0001801075us-gaap:ShortdurationInsuranceContractsAccidentYear2011Memberanat:CommercialMultiPerilMember2019-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
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| ☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2021
or
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| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No. 001-39369
American National Group, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 30-1221711 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
One Moody Plaza
Galveston, Texas 77550-7999
(Address of principal executive offices) (Zip Code)
(409) 763-4661
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of Each Class | Trading Symbol | Name of Each Exchange on which Registered |
| Common Stock, par value $0.01 | ANAT | NASDAQ |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act: | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
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| Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
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| Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The aggregate market value on June 30, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter) of the voting stock held by non-affiliates of the registrant was approximately $1.1 billion. For purposes of the determination of the above-stated amount, only directors, executive officers and 10% shareholders are presumed to be affiliates, but neither the registrant nor any such person concedes that they are affiliates of registrant.
As of February 25,April 12, 2022, there were 26,887,200 shares of the registrant’s voting common stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information called for in Part III of this Form 10-K is incorporated by reference to the registrant’s Definitive Proxy Statement to be filed within 120 days of the close of the registrant’s fiscal year in conjunction with the registrant’s annual meeting of shareholders.None.
AMERICAN NATIONAL GROUP, INC.
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SIGNATURES | | |
PART I
ITEM 1. BUSINESSEXPLANATORY NOTE
Company Overview
We have conducted business from our headquarters in Galveston, Texas since 1905. Our core business segments are life insurance, annuities, and property and casualty insurance. We also offer limited health insurance. We provide personalized serviceThis Amendment No. 1 to approximately six million policyholders throughoutForm 10-K (this “Amended Filing”) amends the United States, the District of Columbia, and Puerto Rico. In addition, as of December 31, 2021, we have over $136.9 billion of life insurance in-force.
On July 1, 2020, American National Insurance Company, a Texas insurance company (“ANICO”), completed its previously announced holding company reorganization, which was approved by its shareholders at its Annual Meeting of Shareholders heldReport on April 23, 2020. As a result of such reorganization, ANICO became a wholly owned subsidiaryForm 10-K of American National Group, Inc., a Delaware corporation (“ANAT” (the “Company,” “American National,” “we,” “us” and “our”), and ANAT replaced ANICO asfor the publicly held company. Consequently, all filingsfiscal year ended December 31, 2021, which was originally filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2022 (the “Original Filing”). This Amended Filing provides the information required by Items 10, 11, 12, 13, and 14 of Part III of the Original Filing, which was omitted from July 2, 2020 forwardthe Original Filing in reliance on General Instruction G(3) to Form 10-K. Such instruction permits the information in Part III to be incorporated into the Form 10-K by reference from our definitive proxy statement, if such proxy statement is filed no later than 120 days after the end of our fiscal year. We do not expect to file a definitive proxy statement containing this information within 120 days after the end of the fiscal year covered by the Original Filing. Accordingly, we hereby amend and restate in its entirety Part III of the Original Filing. Capitalized terms not otherwise defined in Part III of this Amended Filing shall have been filed by ANAT under CIK No. 0001801075.the same meanings assigned to such terms in Parts I and II of the Original Filing.
OnIn addition, this Amended Filing amends Part IV, Item 15 of the Original Filing to include new certifications by our principal executive officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act of 2002, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended. Because no financial statements have been included in this Amended Filing and this Amended Filing does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4 and 5 of the certifications have been omitted. Additionally, we are not including the certification under Section 906 of the Sarbanes-Oxley Act of 2002, as no financial statements are being filed with this Amended Filing.
This Amended Filing does not amend or otherwise update any other information in the Original Filing. Other than the information specifically amended and restated herein, this Amended Filing does not reflect events occurring after February 25, 2022, the date of the Original Filing, or modify or update those disclosures that may have been affected by subsequent events. Accordingly, this Amended Filing should be read in conjunction with the Original Filing and with our filings with the SEC subsequent to the Original Filing.
As described in the Original Filing, on August 6, 2021, ANATthe Company entered into an Agreement and Plan of Merger (the "Merger Agreement"“Merger Agreement”) with Brookfield Asset Management Reinsurance Partners Ltd. ("(“Brookfield Reinsurance"Reinsurance”), an exempted company limited by shares existing under the laws of Bermuda, and Freestone Merger Sub Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Brookfield Reinsurance ("(“Merger Sub"Sub”). On the terms and subject to the conditions of the Merger Agreement, at the closing, Merger Sub will merge with and into ANATthe Company (the "Merger"“Merger”), with ANATthe Company continuing as the surviving entity, which will become an indirect, wholly-owned subsidiary of Brookfield Reinsurance. On the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of the Company'sCompany’s common stock will be converted into the right to receive $190.00 in cash without interest (the "Merger Consideration"“Merger Consideration”), for total Merger Consideration of approximately $5.1 billion. The Merger was unanimously approved by the ANAT's board of directors. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information regarding the Merger.
In this document, we refer to ANAT and its subsidiaries as "American National," the "Company,” “we,” “our,” and “us.”
Our vision is 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 corporate culture. We have an unwavering commitment to serve our policyholders, agents, and shareholders by providing excellent service and competitively priced products and services through a diversified network of distribution channels. We are committed to profitable growth, which enables us to remain financially strong. We invest regularly in our distribution channels, technology, and our human resources to fuel our capacity for profitable growth.
We are committed to excellence and maintaining high ethical standards in all our business dealings. Disciplined adherence to our values has allowed us to deliver consistently high levels of service through talented people, who are at the heart of our business. We define our values with the acronym FIRST, which stands for Financial strength, Integrity, Respect, Service, and Teamwork. Additionally, we describe our culture as ACE which stands for Agility, Collaboration, and Engagement, three characteristics that describe how we want to operate as a team dedicated to the success of our stakeholders. In 2021, we instituted ACE Culture 2.0 with additional emphasis on diversity, equity, and inclusion.
Business Segments
Our family of companies includes five life insurance companies, eight property and casualty insurance companies, and numerous non-insurance subsidiaries. We organize and operate our businesses in the following business segments: Life, Annuity, Property and Casualty, Health, and Corporate and Other. The following discussion provides an overview of the products we offer within these segments.
ITEM 1. BUSINESS — (Continued)
Life Segment
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, to a specified age or a fixed number of years, and may be level or change in accordance with a predetermined schedule. Whole life insurance includes some policies that provide a participation feature in the form of dividends. Policyholders may receive dividends in cash or apply them to increase death benefits or cash values available upon surrender, or reduce the premiums required to maintain the contract in-force.
Term Life. Term life products provide 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 to thirty years, but in no event longer than the period over which premiums are paid.
Universal Life. Universal life insurance products provide coverage through a contract that gives the policyholder flexibility in premium payments and coverage amounts. Universal life products may allow the policyholder, within certain limits, to increase or decrease the amount of death benefit coverage over the term of the contract and to adjust the frequency and amount of premium payments. Universal life products are interest rate sensitive, and we determine the interest crediting rates during the contract period, subject to policy specific minimums.
An equity-indexed universal life product is credited with interest using a return that is based, in part, on changes in an index, such as the Standard & Poor’s 500 Index (“S&P 500”), subject to a specified minimum.
Variable Universal Life. Variable universal life products provide insurance coverage on a similar basis as universal life, except that the policyholder bears the investment risk because the value of the policyholder’s account balance varies with the investment experience of the securities selected by the policyholder held in the separate account.
Credit Life Insurance. Credit life insurance products are sold in connection with a loan or other credit account. Credit life insurance products are designed to pay to the lender the borrower’s remaining debt on a loan or credit account if the borrower dies during the coverage period.
Annuity Segment
Deferred Annuity. A deferred annuity is an asset accumulation product. Deposits are received as a single premium deferred annuity or in a series of payments for a flexible premium deferred annuity. Deposits are credited with interest at our determined rates subject to policy minimums. For certain limited periods of time, usually from one to ten years, interest rates are guaranteed not to change. Deferred annuities usually have surrender charges that begin at issue and reduce over time and may have market value adjustments that can increase or decrease any surrender value.
An equity-indexed deferred annuity is credited with interest using a return that is based, in part, on changes in an index, such as the S&P 500, subject to a specified minimum.
Single Premium Immediate Annuity (“SPIA”). A SPIA is purchased with one premium payment, providing periodic (usually monthly or annual) payments to the annuitant for a specified period, such as for the remainder of the annuitant’s life. Return of the original deposit may or may not be guaranteed, depending on the terms of the annuity contract.
Variable Annuity. With a variable annuity, the policyholder bears the investment risk because the value of the policyholder’s account balance varies with the investment experience of the separate account investment options selected by the policyholder. Our variable annuity products have no guaranteed minimum withdrawal benefits.
ITEM 1. BUSINESS — (Continued)
Health Segment
Medicare Supplement. Medicare supplement insurance is a type of private health insurance designed to supplement or pay the costs of certain medical services not covered by Medicare. Due to competitive pressures and a marketing shift toward more profitable lines of business, we are completing the process of withdrawing from the Medicare Supplement market. New business sales ceased as of January 31, 2022. Going forward, existing policies will be in run-off and lapse at the end of the policy period.
Supplemental Insurance. Supplemental insurance is designed to provide supplemental coverage for specific events or illnesses such as cancer, accidental injury or death, or disability for short periods of time.
Stop-Loss. Stop-loss coverage is used by employers to limit their exposure under self-insured medical plans. Two coverages, which are usually offered concurrently, are available. Specific stop-loss provides coverage when claims for an individual reach a threshold; after the threshold is reached, the policy reimburses claims paid by the employer up to a coverage limit for each individual. Aggregate stop-loss reimburses the employer once the group’s total paid claims reach a threshold.
Credit Disability. Credit disability (also called credit health) insurance pays a limited number of monthly payments on a loan or credit account if the borrower becomes disabled during the coverage period.
Medical Expense. Medical expense insurance covers most health expenses including hospitalization, surgery, and outpatient services (excluding dental and vision costs). We no longer market these products and existing contracts are in run-off.
Short-Term Medical Insurance. Short-term medical provides temporary medical expense coverage for policyholders between jobs, waiting for other coverages to begin, or currently without other medical expense coverage. Under current federal regulation, short-term medical may be renewed up to 36 months.
Property and Casualty Segment
Personal Lines. Personal lines include insurance policies sold to individuals for auto, homeowners, and other similar exposures. Auto insurance covers specific risks involved in owning and operating an automobile. Homeowners insurance provides coverage that protects the insured owner’s property against loss from perils. Other personal insurance provides coverage for property such as boats, motorcycles and recreational vehicles, and umbrella protection coverage.
Commercial Lines. Commercial lines are primarily focused on providing insurance to agricultural related operations and small to midsize businesses. This includes property and casualty coverage tailored for a farm, ranch, or other agricultural-related businesses. Commercial auto insurance is typically issued in conjunction with the sale of our policies covering farms, ranches, and businesses and covers specific risks involved in owning and operating motor vehicles. Business owners' property and liability insurance, workers' compensation insurance, and other commercial insurance encompassing umbrella protection coverage and other liability coverages, are also offered.
Specialty Markets. Specialty markets products include renters, mortgage security, aviation, private flood, and credit insurance. Credit insurance provides protection to borrowers and the creditors that extend credit to them against unpaid indebtedness as a result of death, disability, involuntary unemployment, or untimely loss to the collateral securing a personal or mortgage loan. Coverage available for the segment includes:
•Collateral or Creditor Protection Insurance (“CPI”). CPI provides insurance against loss, expense to recover, or damage to personal property pledged as collateral (typically automobiles and homes) resulting from fire, burglary, collision, or other loss occurrence that would either impair a creditor’s interest or adversely affect the value of the collateral. The coverage is purchased from us by the lender according to the terms of the credit obligation and charged to the borrower by the lender when the borrower fails to provide the required insurance.
•Guaranteed Auto Protection or Guaranteed Asset Protection (“GAP”). GAP insures the excess outstanding indebtedness over the primary property insurance benefits that may occur when there is a total loss to or an unrecovered theft of the collateral. GAP can be written on a variety of assets that are used as collateral to secure credit; however, it is most commonly written on automobiles.
ITEM 1. BUSINESS — (Continued)
Corporate and Other Segment
Our Corporate and Other segment includes our non-insurance subsidiaries and other invested assets not matched with insurance activities.
Marketing Channels
Our diversified product distribution network is designed to satisfy the needs of the markets we serve.
Career Sales and Service Division (“CSSD”)—can be traced to the Company's founding in 1905, and offers life insurance, annuities, and limited benefit health insurance products through employee agents primarily to the lower and middle-income market. CSSD's business model is structured to enable agents located throughout the United States to efficiently distribute new products and provide personalized service to the customer. CSSD has evolved its operations to offer a wider variety of products and electronic processing to meet the ever-changing needs of the customer and the agents that serve them.
Independent Marketing Group (“IMG”)—distributes our life insurance and annuity products and solutions through independent agents, financial institutions, large marketing organizations, employee benefit firms, broker-dealers and brokers. IMG provides these products and services to clients in need of wealth protection, accumulation, distribution, and transfer. IMG also markets to individuals who favor purchasing life insurance directly from an insurance company, through call centers.
Multiple Line Agencies—offers life insurance, annuities, and property and casualty insurance and a limited amount of health insurance primarily through agents, who, for the most part, primarily or exclusively represent the Company. This distribution channel serves individuals, families, farmers, ranchers, other agricultural clients, and small business owners across the country. Policyholders can generally obtain all their insurance solutions through our multiple line agents, which has been identified as an important driver to client satisfaction.
Health Insurance Division—serves the needs of a variety of markets including middle-income seniors, self-insured employers, and the special needs of individuals with supplemental products which are sold direct to consumer, and by independent agents, brokers, and Managing General Underwriters (“MGU”). The Health Insurance Division primarily offers health insurance products, supplemental health insurance products, health reinsurance, and traditional medicare supplement products.
Specialty Markets Group("SMG")—primarily offers property and casualty products, including some credit property and casualty products. Credit product distribution includes general agents who market to financial institutions, automobile dealers, and furniture dealers. Our SMG distribution channel also provides property and casualty products for renters, mortgage security, aviation for small hull aircraft, self-storage contents, and private flood insurance through general agents and managing general agents. Some of the products distributed by SMG, including aviation and private flood, are fully reinsured. In addition, SMG sells some credit life and credit disability products.
Policyholder Liabilities
We record the amounts for policyholder liabilities in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and the standards of practice of the American Academy of Actuaries. We carry 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 premiums and claims payable, and for unearned revenue from front-end fees. We also establish liabilities for unpaid claims and claim adjustment expenses, including those that have been incurred but not yet reported. In addition, we carry liabilities for secondary guarantees relating to certain life policies and fair value reserves associated with embedded derivatives on equity-indexed products.
Additional information regarding our policyholder liabilities may be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Reserves section, and Part II, Item 8, Financial Statements and Supplementary Data — Note 11, Liability for Future Policy Benefits and Policyholder Account Balances, and Note 12, Liability for Unpaid Claims and Claim Adjustment Expenses, of the Notes to the Consolidated Financial Statements.
ITEM 1. BUSINESS — (Continued)
Risk Management
A conservative operating philosophy was a founding principle for our Company and continues to be a guiding principle for us. We manage risks across the Company by employing controls throughout our business operations. These controls are designed to both place limits on activities and provide internal reporting information that helps us monitor our businesses and shape decisions and actions. The Company’s Board of Directors oversees a formal enterprise risk management program to coordinate risk management efforts and to provide reasonable assurance that risk taking activities are aligned with strategic objectives. The Board Audit Committee assists the Board in its risk management oversight. The risk management program includes a Corporate Risk Officer to ensure consistent application of the enterprise risk management process across all business segments. The Enterprise Risk Management Committee is supported by three sub-committees, one focusing on life and annuity business risks, one focusing on property and casualty business risks, and another focusing on health and credit life business risks. In addition, several other senior management committees support the discussion and enforcement of risk controls in the management of the Company.
Our insurance products are designed to balance features desired by the marketplace with provisions that mitigate our risk exposures across our insurance products portfolio. We employ underwriting standards to help ensure proper rates are charged to different classes of risks. In our life insurance and annuity products, we seek to mitigate disintermediation risk, the risk of large outflows of cash at times when it is disadvantageous to us to dispose of invested assets, with surrender charges and market value adjustment features.
The process of linking the timing and the amount of payment obligations related to our insurance and annuity contracts and the cash flows and valuations of the invested assets supporting those obligations is commonly referred to as asset-liability management (“ALM”). Our ALM Committee, including many of our Company's senior executive officers, regularly monitors the level of risk in the interaction of assets and liabilities and helps shape actions intended to attain our desired risk-return profile. Investment allocations and duration targets are also intended to manage the risk exposure in our annuity products by setting the credited rate within a range supported by our investments. Tools that help shape investment decisions include deterministic and stochastic interest rate scenario analyses using a licensed third-party economic scenario generator and detailed insurance ALM models. These models also use experience related to surrenders and claims.
We also manage risk by purchasing reinsurance to limit exposure in our Life, Health, and Property and Casualty segments. In our Life segment, we currently retain 100% of newly developed permanent and term products up to our retention limit and cede the excess exposure to reinsurers that are evaluated for their credit strength. Consistent with our corporate risk management strategy, we periodically adjust our Life reinsurance program and retention limits as market conditions warrant. In our Health segment, we use reinsurance on an excess of loss basis for our MGU stop-loss business. In our Property and Casualty segment, our reinsurance program provides coverage for some individual risks with exposures above certain amounts as well as exposure to catastrophes including hurricanes, tornadoes, wind and hail events, earthquakes, fires following earthquakes, winter storms, and wildfires. In all segments, we purchase reinsurance from multiple providers and regularly review the financial strength ratings of our reinsurers. Reinsurance does not remove our liability to pay our policyholders, and we remain liable to our policyholders for the risks we insure. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for retention limits.
In our Property and Casualty segment, the use of catastrophic event models is an important element of risk management. These models assist in the measurement and management of exposure concentrations and the amount and structure of reinsurance purchases. In addition to reinsurance, we manage exposure to catastrophic risk by limiting property exposure in areas with heightened brush fire risks and exposures and in coastal areas, implementing hurricane, wind and hail deductible requirements where appropriate, and not renewing coverage, when permitted by applicable law, in regions where we believe exposure to risky events exceeds our risk appetite.
Pricing
We establish premium rates for life, annuity, and health products using assumptions as to future mortality, morbidity, persistency, investments, and expenses, all of which are estimates generally based on our experience, industry data, projected investment earnings, competition, regulation and legislation. These assumptions are also considered when setting crediting rates for interest sensitive life and annuity products. Premium rates for property and casualty insurance are influenced by many factors, including the estimated frequency and severity of claims, expenses, state regulation and legislation, and general business and economic conditions, including market interest rates and inflation. Profitability is affected to the extent actual experience deviates from our pricing assumptions.
ITEM 1. BUSINESS — (Continued)
Payments we receive for certain annuity and life products are not recognized as revenues, but are deposits added to policyholder account balances. Revenues from these products result from charges to the account balances for the cost of insurance risk and administrative fees and, in some cases, surrender fees. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income on assets invested from the deposits in excess of the amounts credited to policyholders.
Premiums for health policies with medical expense components must take into account the rising utilization and cost of medical care. The annual rate of medical cost inflation has historically been higher than the general rate of inflation, requiring frequent rate increases, most of which are subject to approval by state regulatory agencies.
Credit life and health rates are set by each state. These rates are the maximum amounts that may be charged. We may charge a lower rate to reflect a variety of factors including better than expected experience, compensation adjustments, and competitive forces. If an account's experience is poor and less than our pricing assumptions, we may request a rate increase from the applicable state.
Competition
We compete principally on the breadth of our product offerings, reputation, the overall ease of doing business with us, marketing expertise and support, the scope of our distribution systems, financial strength and ratings, product features and prices, customer service, claims handling, and in the case of producers, service as well as compensation. The market for insurance, retirement and investment products continues to be highly fragmented and competitive. We compete with a large number of domestic and foreign insurance companies, many of which offer one or more similar products. In addition, for products that include an asset accumulation component, our competition includes domestic and foreign securities firms, investment advisors, mutual funds, banks, and other financial institutions.
Several competing insurance carriers are larger than we are, have brands that are more commonly known, and spend significantly more on advertising than we do. We endeavor to remain competitive with these commonly known brands by managing costs, providing attractive coverage and service, maintaining positive relationships with our agents and our policyholders, and by maintaining our financial strength.
Ratings
Rating agencies provide independent opinions or ratings. These ratings are based on each rating agency’s quantitative and qualitative evaluation of a company. The rating agencies do not provide ratings as a recommendation to purchase insurance or annuities, nor as a guarantee of an insurer’s current or future ability to meet contractual obligations. Each agency’s rating should be evaluated independently of any other rating. Ratings may be changed, suspended, or withdrawn at any time.
ANICO's current insurer financial strength rating from two of the most widely referenced rating organizations as of the date of this filing are as follows:
•A.M. Best Company: A (Excellent) (1)
•Standard & Poor’s (“S&P”): A (Strong) (2)
(1)A.M. Best's active company rating scale consists of thirteen ratings ranging from A++ (Superior) to D (poor).
(2)S&P’s active company ratings scale ‘AAA’ to ‘R’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
A.M. Best has placed American National’s issuer credit and financial strength ratings under review with developing implications and S&P Global Ratings has placed the ratings on CreditWatch with negative implications due to the pending Merger with Brookfield Reinsurance. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional details.
