Articles of Incorporation
|
|
|
|
|
|
|
3.2
|
|
|
Bylaws
|
|
|
|
|
|
|
4.1
|
|
|
Specimen copy of Stock Certificate.
|
|
|
|
|
|
|
10.1
|
|
|
Administrative Services Agreement dated October 17, 2007 by and between American
National Insurance Company and Transaction Applications Group, Inc.
|
|
|
|
|
|
|
10.2
|
|
|
American National Insurance Company 1999 Stock and Incentive Plan (the Stock and
Incentive Plan)
|
|
|
|
|
|
|
10.3
|
|
|
Form of Restricted Stock Agreement for Directors under the Stock and Incentive Plan
|
|
|
|
|
|
|
10.4
|
|
|
Form of Restricted Stock Agreement for Employees under the Stock and Incentive Plan
|
|
|
|
|
|
|
10.5
|
|
|
Form of Stock Appreciation Rights Agreement under the Stock and Incentive Plan
|
|
|
|
|
|
|
10.6
|
|
|
American National Insurance Company Nonqualified Retirement Plan for Certain
Salaried Employees
|
|
|
|
|
|
|
10.7
|
|
|
American National Insurance Company Nonqualified Retirement Plan
|
|
|
|
|
|
|
11
|
|
|
Statement re: Computation of Per Share Earnings See Note 13 to the Consolidated
Financial Statements
|
|
|
|
|
|
|
21
|
|
|
Subsidiaries
|
|
|
|
|
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
180