The continued low interest rate environment has remained a challenge for life insurers as the spreads on deposit-type contracts narrow, especially as interest rates approach minimum crediting rates. Low market interest rates reduce the spreads between the amounts we credit to fixed annuity and individual life policyholders and the amounts we earn on the investments that support these obligations. Our ALM Committee actively manages the profitability of our in-force contracts. In previous years, we reduced the guaranteed minimum crediting rates on new fixed annuity contracts and new business which has afforded us the flexibility to respond to the unusually low interest rate environment. In previous years, we also 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 the profitability of these products, although sales volume could be negatively impacted as a result. We also maintain assets with various maturities to support product liabilities and ensure liquidity. A gradual increase in longer-term interest rates relative to short-term rates generally will have a favorable effect on the profitability of our products. Rapidly rising interest rates, however, could result in reduced persistency of our spread-based products, if contract holders shift assets into higher yielding investments. We believe our ability to react quickly to the changing marketplace will help us manage this risk.
During 2012, the Company retrospectively adopted a new accounting standard relating to DAC. Consequently, certain 2011 financial statement balances were adjusted to reflect the effect of such retrospective adoption, which decreased the reported income before other items and federal income taxes by $2.3 million for 2011.
Life insurance sales based on annualized premium aggregate the total yearly premium that insurance companies would expect to receive if all policies would remain in force plus 10% of single and excess premiums and 15% of credit life premium. Life insurance sales measure activity associated with gaining new insurance business in the current period whereas GAAP premium revenues are associated with policies sold in current and prior periods; therefore, a reconciliation of premium revenues and insurance sales is not meaningful.
Fixed deferred annuity net inflows decreased during 2013 compared to 2012, and during 2012 compared to 2011 primarily resulting from our management of these products to mitigate risks associated with investing in the persistently low interest rate environment. Surrenders increased during 2013 compared to 2012 primarily due to a larger block of policies reaching the end of their surrender charge period. An equity-indexed annuity allows a policyholder to participate in equity returns should they exceed the guaranteed minimum return as defined in the product. Deposits for this product increased during 2013 compared to 2012 primarily attributed to customers preferring the potential for enhanced return of this product compared to fixed annuities. Deposits for this product decreased during 2012 compared to 2011, primarily attributed to lower indexed crediting terms resulting from lower fixed investment yields.
Commercial Automobile: Net premiums written and earned remained substantially unchanged during 2013 compared to 2012. Net premiums written and earned decreased during 2012 compared to 2011 primarily as a result of lower new business writings in our small commercial business as well as selective underwriting intended to improve risk selection.
The combined industry ratios per A.M. Best for 2013 (estimated), 2012, and 2011 were 104.1%, 106.8%, and 103.4%, respectively.
While we believe that our claims reserves at December 31, 2013 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in our ultimate losses in amounts significantly greater or less than the reserves currently recorded. The actual final cost of settling both claims outstanding at December 31, 2013 and claims expected to arise from unexpired periods of risk is uncertain. There are many other factors that would cause our losses to increase or decrease, which include but are not limited to: changes in claim severity; changes in the expected level of reported claims; judicial action changing the scope or liability of coverage; changes in the regulatory, social and economic environment; and unexpected changes in loss inflation. The deficiency or redundancy for different reporting dates is cumulative and should not be added together.
Bonds-We allocate most of our fixed maturity securities to support our insurance business. At December 31, 2013, our fixed maturity securities had an estimated fair value of $13.4 billion, which was $0.5 billion, or 3.7%, above amortized cost. At December 31, 2012, our fixed maturity securities had an estimated fair value of $14.5 billion, which was $1.2 billion, or 8.9%, above amortized cost. Fixed maturity securities’ estimated fair value, due in one year or less, decreased to $1.1 billion as of December 31, 2013 from $1.7 million as of December 31, 2012, primarily as a result of maturities.
Guidance addressing questions on the recognition and classification of fees mandated by the Patient Protection and Affordable Care Act on health insurers’ financial statements. The guidance specifies that the liability for the fee should be recorded in full once the entity provides qualifying health insurance in the applicable calendar year. The corresponding deferred cost is then amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable.
Commissions comprise the majority of the additions to deferred policy acquisition costs for each year.
American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company that is owned by its policyholders. American National has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at December 31, 2013 and 2012.