ITEM 1. BUSINESS — (Continued)
Regulations Applicable to Our Business
Our insurance operations are subject to extensive regulation, primarily at the state level. Such regulation varies by state but generally has its source in statutes that establish requirements for the business of insurance and that grant broad regulatory authority to a state agency. Insurance regulation has a substantial effect on us and governs a wide variety of matters, such as insurance company licensing, agent and adjuster licensing, policy benefits, price setting, accounting practices, product suitability, the payment of dividends, the nature and amount of investments, underwriting practices, reserve requirements, sales and advertising practices, privacy practices, information systems security, policy forms, reinsurance reserve requirements, risk and solvency assessments, mergers and acquisitions, corporate governance practices, capital adequacy, transactions with affiliates, participation in shared markets and guaranty associations, claims practices, the remittance of unclaimed property, and enterprise risk management requirements. The models for state laws and regulations often emanate from the National Association of Insurance Commissioners (“NAIC”). While it is not mandatory for insurers to comply with an NAIC model law, nor for states to adopt a model law, state and federal legislators and regulators are likely to look to the model law for guidance in proposing new legislation and regulation.
State insurance departments monitor compliance with regulations through periodic reporting procedures and examinations. At any given time, financial, market conduct or other examinations of our insurance companies may be occurring.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) expanded the U.S. federal government presence in insurance oversight. Dodd-Frank also established the Federal Insurance Office within the U.S. Department of Treasury, which is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify certain issues in the regulation of insurers, and preempt state insurance measures under certain circumstances. Provisions of Dodd-Frank are or may become applicable to us, our competitors, or certain entities with which we do business. For example, it is possible that regulations issued by the Consumer Financial Protection Bureau may extend, or be interpreted to extend, to the sale of certain insurance products by covered financial institutions, which could adversely affect sales of such products. The Federal Insurance Office, as a result of various studies it conducts, may also recommend changes in laws or regulations that affect our business. There may be further federal involvement in the business of insurance in the future, which may add significant legal complexity and associated costs to our business.
Regulatory matters having the most significant effects on our insurance operations and financial reporting are described further below. In addition, Item 1A, Risk Factors, Litigation and Regulation Risk Factors, below discusses significant risks presented to our business by extensive regulation and describes certain other laws and regulations that are or may become applicable to us.
Holding Company Regulation. We are an insurance holding company system under the insurance laws of the states where we do business. Our insurance companies are organized under the laws of Texas, Missouri, New York, Louisiana, and California. Insurance holding company system laws and regulations in such states generally require periodic reporting to state insurance regulators of various business, enterprise risk management, corporate governance, and financial matters, as well as advance notice to, and in some cases approval by, such regulators prior to certain transactions between insurers and their affiliates. These laws also generally require regulatory approval prior to the acquisition of a controlling interest in an insurance company. These requirements may deter or delay certain transactions considered desirable by management or our stockholders.
Limitations on Dividends by Insurance Subsidiaries. Dividends received from ANICO are the sole source of cash for ANAT. ANICO and its insurance subsidiaries’ ability to pay dividends is generally limited by state law and is also impacted by federal income tax considerations. Our insurance subsidiaries' ability to pay dividends is important to ANAT's ability to pay dividends to shareholders.
Rate Regulation. Nearly all states have laws that require life, health, credit, and property and casualty insurers to file rate schedules and require most insurers to file policy or coverage forms and other information with the state’s insurance regulatory authority. In many cases these must be approved prior to use. The objectives of rate laws vary, but generally a price cannot be excessive, inadequate, or unfairly discriminatory. Prohibitions on discriminatory underwriting practices apply in the context of certain products as well.
Our ability to adjust premium rates, particularly with certain property and casualty and health insurance products, is often dependent on the applicable pricing law and our ability to demonstrate to the particular regulator that current or proposed pricing complies with such law. Rate increases that we believe are necessary for our profitability may be delayed or denied as a result of such laws. We manage our risk of loss by charging a price that reflects the cost and expense of providing insurance products and by being selective in underwriting. When a state has significant underwriting and pricing restrictions, it becomes more difficult to manage our risk of loss, which can adversely impact our ability to market products profitably in such states.
ITEM 1. BUSINESS — (Continued)
Guaranty Associations and Involuntary Markets. State laws allow insurers to be assessed, subject to prescribed limits, insurance guaranty fund fees to pay certain obligations of insolvent insurance companies. In addition, to maintain our licenses to write 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 insurance coverages to purchasers that otherwise are unable to obtain coverage from private insurers.
Investment Regulation. Insurance company investment regulations require investment portfolio diversification and limit the amount of investment in certain asset categories. Failure to comply with these regulations leads to the treatment of non-conforming investments as non-admitted assets for measuring statutory surplus. In some instances, these rules require the sale of non-conforming investments.
Exiting Geographic Markets, Canceling and Non-Renewing Policies. Most states regulate an insurer’s ability to exit a market by limiting the 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 an approved plan. These regulations can restrict our ability to exit unprofitable markets.
Statutory Accounting. Financial reports to state insurance regulators utilize statutory accounting practices as defined in the Accounting Practices and Procedures Manual of the NAIC, which are different from GAAP. Statutory accounting practices, in keeping with the intent to assure the protection of policyholders, are generally based on a solvency concept, while GAAP is based on a going-concern concept. While not a substitute for GAAP performance measures, statutory information is used by industry analysts and reporting sources to compare the performance of insurance companies and impacts the ability of insurance subsidiaries to pay dividends to ANAT. Maintaining both GAAP and statutory financial records increases our business costs.
Pursuant to state insurance laws, we establish statutory reserves, which are reported as liabilities in the separate stand-alone statutory-basis financial statements of ANAT's insurance subsidiaries, and which generally differ from future policy benefits determined using GAAP 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 prescribed rates.
Insurance Reserves. State insurance laws require life and property and casualty insurers to annually analyze the adequacy of statutory reserves. Our appointed actuaries must submit opinions annually for our insurance companies that policyholder and claim reserves are adequate.
Risk-Based Capital and Solvency Requirements. The NAIC has a formula for analyzing capital levels of insurance companies called Risk-Based Capital (“RBC”). The RBC formula has minimum capital thresholds that vary with the size and mix of a company’s business and assets. It is designed to identify companies with capital levels that may require regulatory attention. As of December 31, 2021, the capital level of each of our insurance company subsidiaries exceeded 300% of their respective Authorized Control Levels, the minimum RBC requirement before any action level is triggered or considered.
Own Risk and Solvency Assessment ("ORSA"). The NAIC Risk Management and ORSA Model Act (#505) requires insurers to maintain a framework for identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the insurers' (or insurance groups') current and future business plans. The model act, which has been adopted by the state insurance regulators of our insurance companies, requires companies to file an internal assessment of their solvency with insurance regulators annually. Although no specific capital adequacy standard is currently articulated in the ORSA requirement, it is possible that such standard will be developed over time and may increase insurers' minimum capital requirements, which could adversely impact our growth and return on equity. Our own minimum capital requirement, the Defined Security Standard in our 2021 ORSA, is 200% of the 1-in-250 Conditional Tail Expectation event as measured by the American National Internal Capital Model. As of December 31, 2021, GAAP equity exceeds this minimum requirement.
Securities Regulation. The sale and administration of variable life insurance and variable annuities are subject to extensive regulation at the federal and state level, including by the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). Our variable annuity contracts and variable life insurance policies, other than group unallocated, were 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 generally are registered with the SEC under the Securities Act of 1933. The U.S. 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.
ITEM 1. BUSINESS — (Continued)
In addition, our periodic reports and proxy statements to stockholders are subject to the requirements of the Securities Exchange Act of 1934 and corresponding rules of the SEC, and our corporate governance processes are subject to regulation by the SEC and the NASDAQ Stock Market. Our registered wholesale broker-dealer and registered investment adviser subsidiaries are subject to regulation and supervision by the SEC, FINRA and, in some cases, state securities administrators.
Suitability. FINRA rules require broker-dealers selling variable insurance products to determine that transactions in such products are “suitable” to the circumstances of the particular customer. In addition, most states have enacted the NAIC’s Suitability in Annuity Transactions Model Regulation that, in adopting states, places suitability responsibilities on insurance companies in the sale of fixed and indexed annuities, including responsibilities for training agents. The NAIC has adopted revisions to this model regulation that would further elevate the standard of care for annuity sales and align it with the SEC's new Regulation Best Interest. Several states have either adopted the model regulation or are considering adopting the model regulation. We anticipate that the revised model will be adopted in some form by many of the states in which we do business. New York has already taken further action, through the adoption by the New York Department of Financial Services ("NYDFS") of a regulation that requires in part that life insurance policies and annuity contracts delivered or issued for delivery in New York be in the best interest of the consumer.
Protection of Consumer Information. U.S. federal laws, such as the Gramm-Leach-Bliley Act ("GLB"), and state laws regulate disclosures of certain customer information and require us to protect the security and confidentiality of such information. Such laws also require us to notify customers about our policies and practices relating to the collection, protection and disclosure of confidential customer information. State and federal laws, such as the federal Health Insurance Portability and Accountability Act ("HIPAA"), regulate our use, protection, and disclosure of certain personal health information. In addition, most states have laws or regulations that require us to notify regulators and affected customers in the event of a data breach, and some of these laws and regulations are becoming more stringent by requiring faster notifications and creating private causes of action for violations.
On June 28, 2018, California enacted a sweeping new privacy law known as the California Consumer Privacy Act of 2018 (“CCPA”). The CCPA requires enhanced customer disclosure about how a business collects and uses personal data, how such data is used in business processes, and with and to whom customer data is shared or sold. In addition, the CCPA also affords a consumer a “right to request deletion” in certain circumstances. On August 31, 2018, the California State Legislature passed SB-1121, a bill that delayed enforcement of the CCPA until July 1, 2020, and made other amendments and clarifications to the law. Such clarifications include exempting from certain requirements of the CCPA information that is collected, processed, sold or disclosed pursuant to the California Financial Information Privacy Act, GLB, the federal Fair Credit Reporting Act ("FCRA"), HIPAA, or the federal Driver’s Privacy Protection Act. The revisions, however, do not exempt such information from the CCPA’s private right of action provision in all instances. Additionally, the definition of “personal information” in the CCPA is broad and may encompass other information that we maintain in our California business beyond that excluded under GLB, FCRA, HIPAA, the Driver’s Privacy Protection Act, or the California Financial Information Privacy Act exemption. In addition, in November 2020, California enacted the Consumer Privacy Rights Act, which is effective January 1, 2023 and grants new consumer rights regarding personal information and strengthens certain provisions of the CCPA. Other states may adopt comprehensive privacy laws like California. For example, on March 2, 2021, Virginia enacted the Virginia Consumer Data Protection Act ("CDPA"). On June 8, 2021, Colorado passed the Colorado Privacy Act ("CPA"). Both the CDPA and CPA give certain consumers data protections rights including the right to opt-out of processing their personal data, the right to delete information, and the right to correct information. The CDPA will go into effect on January 1, 2023 and CPA will go into effect on July 1, 2023.
We anticipate further efforts at the federal and state levels to strengthen the protection of consumer information, and such efforts will continue to have a significant impact on our information practices.
In addition, FCRA is a federal law that governs the use and sharing of consumer credit information provided by a consumer reporting agency. Requirements under FCRA apply to an insurer if such insurer obtains and uses consumer credit information to underwrite insurance. Such requirements may include obtaining the consumer’s consent and providing various notices to the consumer. While the use of consumer credit information in the underwriting process is expressly authorized by FCRA, various states have issued regulations that limit or prohibit the use of consumer credit information by insurers, and some consumer groups continue to criticize the use of credit-based insurance scoring in underwriting and rating processes. There may be additional efforts at the federal or state level to regulate the use of credit-based information by insurers. Any such regulation could force changes in our underwriting practices and impact our profitability.
ITEM 1. BUSINESS — (Continued)
Cybersecurity. In recent years, millions of consumers and businesses have been impacted by data breaches of companies in various industries, increasing the regulatory focus on consumer information protection and data privacy. On August 28, 2017, New York became the first state to adopt minimum cybersecurity standards for certain financial institutions. NYDFS requires financial institutions authorized to do business under New York banking, insurance, or other financial services laws, including certain of our subsidiaries, to develop a cybersecurity program and policy based on an assessment of the institution’s cybersecurity risks, designate a Chief Information Security Officer, maintain written policies and procedures with respect to third-party service providers, limit who has access to data or systems, use qualified cybersecurity personnel to manage cybersecurity risks, notify NYDFS of a cybersecurity event within seventy-two hours, maintain a written incident response plan, and provide NYDFS with an annual certification of compliance.
In addition, the NAIC has adopted the Cybersecurity Bill of Rights, a set of directives aimed at protecting consumer data, and the Insurance Data Security Model Law, a model law patterned after New York's cybersecurity standards. The Insurance Data Security Model Law establishes standards for data security in the insurance industry, including standards for investigating a data breach and requiring certain notifications to regulators, producers and consumers. South Carolina became the first state to adopt the Insurance Data Security Model Law in May 2018. Since then, more states have adopted the model law in some form. In states that have not adopted the Insurance Data Security Model Law, it is not mandatory for insurers to comply with the model law; however, state and federal legislators and regulators are likely to look to the model law, as well as the NYDFS regulation, for guidance in proposing new legislation and regulation. The NAIC has also strengthened and enhanced the cybersecurity guidance included in its handbook for state insurance examiners. We expect a continuing focus at the state and federal levels on the privacy and security of personal information.
Anti-Money Laundering. Federal law and regulations require us to take certain steps to help prevent and detect money laundering activities. The USA PATRIOT Act of 2001 contains anti-money laundering and financial transparency requirements applicable to certain financial services companies, including insurance companies. The Bank Secrecy Act requires insurers to implement a risk-based compliance program to detect, deter and (in some cases) report financial or other illicit crimes including, but not limited to, money laundering and terrorist financing. The Office of Foreign Assets Control (“OFAC”), a division of the U.S. Treasury Department, administers and enforces economic and trade sanctions. For certain transactions, an insurer may be required to search policyholder, agent, vendor and employee databases for specially designated nationals or suspected terrorists, in order to comply with OFAC obligations.
Healthcare Regulation. We are subject to various conditions and requirements of the Patient Protection and Affordable Care Act of 2010 (the “Healthcare Act”). The Healthcare Act affects the small blocks of business we have offered or acquired over the years that are, or are deemed to be, health insurance. The Healthcare Act also influences the design of products sold by our Health segment, which may influence consumer acceptance of such products and the cost of monitoring compliance with the Healthcare Act. Moreover, the Healthcare Act affects the benefit plans we sponsor for employees, retirees and their dependents, our expense to provide such benefits, our tax liabilities in connection with the provision of such benefits, and our ability to attract or retain employees. Any repeal, replacement or amendment of the Healthcare Act, or judicial decisions impacting the Healthcare Act, could have similar effects on us.
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 the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. We routinely have environmental assessments performed with respect to real estate being acquired for investment or through foreclosure, but we cannot provide assurance that unexpected environmental liabilities will not arise. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities. Based on information currently available to us, management believes that any costs associated with compliance with environmental laws and regulations or any required remediation will not have a material adverse effect on our business, results of operations or financial condition.
Other types of regulations that affect us include insurable interest laws, employee benefit plan laws, antitrust laws, employment and labor laws, and federal and state tax laws. Failure to comply with federal and state laws and regulations may result in censure; the issuance of cease-and-desist orders; reputational damage; suspension, termination or limitation of the activities of our operations and/or our employees and agents; or the obligation to pay fines, penalties, assessments, interest, or additional taxes and wages. In some cases, severe penalties may be imposed for breach of these laws. We cannot predict the impact of these actions on our business, results of operations or financial condition.
ITEM 1. BUSINESS — (Continued)
Human Capital Resources
As of December 31, 2021, we employed approximately 4,545 employees in 45 states. Most employees work from one of our four primary office locations in Galveston, Texas; Springfield, Missouri; League City, Texas; and Glenmont, New York. As a result of COVID-19, a majority of employees have transitioned to a hybrid work model that combines on-premise and remote work. We also have employees working at other locations, primarily employees of our CSSD division, which has 57 district offices operating in 15 states. Approximately 985 of our employees are covered under a collective bargaining agreement, the majority of whom are within CSSD.
In addition to our employees, we have approximately 143,000 non-employee producers who are appointed by the Company to market specific products and insurance to the various markets we serve. These non-employee producers are vital to our long-term success in the financial services industry, which is a human-capital intensive business. As such, we support and monitor these relationships through our commitment to attracting, developing and retaining producers who are client-focused and align with our company values.
During 2021, the Company’s total employee voluntary turnover was less than 12.2%. We believe we have good relationships with our employees. We consider our employees to be the foundation for our continued growth and success through demonstration of our FIRST values and Code of Business Conduct and Ethics, which speak to who we are and define the expectation for how we conduct ourselves.
Engagement. We periodically conduct employee surveys managed through a third-party vendor to capture the voice of our employees, to provide current data on the level of employee engagement, and to identify strengths and opportunities for improvement. Our corporate values drive who we are, which directly relates to the consistently high marks for ethics that we receive in our employee surveys.
Employee survey input is routinely integrated into new and existing programs, policies and practices. Culture initiatives focused on increasing agility, collaboration, and engagement ("ACE"), ongoing since 2016, continue to evolve and benefit with direct input from employees. Through our ACE culture efforts, we promote diverse discussion and value ideas from all employees on how to work more effectively and more inclusively.
Diversity, Equity and Inclusion ("DEI"). ACE culture includes focus and commitment towards diversity, equity and inclusion. American National is committed to fostering a culture that welcomes diverse talents and perspectives and uses varied insights to make us better. We believe our company is strongest when each member of our team is respected, treated fairly and is comfortable to be who they are. We value the creativity and vitality an inclusive workforce creates and strive to embrace what makes each of us unique, including: race, ethnicity, culture, sexual orientation, gender, religion, age, personal style and physical ability, as well as diverse opinions, perspectives, lifestyles and ideas.
•DEI Statement. In 2020, we released a diversity, equity and inclusion commitment statement and formed an executive-led ACE culture task force to build a strategy and roadmap of actions aimed at continuing to grow diversity, equity and inclusion within the company
•Inclusive Leadership Development. We believe inclusive leaders are necessary for building diverse teams, leveraging diverse perspectives to innovate and are critical to achieving organizational growth in the 21st century. Inclusive behavioral expectations are reflected in all manager goal forms and are considered when evaluating performance and compensation. Our leadership development program, Ascend, is designed to address and sharpen leaders’ skills we believe engage and retain employees. Leadership skills and behaviors are reviewed and calibrated in the annual succession planning process.
•Women's Leadership Forum. Our Women’s Leadership Forum was created in 2018 for female leaders to discuss important issues and share advice for working and advancing within American National.
•Texas Competes. We are members of Texas Competes, a partnership of business leaders that is welcoming to people in the LGBTQIA+ community.
•Celebrating Diversity. Our annual calendar campaign recognizes, celebrates and educates that which makes us unique and includes commemorative months such as Black History Month, Women's History Month, Asian American Pacific Islander Month, LGBTQIA+ Pride Month, National Hispanic Heritage Month, National Disability Employment Awareness Month and National American Indian Heritage Month.
ITEM 1. BUSINESS — (Continued)
•Recruitment and Retention. We have steadily increased our efforts in recent years to attract, retain, develop and promote qualified women and diverse candidates in our company. We use a variety of opportunities and programs to reach a broader range of applicants and talented individuals. Our talent acquisition team attends job fairs, provides internships and visits many colleges and universities, including certain historically black institutions, to find exceptional talent. We also participate in the U.S. Army Partnership for Youth Success to help honorably discharged soldiers find civilian careers.
•Females constitute approximately 61% of our workforce. In the past five years, the percentage of women in officer positions grew from 25% to 34% with additional growth in all people-leader positions from 51% to 55%. Diversity in people-leader positions grew from 16% to 20% and diversity in officer positions grew from 6% to 10%.
Compensation and Benefits. We invest in our employees’ development and well-being and place a focus on providing a competitive total rewards package that includes the following:
•Base salaries that are consistent with position, skill level, experience and location. Base salaries are reviewed annually and have an opportunity to be increased based on performance. With the current competitive talent market, we routinely review critical positions against the market and adjust as necessary.
•Employees are eligible for health benefits, health savings/flexible spending accounts, paid and unpaid leaves – including tenure-based paid time off and floating holidays - a 401(k) plan with a 4% company match, company-paid life insurance and disability/accident coverage, and dental and vision insurance
•Our employees’ personal well-being and professional development are critical to our long-term success. We provide all employees with the opportunity for paid volunteer time, a strong Employee Assistance Program to support individuals on a variety of topics impacting them, access to wellness coaching, health risk assessments, and onsite gyms.
Development and Training. American National is committed to supporting the advancement of all employees through formal and informal learning opportunities, all of which are driven by our company goals, values and culture initiatives. All employees have opportunities to increase their insurance knowledge through certifications. The company partners with LOMA (Life Office Management Association) and The Institutes (Risk & Insurance Knowledge Group) to further employee education and professional development.
Employee Health and Welfare. During the COVID-19 pandemic, American National has devoted key resources to make employee health and safety a top priority. A majority of the workforce has transitioned to a hybrid work model that combines on-premise and remote work. This approach has reduced the daily volume of people on-site and has created a more flexible environment for employees. These efforts are having a positive impact as reflected in recent employee engagement survey results. As we proceed through the pandemic, we believe employee safety, productivity and retention are vital to meeting important business goals and objectives. Refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional discussion on management’s response to COVID-19.
Succession Planning. Succession planning is part of a larger talent management process which feeds organizational strategy to capitalize on the full potential of American National leaders. The talent management process touches on all key human resource areas of the employee life cycle and is aimed at retaining and growing high potential leaders, increasing performance and engagement, supporting internal mobility and future organizational structure.
