Trademark Trial and Appeal Board Electronic Filing System. http://estta.uspto.gov
`ESTTA375141
`ESTTA Tracking number:
`10/26/2010
`
`Filing date:
`IN THE UNITED STATES PATENT AND TRADEMARK OFFICE
`BEFORE THE TRADEMARK TRIAL AND APPEAL BOARD
`91178996
`Defendant
`American National Insurance Company
`Margaret A. Boulware
`Baker & McKenzie LLP
`711 Louisiana Street, Suite 3400
`Houston, TX 77002-2746
`UNITED STATES
`tanya.m.marshall@bakernet.com, meg.a.boulware@bakernet.com,
`andrea.m.guy@bakernet.com, tan.pham@bakernet.com
`Testimony For Defendant
`Tan Pham
`Tan.Pham@bakermckenzie.com, meg.boulware@bakermckenzie.com,
`tanya.marshall@bakermckenzie.com
`/Tan Pham/
`10/26/2010
`2010-08-18 Deposition of George Crume - Exhibit 6 (pages 23-140) (9 of 11).pdf
`( 118 pages )(10103033 bytes )
`
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`American National Insurance Company
`
`Management’s Discussion and Analysis
`
`and
`
`Financial Statements and Corresponding Footnotes
`
`As filed with the Securities and Exchange Commission, March 12, 2010
`
`

`
`ITEM 7.
`
`MANAGEMENT’S 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. This
`narrative analysis should be read in conjunction with the fon/vard—looking statement infomwation below, and the audited
`consolidated financial statements and related notes included in Item 8.
`
`INDEX
`
`Segments .............................................................................................................................................................................1
`
`
`
`Consolidated Results of Operations ............................................................................................................................... .. 18
`
`Life ................................................................................................................................................................................... .. 20
`
`Annuity............................................................................................................................................................................. .. 25
`
`Health .............................................................................................................................................................................. .. 32
`
`Property and Casualty..................................................................................................................................................... .. 36
`
`Corporate and Other ....................................................................................................................................................... .. 45
`
`
`
`Contractual Obligations .............................. .§................................................................................................................... .. 43
`
`Off-Balance Sheet Arrangements................................................................................................................................... .. 49
`
`Related Party Transactions............................................................................................................................................. .. 49
`
`Investments ..................................................................................................................................................................... .. 49
`
`

`
`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 operate in all 50 states, the District of
`Columbia, Guam, American Samoa and Puerto Rico.
`
`Segments
`
`We manage our business through five business segments, which are comprised of four insurance segments: Life,
`Annuity, Health and Property and Casualty, and our Corporate and Other segment. The life, annuity, and health insurance
`segments are primarily operated through five domestic insurance companies. The pro
`rty and casualty insurance
`
`
`
`
`
`Insurance Segments
`
`The insurance segments have revenues, which consist primarily of the following:
`
`0
`
`a
`
`o
`
`net premiums earned on individual term and whole life insurance, property and casualty insurance, credit v
`insurance, health insurance and single premium immediate annuity products;
`
`net investment income; and
`
`insurance and investment product fees and other income, including surrender charges, mortality and
`expense risk charges, primarily from variable life and annuity, deferred annuities, and universal life insurance
`policies, management fees and commissions from other investment products, and other administrative
`charges.
`
`The insurance segment expenses primarily consist of the following:
`
`-
`
`-
`
`-
`
`-
`o
`
`benefits provided to policyholders and contract holders and changes in reserves held for future benefits;
`
`interest credited on account balances;
`
`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);
`
`amortization of deferred policy acquisition costs and other intangible assets; and
`income taxes.
`
`The insurance segments have liabilities for all of the insurance products sold through the segment. Each insurance
`segment also has an amount of surplus allocated to it sufficient to support the segment's business activities. The insurance
`segments do not directly own any assets, but assets are allocated to the segments to support the liabilities and surplus of
`each segment. The mix of assets allocated to each of the insurance segments is modified as necessary to provide the right
`match of cash flows and earnings to properly support the characteristics of the insurance liabilities. We have utilized this
`methodology consistently over all periods presented.
`
`Corporate & Other
`
`The Corporate and Other segment directly owns all of the invested assets of the Company. As noted above, assets
`and surplus from the Corporate and Other segment are allocated to the insurance segments as necessary to support the
`liabilities of those segments. The investment income from the invested assets is also allocated to the insurance segments
`from the Corporate and Other segment in accordance with the amount of assets allocated to each segment Earnings of the
`Corporate and Other segment are derived from our non-insurance businesses as well as earnings from those invested
`assets that do notsupport the insurance segments. All realized investment gains and losses are recorded in this segment.