Available Information
We file periodic and current reports, proxy statements and other information with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy statements, and other information regarding issuers that file electronically with the SEC, including us.
Our press releases, financial information and reports filed with the SEC (for example, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those forms) are also available online through www.americannational.com. The reference to our website does not constitute the incorporation by reference of information contained at such website into this, or any other, report. Copies of any documents on our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC.
We are exposed to numerous risk factors that individually or in the aggregate could cause actual results to differ materially from recent results or anticipated future results. The following discussion details the material risk factors to our Company. While our enterprise risk management framework contains various strategies, processes, policies and procedures to address these risks and uncertainties, we cannot be certain that these measures will be implemented successfully in all circumstances. In addition, we could experience risks that we failed to identify, or risks of a magnitude greater than expected. Readers are advised to consider all of these factors along with the other information included in this 2021 Annual Report, including the important factors relating to the Merger set forth under the caption "Caution Regarding Forward-Looking Statements" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and to consult any further disclosures we make on related subjects in our filings with the SEC.
Economic and Investment Market Risk Factors
Our results of operations are materially affected by economic and political conditions in the U.S. and elsewhere. The strength and sustainability of economic activity is inherently uncertain. Factors such as unemployment, workforce participation levels, inflation, domestic political uncertainty and strife, geopolitical and international trade issues, energy prices, stagnant or declining family incomes, consumer confidence and spending, and increased student and consumer debt can adversely affect the economy and demand for our products. Unfavorable economic developments could adversely affect us if our customers have less need for insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. Challenging economic conditions may impair the ability of our customers to pay premiums as they come due. These risks are exacerbated by the ongoing COVID-19 pandemic.
The low-interest rate environment is a challenge for life and annuity insurers as the spreads on deposit-type contracts remain narrow, especially as interest rates have approached 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 these in-force blocks of business. In previous years, we reduced the guaranteed minimum crediting rates on new fixed annuity contracts, which has afforded us the flexibility to respond to the unusually low-interest rate environment. We have also reduced crediting rates on in-force contracts, where permitted to do so. These actions help mitigate the adverse impact of low interest rates on the profitability of these products, although sales volume may 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 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.
Interest rates have a significant impact on our business and on consumer demand for our products. When interest rates rise, the value of our investment portfolio may decline due to decreases in the fair value of our fixed maturity securities. In addition, increasing rates on other insurance or investment products offered by competitors can lead to higher surrenders by our customers at a time when fixed maturity investment asset values are lower. We may react to market conditions by increasing crediting rates, which narrows our “spread,” or the difference between the amounts we earn on investments and the amount we must pay under our contracts. Decreasing interest rates also can adversely affect our spreads, particularly with interest-sensitive life insurance and fixed annuities. An environment of persistently low (or lower) interest rates, as in recent years, compounds this spread compression. Further, when market interest rates decrease or remain at relatively low levels, prepayments and redemptions affecting our investment securities and mortgage loan investments may increase as issuers and borrowers seek to refinance at a lower rate. Proceeds from maturing, prepaid or sold bonds or mortgage loan investments may be reinvested at lower yields, reducing our spread. Our ability to decrease product crediting rates in response may be limited by market and competitive conditions and by regulatory or contractual minimum rate guarantees. While we use ALM processes to mitigate the effect on our spreads of changes in interest rates, they may not be fully effective. See the Risk Management discussion in Part I, Item 1, Business above and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — General Trends below for further details about interest rates and our ALM processes.
The interest rate environment affects estimated future profit projections, which could impact the amortization of our deferred policy acquisition costs ("DAC") assets and the estimates of policyholder liabilities. Significantly lower future estimated profits may cause us to accelerate the amortization of DAC or require us to establish additional policyholder liabilities, thereby reducing earnings. We periodically review assumptions with respect to future earnings to ensure they remain appropriate considering the current interest rate environment.
ITEM 1A. RISK FACTORS — (Continued)
Low interest rates are also challenging for property and casualty insurers. Investment income is an important element in earning an acceptable return on capital. Lower interest rates resulting in lower investment income require us to achieve better underwriting results. We have adjusted policy prices to help mitigate the adverse impact of low interest rates on our property and casualty business.
Fluctuations in the markets for fixed maturity securities, equity securities, alternative investments, and commercial real estate could adversely affect our business.Investment returns are an important part of our profitability. Substantially all investments, including our fixed maturity, equity, alternative investments, real estate, and mortgage loan investment portfolios, are subject to market and credit risks, including market volatility and deterioration in the credit or prospects of companies or governmental entities in which we invest. We could incur significant losses from such risks, particularly during extreme market events. The concentration of our investments in any particular industry, group of related industries or government issuers, or geographic area can compound these risks. Moreover, the Board of Governors of the Federal Reserve System may move further towards normalizing monetary policy from the programs of recent years that have fostered a historically low interest rate environment. In addition to resulting in higher interest rates, such a move may generate volatility in debt and equity markets. During the fourth quarter 2021, the Company sold the majority of our equity securities portfolio.
In addition to negatively affecting investment returns, equity market downturns and volatility can have other adverse effects on us. First, equity market downturns and volatility may discourage new purchases of our products that have returns linked to the performance of the equity market and may cause some existing customers to withdraw cash values or reduce investments in such products, in turn reducing our fee revenues. Second, the guarantees provided under certain products may cost more than expected in volatile or declining equity market conditions, which could negatively affect our earnings. Third, our estimates of liabilities and expenses for pension and other postretirement benefits incorporate assumptions regarding the rate used to discount estimated future liabilities and the long-term rate of return on plan assets. Declines in the discount rate or the rate of return on plan assets, both of which are influenced by potential investment returns, could increase our required cash contributions or pension-related expenses in future periods.
Some of our investments are relatively illiquid. Investments in privately placed securities, mortgage loans, and real estate, including real estate joint ventures and certain other equity interests, are relatively illiquid. If we suddenly require significant amounts of cash in excess of ordinary cash requirements, it may be difficult or not possible to sell these investments in an orderly manner for a favorable price.
Risk Factors Relating to Our Business and Industry
Major public health issues, such as the novel coronavirus identified in 2019, COVID-19, could have an adverse impact on our business and results of operations. We are continuing to closely monitor developments related to the COVID-19 pandemic to assess its impact on our business; however, due to the wide-ranging and highly uncertain nature of this event, it currently is not possible to estimate the ultimate direct and indirect impact of COVID-19 on our business, results of operations, financial condition, or liquidity with reasonable certainty. The COVID-19 pandemic has resulted in, and is expected to continue to result in, significant disruptions in economic activity and financial markets. COVID-19 has impacted us, as discussed below and elsewhere in the report, and COVID-19 or other major public health issues may further impact us in a number of ways.
As a result of COVID-19, we have incurred increased death claims and due to supply chain issues and inflation, which appear to be connected with the impact of the pandemic, we are facing increased costs associated with claims under our life, health, and commercial property and casualty insurance products. COVID-19 has directly and indirectly increased mortality. The cost of reinsurance to us for these coverages has increased and could increase further, and we may encounter decreased availability of reinsurance. With respect to our commercial property and casualty insurance business, reinsurers generally have excluded reinsurance coverage for losses attributable to COVID-19 and other communicable diseases beginning January 1, 2021. Our commercial property and casualty policies generally exclude coverage for losses attributable to communicable diseases. However, courts, legislatures or state insurance regulators could invalidate or refuse to give effect to such exclusions, forcing us to extend coverage beyond our policy language and underwriting intent. Without adequate reinsurance coverage available for such losses, the resulting impact on our commercial property and casualty business could be significant. In particular, there is much litigation in the industry regarding whether losses from business closures attributable to the COVID-19 pandemic are insured under the business interruption coverages of many commercial property and casualty insurance policies. As of February 4, 2022, we have received 321 business interruption claims related to COVID-19; all claims received have been closed without payment based on applicable exclusions. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information regarding the impact of COVID-19.
ITEM 1A. RISK FACTORS — (Continued)
Our investment portfolio has been and may continue to be adversely affected by market volatility, changes in interest rates, reduced liquidity, deteriorating capacity of our mortgage loan borrowers to meet their obligations to us, possible declining values of collateral securing our mortgage loan portfolio, and by the impact of the COVID-19 pandemic on the U.S. and global economies and the uncertainty of its outcome. Extreme market volatility may leave us unable to react to market events in a prudent manner consistent with our historical practices in dealing with more orderly markets. For additional information regarding the impact of COVID-19 to mortgage loans, see Part II, Item 8, Financial Statements and Supplementary Data —Note 5, Mortgage Loans, of the Notes to the Consolidated Financial Statements.
Our workforce, and the workforces of our vendors, service providers and counterparties, could be affected by COVID-19, which could result in an adverse impact on our ability to conduct business. We are continuing to take precautions to protect the safety and well-being of our employees while striving to provide uninterrupted service to our policyholders and claimants. Since the onset of the pandemic, we have continued to support our business operations. However, no assurance can be given that these actions will be sufficient, nor can we predict the level of disruption that will occur to our employees' ability to continue to provide customer support and service as many continue to work remotely. In addition, the increase in the number of our employees working remotely has increased certain risks to our business, including increased demand on our information technology resources and systems, greater potential for phishing and other cybersecurity attacks, and an increase in the number of points of potential attack. Any failure to manage these risks effectively and to identify and respond to any cyberattacks on a timely basis may adversely affect our business. We continue to monitor our internal controls over financial reporting for adverse impacts due to the large number of our employees working remotely. New processes, procedures, and controls may be required to respond to any changes in our business environment. Further, should any key employees become ill from COVID-19 and unable to work, our ability to operate our internal controls may be adversely impacted.
The efforts of governmental and non-governmental organizations in combating the spread and severity of COVID-19 or other major public health issues may not be effective. Further, we cannot predict how legal and regulatory responses to concerns about COVID-19 or other major public health issues will impact our business. For example, during the height of the pandemic, state insurance regulators across the country restricted our ability to cancel certain policies for non-payment. Such actions impacted our cash flows from these policies. In addition, some state insurance regulators have restricted the introduction of new communicable disease exclusions by property and casualty insurers.
Thus far, throughout the pandemic, we believe we have successfully navigated the risks associated with COVID-19 and have been able to successfully maintain our business operations. However, as the pandemic continues, the extent to which COVID-19 impacts our business, results of operations, financial condition, or liquidity will depend on future developments which remain highly uncertain.
Our actual experience could differ from our estimates and assumptions. Our product pricing includes long-term assumptions such as investment returns, mortality, morbidity (the rate of incidence of illness), persistency (the rate at which policies remain in-force), and operating expenses. Our profitability substantially depends on actual experience being consistent with or better than these assumptions. If we fail to appropriately price our insured risks, or if claims experience is more severe than we assumed, our earnings and financial condition may be negatively affected. Conversely, significantly overpriced risks may negatively impact new business sales and retention of existing business.
Our liabilities for losses are estimates of amounts needed to pay and administer incurred claims and, as such, are inherently uncertain; they do not and cannot represent exact measures of liability. Inflationary events, especially events outside of historical norms, or regulatory changes that affect the assumptions underlying our estimates can cause variability. For example, increases in costs for auto parts and repair services, construction costs, and commodities (whether as a result of market forces, tariffs or other conditions or events) result in higher losses for property damage claims. Accordingly, our liabilities for losses could prove to be inadequate to cover our actual losses and related expenses. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Reserves, for additional information.
With respect to our investments, the determination of estimates for allowances and impairments varies by investment type and is based upon our periodic evaluation of known and inherent risks associated with the respective asset class. Historical trends and assumed changes may not be indicative of future impairments or allowances. See Part II, Item 8, Financial Statements and Supplementary Data — Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Consolidated Financial Statements for further description of our evaluation of impairments.
ITEM 1A. RISK FACTORS — (Continued)
Assumptions regarding the future realization of deferred tax assets are dependent upon estimating the generation of sufficient future taxable income, including capital gains. If future events differ from our current forecasts and it is determined that deferred tax assets cannot be realized, a deferred tax valuation allowance must be established, with a charge to tax expense.
Interest rate fluctuations and other events may require us to accelerate the amortization of DAC. When interest rates rise, life and annuity surrenders and withdrawals may increase as policyholders seek to buy products with higher or perceived higher returns, impacting estimates of future profits. When interest rates fall, we would have the opposite effect. Significantly lower future profits may cause us to accelerate DAC amortization, and such acceleration could adversely affect our results of operations to the extent such amortization exceeds any surrender or other charges earned as income upon surrender and withdrawal. See also Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates, and Part II, Item 8, Financial Statements and Supplementary Data — Note 2, Summary of Significant Accounting Policies and Practices, and Note 10, Deferred Policy Acquisition Costs, of the Notes to the Consolidated Financial Statements, for additional information.
Our business operations depend on our ability to appropriately distribute, execute and administer our policies and claims. Our primary business is writing and servicing life, annuity, property and casualty, and health insurance for individuals, families and businesses. 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 a negative effect on operations and reputation, particularly if such problems or discrepancies are replicated through multiple policies.
Our financial strength ratings could be downgraded. Various Nationally Recognized Statistical Rating Organizations (“NRSROs”) publish financial strength ratings as their opinion of an insurance company’s creditworthiness and ability to meet policyholder and contractholder obligations. As with other rated companies, our ratings could be downgraded at any time and without any notice by any NRSRO. A downgrade or an announced potential downgrade of our financial strength ratings could have multiple adverse effects on us including:
•reducing new sales of insurance and annuity products or increasing the number or amount of surrenders and withdrawals;
•affecting our relationships with our sales force, independent sales intermediaries, and credit counterparties;
•requiring us to offer higher crediting rates or greater policyholder guarantees on our insurance products in order to remain competitive; and
•affecting our ability to obtain reinsurance at reasonable prices.
It is likely that the NRSROs will continue to apply a high level of scrutiny to financial institutions, including us and our competitors, and may adjust the capital, risk management and other requirements employed in the NRSRO models for maintenance of certain ratings levels.
Advances in medical technology may adversely affect our business. Genetic testing and diagnostic imaging technology is advancing rapidly. Increases in the prevalence, availability (particularly in the case of direct to consumer genetic testing) and accuracy of such testing may increase our adverse selection risk, as people who learn that they are predisposed to certain medical conditions associated with reduced life expectancy may be more likely to purchase and maintain life insurance. Conversely, people who learn that they lack genetic predisposition to conditions associated with reduced life expectancy may forego the purchase of life insurance, or permit existing policies to lapse, and may be more likely to purchase certain annuity products. Our access to and ability to use medical information, including the results of genetic and diagnostic testing, that is known to our prospective policyholders is important to our underwriting of life insurance and annuities. Some states restrict insurers’ access and use of genetic information, and similar additional regulations and legislation may be adopted. Such regulation and legislation likely would exacerbate adverse risk selection related to genetic and diagnostic testing.
In addition to earlier diagnosis and knowledge of disease risk, medical advances may increase overall health and longevity. If this were to occur, the duration of payments made under certain of our annuity products would be extended beyond our actuarial assumptions, reducing the profitability of such business. This may require us to modify our assumptions, models or reserves.
ITEM 1A. RISK FACTORS — (Continued)
Information Technology Risk Factors
We may be unable to maintain the availability and performance of our systems and to safeguard our data and our customers' confidential information and privacy. We rely on the availability, reliability, and security of internet technologies, our internal networks, information-processing infrastructure, system platforms, business applications and third-party providers (collectively “systems”) to operate our businesses. We use these systems to receive, store, process, retrieve, calculate and evaluate customer and company information, including to provide insurance quotes, process premium payments, administer our products, provide customer support, process claims and make changes to existing policies, among many other functions. We also rely on systems for investment management, financial reporting and data analysis to support our policyholder reserves and other actuarial estimates.
We have strategies and processes to secure, maintain and enhance our existing internal networks, technology and processing infrastructure and our information systems, including updating or replacing certain information systems to keep pace with advancing technology, changing customer preferences and expectations, and increasingly stringent industry and regulatory standards. However, despite these efforts, we still may experience system failures, extended unavailability or other outages, or damage or destruction to internal or external networks or systems, whether caused by intentional or unintentional acts or events, as well as difficulties arising from the implementation of system-security vulnerability patches, third-party system upgrades, and new systems and technologies, any of which could compromise our ability to perform critical functions on a timely basis. For instance, if these systems were inaccessible or inoperable, or if they fail to function properly, the resulting disruptions may impede or interrupt our business operations, cause misstated or unreliable financial data, or impact the effectiveness of our internal controls over financial reporting.
In certain lines of our business, our information technology and telecommunication systems interface with and rely upon third-party services, over which we have no direct control, including providers of computing infrastructure platforms or externally hosted systems commonly known as the “cloud.” We are highly dependent on our ability to access these external services for necessary business functions, such as acquiring new business, managing existing business, paying claims, and ensuring timely and accurate financial reporting. If we do not effectively develop, implement and monitor these relationships, if third-party providers do not perform as anticipated, if technological or other problems are incurred with a transition, or if outsourcing relationships relevant to our business process functions are terminated or otherwise interrupted, we may not realize expected productivity improvements or cost-efficiencies, and we may experience operational difficulties, increased costs and a loss of business.
We receive and transmit legally protected information with and among customers, agents, financial institutions and selected third-party vendors and service providers, including personally identifiable information and non-public information. We have invested significant time and resources towards preventing and mitigating the risks associated with unauthorized access to this data through security penetration and vulnerability assessments, vulnerability patching processes and several layers of data intrusion and detection protection technologies, designs and authentication capabilities. However, because the techniques used to obtain unauthorized access, disable or degrade service, deposit ransomware or sabotage systems constantly evolve and may be difficult to detect for long periods of time, we may be unable to implement adequate preventive measures. In addition, hardware, software or applications we develop or procure from third parties may contain vulnerability defects in design or manufacture or other problems that could unexpectedly compromise information security or access thereto. Consequently, our cybersecurity efforts may not be effective against all security threats and breach attempts in light of increasingly complex and advanced persistent threat techniques and the evolving sophistication of individual and nation state-sponsored cyber-attacks. A breach, whether from external or internal sources, or from the theft or loss of equipment, can result in access, viewing, misappropriation, altering or deleting information in our or a third-party’s systems on which we rely, including customers’, agents’ and employees’ sensitive personal and financial information and our proprietary business information.
ITEM 1A. RISK FACTORS — (Continued)
Like other companies, we have experienced threats to our data and systems through phishing campaigns, malware, ransomware and other fraudulent and deceptive activities, and we have experienced certain incidents of unauthorized access to our data and systems. In addition, spoofing attacks have been carried out by individuals impersonating customers, which have resulted in unauthorized withdrawals from a limited number of customer accounts. Such withdrawals were refunded by us, and we believe that implemented business process changes have helped mitigate the impact of new attacks. We have also implemented technology to further assist in the identification of these bad actors. These various threats, attacks and incidents that have occurred to date have not been material to our operations and are not expected to be material to our operations based on information presently known to management. However, any significant attacks, unauthorized access or disclosures, disruptions or other security breaches, whether affecting us or third parties, could result in substantial business disruption and consequences, including without limitation, costs of repairing or replacing systems, increased security costs, costs of customer notifications and credit monitoring services, lost revenues, litigation, regulatory action, fines and penalties, and harm to customer and producer confidence and our reputation. While we have purchased cybersecurity risk insurance and intend to assess the adequacy of this insurance annually, this insurance may not be sufficient in scope or amount to cover all of our losses from breaches of our data.
Our failure to complete and implement technology initiatives in a timely manner could result in the loss of business and incurrence of software development costs that may not be recoverable. Digital strategies, data, and analytics play an increasingly important role in the insurance industry. We may initiate multi-year technology projects from time to time to enhance the client experience, operations or replace aging systems. While technology developments can enhance the utility and value of data and analytics, deliver on client expectations, streamline business processes and ultimately reduce the cost of operations, technology initiatives can also present significant economic and organizational challenges, short-term costs and implementation risks. In addition, projections of expenses and implementation schedules could change materially and costs could escalate over time, while the ultimate utility of a technology initiative could deteriorate over time.
Due to the highly-regulated nature of the insurance industry, we also face increasing costs and competing time constraints in adapting technology to meet compliance requirements of new and proposed regulations. The costs to develop and implement systems to replace our aging systems and to comply with new regulatory requirements as needed over time are expected to be significant. Due to the complexities involved, there can be no assurances that new multi-year projects will be successful and that the costs incurred to develop and implement replacement systems will be recoverable. Furthermore, failure to implement replacement systems in a timely manner could result in loss of business from our delay or inability to design and introduce new insurance systems and solutions that meet emerging consumer needs and competitive trends.
Catastrophic Event Risk Factors
We may incur significant losses resulting from catastrophic events. Our property and casualty operations are exposed to catastrophes caused by natural events, such as hurricanes, tornadoes, wildfires, droughts, earthquakes, snow, hail and windstorms, and manmade events, such as terrorism, riots, explosions, hazardous material releases, and utility outages. Our life and health insurance operations are 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. Our investment operations are exposed to catastrophes as a result of direct investments and mortgages related to real estate.Our operating results may vary significantly from one period to the next since the likelihood, timing, severity, number or type of catastrophe events cannot be accurately predicted. Our losses in connection with catastrophic events are primarily a function of the severity of the event and the amount of our exposure in the affected area.
Climate change, and increasing regulation with respect to climate change, may adversely impact our results of operations. There are concerns that the increased frequency and severity of weather-related catastrophes and other losses, such as hurricanes and wildfires, incurred by the industry in recent years are indicative of changing weather patterns, whether as a result of global climate change caused by human activities or otherwise, which could cause such events to persist. Increased weather-related catastrophes would lead to higher overall losses, which we may not be able to recoup, particularly in a highly regulated and competitive environment, and higher reinsurance costs. Increased weather-related catastrophes could also result in increased credit exposure to reinsurers and other counterparties we do business with. Certain catastrophe models assume an increase in frequency and severity of certain weather or other events, which could result in a disproportionate impact on insurers with certain geographic concentrations of risk. This would also likely increase the risks of writing property insurance in coastal areas or areas susceptible to wildfires or flooding, particularly in jurisdictions that restrict pricing and underwriting flexibility. The threat of rising seas or other catastrophe losses as a result of climate change may also cause property values in coastal or such other communities to decrease, reducing the total amount of insurance coverage that is required.
ITEM 1A. RISK FACTORS — (Continued)
In addition, climate change could have an impact on assets in which we invest, resulting in realized and unrealized losses in future periods that could have a material adverse impact on our results of operations and/or financial position. Such investment risks can include, but are not limited to, changes in supply and demand characteristics for fossil fuels, advances in low-carbon technology and renewable energy development, effects of extreme weather events on the physical and operating exposure of industries and issuers, and the transition that issuers make towards addressing climate risk in their own businesses. It is not possible to foresee with certainty which, if any, assets, industries or markets will be materially and adversely affected, nor is it possible to foresee the magnitude of such effect.
Moreover, we cannot predict how legal, regulatory and social responses to concerns about climate change will impact our business or the value of our investments. We are subject to complex and changing regulation and public policy debates relating to climate change that are difficult to predict and quantify and that may have an adverse impact on our business. For example, in November of 2021, NYDFS finalized its “Guidance for Domestic Insurers on Managing the Financial Risks from Climate Change.” In general, the guidance provides that a New York-domiciled insurer should integrate consideration of climate risks into its governance structure at the insurer or group level, consider the impact of climate-related factors on its business decisions using time horizons that are tailored to the insurer and its activities, incorporate climate risks into its existing financial risk management framework, use scenario analysis to inform business strategies and risk identification and assessment, and disclose its climate risks and engage with the Task Force on Climate-related Financial Disclosures and other initiatives when developing disclosure approaches. In addition, the NAIC and federal agencies, including the SEC and Federal Insurance Office, are increasingly focused on assessment and disclosure of climate change risks. Governmental guidance or regulations relating to climate change, or our own leadership decisions implemented as a result of assessing the impact of climate change on our business, may increase our costs of doing business.
Marketplace Risk Factors
Our future results are dependent in part on successfully operating in insurance and annuity industries that are highly competitive with regard to customers, employees and producers. Strong competition for customers has led to increased marketing and advertising by our competitors, many of whom have well-established national reputations and greater financial and marketing resources, as well as the introduction of new insurance products and aggressive pricing. These competitive pressures could result in increased pricing pressures on a number of our products and services, particularly as competitors seek to win market share, and may limit our ability to maintain or increase our profitability. Because of its relatively low cost of entry, the Internet has emerged as a significant place of new competition, both from existing competitors and new competitors. In addition, product development and life-cycles have shortened in many product segments, leading to intense competition with respect to product features.
We 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, customer expectations are evolving as technology advances and consumers become accustomed to enjoying tailored, easy to-use-services and products from various industries. This is reshaping and raising consumer expectations when dealing with insurance. We are addressing these changing consumer expectations by investing in technology with a particular focus on consumer-facing sales and service platforms, by internally promoting a strategically-focused innovative culture initiative, and by creating internal forums to drive next generation solutions based on consumer insights. However, if we cannot effectively respond to increased competition and such increased consumer expectations, we may not be able to grow our business or we may lose market share.
We compete with other insurers for producers primarily on the basis of our financial position, reputation, longevity, support services, compensation, product features and pricing. We may be unable to compete for producers with insurers that adopt more aggressive pricing or compensation, that offer a broader array of products or packages of products, or that have extensive promotional and advertising campaigns. Attracting qualified individuals and retaining existing employees continues to be a challenge for employers. Businesses have become extremely competitive in the ever-changing landscape of the talent marketplace. As a result, it is an increasing challenge to distinguish us as an employer of choice.
ITEM 1A. RISK FACTORS — (Continued)
Our supplemental health business could be negatively affected by alternative healthcare providers or changes in federal healthcare policy. Our Medicare Supplement business is impacted by market trends in the senior-aged healthcare industry that provide alternatives to traditional Medicare such as HMO and other managed care or private plans. The success of these alternative healthcare solutions for seniors could negatively affect the sales and premium growth of traditional Medicare Supplement and impact our ability to offer such products. Additionally, other supplemental products in our portfolio, including Short-Term Care and Limited Benefit plans could be impacted by future federal and state legislation. These products are excluded from coverage requirements in the Healthcare Act. They are designed to fill the niche for consumers unable to get full coverage at any given time. State and federal legislation, either through Congress or the U.S. Department of Health & Human Services ("HHS"), could impact marketing by enacting laws and regulations restricting these products in the market. Changes to healthcare policy could limit the ability to renew/rewrite, impose limitations on the length of coverage periods or limit benefit amounts available in plans.
Litigation and Regulation Risk Factors
Litigation may result in significant financial losses and harm our reputation. Plaintiffs have brought and may bring lawsuits, including class actions, against us relating to, among other things, sales or underwriting practices, alleged agent misconduct, product design, product disclosure, product administration, fees charged, denial or delay of claims and benefits, product suitability, claims-handling practices (including the permitted use of aftermarket, non-original equipment manufacturer auto parts), loss valuation methodology, refund practices, employment and producer contracting matters, and breaches of duties to customers. Plaintiffs may seek very large or indeterminate amounts, including punitive and treble damages, and our reputation could be harmed. The damages claimed and the amount of any probable and estimable liability, if any, may remain unknown for substantial periods of time. Even when successful in the defense of such actions, we incur significant attorneys’ fees, direct litigation costs and substantial amounts of management time that otherwise would be devoted to our business.
We are subject to extensive regulation, and potential further regulation may increase our operating costs, restrict our ability to innovate and limit our growth. We are subject to extensive insurance laws and regulations that affect nearly every aspect of our business. We are also subject to additional laws and regulations administered and enforced by a number of different governmental authorities, such as state securities and workforce regulators, the SEC, the Internal Revenue Service (“IRS”), FINRA, the U.S. Department of Justice, the U.S. Department of Labor (“DOL”), the U.S. Department of Housing and Urban Development (“HUD”), HHS, the Federal Trade Commission and state attorneys general, each of which exercises a degree of interpretive latitude. We face the risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may conflict with that of another regulator or enforcement authority or may change over time to our detriment. Regulatory investigations and examinations, which can be broad and unpredictable, may raise issues not identified previously and could result in new legal actions against us and industry-wide regulations that could adversely affect us. Further, we are experiencing increasing information requests from regulators without corresponding direct regulation being applicable to us, on issues such as climate change, diversity and our investments in certain companies or industries. Responding to such requests adds to our compliance costs.
The laws and regulations applicable to us are complex and subject to change, and compliance is time consuming and personnel-intensive. Changes in these laws and regulations, or interpretations by courts or regulators, may materially increase our costs of doing business and may result in changes to our practices that may limit our ability to grow and improve our profitability. Regulatory developments or actions against us could have material adverse financial effects and could harm our reputation. 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.
ITEM 1A. RISK FACTORS — (Continued)
As insurance industry practices and legal, judicial, social, and other conditions outside of our control change, unexpected issues related to claims and coverage may emerge. These changes may include modifications to long established business practices or policy interpretations, which may adversely affect us by extending coverage beyond our underwriting intent or by increasing the type, number, or size of claims. For example, in January 2019, NYDFS issued Circular Letter No. 1, in which the department set out its views concerning the use of external consumer data sources in the underwriting of life insurance. NYDFS contends that external data sources can be unreliable and that many are not subject to regulatory oversight. Circular Letter No. 1 further highlights two particular areas of immediate concern for NYDFS involving the use of external data sources by life insurers. First, the department states that the use of external data sources has a significant potential to negatively impact protected classes of consumers in violation of state and federal anti-discrimination laws, and that insurers should not use an external data source unless the insurer can prove that such source does not violate anti-discrimination laws. Second, NYDFS contends that an insurer’s use of external data sources is often accompanied by a lack of transparency to consumers, which may implicate unfair trade practice law. Other states may undertake regulatory efforts similar to Circular Letter No. 1. For example, on July 6, 2021, the governor of Colorado signed Senate Bill 21-169, which also regulates an insurer’s use of external consumer data and information sources. In addition, the NAIC formed a committee on race and insurance which is focused on underwriting practices that may be an unintentional proxy for discrimination. As a result of these regulatory efforts, there is a great deal of uncertainty whether traditional underwriting criteria will be restricted by new state laws or regulations. Such regulatory efforts may significantly hinder our use of technological and innovative advances to underwrite and price life insurance accurately and deter the use of what is commonly called “big data” in the underwriting of property and casualty insurance.
Federal regulatory changes and initiatives have a growing impact on us. For example, certain federal regulation may impact our property and casualty operations. In 2013, HUD finalized a regulation under the Fair Housing Act that applies to home lenders, landlords and other housing providers (the "2013 Rule"). Such regulation prohibits lending and housing practices having a disparate impact against protected classes, even if there is no intent to discriminate. Various legal challenges to this regulation were pursued, culminating in a decision of the U.S. Supreme Court in 2015 generally viewed as favorable to the regulation. In September 2020, HUD adopted a regulation that substantially revises the 2013 Rule, making it more difficult for plaintiffs to bring disparate impact claims under the Fair Housing Act (the "2020 Rule"). Prior to the 2020 Rule’s effective date, the U.S. District Court for the District of Massachusetts issued a preliminary injunction to stay HUD’s implementation and enforcement of the 2020 Rule. On June 25, 2021, HUD reconsidered the 2020 Rule and instead proposed to recodify the 2013 Rule. While the recodification of the 2013 Rule is not yet final, finalization appears likely. There is concern among property and casualty insurers that such regulation may impact property and casualty industry underwriting practices and could be applied in a manner that adversely impacts price differentiation for homeowners’ policies using traditional risk selection analysis. Such an outcome, could increase litigation costs, force changes in underwriting practices, and impair our ability to write homeowners business profitably. In addition, Congress or states may enact legislation affecting insurers’ ability to use credit-based insurance scores as part of the property and casualty underwriting or rating process, which also could force changes in underwriting practices and impair our property and casualty operations’ ability to write homeowners business profitably.
There have been federal efforts to change the standards of care applicable to broker-dealers and investment advisers. We have previously reported that in April 2016, the DOL issued a regulation that significantly expanded the range of activities considered to be fiduciary investment advice under the Employee Retirement and Income Security Act of 1974 ("ERISA") and the Internal Revenue Code of 1986 (the “fiduciary rule”). The fiduciary rule would have applied ERISA’s fiduciary standard to many insurance agents, broker-dealers, advisers and others not previously subject to the standard when they sell annuities through IRA’s and qualified retirement plans. The fiduciary rule ultimately was vacated on June 21, 2018, by the U.S. Court of Appeals for the Fifth Circuit, ending the rule's effectiveness. Effective February 16, 2021, the DOL adopted a rule that formally reinstated the investment advice fiduciary definition that existed before the 2016 fiduciary rule was enacted and that included new interpretations that expanded the definition’s reach to include advice to roll over assets from a qualified plan to an IRA. The new regulation also included certain new exemptions. Nevertheless, there are indications that the DOL may propose an alternative fiduciary rule under the Biden Administration.
In addition, the SEC adopted "Regulation Best Interest," which was effective June 1, 2020 and addresses the standards of care applicable to broker-dealers and investment advisers. Regulation Best Interest requires a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities. The rule also requires broker-dealers and investment advisers to provide retail customers a Client Relationship Summary (“Form CRS”) to disclose certain information about the nature of the customer’s relationship with their investment professional, including fees and costs associated with services and conflicts of interest the firm may have.
ITEM 1A. RISK FACTORS — (Continued)
There have also been state efforts to change the standards of care applicable to broker-dealers, investment advisers and insurance producers, including through the NAIC's Suitability in Annuity Transactions Model Regulation and the “Suitability and Best Interests in Life Insurance and Annuity Transactions” regulation adopted by the NYDFS. The NAIC model regulation places suitability responsibilities on insurance companies in the sale of fixed and indexed annuities, including responsibilities for training agents. The NAIC recently has adopted revisions to this model regulation that would further elevate the standard of care for annuity sales and harmonize it with the SEC's new Regulation Best Interest. The revised model has been adopted in some form by many of the states in which we do business, including Texas, and is pending or under consideration in several others. The NYDFS regulation addresses the duties and obligations of insurers and their producers and provides that any transactions with respect to life insurance policies and annuity contracts delivered or issued for delivery in New York must be in the best interest of the consumer and appropriately address the insurance needs and financial objectives of the consumer at the time of the transaction. It further requires that any recommendation must be based on an evaluation of the suitability information of the consumer and reflect the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the prevailing circumstances. Further, a producer’s compensation and other incentives must not influence his or her recommendations. The New York regulation became effective for annuity products on August 1, 2019 and for life insurance products on February 1, 2020.
All or any of the above-described federal and state efforts to address the standards of care applicable to broker-dealers, investment advisers and insurance producers could materially affect how our life insurance and annuity products are designed, marketed and serviced. We may find it necessary to change our producer compensation practices, limit the assistance producers can provide to contract owners, replace or engage additional producers, or otherwise change how we design and support sales of our annuities. Any of these regulatory or legislative measures, or judicial rulings regarding the same, or consumer and producer reaction to such measures, could have a material adverse impact on our ability to sell annuities and certain other products and to retain in-force business.
Lastly, international standards continue to emerge in response to the globalization of the insurance industry and evolving standards of regulation, privacy, solvency measurement and risk management. Any international conventions or mandates that directly or indirectly impact or influence the nature of U.S. regulation or industry operations could negatively affect us.
For further discussions of the kinds of regulation applicable to us, see Part I, Item 1, Business — Regulations Applicable to Our Business section.
Changes in tax laws could adversely affect our business. Under current U.S. federal and state income tax laws, certain products we offer, primarily life insurance and annuities, receive tax treatment designed to encourage consumers to purchase these products. This treatment may encourage some consumers to select our products over non-insurance products. The U.S. Congress from time to time may consider legislation that would change the taxation of insurance products and/or reduce the taxation of competing products. Such legislation, if adopted, could materially change consumer behavior, which may harm our ability to sell such products and result in the surrender of some existing contracts and policies. In addition, changes in the U.S. federal and state estate tax laws could negatively affect the demand for the types of life insurance used in estate planning. Uncertainty regarding the tax structure in the future may also cause some current or future purchasers to delay or indefinitely postpone the purchase of products we offer. Finally, changes in federal corporate income tax laws could adversely affect the federal income taxation of our ongoing operations and have a material adverse impact on our business and results of operations.
New accounting rules or changes to existing accounting rules could negatively impact our business. We are required to comply with GAAP. A number of organizations are instrumental in the development and interpretation of GAAP, such as the SEC, the Financial Accounting Standards Board (“FASB”), and the American Institute of Certified Public Accountants. GAAP is subject to review by these organizations and others and is, therefore, subject to change in ways that could change the current accounting treatments we apply.
We also must comply with Statutory Accounting Principles (“SAP”) in our insurance operations. SAP and various components of SAP (such as actuarial reserving methodology) are subject to review by the NAIC and its taskforces and committees, as well as state insurance departments.
ITEM 1A. RISK FACTORS — (Continued)
Future changes to GAAP or SAP could impact our product profitability, reserve and capital requirements, financial condition or results of operations. For example, in August 2018, the FASB released Accounting Standards Update ("ASU") 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, which is expected to result in significant changes to accounting and disclosures for long-duration insurance contracts, which primarily relates to our life and annuity products as well as certain health products, among others. See Part II, Item 8, Financial Statements and Supplementary Data — Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Consolidated Financial Statements for a detailed discussion regarding the impact of the recently issued accounting pronouncements and the future adoption of new accounting standards on the Company.
Reinsurance and Counterparty Risk Factors
Reinsurance may not be available, affordable, adequate or collectible to protect us against losses.As part of our risk management strategy, we purchase reinsurance for certain risks that we underwrite. Market conditions, catastrophes, significant public health events (such as the COVID-19 pandemic) and geo-political events beyond our control, including the continued threat of terrorism, influence the availability and cost of reinsurance for new business. In certain circumstances, the price of existing reinsurance contracts may also increase. Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Our reinsurers may not pay the reinsurance recoverables owed to us or they may not pay these balances on a timely basis.
The counterparties to derivative instruments we use to hedge our business risks could default or fail to perform. We enter into derivative contracts, such as options, with a number of counterparties to hedge various business risks. If our counterparties fail or refuse to honor their obligations, our economic hedges of the related risks will be ineffective. Such counterparty failures could have a material adverse effect on us. See Part II, Item 8, Financial Statements and Supplementary Data — Note 7, Derivative Instruments, of the Notes to the Consolidated Financial Statements for additional details.
Risk Factors Relating to Our Corporate Structure and Ownership of Our Common Stock
We depend on dividends from our operating subsidiaries to pay dividends to our stockholders. The amount of dividends paid by our insurance subsidiaries is limited by law. American National Group, Inc. (ticker symbol ANAT) is a Delaware holding company with no business operations of its own. Its only significant assets are the capital stock of its subsidiaries. As a result, ANAT relies on funds from its current subsidiaries and any subsidiaries that it may form or acquire in the future to pay dividends to stockholders and to meet its obligations.
The amount of dividends that ANAT’s insurance company subsidiaries can pay is restricted under applicable insurance law and regulations. These restrictions are based, in part, on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior regulatory approval. Dividends in larger amounts, or extraordinary dividends, are subject to approval by the insurance commissioner of the relevant state of domicile. For example, restrictions applicable to Texas-domiciled life insurance companies like ANICO limit the payment of dividends to the greater of the prior year’s statutory net gain from operations before realized capital gains, or 10% of prior year statutory surplus, in each case determined in accordance with statutory accounting principles.
From time to time, the NAIC has considered, and may in the future consider, proposals to further limit dividend payments that an insurance company may make without regulatory approval. No assurance is given that more stringent restrictions will not be adopted from time to time by the State of Texas or other states in which our insurance subsidiaries are domiciled, and such restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to ANAT by its insurance company subsidiaries without prior approval from regulatory authorities.
We are controlled by a small number of stockholders. As of December 31, 2021, the Moody Foundation, a charitable trust, beneficially owned approximately 22.8% of our common stock. In addition, Moody National Bank, in its capacity as trustee or agent of various accounts, had the power to vote approximately 47.7% of our common stock as of such date. As a result, these institutions have the ability to exercise a controlling influence over matters submitted for stockholder approval, including the composition of our Board of Directors and extraordinary transactions, such as the Merger Agreement with Brookfield Reinsurance. It may also adversely affect the trading price of our common stock if controlling stockholders sell a significant number of shares or if investors perceive disadvantages in owning stock in a company controlled by a small number of stockholders.
ITEM 1A. RISK FACTORS — (Continued)
Our Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all disputes between our stockholders and us, to the fullest extent permitted by law. Such provision could limit the ability of our stockholders to obtain a favorable judicial forum for disputes with us or our directors, officers, stockholders, employees or agents. ANAT’s Certificate of Incorporation provides that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for the following: any derivative action or proceeding brought on behalf of ANAT; any action asserting a claim of breach of a fiduciary duty owed to ANAT or ANAT’s stockholders by any of ANAT’s directors, officers or other employees; any action asserting a claim against ANAT arising pursuant to any provision of the Delaware General Corporation Law or ANAT’s organizational documents; or any action asserting a claim against ANAT that is governed by the internal affairs doctrine.
This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits and increase the costs with respect to such claims. With respect to the federal securities laws and the rules and regulations thereunder, this provision does not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, which provides for the exclusive jurisdiction of the federal courts with respect to such claims. This provision could apply, however, to a suit that falls within one or more of the categories enumerated in the exclusive forum provision and asserts claims under the Securities Act of 1933, as amended (the “Securities Act”), because Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by such act or the rules and regulations thereunder. There is uncertainty as to whether a court would enforce the exclusive forum provision with respect to claims under the Securities Act, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find the exclusive forum provision contained in our Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition.
General Risk Factors
We are subject to environmental, social and governance (“ESG”) risks that could adversely affect our reputation, the market price of our common stock and/or our business, operations and earnings. Governments, investors, rating agencies, customers and the general public are increasingly focused on the ESG practices and disclosures of companies. In addition, certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed scores and ratings to evaluate companies based on ESG metrics. Currently, there are no universal standards for such scores or ratings, but the importance of ESG evaluations is becoming more broadly accepted by investors and shareholders. Investors have begun to consider how issuers are addressing ESG matters when making investment decisions. Any negative publicity regarding ESG or low ESG scores or ratings, or shifts in investing priorities relating to ESG, may adversely affect the market price of our common stock, our ability to attract and retain customers and employees, and/or our business, operations and earnings if investors, shareholders, ratings agencies or other stakeholders determine that we have not adequately considered and addressed ESG matters. In addition, regulatory efforts with respect to ESG matters, including climate change, may increase our costs of doing business.