`
`

`
`Outlook
`
`"The Outlook” sections contain many forward-looking statements, particularly relating to our future financial
`performance. These fowl/ard—|ooking statements are estimates based on information currently available to us, are made
`pursuant to the safe harbor provisions of the Private Securities Litigation Refonn Act of 1995, and are subject to the
`precautionary statements set forth in the introduction to MD&A above. Actual results are likely to differ materially from those
`forecast by us, depending on the outcome of various factors.
`
`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
`
`_ G
`
`eneral 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 govemment efforts, economic indicators
`remain mixed. During 2009, these market conditions contributed to an other-than temporary impairment loss of $98.9 million
`in our $16.6 billion investment portfolio. 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 acquisitions and consolidations
`principally among financial institutions, we have experienced credit concentrations beyond our nonnal 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, impact the demand for the type of financial and insurance products we offer. 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 those risks are somewhat mitigated by our financial strength, active risk
`management and disciplined undenrvriting 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 adapt to current economic times and give us
`the ability to serve the changing needs of our customer base. For example, recent fiuctuations 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 success with fixed annuity products. Also, through our conservative business
`approach, we believe we remain financially strong and we are committed to providing a steady and reliable source of
`financial protection for policyholders and investors alike.
`
`Low Interest Rates: Low interest rate environments are typically challenging for life and annuity companies as the
`spreads on deposit-type funds and contracts narrow and policies approach their minimum crediting rates. Low market
`interest rates may reduce the spreads between the amounts we credit to fixed annuity and individual life policyholders and
`the yield we earn on the investments that support these obligations. We have an established Asset/Liability Management
`Committee that actively manages the profitability of our in force block of insurance policies. In response to the unusually low
`interest rates in recent years, we have reduced the guaranteed minimum crediting rates on newlyissued fixed annuity
`contracts and reduced crediting rates on in-force contracts, where pennitted 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 and
`persistency could diminish as a result. Additionally, the committee maintains assets with various maturities to support
`product liabilities and ensure liquidity. A gradual increase in longer-tenn interest rates relative to short-tenn 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.
`
`

`
`Focus on Operating Efficiencies: The challenging economic environment and the recent investment related
`losses across the industry have created a renewed focus on operating cost reductions and efficiencies. We continue
`to aggressively manage our cost base while maintaining our commitment to provide superior customer service to
`agents and policyholders. Investments in technology are aligned with activities and are coordinated through a
`disciplined project management process. In 2009, we consolidated our data centers and Information Technology
`(“IT”) operations to realize some of the synergies with our subsidiaries. We also anticipate using technology to
`enhance our web experience for policyholders and agents.
`
`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 proactively monitor this debate to determine its impact on
`our business. The SEC is attempting to enact new registration requirements for equity-indexed products. American National
`is prepared to support these products, even with additional registration requirements and regulation.
`
`Life and Annuity
`
`Due to the recent market and economic turmoil, life insurance companies experienced declining demand for certain
`products in 2008 and 2009. In response, we developed and began offering in September, 2009 a new Indexed Universal
`Life product, which we anticipate will be desirable in the current market Life insurance continues to be a mainstay product
`for us today, as it has during our long history. We believe that the combination of predictable and decreasing mortality rates,
`positive cash flow generation for many years after policy issue and favorable persistency characteristics, suggest 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.
`
`While the annuity segment had insignificant sales volume historically, this segment now represents a major and
`growing contributor to our operations. Although we experienced a slowdown in variable annuity sales in 2009, our fixed
`annuity sales continued to increase as investors sought less volatile investment vehicles. In light of the current market, we
`are committed to maintaining our 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 approximately 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), is crucial to
`our success in the annuity segment. Asset “disintennediation", 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. The ALM Committee monitors asset disintennediation risk
`through the use of statistical measures such as duration and projected future cash flows based on 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.
`
`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 income protection.
`We believe that our overall financial strength and broad distribution channels will position us to respond with a variety of
`products needed by Baby Boomers for retirement planning and income requirements. We are ready to respond to
`individuals approaching retirement age who seek inforrnaticn to plan for and manage their retirement needs. Our products
`that offer guaranteed income flows for life, 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 industry's 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 is also 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. insurers
`continue to evaluate 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. Wnile this may have impeded
`our ability to sell variable annuities in the short mn, this strategy has given us an advantage in tenns 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.
`
`
`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 obtain profitable growth. Some of the steps we
`have taken to improve our competitive position in the market include:
`
`o
`
`-
`
`Established in 2009, we have a project under way to establish a New York life insurance subsidiary. We
`anticipate that sales will begin through this new company in the first half of 2010. A variety of annuity products
`will be available for sale once the subsidiary is established, followed in subsequent years by our life products.