Employee and agent error and misconduct may be difficult to detect and prevent and may result in significant losses. The actions or inaction of our employees, agents, producers, managing general agents, managing general underwriters and third-party administrators could result in losses arising from, among other things, fraud, errors, failure to properly document transactions, failure to obtain proper internal authorization, failure to maintain effective internal controls, or failure to comply with underwriting guidelines or regulatory requirements. It is not always possible to deter or prevent misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, which may adversely impact our Company. It is necessary for us to maintain effective internal controls over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures to provide timely and reliable financial and other information. However, we cannot be certain that we will be able to prevent future material weaknesses or that there are no existing, but as yet undiscovered, weaknesses that we need to address. A failure to maintain adequate internal controls may adversely affect our ability to provide information that accurately reflects our financial condition on a timely basis. This could cause an adverse effect on our business, results of operations and the market price of our stock if investors, customers, rating agencies, regulators or others lose confidence in our reported financial and other information, if we become subject to SEC or other regulatory review and sanctions, or if we become subject to litigation that results in substantial fines, penalties or liabilities.
ITEM 1A. RISK FACTORS — (Continued)
The occurrence of events that are unanticipated in our business continuity and disaster recovery planning could impair our ability to conduct business effectively.Our corporate headquarters are located in Galveston, Texas, on the coast of the Gulf of Mexico and in the past has been impacted by hurricanes. Our League City, Texas offices are designed to support our operations and service our policyholders in the event of a hurricane or other natural disaster affecting Galveston. The primary offices of our property and casualty insurance companies are in Springfield, Missouri and Glenmont, New York, which helps to insulate these facilities and their operations from coastal catastrophes. While we periodically test our business continuity and disaster recovery plans, the severity, timing, duration or extent of an event may be unanticipated by such plans, which could result in an adverse impact on our ability to conduct business. In the event a significant number of our employees or agents were unavailable or unable to work following such a disaster, or if our computer-based data processing, transmission, storage and retrieval systems were affected, our ability to effectively conduct our business could be compromised.
See also Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for additional details regarding certain risks that we face.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
We own and occupy our corporate headquarters in Galveston, Texas. We also own and occupy the following properties that are materially important to our operations:
•Three buildings in League City, Texas, which are used primarily by our backup datacenter and Life, Health, and Corporate and Other segments.
•Five buildings, four in Springfield, Missouri and the other in Glenmont, New York, which are used primarily by our Property and Casualty segment.
We believe our properties are adequate and suitable for our business as currently conducted and are adequately maintained. The above does not include properties we own only for investment purposes.
ITEM 3. LEGAL PROCEEDINGS
Information required for Item 3 is incorporated by reference to the discussion under the heading “Litigation” in Part II, Item 8, Financial Statements and Supplementary Data — Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stockholder Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “ANAT.”
On December 31, 2021, our year-end closing stock price was $188.84 per share, and there were 596 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 securities issued under American National’s 1999 Stock and Incentive Plan as of December 31, 2021. The term for granting additional awards under such plan expired in 2019.
| | | | | | | | | | | | | | | | | | | | |
| | Equity Compensation Plan Information |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | | (b) | | (c) |
Plan category | | | | | | |
Equity compensation plans | | | | | | |
Approved by security holders | | — | | | $ | 80.05 | | | — | |
Not approved by security holders | | — | | | — | | | — | |
Total | | — | | | $ | 80.05 | | | — | |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES — (Continued)
Performance Graph
The following graph compares the cumulative stockholder return for our common stock for the last five years with the performance of the NASDAQ Stock Market and a NASDAQ Insurance Stock index using NASDAQ OMX Global Indexes. It shows the cumulative changes in value of an initial $100 investment on December 31, 2016, with all dividends reinvested.
Value at each year-end of a $100 initial investment made on December 31, 2016:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| American National (ANAT) | | $ | 100.00 | | | $ | 104.52 | | | $ | 105.89 | | | $ | 100.45 | | | $ | 85.46 | | | $ | 162.27 | |
| NASDAQ Total OMX | | 100.00 | | | 121.38 | | | 114.78 | | | 150.55 | | | 182.58 | | | 229.84 | |
| NASDAQ Insurance OMX | | 100.00 | | | 116.95 | | | 109.08 | | | 133.15 | | | 132.39 | | | 170.09 | |
This performance graph shall not be deemed to be incorporated by reference into our SEC filings or to constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
ITEM 6. [RESERVED]
Not applicable
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 8, Financial Statements and Supplementary Data. For comparison of 2020 to 2019, see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 4, 2021.
Introductory Note Regarding Pending Merger
On August 6, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Brookfield Asset Management Reinsurance Partners Ltd. (“Brookfield Reinsurance”), an exempted company limited by shares existing under the laws of Bermuda, and Freestone Merger Sub Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Brookfield Reinsurance (“Merger Sub”). Upon completion of the transactions contemplated by the Merger Agreement, the Company will become an indirect wholly owned subsidiary of Brookfield Reinsurance in consideration for the payment of $190.00 per share in cash, for total merger consideration of $5.1 billion.
Regulatory Approval Process. The completion of the Merger contemplated by the Merger Agreement (the “Merger”)is subject to satisfaction or waiver of certain customary closing conditions, including obtaining the required regulatory approval from the insurance authorities in Texas, Missouri, New York, Louisiana and California. The required insurance regulatory process has been moving forward consistent with our prior disclosures, and we continue to expect to complete
AMERICAN NATIONAL GROUP, INC.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
INFORMATION ABOUT OUR DIRECTORS
On July 1, 2020, American National Insurance Company (“ANICO”) completed its previously announced holding company reorganization (the “Reorganization”), which was approved by its stockholders at the Merger before the endAnnual Meeting of Stockholders held on April 23, 2020. As a result of the first halfReorganization, ANICO became a wholly owned subsidiary of 2022. However, because state insurance regulatory approval remains outstanding, the Company, cannot provide assuranceand the Merger will be completedCompany replaced ANICO as the publicly held company. The time of service on our Board of Directors (the "Board") disclosed below for each of our directors includes service on the terms or timeline currently contemplated, or at all.ANICO Board of Directors prior to the Reorganization.
Merger Agreement's Restrictions on Interim Operations.William C. Ansell, CPA (age 64) has been a member of our Board since February 2015. Principal Occupation: Partner of Ham, Langston & Brezina, LLP (accounting firm), Houston, Texas, since December 2015; Vice President and Shareholder of DRDA, PLLC (accounting firm), Galveston, Texas, from 2001 to December 2015. Member of Tremont Street Financial Group, LLC (wealth management and accounting services), Galveston, Texas since 2012; President of Ducks Unlimited de Mexico (non-profit conservation organization) since May 2019, and Treasurer from 2012 to May 2019; Past Director of Moody National Bank.
Mr. Ansell is a certified public accountant and brings to our Board his approximately forty years of experience in auditing, tax, and business and personal consulting. Mr. Ansell also holds a Series 66 (securities agent and investment adviser representative) license and a Texas general lines insurance agent’s license, which further enhance the experience and expertise he brings to our Board.
Arthur O. Dummer (age 88) was first elected to our Board in 2004. Principal Occupation: President, The Donner Company (privately owned actuarial consulting company), Salt Lake City, Utah since 1985. Past Chairman of the Board of Directors of the National Organization of Life and Health Guaranty Associations, Herndon, Virginia; Past Director of: American Community Mutual Insurance Company, Livonia, Michigan (mutual insurance company); American Underwriters Insurance Company, Wichita, Kansas; Casualty Underwriters Insurance Company, Salt Lake City, Utah; 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.
Mr. Dummer is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He has agreed to certain covenantsover sixty years of experience in the Merger Agreement restrictinginsurance industry, including service as the conductformer Chief Examiner and Actuary of the Utah Insurance Department. His extensive background in the insurance industry and his knowledge of actuarial and accounting issues are highly valued by our Board.
Irwin M. Herz, Jr. (age 81) was appointed as a director by our Board in July 2018, upon the increase in the size of the Board to ten directors. He served as an advisory director to our Board from 2004 until such appointment, and as a director from 1981 to 1983 and from 1984 to 2004. Principal Occupation: Since 1980, Partner of Greer, Herz & Adams, LLP, General Counsel to the Company; Trustee of the Three R Trusts (trusts for the benefit of the children of Robert L. Moody, Sr.).
Mr. Herz’s service as a director of numerous insurance companies, including over thirty-eight years on our Board, has provided him with extensive knowledge of the insurance industry. In addition, his background and experience as a corporate and commercial lawyer provides a wealth of knowledge and problem-solving skills to the Board.
E. Douglas McLeod (age 80) was appointed as a director by our Board in July 2018, upon the increase in the size of our Board to ten directors. He served as an advisory director to our Board from 2004 until such appointment, and as a director from 1984 to 2004. Principal Occupation: Chairman and Director of Moody Gardens, Inc. (charitable corporation); Attorney; Past Director of Development of The Moody Foundation (charitable and educational foundation) from 1982 to 2013 (retired); Director of National Western Life Group, Inc. (insurance holding company), Austin, Texas, since 2015; Director of National Western Life Insurance Company, Austin, Texas, from 1979 to 2015; Vice President and Director of Colonel Museum, Inc. (charitable organization); Director of American National County Mutual Insurance Company (subsidiary insurance company); Past Director and past Chairman of Center for Transportation and Commerce (charitable organization); Past Director, Chairman of the Audit Committee, and Executive Committee Member, South Texas College of Law Houston (law school); Past Member of State House of Representatives of the State of Texas (terms ended January 1983).
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE — (Continued)
Mr. McLeod has experience as a lawyer and public servant, including as a state legislator, as well as experience in real estate development and non-profit administration. He brings a varied perspective and set of problem-solving skills and valuable insight to the Board.
Frances A. Moody-Dahlberg (age 52) was first elected to our Board in 1987. Principal Occupation: Executive Director of The Moody Foundation (charitable and educational foundation) since 1998, and a Trustee of The Moody Foundation since 2004; Director of National Western Life Group, Inc., Austin, Texas, since 2015; Director of National Western Life Insurance Company, Austin, Texas, from 1990 to 2015; Director of The Moody Endowment and Transitional Learning Center at Galveston since 2012 and Director of Moody Medical Research Institute since 2018 (charitable organizations); Director of Moody National Bank since 2018; Director of Gal-Tex Hotel Corporation (hotel management corporation) from March 2000 to December 2003.
Ms. Moody-Dahlberg has over thirty years of experience as a member of our Board. As Executive Director of The Moody Foundation, one of the largest charitable foundations in the State of Texas, she provides insight regarding the concerns of our significant non-profit stockholders.
Ross R. Moody (age 59) has been a member of our Board since November 2016 and Chairman of the Board since April 2017. Principal Occupation: Chairman of the Board, President and Chief Executive Officer of National Western Life Group, Inc., Austin, Texas, since 2015; Chief Executive Officer of National Western Life Insurance Company, Austin, Texas, since 2015; President and Chief Operating Officer of National Western Life Insurance Company from 1992 to 2015; and a Trustee of The Moody Foundation since 1987. Director of The Moody Endowment and Transitional Learning Center at Galveston since 2012 and Director of Moody Medical Research Institute since 2018 (charitable organizations); Director of Moody National Bank since 2018.
Mr. Moody has served as an insurance company executive for approximately thirty years. His knowledge and experience are valuable to our Board’s discussions of operational and strategic matters.
James P. Payne (age 77) has been a member of our Board since February 2015. Principal Occupation: Retired Senior Vice President- Secretary, National Western Life Insurance Company, Austin, Texas, and officer and director of various of its subsidiary companies, 1998 to February 2015.
Mr. Payne has over forty years of experience in the insurance industry, primarily as chief legal officer for various insurance companies. His extensive industry knowledge, government relations background, and significant experience with corporate governance are an asset to our Board.
E. J. “Jere” Pederson (age 74) was first elected to our Board in 2014. Principal Occupation: Managing Director of CitareTx Management, LLC (manager of medical device venture development and investment company) since 2007; Special Assistant to the Chief Executive Officer, Texas A&M Health Science Center from October 2013 to June 2014; Interim President, Texas A&M Health Science Center and Interim Vice Chancellor for Health Affairs, Texas A&M University System from October 2012 to October 2013; independent management consultant from September 2006 to October 2012; Executive Vice President and Chief Operating Officer of the University of Texas Medical Branch, Galveston, Texas, from 1986 to 2005; Director since 2015 and member of the Audit Committee and the Compensation and Stock Option Committee of National Western Life Group, Inc., Austin, Texas; Director of National Western Life Insurance Company, Austin, Texas, since 1992; Director of The Sealy & Smith Foundation, Galveston, Texas (charitable organization) since December 2010.
Mr. Pederson brings to our Board the benefit of his financial and administrative expertise gained through more than thirty years of experience in health care and university administration.
James E. Pozzi (age 71) was first elected to our Board in 2012. Principal Occupation: President and Chief Executive Officer of the Company since May 2015; Chairman of the Board from February 2016 to April 2017; President and Chief Operating Officer from May 2012 to May 2015; Senior Executive Vice President, Chief Administrative Officer from 2008 to May 2012; Senior Executive Vice President, Corporate Planning, Systems and Life Administration from 2004 to 2008; Executive Vice President, Corporate Planning & Development from 1996 to 2004; also a director and/or officer of various Company subsidiaries.
Mr. Pozzi has been an officer of ANICO for over forty-nine years. His past service in various senior management roles and his current service as our President and Chief Executive Officer have provided him with intimate knowledge of the financial services industry and our operations.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE — (Continued)
James D. Yarbrough (age 66) was first elected to our Board in 2001. Principal Occupation: Former Mayor of the City of Galveston, Texas from May 2014 to July 15, 2020; Owner and Consultant, James D. Yarbrough & Co., from October 2011 to May 2014, and October 1989 through December 1994 (privately owned contract management and financial consulting firm); Chairman of the Galveston Industrial Development Corporation from May 2014 to July 2020 (municipal government body with responsibility for allocation of certain sales tax revenues); Member of Board of Trustees of the Port of Galveston from May 2014 to July 2020; Director of Economic Development, City of Galveston, Texas from February 2011 through September 2011; County Judge, County of Galveston, Texas, 1995 through 2010; Director and Member of the Governance and Executive Committees of American National Life Insurance Company of New York, and director of American National Insurance Company, American National Property and Casualty Company, Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, and United Farm Family Insurance Company (subsidiary insurance companies).
Mayor Yarbrough has management experience in both the private and public sectors, including six years as the Mayor of the City of Galveston and sixteen years as the chief executive of the County of Galveston. In the private sector, he has served as a bank president, owner of a business consulting firm, and director of numerous interests. This varied experience in the public and private sectors makes him a valuable contributor to the Board’s deliberations.
INFORMATION ABOUT OUR ADVISORY DIRECTORS
The Board of Directors has appointed the following advisory directors, who serve at the pleasure of the Board. Although advisory directors are not entitled to vote on matters considered by the Board or otherwise manage or direct the affairs of the Company, 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 time of service on our Board disclosed below for each of the advisory directors includes service on the ANICO Board of Directors prior to the Reorganization.
R. Eugene Lucas (age 96) was first appointed as an advisory director in 2004, having previously served as a director from 1981 to 2004. Principal Occupation: Since 1971, President and Director of Gal-Tex Hotel Corporation (hospitality and hotel management company); President of Gal-Tenn Hotel Corporation, LHH Hospitality, LLC, 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).
Mr. Lucas has served on our Board for over thirty-eight years, including twenty-three years as a member of our Audit Committee. In addition, Mr. Lucas provides our Board with the perspective of an experienced and knowledgeable executive officer outside of the insurance industry. He has been associated with Gal-Tex Hotel Corporation since 1941, including over forty years as its President.
Russell S. Moody (age 60) was first appointed as an advisory director in 2016, having previously served as a director since 1986. Principal Occupation: Investments, League City, Texas, since 2003. Advisory Director of National Western Life Group, Inc. since 2017 and director from 2015 to 2017; Director of National Western Life Insurance Company, Austin, Texas, from 1988 to 2015; Director of The Moody Endowment and Transitional Learning Center at Galveston (charitable organizations) since July 2009; Director of Gal-Tex Hotel Corporation (hotel management company) from March 2000 to December 2003.
Mr. Moody has served as a member of our Board for over thirty years. Along with his sister, Frances A. Moody-Dahlberg, Mr. Moody helps to represent the concerns of our significant non-profit stockholders. Mr. Moody serves as a director of The Moody Endowment, a charitable organization that owns nearly 900,000 shares of our Common Stock.
RELATIONSHIPS AMONG DIRECTORS, ADVISORY DIRECTORS AND CERTAIN ENTITIES
Company director Ross R. Moody and advisory director Russell S. Moody are brothers and the half-brothers of Company director Frances A. Moody-Dahlberg. Director E. Douglas McLeod is the uncle of Frances A. Moody-Dahlberg and the stepfather-in-law of director William C. Ansell. The Moody Foundation owns 34.0% and the Libbie Shearn Moody Trust owns 50.2% of Gal-Tex Hotel Corporation. National Western Life Insurance Company is a subsidiary of National Western Life Group, Inc., a publicly traded corporation controlled by Robert L. Moody, Sr. through the Robert L. Moody Revocable Trust, of which Moody National Bank is trustee. See the "Security Ownership of Certain Beneficial Owners" section below for additional information regarding The Moody Foundation, the Libbie Shearn Moody Trust, Robert L. Moody, Sr., and Moody National Bank.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE — (Continued)
CORPORATE GOVERNANCE
Board Committees
The Company’s Board has a standing Audit Committee, Compensation Committee, Nominating Committee and Executive Committee. The Compensation Committee of the Board of Directors is referred to herein as the Board Compensation Committee to distinguish it from the Management Compensation Committee (described further in the “Approach for Determining Form and Amount of Compensation” section of the Compensation Discussion and Analysis below). The Board has determined that all of the members of the Audit Committee, the Board Compensation Committee and the Nominating Committee are independent in accordance with the NASDAQ listing standards and applicable independence requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board may also establish special committees from time to time.
The Board of Directors has adopted written charters for the Audit Committee, the Board Compensation Committee and the Nominating Committee. Each of these committees reviews the adequacy of its charter annually. These charters are posted on the Company’s website at the following address:
https://www.americannational.com/wps/portal/an/menu/about/investors/
Audit Committee
All of our independent directors other than Mr. McLeod serve on the Audit Committee, of which Mr. Dummer is Chairman. The Board has determined that Mr. Dummer is the financial expert on the Audit Committee, as defined by NASDAQ listing standards and by the Exchange Act. The Audit Committee is responsible for the following, among other matters:
•The appointment, compensation and oversight of the work of our independent auditors, including the plan and scope of the audit and reviewing and confirming the independence of the auditors. The Audit Committee annually evaluates the performance of and whether to change our independent auditing firmor audit team personnel based on relevant facts known to the Audit Committee, such as the qualifications of the auditors, the quality of services performed, planning and staffing of the audit, management’s opinion of the independence of the auditing firm, length of tenure, factors having the potential to impact objectivity, compliance with regulatory requirements, any reported issues regarding the firm’s internal controls or audits of other companies, and the firm’s efficiencies and relevant expertise regarding our business. The Audit Committee conducts regular executive sessions with the independent auditors.
•Consideration of the effectiveness of our system of internal controls over financial reporting. The Audit Committee regularly considers and reviews with management, the independent auditors and senior internal audit staff the effectiveness of our internal controls over financial reporting, disclosure controls and procedures, disclosures about such controls, and our safeguarding of assets.
•Oversight of the internal audit function. The Audit Committee has supervisory authority for and oversight of our internal audit function, which the Audit Committee regularly reviews and discusses with management and the independent auditors. The Audit Committee annually reviews and approves the internal audit work plan and receives quarterly reports on internal audit activities from senior internal audit staff. As necessary, the Audit Committee appoints or removes our senior internal audit executive and approves the annual compensation of such executive. The Audit Committee conducts regular executive sessions with senior internal audit staff.
•Review of related party transactions, as described further in the “Procedure for Review, Approval or Ratification of Related Persons Transactions” section below.
•Review and discussion of financial statements and earnings releases. The Audit Committee reviews and discusses with management and the independent auditors our annual and quarterly financial statements and related footnotes and the independent auditors’ report or review thereof and recommends to the Board whether our audited financial statements should be included in our Annual Report on Form 10-K. The Audit Committee also reviews and discusses with management and the independent auditors any earnings press release prior to their release.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE — (Continued)
•Oversight of our enterprise risk management program. The Audit Committee reviews and discusses with management all significant enterprise risks and evaluates the processes by which risk assessment and risk management are undertaken, including by review and discussion, no less than quarterly, of reports and assessments from our Chief Risk Officer. The Audit Committee also periodically reviews our Risk Policy and the activities of our Management Risk Committee. Additional information regarding risk management is described further under “The Board’s Role in Risk Oversight” below.
Board Compensation Committee
All of our independent directors other than Mr. McLeod serve on the Board Compensation Committee, of which Mr. Pederson is Chairman. The Board Compensation Committee makes recommendations as to the compensation of the Company’s executive officers. A description of the Company’s process and procedures for the consideration and determination of executive compensation, and the Board Compensation Committee’s role in such matters, is provided below in the Compensation Discussion and Analysis.
Nominating Committee
Messrs. Yarbrough, Dummer and Pederson are the current members of the Nominating Committee, of which Mr. Yarbrough is Chairman. The Nominating Committee recommends to the Board, director nominees to be submitted for election at each Annual Meeting of Stockholders.
While there are no specific minimum qualifications that a potential nominee must possess, director nominees are evaluated based upon, among other things, their independence under applicable legal standards; relevant industry, financial, professional or technical expertise and experience; the ability to devote appropriate time and effort to Board matters; the ability to exercise sound judgment; characteristics of leadership, integrity and civility; and experience and knowledge of the Company’s business, history and culture.
While we have no formal policy on Board diversity, the charter of the Nominating Committee reflects our philosophy. Specifically, the Board and the Nominating Committee believe that it is valuable for Board members to represent a diversity of perspective, experience, skill, education, gender, race, age, ethnicity, religion, disability, and geographic origin whenever possible. The Board believes that such diversity can provide broader insight into the views and priorities of our diverse stockholders, customers, employees and agents. We are committed to considering candidates to the Board regardless of gender, race, ethnicity, religion and national origin, and any search firm retained to assist the Nominating Committee in seeking candidates for the Board will affirmatively be instructed to seek to present women and minority candidates.
Executive Committee
Ross R. Moody, Chairman, E. J. Pederson, James E. Pozzi, and James D. Yarbrough are the present members of the Executive Committee. The Executive Committee may act on behalf of the full Board of Directors between regular Board meetings, within certain limitations established by our corporate organizational documents and applicable law. For example, our Executive Committee may from time to time approve certain expenditures or investment activities.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE — (Continued)
INFORMATION CONCERNING EXECUTIVE OFFICERS
The following are our executive officers, other than Mr. Pozzi, who is also a director, their current ages, and their positions and offices for the past five years, including positions and offices with ANICO prior to the Reorganization. Officer titles with the Company immediately after the Reorganization were the same as those with ANICO immediately prior to the Reorganization.
| | | | | | | | | | | | | | |
| Name of Officer | | Age | | Position (Year Elected to Position) |
| David A. Behrens | | 59 | | Executive Vice President, Independent Marketing (1999) |
| Johnny D. Johnson | | 69 | | Executive Vice President, Corporate Business Process Officer (2021); Executive Vice President, Corporate Business Process Officer and Chief Information Officer (2013 - 2021) |
| James W. Pangburn | | 65 | | Executive Vice President, Specialty Markets Sales and Marketing (2018); Executive Vice President, Credit Insurance Division (2014-2018) |
| John F. Simon | | 58 | | Executive Vice President, Chief Life and Annuity Administrative Officer (2021); Executive Vice President and Chief Life and Annuity Actuary (2016 - 2021) |
| Shannon L. Smith | | 62 | | Executive Vice President, Chief Agencies Officer, Multiple Line (2017) |
| James P. Stelling | | 53 | | Executive Vice President, Health (2022); Executive Vice President, Health and Specialty Markets Operations (2018-2022); Senior Vice President, Health Insurance Operations (2015-2018) |
| Hoyt J. Strickland | | 65 | | Executive Vice President, Career Sales and Service Division (2012) |
| Timothy A. Walsh | | 60 | | Executive Vice President, Chief Operating Officer (2021); Executive Vice President, CFO, Treasurer, ML and P and C Operations (2017 - 2021) |
| Scott F. Brast | | 58 | | Senior Vice President and Chief Mortgage Loan and Real Estate Investment Officer (2018); Senior Vice President, Real Estate/Mortgage Loan (2005-2018) |
| Deborah K. Janson | | 55 | | Senior Vice President, Corporate Office (2016), Chief Business Planning Officer (2019) and Corporate Secretary (2021); Chief Corporate Risk Officer (2017-2019) |
| Anne M. LeMire | | 59 | | Senior Vice President and Chief Securities Investment Officer (2018); Senior Vice President, Fixed Income and Equity Investments (2015-2018) |
| Brody J. Merrill | | 49 | | Senior Vice President, Chief Financial Officer and Treasurer (April 2021); Interim Chief Risk Officer (August 2021); Senior Vice President, Deputy Chief Financial Officer (November 2020 – April 2021); Vice President of Corporate Finance of USAA (financial services company) (2016 – October 2020) |
| Michelle A. Gage | | 55 | | Vice President and Controller (2017) |
There are no arrangements or understandings pursuant to which any officer was elected. All officers are elected annually by the Board of Directors and serve until their successors are elected and qualified, unless otherwise specified by the Board.
CODE OF BUSINESS CONDUCT AND ETHICS
Our Code of Business Conduct and Ethics applies to all directors, officers and employees of our Company and is available through a link provided on our website at the following address:
https://www.americannational.com/wps/portal/an/menu/about/investors/
We may satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding certain amendments to, or waivers from, provisions of our Code of Business Conduct and Ethics by posting such information on our website where it is accessible through the same link noted above.
Links to our website included in this report are provided solely for convenience. The information contained on our website is not, and will not be deemed to be, part of this report or incorporated by reference into any of our filings with the SEC.
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholders may communicate with the full Board of Directors by writing to the Board or a specific director or directors in care of the Company’s Secretary at the address shown on page 1, by facsimile transmission to (409) 766-6803, or by e-mail to jelayne.hoffman@americannational.com. All such communications will be forwarded to the Board, as specified.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Executive Summary
This Compensation Discussion and Analysis explains the philosophy underlying our compensation strategy and the fundamental elements of compensation paid to our executive officers included in the Summary Compensation Table, to whom we refer collectively as our “Named Executive Officers,” or “NEOs.” The Company's NEOs served as executive officers of ANICO both before and after the date of the Merger AgreementReorganization, with the same titles. Accordingly, the compensation information described herein and in the earlierSummary Compensation Table and related compensation tables reflects compensation paid to the NEOs for their service to the Company and ANICO during 2021 and 2020. Compensation information described herein and in such tables for years prior to 2020 reflects compensation paid to the NEOs for service to ANICO.
The NEOs for 2021 were:
•James E. Pozzi, President and Chief Executive Officer
•Timothy A. Walsh, Executive Vice President, Chief Operating Officer (promotion from Executive Vice President,
CFO, Treasurer, ML and P and C Operations effective April 22, 2021)
•Brody J. Merrill, Senior Vice President, Chief Financial Officer and Treasurer (promotion from Senior Vice President,
Deputy Chief Financial Officer effective April 22, 2021)
•David A. Behrens, Executive Vice President, Independent Marketing
•J.D. Johnson, Executive Vice President, Corporate Business Process Officer
•Hoyt J. Strickland, Executive Vice President, Career Sales and Service Division
Our Board Compensation Committee (which we refer to in this Compensation Discussion and Analysis as the “Committee”) is comprised solely of independent directors and has oversight responsibility for our executive compensation program. The overall goal of the Effective Timeprogram is to retain and reward leaders who will help the terminationCompany create long-term value for our stockholders. With this goal in mind, our compensation program is designed to:
•Attract and retain experienced, highly qualified individuals who can make significant contributions to our long-term success;
•Drive exceptional performance and motivate our executive officers to achieve desired financial results; and
•Align the interests of our executive officers with the long-term interests of our stockholders through the use of performance-based incentives and stock ownership guidelines.
The key components of our executive compensation program for 2021 included base salary, a short-term cash incentive award opportunity, and a long-term cash incentive award opportunity. Incentive opportunities for our executives are based 100% on performance relative to certain measures aligned with the growth and profitability of our business and long-term stockholder value creation.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Pay Governance
•Stockholder Say-on-Pay Advisory Voting. At the 2021 Annual Meeting, stockholders strongly approved our 2020 executive compensation program by over 99% of the Merger Agreement. votes cast.
•Stock Ownership Guidelines. The generalCommittee first adopted stock ownership guidelines in 2011, and adopted revised ownership guidelines in 2018, to encourage stock ownership by our officers and directors and to further align their long-term goals and objectives with those of our stockholders. The current ownership guidelines for officers as a multiple of base salary are as follows: President and CEO - five times; Executive Vice Presidents - two times; and Senior Vice Presidents - one times. The ownership guideline for directors is five times the annual cash retainer. For purposes of determining ownership under the guidelines, restricted stock and book value units (“BVUs”) are included in an individual’s ownership. Each share of restricted stock counts as one share of common stock. The value of an individual’s aggregate holdings in common stock and restricted stock is based upon the greater of market value or book value of the Company’s common stock. The value of an individual’s aggregate holdings in BVUs is based upon the BVU initial value of $100 per BVU. Officers and directors who do not meet the ownership guidelines are given five years to comply and may not sell Company stock without Committee approval.
•Clawback Policy. Our Clawback Policy authorizes the Committee, on behalf of the Company and in all appropriate circumstances, to seek reimbursement of any annual incentive payment or long-term incentive payment paid within three years of an accounting restatement made to correct financial statement inaccuracies resulting from material noncompliance with any financial reporting requirement under applicable securities laws. The amount subject to recovery is the excess, if any, of the total incentive payment made to the recipient based on such financial statement inaccuracies over the amount that would have been paid had such payment been calculated in accordance with the accounting restatement, up to the full amount of the incentive payment made. In addition, if an incentive payment recipient engages in intentional misconduct that contributes to the payment to him or her of incentive compensation that is greater than would have been paid in the absence of such misconduct, the Committee has the discretion to seek reimbursement or other remedial action. The recovery of any payments under this policy is administered by the Committee, which has sole discretion as to whether and how to seek recovery.
•Anti-Hedging Policy. Our Insider Trading Policy prohibits our officers, employees and directors from (1) engaging in any transactions with respect to our common stock that are designed to or have the effect of these covenants is that, during such interim period, the Company will be limited in its ability to pursue strategic and operational matters outside the ordinary course of business. The Company has agreed that it and its subsidiaries will conduct their businesshedging or offsetting any decrease in the ordinary course consistentmarket value of such stock, such as put or call options, prepaid variable forward contracts, collars and exchange funds; (2) pledging such stock as collateral for any loan or holding such stock in a margin account; and (3) engaging in short-term speculative trading in such stock.
•Limited Executive Perquisites and Tax Gross-ups. We strive to keep executive perquisites to a minimum. Accordingly, our perquisites are generally limited to nonqualified supplemental health care, a company car for the CEO, memberships in a golf club operated on property owned by a Company subsidiary, and occasional guest travel for company events (treated as taxable income to the executive). We generally do not use tax gross-ups for our executives and have done so in recent years only in rare and limited circumstances. The perquisites and benefits provided to each NEO during 2021 are included in the “All Other Compensation” column of the Summary Compensation Table, located in the “Compensation Tables” section below, and are reported in further detail in the “All Other Compensation Table - NEOs” in such section.
•Incentive Compensation Adjustments. In February 2018, the Committee adopted a policy governing adjustments to performance criteria under our incentive compensation programs. Such policy requires Committee approval of any such adjustments and provides certain objective standards for evaluation of any adjustments proposed by management. Any potential adjustments must have a material impact to the incentive program results, must be needed to maintain the integrity and motivational value of the program, and must be as a result of unexpected circumstances that management could not reasonably anticipate or avoid through diligent planning or have adequate time to overcome. Examples of adjustments that may be considered under such policy include unbudgeted revenue, expense or operating income from a merger, acquisition or divestiture in the year of such an event; legal settlements unrelated to operations; legislative changes with past practiceunanticipated effects; changes in all material respectsaccounting methods that are not budgeted; and use reasonable best efforts to preserve their business organizations, goodwill and assets, keep availableredirections of strategy that are not budgeted.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
2021 Executive Compensation Program Summary
•Base Salaries in 2021. Salary merit increases at our Company typically take effect in May of each year. In April, the services of their current key officers and employees, and preserve their present relationships with governmental entitiesCommittee considered salary increases for the NEOs and other officers, as it has in prior years. The Committee and our Board approved base salary increases of 3.5% for Messrs. Pozzi, Walsh, Behrens, Johnson and Strickland, plus an additional 9.5% for Mr. Walsh in connection with his promotion to Chief Operating Officer, and an increase of approximately 2.9% for Mr. Merrill. These changes are further discussed in the “Base Salaries”section below. Immediately prior to their promotions, Mr. Walsh served as Executive Vice President, CFO, Treasurer, Multiple Line and P and C Operations, and Mr. Merrill served as Senior Vice President, Deputy Chief Financial Officer.
•Executive Incentive Compensation Program (“EICP”). The basic structure of the 2021 EICP was substantially unchanged from the 2020 EICP and included a separate short-term incentive (“STI”) and long-term incentive (“LTI”).
◦STI. The STI for 2021 again focused on a common framework of performance metrics for all executives, emphasizing key third parties, including customers, reinsurers, distributors, suppliersinsurance industry performance indicators, such as premium growth, the property and casualty combined ratio, and total pre-tax operating income, with an additional performance factor for business unit leaders based on their individual accountability. STI metrics and objectives for 2021 were approved in March of that year. In connection with Mr. Walsh’s promotion, his target annual incentive opportunity was increased from 70% of base salary to 75% of base salary. The target annual incentive opportunities for the other personsNEOs remained unchanged. The STI is discussed in greater detail in the “Short-Term Incentive Compensation” discussion below.
◦LTI. The LTI again focused on growth in Company net book value over a three-year period through the issuance of BVUs, as we believe book value growth for our Company, over the long term, aligns the interests of management with whomlong-term value creation for our stockholders. The Committee approved LTI objectives in March 2021. In connection with Mr.Walsh’s promotion, his target long-term incentive opportunity increased from 65% of base salary to 70% of base salary. The target long-term incentive opportunities for the other NEOs remained unchanged. The LTI is discussed in greater detail in the “Long-Term Incentive Compensation” discussion below.
•Executive Severance Plan. In connection with Mr. Walsh’s and Mr. Merrill’s promotions, the Committee reviewed the Company’s executive severance practices. As a result of that review, on April 20, 2021, the Committee recommended that the Board adopt the American National Group, Inc. Executive Severance Plan (the “Severance Plan”). On April 21, 2021, the Board adopted the Severance Plan. The Severance Plan provides severance benefits to certain officers of the Company and its subsidiaries who (i) are selected by the Committee and have entered into a Participation Agreement with the Company (each, a “Severance Participant”), and (ii) whose employment is terminated in a “Qualifying Termination,” meaning a termination without “Cause” or resignation with “Good Reason,” in each case as defined in the Severance Plan. On April 20, 2021, subject to the above adoption of the Severance Plan by the Board, the Committee designated Messrs. Pozzi, Walsh and Merrill to be Severance Participants under the Severance Plan. On August 5, 2021, the Committee designated Messrs. Behrens, Johnson and Strickland as Severance Participants under the Severance Plan. Additional information regarding the Severance Plan is provided in the “Executive Severance Plan Payments upon Qualifying Termination” discussion in the section below entitled “Potential Payments Upon Termination or Change of Control.”
•Retirement and Other Benefits. NEOs are eligible to participate in a tax-qualified retirement plan and a nonqualified deferred compensation plan. The Company offers basic health benefits, disability protection, life insurance, and similar programs to all employees. In addition to these plans, the NEOs and officers of the parent company who are at the vice president level and above participate in an excess benefit plan that complements their core medical insurance coverage (the “Merit Plan”).
Approach for Determining Form and Amount of Compensation
The Committee oversees and recommends to our Board all compensation policies and programs for our senior officers, including the NEOs. For 2021, the Committee retained Frederic W. Cook & Co., Inc. (“FW Cook”) as its independent compensation consultant to conduct an annual compensation study that included analysis against our peers and the market generally, and to provide related advice. In addition, the Committee may seek information from such other sources as it deems appropriate, and it considers compensation recommendations for executives other than the CEO from our Management Compensation Committee. At the time 2021 officer compensation recommendations were made, the Management Compensation Committee was comprised of five of our most senior officers: James E. Pozzi, Timothy A. Walsh, J.D. Johnson, Bruce M. LePard, and John F. Simon.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Role of Independent Compensation Consultant
During 2021, FW Cook performed the following services for the Committee:
•Briefed the Committee on executive compensation trends and emerging issues among our peers and the broader insurance industry, recent developments related to our executive compensation program and practices, and regulatory changes;
•Provided an annual evaluation of our executive compensation program compared to market practices and ongoing advice to the Committee as needed for periodic requests related to the determination of the amount and form of executive compensation, including short-term and long-term incentives;
•Provided an evaluation of our non-employee director compensation program compared to market practices; and
•Attended six of the Committee’s eight meetings in person or by conference telephone and provided advice on other ad hoc queries by the Committee throughout the year.
FW Cook is independent of us and has no relationship with us other than assisting the Committee with its executive compensation governance responsibilities. In accordance with SEC rules established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended (the “Dodd-Frank Act”), the Committee follows practices that it considers adequate to ensure that the compensation consultant’s advice to the Committee remains objective and is not improperly influenced by our management. These practices include a direct reporting relationship of the consultant to the Committee chairman; meeting with the consultant at least annually in executive session without management present; an annual update to the Committee on FW Cook’s financial relationship with us, including a summary of the work performed for us during the preceding twelve months; and an assessment and confirmation by the Committee of FW Cook’s independence from us. Additionally, FW Cook has no service lines other than executive compensation consulting, so the potential for any conflict of interest as a result of providing other services to us is nonexistent. With the consent of the Committee chair, FW Cook 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.
How We Determine Each Element of Compensation
The compensation process for our NEOs and other executive officers begins with an annual evaluation by the Management Compensation Committee, which considers Company performance against the stated performance measures and goals for the year, each executive officer’s individual performance and contributions to our results, any changes in responsibilities, internal equity and consistency, the future potential of each executive officer, and market data from industry and general market sources. The Management Compensation Committee formulates recommendations based on this process for the base salaries and incentive opportunities for all executive officers other than the members of such committee. After review and approval of the Management Compensation Committee’s recommendations by the CEO, such recommendations are presented to the Committee for its consideration and evaluation. The CEO makes recommendations to the Committee with respect to other members of the Management Compensation Committee. The Committee evaluates these recommendations and makes its own determination for the base salary and incentive opportunities of our CEO. The Committee’s compensation recommendations are then presented to our Board for final approval.
In determining the amounts of each element of compensation and the aggregate compensation for our NEOs, 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 incentive as a percentage of total compensation. Target compensation levels are decided upon based on a review of relevant market practices; the responsibilities, past performance and future potential of each executive; internal equity considerations; each executive’s ability to impact financial and operational results; and the recommendations of the Committee’s independent compensation consultant.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Market Comparisons
During early 2021, FW Cook evaluated the total direct compensation (consisting of base salary, STI and LTI) of our NEOs relative to market practices. The compensation of each of our NEOs was compared to that of individuals in comparable positions among a peer group of companies listed below, and to nationally published compensation survey data.
The peer group in place when 2021 compensation levels were set consisted of sixteen publicly traded companies in the insurance industry that compete with us for talent, face similar challenges in the financial services sector, and have senior executives with generally comparable responsibilities. As of the date of FW Cook’s report, the 2021 peer group revenues for the prior four quarters ranged from approximately $1.3 billion to $18.6 billion (median revenues of approximately $5.8 billion), and assets ranged from approximately $9.5 billion to $73.1 billion (median assets of approximately $27.2 billion). Our total revenues were approximately $3.8 billion in 2020, and our assets were approximately $29.5 billion at the end of 2020, placing us slightly above the 25th percentile of the peer group in revenues and above the median of the peer group in assets. The 2021 peer group was comprised of the following companies:
| | | | | | |
| | |
| American Equity Investment Life Insurance Company | The Hanover Insurance Group, Inc. | |
| American Financial Group, Inc. | Horace Mann Educators Corp. | |
| Arch Capital Group, Ltd. | Kemper Corporation | |
| Cincinnati Financial Corporation | Markel Corporation | |
| CNO Financial Group, Inc. | Old Republic International Corporation | |
| First American Financial Corporation | Primerica, Inc. | |
| Fairfax Financial Holdings, Ltd. | Selective Insurance Group, Inc. | |
| Globe Life, Inc. | Unum Group | |
The published survey data used by FW Cook covered a broader set of companies within the insurance industry, including many if not all of the peer companies. Our executives were matched to survey data based on job scope and responsibility in order to develop a competitive analysis. The specific surveys used for 2021 were:
•Mercer’s 2020 Executive Benchmark Database (containing tabular data of insurance companies based on asset size and industry data based on net revenues);
•Willis Towers Watson’s 2020 Financial Services survey (containing insurance industry data based on each executive’s individual job scope); and
•LOMA’s 2020 Executive Compensation Survey Report (containing tabular insurance industry data).
FW Cook also presented a market composite of survey and peer group data to the Committee, weighted one-third as to the peer group and two-thirds as to the survey data.
After considering FW Cook’s report and the recommendations of the Management Compensation Committee, the Committee recommended, and the Board approved, the 2021 compensation of the NEOs in April 2021.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Elements of 2021 Compensation Provided to the NEOs
The following table lists the primary elements of our executive compensation program for 2021 and the primary purpose of each element. Additional explanation of each element is provided below.
| | | | | | | | |
| Element | | Purpose |
| Base Salary | | Provides a fixed level of competitive compensation commensurate with role and responsibility. |
| Short-Term Incentive Compensation (STI) through an annual cash bonus opportunity | | Focuses executive attention on key financial and operational performance measures. |
| Long-Term Incentive Compensation (LTI) through growth in the value of book value units (BVUs) | | Aligns executives’ interests with those of our stockholders and helps retain executive talent with the opportunity for cash payout of BVUs, based on growth in book value over a three-year period. |
| Retirement Benefits, consisting of non-qualified deferred compensation plans, qualified and non-qualified Company pension plans (now frozen), and the Company’s 401(k) Plan | | Assists in providing for the long-term financial security and future well-being of our executives and their families. |
| Health and Welfare Benefits (consisting of basic and supplemental health insurance, disability protection, and life insurance) | | Assists in providing for the current well-being and financial protection of our executives and their families. |
Base Salary
Base salary is an important component of total compensation for our NEOs, and it is vital to our goal of recruiting and retaining executive officers with proven abilities. Base salaries are determined for each NEO based on abilities, qualifications, accomplishments, prior work experience and market data. Adjustments are considered annually based on current market data, the consistency of the executive officer’s individual performance over the prior year, changes in responsibilities, future potential and internal equity. The Committee generally has sought to approximate market median salaries for the NEOs.