`lnitial sales are anticipated through independent and multiple-line agents. Based on competitors‘ market
`experience, we expect annuity deposits from this subsidiary to represent five to ten percent of total deposits
`received once the market is established.
`
`Sales of traditional life insurance products through our Career Sales and Services Division increased in 2009.
`This coupled with our focus on policy persistency and expense management allowed us to continue to
`maintain a stable and profitable block of in force business.
`
`- We have repositioned the competitiveness of life products sold through our lndependent Marketing Group,
`particularly at older ages. While this repositioning resulted in a slowing of sales in the last quarter of 2008 and
`2009, it has and will help improve the future profitability of these products.
`
`. - We believe there will be a continuing shift in sales emphasis to utilizing the lntemet, endorsed direct mail and
`innovative productldistribution combinations. Although our direct sales of life insurance products were lower in
`2009, we remain committed to traditional life insurance products (tenn life and whole life) through our lntemet
`and third-party marketing distribution channels.
`
`Health
`
`We experienced a slight reduction in Medicare Supplement policies in-force in 2009 as the industry continued to move
`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 tenn. Sales of
`traditional products decreased during 2009; however, the trend of decreased sales reversed in 2007 and in 2008.
`
`The number of hospital surgical health insurance policies in-force decreased in 2009. The decrease was mainly a
`result of rate increases. Profitability for our 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 a
`significant contributor to profitability as it allows us to negotiate better arrangements with healthcare providers, thus
`decreasing unit costs. We consider both 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 2007, the property and casualty insurance industry has been experiencing a soft market, characterized by
`declining premium growth for three consecutive years. "U.S. Property/Casualty —- Review and Previevi/' published by A.M.
`Best on February 8, 2010 noted that the expected decrease in Net Premiums Written in 2009 has resulted in the first three
`consecutive year decline in AM. Best's recorded history. Following the industry's historical decreases the last three years to
`Net Written Premiums, industry-vvide operating results are expected to have improved in 2009. This improvement was due
`to the decline in catastrophe activity from an estimated $23 billion ' dustry-wide in 2008 to an estimated $14 billion in 2009,
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`companies, alternative fomis of risk transfer and the weak economy. AM. Best expects this competitive pressure will
`continue in 2010, with an average forecast decline in industry net premiums written of 1.6%. We expect to experience
`continued pressure on pricing early in 2010, but easing fiom the levels experienced since 2007, and increasing by the end
`of 2010. To compete in this tough pricing environment, our long-terrn plans include developing tiered pricing for our
`agricultural and commercial lines. Tiered pricing will create a broader range of premiums and is designed to continue to
`improve our competitive position in the marketplace and our profitability.
`
`
`
`Wrt.’n 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 produdion 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, as well as adding new agents to expand our
`exposure to the credit-related insurance market We are reviewing and implementing improved procedures to enhance
`customer service and, at the same time, looking for efficiencies to reduce administrative costs.
`
`Competition: Property and casualty insurers are facing a continued competitive pricing environment The condition of
`the economy in 2009 prevented the rate hardening most industry leaders were expecting following the declines in previous
`years. The competitive environment is expected to continue into 2010 as foremsts for an active hurricane season, the low
`interest rate environment, and an anticipated sluggish economic recovery all undennine any significant improvement in the
`market
`
`Despite the challenging pricing environment, we expect to identify profitable opportunities through our strong
`distribution channels, expanding geographic coverage, target marketing effects and new product development. Through our
`mu|tiple—|ine exclusive agents, we will continue to focus on increasing the percentage of clients that buy their home, auto,
`business, and life insurance from us. Introduction of new products, such as one targeted toward the young family market in
`2007," has been a main driver for increased policy counts in homeowners and auto insurance. The integration ofthe Farm
`Family companies over the last nine years has allowed us to expand our geographic coverage into the Northeast and our
`product portfolio to include agribusiness and commercial insurance. 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 confomiity 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:
`
`o
`
`-
`
`o
`
`-
`
`o
`
`-
`
`Deferred acquisition costs;
`
`Reserves;
`
`Pension and postretirement benefit plans;
`
`Other-than-temporary impaimient;
`
`Litigation contingencies; and
`
`Federal income taxes.
`
`-
`
`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. We
`believe that the estimates used in our deferred acquisition cost calculations provide a representative example of how
`variations in assumptions and estimates would affect our business. Please see the sensitivity table in the Deferred
`Acquisition Costs section below for further information on how changes in assumptions and estimates would affect our
`business.
`
`A discussion of these critical accounting estimates is presented below.
`
`Deferred Acquisition Costs
`
`We incur significant costs in connection with acquiring insurance business, including commissions and certain other
`expenses. 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
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`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.
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`Costs deferred on universal life, variable universal life, limited pay life and investrnent-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 policyholders, 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 increa