In its evaluation of our executive compensation program in early 2021, FW Cook found that the base salaries of the NEOs other than Mr. Merrill approximated the market median and that Mr. Merrill’s base salary was approximately 72% of market median. Such evaluation was conducted prior to Mr. Walsh’s and Mr. Merrill’s promotions. After considering FW Cook’s findings, the Committee in April 2021 recommended increasing the base salaries of each of the NEOs other than Mr. Merrill by 3.5%, which the Committee and FW Cook believed was supported by market data and was generally consistent with base salary increases in the industry. In recognition of Mr. Walsh’s promotion to Chief Operating Officer, the Committee granted Mr. Walsh an additional 9.5% base salary increase on top of the 3.5% increase. Mr. Merrill had been hired as Senior Vice President, Deputy Chief Financial Officer in November 2020 at a base salary that the Committee believed would be commensurate with his experience upon his promotion to Chief Financial Officer. In response to FW Cook’s findings, however, the Committee in April 2021 recommended an increase of $10,000 to Mr. Merrill’s prior base salary of $340,000. The Board approved the Committee’s recommendations with respect to the NEOs in April 2021.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
The table below illustrates base salary changes for 2021.
| | | | | | | | | | | | | | | | | | | | |
| Name | | 2020 Base Salary | | 2021 Base Salary | | Percentage Increase |
| James E. Pozzi | | $ | 1,115,030 | | | $ | 1,154,069 | | | 3.5 | % |
| Timothy A. Walsh | | $ | 575,016 | | | $ | 649,779 | | | 13.0 | % |
| Brody J. Merrill | | $ | 340,000 | | | $ | 350,006 | | | 2.9 | % |
| David A. Behrens | | $ | 599,918 | | | $ | 620,919 | | | 3.5 | % |
| J.D. Johnson | | $ | 444,581 | | | $ | 460,142 | | | 3.5 | % |
| Hoyt J. Strickland | | $ | 444,581 | | | $ | 460,142 | | | 3.5 | % |
| | | | | | |
Base salary changes at our Company typically take effect on May 1st. As a result, salary amounts shown in the Summary Compensation Table as paid for 2021, for example, include four months (January through April) of amounts paid based on 2020 approved base salaries and eight months based on 2021 approved base salaries.
Incentive Compensation Generally
Eligibility for EICP participation is determined by the Committee and the Board. All incentive compensation is subject to review and approval by the Committee and the Board, both at the time of setting performance goals and at the time of payment of awards. Except as otherwise described in the “Long-Term Incentive Compensation” discussion below, in order to receive an incentive compensation award payout, an executive must be employed by us at the time of payout; provided, however, that in the event of death, disability, normal retirement after the age of 65, or retirement prior to age 65 with age plus years of service to American National equal to at least 85, the payout will be prorated for the portion of the applicable performance period up to the date of such event. Like our 2020 EICP, the 2021 EICP featured separate STI and LTI components.
Short-Term Incentive Compensation
For 2021, the Committee recommended, and the Board approved, the continuation of the STI framework first implemented in 2016, which features a common set of performance measures for all executives, all of which are important measures of insurance company financial performance. For 2016 through 2019, those performance measures focused on premium growth, insurance return on equity, and the property and casualty combined ratio. For 2020, the Committee and Board determined to replace the insurance return on equity performance measure with pre-tax total operating income to allow for a more transparent metric, and such metric remained during 2021. The Committee believes that program participants have a better understanding of the new metric and how departmental goals can impact its result. The metrics for 2021 are described in further detail below. The metrics for business relationships.unit leaders include an additional performance factor relevant to each unit leader’s specific area of operations.
Incentive Opportunities: STI opportunities are expressed as a percentage of base salary for each participant. For each applicable performance measure, the Committee adopts threshold, target and maximum levels of performance. An NEO’s aggregate STI opportunity is equal to the sum of the incentive opportunities tied to the specific performance measures applicable to that individual. For each performance measure, the payout for threshold level performance is equal to 50% of the target performance payout, and the payout for maximum level performance is equal to 150% of the target performance payout. The earned percentage is prorated for performance between levels. For example, if actual performance under a particular measure is halfway between threshold and target levels, an NEO would receive his threshold award plus one-half of the additional award attributable to target level achievement for that measure.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
After reviewing market data from FW Cook, the Committee determined that aggregate target STI opportunities under the 2020 EICP were reasonably aligned with market median practices. For 2021, therefore, the Committee recommended, and the Board approved, the use of the same aggregate STI award opportunities for the NEOs as under the 2020 EICP, except that Mr. Walsh’s aggregate target STI opportunity was increased from 70% of base salary to 75% of base salary in light of his promotion. The following table reports the aggregate threshold, target and maximum STI opportunity for each of the NEOs as a percentage of base salary for 2021:
2021 STI Aggregate Incentive Opportunities as a Percentage of Base Salary
| | | | | | | | | | | | | | | | | | | | |
| Name | | Threshold | | Target | | Maximum |
| James E. Pozzi | | 50.0 | % | | 100.0 | % | | 150.0 | % |
| Timothy A. Walsh | | 37.5 | % | | 75.0 | % | | 112.5 | % |
| Brody J. Merrill | | 25.0 | % | | 50.0 | % | | 75.0 | % |
| David A. Behrens | | 35.0 | % | | 70.0 | % | | 105.0 | % |
| J.D. Johnson | | 27.5 | % | | 55.0 | % | | 82.5 | % |
| Hoyt J. Strickland | | 27.5 | % | | 55.0 | % | | 82.5 | % |
Performance Measures: The Committee generally recommends performance measures and the corresponding threshold, target and maximum levels of performance for our NEOs after consideration of our annual business plan, historical data and input from the Management Compensation Committee. The Committee recommended the specific performance measures and goals for the 2021 EICP in March 2021, and the Board approved them in April 2021.
Performance measures and goals are intentionally set with a level of stretch such that achieving target goals is not assured. NEOs are reasonably likely to meet most, but not all, threshold performance goals. Target performance goals generally are set in accordance with the Company’s annual business plan and include a reasonable degree of stretch. Maximum levels of performance are established at levels including significant stretch and above that which is expected to achieve the performance required under the business plan. Achievement of an aggregate target STI payout generally means that the performance of the NEO and the Company has met yearly objectives established under the EICP.
STI performance measures used for the NEOs in 2021 are explained below.
1.Total Pre-Tax Operating Income:This is pre-tax operating income excluding realized investment gains and losses and unrealized gains and losses on equity securities.
2.Life and P&C Direct Earned Premium Growth (“Premium Growth”): This is the simple average of the annual growth in weighted direct earned premium for our life and property and casualty business segments, calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Weighted direct earned premium is premium income to us, actually received, that is weighted in accordance with industry standards for measuring premium. Pursuant to such standards, recurring premiums are weighted at 100%, and single premiums are weighted at 10% of the actual amount received.
3.P&C Combined Ratio: This is the total combined ratio for our property and casualty insurance operations, inclusive of the impact of catastrophes and credit property and casualty operations. The combined ratio, an indication of underwriting profitability, measures the ratio of losses, loss adjustment expenses and operating expenses to net earned premium. Losses, loss adjustment expenses and operating expenses are calculated after reinsurance.
4.IMG Life Direct Earned Premium Growth: This is actual annual growth in our total weighted life direct earned premium through our Independent Marketing Group. Weightings include single premiums at 10%. Excess premiums are unweighted.
5.CSSD Life Direct Earned Premium Growth: This is actual annual growth in our total weighted life direct earned premium through our Career Sales and Service Division. Weightings include single premiums at 10%. Excess premiums are unweighted.
In accordance with the terms of the EICP, the amount of an STI award payable based on performance measures unrelated to earnings is reduced by 50% of the calculated amount if operating return on equity (“ROE”) falls below a specified level. This includes the performance measures for Premium Growth, IMG Life Direct Earned Premium Growth, and CSSD Life Direct Earned Premium Growth. The threshold level of operating ROE performance was achieved during 2021; accordingly, no such reduction was required.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
The table below shows the performance measures and their approximate weightings as a percentage of the total STI opportunity for each NEO during 2021. As business unit leaders, Messrs. Behrens and Strickland had an added key operational measure based on the Direct Life Earned Premium Growth measure that each had the ability to impact, in addition to the Company has agreedthree common performance metrics.
2021 STI Performance Measures and Approximate Weightings for NEOs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance Measure | | Pozzi | | Walsh | | Merrill | | Behrens | | Johnson | | Strickland |
| Total Pre-Tax Operating Income | | 50.0 | % | | 50.0 | % | | 50.0 | % | | 40.0 | % | | 50.0 | % | | 40.0 | % |
| Premium Growth | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 25.0 | % | | 35.0 | % | | 25.0 | % |
| P&C Combined Ratio | | 15.0 | % | | 15.0 | % | | 15.0 | % | | 10.0 | % | | 15.0 | % | | 10.0 | % |
| IMG Life Direct Earned Premium Growth | | — | % | | — | % | | — | % | | 25.0 | % | | — | % | | — | % |
| CSSD Life Direct Earned Premium Growth | | — | % | | — | % | | — | % | | — | % | | — | % | | 25.0 | % |
The table below shows each STI performance measure and the threshold, target and maximum goals associated with each, along with actual 2021 performance with respect to specific restrictionseach performance measure. Incentive opportunities are expressed as a percentage of base salary. Pursuant to the Committee’s incentive compensation adjustments policy, in calculating Total Pre-Tax Operating Income, we excluded the impact of $21.4 million in expenses relating to the conductMerger. Information regarding our performance measures is provided in the limited context of its businessour STI discussion in this Compensation Discussion and Analysis and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| STI Performance Measure | | Threshold | | Target | | Maximum | | 2021 Actual |
| Total Pre-Tax Operating Income | | $200 million | | $240 million | | $280 million | | $262 million |
| Premium Growth | | 3.00 | % | | 4.00 | % | | 6.00 | % | | 7.20 | % |
| P&C Combined Ratio | | 101.00 | % | | 98.50 | % | | 95.00 | % | | 97.49 | % |
| IMG Life Direct Earned Premium Growth | | 5.00 | % | | 7.10 | % | | 11.00 | % | | 11.67 | % |
| CSSD Life Direct Earned Premium Growth | | 1.00 | % | | 1.90 | % | | 3.00 | % | | 5.39 | % |
Following the Company’s completion of the 2021 financial statements, the Committee and the Board assessed the Company’s performance against the goals established at the beginning of the year to determine the aggregate STI award payable to each NEO. Awards earned were paid on February 25, 2022. The following table shows how each NEO performed relative to his 2021 aggregate target STI opportunity:
2021 STI Potential Target Aggregate Incentive Opportunities for the NEOs Compared to Actual Aggregate STI Incentive Award Earned
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aggregate Target STI | | Actual Aggregate Incentive Award Earned |
| Name | | As a % of Base Salary | | As $ Amount | | As a % of Target STI | | As a % of Base Salary | | As $ Amount |
| James E. Pozzi | | 100 | % | | $ | 1,154,069 | | | 131.5 | % | | 131.5 | % | | $ | 1,517,344 | |
| Timothy A. Walsh | | 75 | % | | $ | 487,334 | | | 127.5 | % | | 95.7 | % | | $ | 621,520 | |
| Brody J. Merrill | | 50 | % | | $ | 175,003 | | | 131.7 | % | | 65.9 | % | | $ | 230,537 | |
| David A. Behrens | | 70 | % | | $ | 434,643 | | | 135.5 | % | | 94.9 | % | | $ | 589,004 | |
| J.D. Johnson | | 55 | % | | $ | 253,078 | | | 131.5 | % | | 72.3 | % | | $ | 332,772 | |
| Hoyt J. Strickland | | 55 | % | | $ | 253,078 | | | 135.5 | % | | 74.5 | % | | $ | 343,003 | |
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Long-Term Incentive Compensation
2021 LTI Program: For 2021, the Committee recommended, and the Board approved, the continuation of the LTI framework originally implemented as part of the 2016 EICP. The Committee and the Board approved the Company’s award to each participant of a target number of BVUs, the ultimate number and value of which will be determined and paid in cash at the end of the three-year performance period ending December 31, 2023, subject to the Company’s achievement of the required growth in book value. The number of target BVUs initially awarded is based on each executive’s target LTI opportunity, as approved by the Committee and the Board, stated in dollars and divided by $100. At the end of the three-year performance period, the number of BVUs earned, if any, will be based on the compound annual growth rate (“CAGR”) of the Company’s GAAP book value during such performance period, adjusted for dividends paid. For purposes of the three-year CAGR calculation, the beginning value will be our GAAP book value at December 31, 2020, and the ending value will be our GAAP book value at December 31, 2023, plus dividends paid during 2021, 2022 and 2023. After the end of the third year, each BVU earned will be settled in cash in an amount equal to $100 times the adjusted three-year CAGR.
The Committee believes providing long-term incentives based on growth in book value aligns management’s economic incentives directly with the long-term financial performance and strength of the Company. Earnings of the Company are either added to book value per share or paid out as dividends on all outstanding shares. In this way, book value more closely reflects the real economic value of the Company and is not subject to fluctuations in the stock market unrelated to the Company’s performance. In addition, awarding long-term incentives in the form of cash-settled BVUs helps mitigate concerns of stockholder dilution associated with certain equity awards.
For the 2021 LTI, the Committee and the Board approved the following book value growth objectives: a threshold book value CAGR of 4.0%, a target book value CAGR of 6.25%, and a maximum book value CAGR of 9.0%. Such objectives were recommended by the Committee after reviewing our three-year adjusted book value CAGR over ten and fifteen-year periods ending December 31, 2020. The three-year average adjusted book value CAGR during the ten-year period was 7.02%, while the three-year average adjusted book value CAGR over the fifteen-year period was 5.75%.
On April 22, 2021, upon the recommendation of the Committee, the Board awarded each LTI participant, including all of the NEOs, with a target number of BVUs that varied with the role and responsibilities of each participant within the enterprise. In accordance with the terms of the LTI program, each target BVU has an initial value of $100. The Committee and Board determined to use the same LTI opportunities for the NEOs for 2021 as were used under the 2018, 2019 and 2020 LTI, except for Mr. Merrill, who joined the Company in November 2020, and for Mr. Walsh, whose LTI opportunity was increased from 65% to 70% of base salary following his promotion.
The number of target BVUs awarded to each NEO under the 2021 EICP is shown in the table immediately below. Such table also shows the value of such target BVUs (based on an initial value of $100 per BVU), expressed both as a dollar amount and as a percentage of base salary.
2021 LTI Target BVUs
| | | | | | | | | | | | | | | | | | | | |
Name | | Target BVUs |
| Number | | As $ Amount* | | As a % of Salary* |
| James E. Pozzi | | 28,852 | | $ | 2,885,200 | | | 250.0 | % |
| Timothy A. Walsh | | 4,548 | | $ | 454,800 | | | 70.0 | % |
| Brody J. Merrill | | 500 | | $ | 50,000 | | | 14.3 | % |
| David A. Behrens | | 4,036 | | $ | 403,600 | | | 65.0 | % |
| J.D. Johnson | | 2,301 | | $ | 230,100 | | | 50.0 | % |
| Hoyt J. Strickland | | 2,301 | | $ | 230,100 | | | 50.0 | % |
*Based on an initial value of $100.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
The following table shows the number of BVUs that may be earned by the NEOs at the end of the three-year performance period ending December 31, 2023 in relation to the established book value growth objectives and the target number of BVUs awarded to each NEO:
| | | | | | | | | | | | | | | | | | | | |
| | Minimum | | Target | | Maximum |
| BVU Growth (CAGR, adjusted for dividends) | | 4.0% | | 6.25% | | 9.0% |
| BVUs Earned | | 50% of Target BVUs | | 100% of Target BVUs | | 150% of Target BVUs |
No BVUs will be awarded if book value CAGR, adjusted for dividends, is less than 4.0% at the end of the performance period. At or above 4.0% adjusted book value CAGR, BVUs earned will be prorated between minimum and target levels or, as applicable, between target and maximum levels, depending on the level of CAGR achieved. The number of BVUs actually earned, if any, will be determined based on information as of December 31, 2023. Each BVU earned in accordance with the table above will be settled in cash in the first quarter of 2024 in an amount equal to $100 times the adjusted three-year CAGR achieved at December 31, 2023.
Generally, all BVUs are forfeited if the recipient’s employment with us terminates prior to settlement for any reason other than (1) normal retirement after age 65, (2) retirement prior to age 65 with age plus years of service to American National equal to at least 85, (3) death or (4) disability. For any of such events, the number of BVUs earned is adjusted pro-rata to the date of such event, based on the number of whole months of service, including credit for the month in which any such event occurs. However, in connection with its review of matters involving the Merger, Agreementthe Committee reviewed the terms and the earlierconditions of the Effective TimeBVUs issued under the LTIs for 2019, 2020 and 2021. As a result of that review, on August 5, 2021, the terminationCommittee approved a form of amendment for all outstanding 2019, 2020 and 2021 BVUs to address their treatment in the event the Merger Agreement, including, but not limited to, not to take (or permit anyis completed during the BVUs’ applicable three-year performance period. Such amendment addresses the treatment of its subsidiaries to take)holders of such BVUs in the following actions (subject,event their employment with the Company or an affiliate thereof is terminated without “cause” (as defined in each case, to exceptions specified belowthe amendment) and in the event of a “Change in Control” of the Company (as defined in the amendment). Each of the NEOs has executed such amendment, which is further described in the “BVUs and Termination of Employment” discussion in the section below titled “Potential Payments Upon Termination or Change of Control.” The Merger Agreementwas not completed prior to the close of the three-year performance period that applied to the 2019 LTI program. As a result, the above BVU amendments did not affect payments made under the 2019 LTI program, which are discussed in the section immediately below.
Settlement of BVUs Awarded under the 2019 LTI Program: The three-year performance period in effect for the 2019 LTI program ended on December 31, 2021. Following the Company’s completion of the 2021 financial statements, the Committee and the Board assessed the Company’s performance against the goals established in 2019 to determine the aggregate BVUs earned. Pursuant to the Committee’s incentive compensation adjustments policy, in calculating the book value CAGR achieved for such performance period, we excluded the after-tax impact of expenses relating to the Merger. By excluding this item, GAAP equity was increased by approximately $16.9 million for purposes of calculating adjusted book value CAGR at December 31, 2021, which had no effect on the BVU cash settlements. Our book value at December 31, 2021 with such exclusion, plus dividends paid during 2019, 2020 and 2021, was approximately $7.28 billion. Our GAAP book value on December 31, 2018 was approximately $5.27 billion. The resulting adjusted book value CAGR for the three-year performance period ending December 31, 2021 was 11.38%.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
The book value growth objectives for the 2019 LTI were a threshold book value CAGR of 4.0%, a target book value CAGR of 6.25%, and a maximum book value CAGR of 9.0%. The 11.38%adjusted book value CAGR achieved, which exceeded maximum, resulted in the maximum percentage of 150% of target BVUs earned by each of the NEOs participating in the 2019 LTI. Each earned BVU was settled in cash on February 25, 2022 at an accumulated value of $129.50 per BVU, the product of the $100 initial BVU value times the three-year adjusted maximum book value CAGR of 9.00% (or $100 x 1.09%3). Such cash settlement is reflected in the table below. Mr. Merrill is excluded from the table below, as he was not employed by the Company when BVUs were issued under the 2019 LTI.
Cash Settlement of BVUs Earned under 2019 LTI Program
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 Target BVUs | | BVUs Earned as of End of Performance Period (12/31/2021) |
| Name | | Number of BVUs | | As $ Amount* | | Number of BVUs | | As $ Amount** |
| James E. Pozzi | | 26,875.0 | | | $ | 2,687,500 | | | 40,312.5 | | | $ | 5,220,469 | |
| Timothy A. Walsh | | 3,465.0 | | | $ | 346,500 | | | 5,197.5 | | | $ | 673,076 | |
| David A. Behrens | | 3,770.0 | | | $ | 377,000 | | | 5,655.0 | | | $ | 732,323 | |
| J.D. Johnson | | 2,150.0 | | | $ | 215,000 | | | 3,225.0 | | | $ | 417,638 | |
| Hoyt J. Strickland | | 2,150.0 | | | $ | 215,000 | | | 3,225.0 | | | $ | 417,638 | |
*Based on initial value of $100.
**Based on a maximum accumulated value of $129.50 per BVU.
Retirement Benefits
We maintain Company-sponsored retirement and deferred compensation plans for the benefit of our salaried employees, including our NEOs. These benefits are designed to assist in providing for the long-term financial security of these employees and their families. Like all of our salaried employees, our NEOs are eligible to participate in the American National 401(k) Plan (the “401(k) Plan”), a Company-wide, tax-qualified retirement plan. The intent of the plan is to provide all salaried employees with a tax-advantaged savings opportunity for retirement. We make an annual matching contribution equal to 100% of each participant’s deferral, up to four percent of his or previously disclosedher compensation. As required, eligible pay under this plan is capped at annual limits established under the Internal Revenue Code of 1986, as amended (the “Code”).
Because eligible pay under the 401(k) Plan is capped under the Code, we have offered additional means for certain employees to save for retirement. Prior to 2014, we offered qualified and nonqualified defined benefit pension plans. The general purpose of the non-qualified defined benefit pension plans was to restore curtailments of benefits under the qualified plan required to comply with covered compensation limits under the Code. These plans and the benefits provided under them to the participating NEOs are further discussed below in writingconnection with the Pension Benefits table.
In July 2013, management recommended and the Committee and the Board approved that we shift our retirement benefits from defined benefit pension plans to Brookfield Reinsurancecontributory defined contribution plans. In accordance with this recommendation, we amended our qualified and non-qualified defined benefit pension plans effective December 31, 2013 to freeze participation and future benefit accruals, with no additional years of service credit or salary increase credit thereafter. Benefits earned by eligible employees prior to such date are not affected, including any such benefits earned by eligible employees who are not vested as of such date but become fully vested thereafter. All participating employees were affected by these amendments, including the NEOs participating in such plans.
In connection with the freezing of the defined benefit pension plans, we adopted the American National Family of Companies Executive Supplemental Savings Plan, effective January 1, 2014. This unfunded nonqualified deferred compensation plan was renamed the American National Executive Supplemental Savings Plan effective January 1, 2015 (the “Executive Plan”). The Executive Plan permits certain executives and highly compensated employees to defer a portion of their compensation that they would otherwise receive and permits us to match such elective deferrals in the same manner as would be permitted under our qualified 401(k) Plan in the absence of limitations imposed by the Code. The Executive Plan includes both employee deferral and Company contribution components. All of the NEOs participate in the Executive Plan.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Pursuant to the Executive Plan, participants may elect to defer a portion of their annual salary and certain performance-based compensation and bonuses. During each plan year, we make a matching contribution equal to 100% of each participant’s deferral, up to four percent of his or her compensation in excess of the compensation limit under Code section 401(a)(17) for that year.
Executive Plan participant deferrals and Company contribution amounts are held in a grantor (rabbi) trust subject to the claims of the creditors of the participant’s employer and are deemed invested in the particular investment options selected by each participant. Participants vest in Company contributions after completing three years of service. Executive Plan participants may elect whether they will receive a distribution of their plan account balances upon termination of employment or at a specified date. Distributions can be made in a lump sum or in five or ten annual installments. As a result of certain restrictions under the Code, most participants (including all of the NEOs) may not actually receive or commence their benefits until six months after termination of employment.
Compensation for purposes of computing the Company’s contributions to an NEO’s Executive Plan account consists of each participant’s W-2 compensation and amounts not included in income due to a salary reduction agreement, such as for 401(k) Plan contributions. Compensation does not include the value of reimbursements or other expense allowances, moving expenses, fringe benefits, deferred compensation, welfare benefits or any amounts includable in income due to restricted stock, BVUs or Christmas bonuses. In addition, when determining the amount of the Company matching contributions to the Executive Plan, the participant’s compensation is determined before any deferral made under that 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 are available to our employees and their family members. Each of our NEOs, as well as all of our officers at the parent company of the level of vice president and above, participates in our Merit Plan, a 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. Benefits under the Merit Plan are taxable to the recipient only to the extent any such benefits are provided for medical expenses that would not be deductible by the recipient for federal income tax purposes.
Special Considerations for Pension-Related Amounts Reported in the Summary Compensation Table
It is important to note that amounts reported in Column (e) (“Changes in Pension Value and Non-Qualified Deferred Compensation Earnings”) of the Summary Compensation Table below are not the result of any decision to increase or decrease pay. For each of the NEOs, the amount reported in such column includes the year-over-year change in accrued pension benefits under our frozen defined benefit pension plans. Such change is influenced by variables outside of the Company’s control, including interest rates, mortality factors, and the age of each individual.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Consideration of Risks from Compensation Policies and Practices
In early 2018, at the request of the Committee, FW Cook performed a review of our compensation policies and practices to determine whether such policies and practices encourage excessive risk taking that is reasonably likely to have a material adverse effect on the Company as a whole. In March of 2019, 2020 and 2021, our Chief Risk Officers provided the Committee with updated reviews of our compensation policies and practices, which noted in part that there have been no material changes to our compensation policies and practices during such years. Based on such reviews, the Committee concluded in each of such years that our compensation programs do not encourage excessive risk taking that is reasonably likely to have a material adverse effect on the Company as a whole. In reaching its conclusion, the Committee considered several features of our compensation programs that were noted by FW Cook and our Chief Risk Officers as discouraging excessive or unnecessary risk taking. Among such features are the following:
•conservative overall pay positioning of annual cash compensation for most executive positions;
•effective balance between annual (STI) and deferred, at-risk (LTI) compensation, with no use of highly leveraged performance stock awards or stock options;
•appropriately rigorous performance measures that are tied to overall corporate results and well-balanced between revenue growth, profitability and capital-based return measures;
•long-term incentives based on growth in book value over overlapping three-year performance periods to mitigate any risk of timing transactions;
•caps on both annual and long-term incentive award payouts at appropriately conservative levels;
•absence of large annual incentive awards based on earnings, without any holdback;
•absence of any mega-grants or front-loaded grants of equity;
•stock ownership guidelines, an incentive compensation clawback policy for executive officers, and anti-hedging and anti-pledging policies with respect to the Company’s stock; and
•independent Committee oversight, supported by the availability of an independent compensation consultant who can communicate directly with the Committee through its Chairman as the Committee deems necessary or appropriate.
COMPENSATION COMMITTEE REPORT
The Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such review, the related discussions and such other matters deemed relevant and appropriate to the Committee, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K.
| | | | | |
| Submitted by the Board Compensation Committee: |
| |
| E. J. Pederson, Chairman |
| William C. Ansell |
| Arthur O. Dummer |
| James P. Payne |
| James D. Yarbrough |
This Compensation Committee Report does not constitute “soliciting material” and shall not be deemed to be “filed” with the SEC or incorporated by reference into any Company filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent the Company specifically incorporates this Compensation Committee Report.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
COMPENSATION TABLES
The compensation tables below reflect compensation paid to our NEOs for their service to the Company during the years shown. Any compensation information described for years prior to 2020 reflects compensation paid for service to ANICO only. Except for Mr. Merrill, who was hired by the Company after the Reorganization, our NEOs held the same officer titles with the Company immediately after the Reorganization as those held with ANICO immediately prior to the Reorganization.
SUMMARY COMPENSATION TABLE
The following table sets forth all of the compensation awarded to or earned by the Named Executive Officers (“NEOs”) for the years ended December 31, 2021, 2020, and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary (a) | | Bonus (b) | | Non-Equity Incentive Plan Compensation (c) | | Change in Pension Value and Non-Qualified Deferred Compensation Earnings (d) | | All Other Compensation (e) | | Total |
| James E. Pozzi, | | 2021 | | $ | 1,139,806 | | | $ | — | | $ | 6,737,813 | | | $ | 940,564 | | | $ | 162,967 | | | $ | 8,981,150 |
| President and Chief Executive Officer | | 2020 | | $ | 1,085,636 | | $ | — | | $ | 5,502,194 | | | $ | 1,761,204 | | | $ | 144,689 | | | $ | 8,493,723 |
| | 2019 | | $ | 1,049,893 | | $ | — | | $ | 4,891,584 | | | $ | 1,755,409 | | | $ | 153,554 | | | $ | 7,850,440 |
Timothy A. Walsh,(1) | | 2021 | | $ | 622,462 | | $ | 198 | | $ | 1,294,596 | | | $ | 6,190 | | | $ | 67,763 | | | $ | 1,991,209 |
| Executive Vice President, | | 2020 | | $ | 544,189 | | $ | 198 | | $ | 983,276 | | | $ | 13,614 | | | $ | 54,100 | | | $ | 1,595,377 |
| Chief Operating Officer | | 2019 | | $ | 526,670 | | $ | 198 | | $ | 741,033 | | | $ | — | | | $ | 56,277 | | | $ | 1,324,178 |
Brody J. Merrill,(2) | | 2021 | | $ | 346,351 | | $ | 132 | | $ | 230,537 | | | $ | — | | | $ | 328,548 | | | $ | 905,568 |
| Senior Vice President, | | 2020 | | $ | 45,770 | | $ | 71 | | $ | — | | | $ | — | | | $ | 19,179 | | | $ | 65,020 |
| Chief Financial Officer and Treasurer | | 2019 | | $ | — | | $ | — | | $ | — | | | $ | — | | | $ | — | | | $ | — |
| David A. Behrens, | | 2021 | | $ | 613,246 | | $ | 247 | | $ | 1,321,327 | | | $ | 19,376 | | | $ | 66,361 | | | $ | 2,020,557 |
| Executive Vice President, | | 2020 | | $ | 585,006 | | $ | 198 | | $ | 1,086,951 | | | $ | 333,949 | | | $ | 57,580 | | | $ | 2,063,684 |
| Independent Marketing | | 2019 | | $ | 572,677 | | $ | 198 | | $ | 981,875 | | | $ | 441,724 | | | $ | 64,232 | | | $ | 2,060,706 |
| Johnny D. Johnson, | | 2021 | | $ | 454,457 | | $ | 198 | | $ | 750,410 | | | $ | 48,556 | | | $ | 56,231 | | | $ | 1,309,852 |
| Executive Vice President, | | 2020 | | $ | 433,536 | | $ | 198 | | $ | 611,882 | | | $ | 99,494 | | | $ | 47,599 | | | $ | 1,192,709 |
| Corporate Business Process Officer | | 2019 | | $ | 424,406 | | $ | 198 | | $ | 467,870 | | | $ | 97,705 | | | $ | 56,807 | | | $ | 1,046,986 |
| Hoyt J. Strickland, | | 2021 | | $ | 454,457 | | $ | 198 | | $ | 760,641 | | | $ | 4,554 | | | $ | 54,415 | | | $ | 1,274,265 |
| Executive Vice President, | | 2020 | | $ | 433,536 | | $ | 198 | | $ | 625,179 | | | $ | 84,125 | | | $ | 46,645 | | | $ | 1,189,683 |
| Career Sales & Service Division | | 2019 | | $ | 424,406 | | $ | 198 | | $ | 489,574 | | | $ | 103,375 | | | $ | 50,652 | | | $ | 1,068,205 |
(1)Mr. Walsh was appointed as Executive Vice President, Chief Operating Officer on April 22, 2021. Prior to such time, during the years presented in the Summary Compensation Table, Mr. Walsh served as Executive Vice President, CFO, Treasurer, Multiple Line and P and C Operations.
(2)Mr. Merrill was appointed as Senior Vice President, Chief Financial Officer and Treasurer on April 22, 2021. He was hired by the Company in November 2020 as Senior Vice President, Deputy Chief Financial Officer.
Column (a) - Salary. These amounts represent base salary paid during the years shown, including any amount of base salary the NEO may have contributed to our 401(k) plan and to the Executive Plan. Any base salary changes at our Company typically take effect on May 1st of each year. Salary amounts shown in the table as paid for 2019, therefore, include four months (January through April) of amounts paid based on 2018 approved salaries and eight months based on 2019 approved salaries, and salary amounts shown in the table as paid for 2021 include four months (January through April) of amounts paid based on 2020 approved salaries and eight months based on 2021 approved salaries. For 2020, however, due to uncertainty relating to the COVID-19 pandemic, salary increases were delayed and not effective until September 15, 2020. Salary for 2020, therefore, includes eight and a half months paid at 2019 salary levels, and three and a half months paid at 2020 salary levels.
Column (b) - Bonus. These amounts reflect an annual holiday bonus. The amount of the bonus is determined based upon an employee’s time of service with us.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Column (c) - Non-Equity Incentive Plan Compensation. The amounts shown include earnings for participating NEOs under the 2021, 2020 and 2019 STIs and the cash settlement of BVUs earned as of December 31, 2021 pursuant to the 2019 LTI, as of December 31, 2020 pursuant to the 2018 LTI, and as of December 31, 2019 pursuant to the 2017 LTI. Earnings under the 2021 STI and the cash settlement of BVUs earned as of December 31, 2021 pursuant to the 2019 LTI are shown in the following table:
| | | | | | | | | | | | | | |
| Name | | STI | | LTI |
| James E. Pozzi | | $ | 1,517,344 | | | $ | 5,220,469 | |
| Timothy A. Walsh | | $ | 621,520 | | | $ | 673,076 | |
| Brody J. Merrill | | $ | 230,537 | | | $ | — | |
| David A. Behrens | | $ | 589,004 | | | $ | 732,323 | |
| J. D. Johnson | | $ | 332,772 | | | $ | 417,638 | |
| Hoyt J. Strickland | | $ | 343,003 | | | $ | 417,638 | |
The cash value of BVUs earned as of December 31, 2021 under the 2019 LTI was contingent upon growth in the book value of the Company’s stock, adjusted for dividends and certain non-recurring items, during the three-year performance period ending December 31, 2021. Similarly, the cash value of BVUs earned as of December 31, 2020 under the 2018 LTI and as of December 31, 2019 under the 2017 LTI was contingent upon growth in the book value of the Company’s stock, adjusted for dividends and certain non-recurring items, during the three-year performance periods ending December 31, 2020 and December 31, 2019, respectively. Please see the “Settlement of BVUs Awarded under the 2019 LTI Program”section of the Compensation Discussion and Analysis above for additional information. For information regarding the target BVUs awarded to the Named Executive Officers during 2021, the ultimate number and cash value of which are also subject to a three-year performance period, please see the 2021 LTI Target BVUs table and additional information provided in the Merger Agreement“Long-Term Incentive Compensation”section of the Compensation Discussion and Analysis above and the Grants of Plan-Based Awards Table below. For further information about the 2021 STI program and grants made under it, please see the “Short Term Incentive Compensation”section of the Compensation Discussion and Analysis above and the Grants of Plan-Based Awards Table below.
Column (d) - Change in Pension Value and Non-Qualified Deferred Compensation Earnings. These amounts represent the increase, if any, in the present value of each participating NEO’s benefits under our tax-qualified pension plan and nonqualified pension plans for the years shown. Any such increase is influenced by variables outside of the Company’s control, including interest rates, mortality factors, and the age of each individual and is not the result of a decision to increase or as consenteddecrease pay. As noted in the “Retirement Benefits” section of the Compensation Discussion and Analysis above, participation and future benefit accruals under these plans were frozen effective December 31, 2013. For 2021, the increase in the present value of each of the participating NEO’s accrued pension benefits was primarily due to increased ages and longer predicted lifetimes for each participant. The interest rates and mortality rates used in writing in advancethe pension calculations are determined by Brookfield Reinsurance (which consent shall not be unreasonably withheld, delayed or conditioned) or as requiredthe plans’ enrolled actuary. The mortality table assumption used to calculate the present values of pension benefits was updated for 2021 to reflect slightly longer life expectancies. This change was precipitated by law:new mortality tables and future mortality improvement scale published by the Society of Actuaries. The Pension Benefits Table below contains additional information.
•
The Company does not pay above-market earnings on deferred compensation; therefore, no amounts are reported in this column for deferred compensation.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Column (e) - All Other Compensation. Amounts included in this column for 2021 are further detailed in the table that follows.
All Other Compensation Table - NEOs – 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Restricted Stock Dividends | | Group Life Insurance Premium(1) | | Company Contributions to Defined Contribution Plans(2) | | Perquisites | | Total |
| James E. Pozzi | | $ | 32,800 | | | $ | 1,236 | | | $ | 91,452 | | | $ | 37,479 | (3) (4) (6) | | $ | 162,967 | |
| Timothy A. Walsh | | $ | — | | | $ | 1,584 | | | $ | 40,990 | | | $ | 25,189 | (3) (5) (6) | | $ | 67,763 | |
| Brody J. Merrill | | $ | — | | | $ | 360 | | | $ | 11,600 | | | $ | 21,588 | (3) | | $ | 328,548 | (7) |
| David A. Behrens | | $ | — | | | $ | 1,032 | | | $ | 42,741 | | | $ | 22,588 | (3) (5) | | $ | 66,361 | |
| J. D. Johnson | | $ | — | | | $ | 3,048 | | | $ | 28,250 | | | $ | 24,933 | (3) (5) (6) | | $ | 56,231 | |
| Hoyt J. Strickland | | $ | — | | | $ | 1,584 | | | $ | 28,782 | | | $ | 24,049 | (3) (5) (6) | | $ | 54,415 | |
(1)Represents imputed income from group life insurance premiums paid by the Company.
(2)Represents Company contributions to the Executive Plan, discussed in the “Retirement Benefits” section of the Compensation Discussion and Analysis above, and $11,600 in Company contributions to our 401(k) Plan. Executive Plan amounts are further described in the Nonqualified Deferred Compensation Plans – Executive Plan table below.
(3)Includes our Merit Plan benefit, described in “Other Benefits” above. The Merit Plan is underwritten by National Western Life Insurance Company. Total premium paid to National Western Life Insurance Company for all Merit Plan participants in 2021 was $2,747,732. The amount included in the table for this benefit ($21,588) is the average cost of the benefit for all Merit Plan participants since there is no individual underwriting or premium relating to each participant.
(4)Includes use of company car.
(5)Includes imputed income relating to a company membership in a golf club operated on property owned by a Company subsidiary.
(6)Includes guest travel, lodging, leisure activities, and/or food and beverage at our business conferences or other events.
(7)In connection with the Company’s hiring of Mr. Merrill in November 2020, the Company agreed to make certain payments to him as a signing bonus, in lieu of participation in the 2020 STIP, and in recognition that his initial long-term incentive grant would not vest and be payable until the end of the three-year period ending December 31, 2023. The total amount shown for Mr. Merrill includes $295,000 paid in 2021 as part of such arrangement.
GRANTS OF PLAN-BASED AWARDS TABLE
The following table has information about 2021 awards made under the EICP. Please see the “Annual Incentive Compensation” section of the Compensation Discussion and Analysis above for a more complete description of the 2021 EICP. The STI and LTI are cash-based, and there were no equity awards granted to the NEOs under the EICPs for any of the years shown in the Summary Compensation Table.
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards
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| | Grant Date STI (a) | | Grant Date LTI (b) | | No. of Target Book Value Units (c) | | Estimated Possible Payouts Under Long-Term Incentive Plan | | Estimated Possible Payouts Under Short-Term Incentive Plan |
| Name | | | | | Threshold (d) | | Target (e) | | Maximum (f) | | Threshold (g) | | Target (h) | | Maximum (i) |
| James E. Pozzi | | 4/22/2021 | | 4/22/2021 | | 28,852 | | $ | 1,442,600 | | | $ | 2,885,200 | | | $ | 4,327,800 | | | $ | 577,035 | | | $ | 1,154,069 | | | $ | 1,731,104 | |
| Timothy A. Walsh | | 4/22/2021 | | 4/22/2021 | | 4,548 | | $ | 227,400 | | | $ | 454,800 | | | $ | 682,200 | | | $ | 243,667 | | | $ | 487,334 | | | $ | 731,001 | |
| Brody J. Merrill | | 4/22/2021 | | 4/22/2021 | | 500 | | $ | 25,000 | | | $ | 50,000 | | | $ | 75,000 | | | $ | 87,502 | | | $ | 175,003 | | | $ | 262,505 | |
| David A. Behrens | | 4/22/2021 | | 4/22/2021 | | 4,036 | | $ | 201,800 | | | $ | 403,600 | | | $ | 605,400 | | | $ | 217,322 | | | $ | 434,643 | | | $ | 651,965 | |
| J.D. Johnson | | 4/22/2021 | | 4/22/2021 | | 2,301 | | $ | 115,050 | | | $ | 230,100 | | | $ | 345,150 | | | $ | 126,539 | | | $ | 253,078 | | | $ | 379,617 | |
| Hoyt J. Strickland | | 4/22/2021 | | 4/22/2021 | | 2,301 | | $ | 115,050 | | | $ | 230,100 | | | $ | 345,150 | | | $ | 126,539 | | | $ | 253,078 | | | $ | 379,617 | |
Column (a) - Grant Date STI. This is the date the STI award opportunity was approved by the Board of Directors, following the recommendation of the Board Compensation Committee.
Column (b) - Grant Date LTI. This is the date the LTI award opportunity was approved by the Board of Directors, following the recommendation of the Board Compensation Committee.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
Column (c)-(f) - Estimated Possible Payouts Under Long-Term Incentive Plan. Pursuant to the LTI under the 2021 EICP, the NEOs have the opportunity to earn book value units based on the CAGR of the Company’s GAAP book value during a three-year performance period ending December 31, 2023. The Board Compensation Committee established three levels (threshold, target and maximum) of book value CAGR performance objectives, with increased BVU opportunities associated with each level. Column (c) shows the number of target BVUs that the Board Compensation Committee awarded to each of the NEOs. Columns (d) through (f) show the dollar value of threshold, target and maximum BVU award opportunities based on an initial base value of $100 per BVU. Any BVUs earned as of the end of the three-year performance period will be paid in cash in the first quarter of 2024. No BVUs will be awarded if book value CAGR, adjusted for dividends, is less than 4% at the end of the performance period. Additional information regarding the LTI is described in the “Long-Term Incentive Compensation” section of the Compensation Discussion and Analysis above. The numbers shown in these columns reflect estimated possible LTI payouts as of the grant date.
Column (g)-(i) - Estimated Possible Payouts Under Short-Term Incentive Plan. These columns include the threshold, target and maximum cash award opportunities for each NEO under the 2021 STI, based on 2021 annual salaries. Under this program, each NEO received an annual incentive award opportunity payable in cash, with final payouts based on 2021 actual performance relative to predetermined performance goals across a range of performance measures. Annual incentive opportunities were based on a percentage of base salary. For each applicable performance measure, there were three levels of performance goals, with increased incentive opportunities associated with each level. Once a threshold performance goal was reached, the actual amount of the award was prorated toward each subsequent performance goal, subject to certain limited exceptions, offer, issue, sell, transfer, pledge, disposea cap at the maximum opportunity. Cash incentive awards actually earned with respect to 2021 by the NEOs under the 2021 STI are included in the “Non-Equity Incentive Plan Compensation” column of or encumber anythe Summary Compensation Table.
OUTSTANDING EQUITY AWARDS AT YEAR-END TABLE
At December 31, 2021, Mr. Pozzi was the only Named Executive Officer with an outstanding equity award, as shown in the table below. Restrictions with respect to these shares of restricted stock lapse on March 1, 2023. Such shares were granted March 1, 2013.
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| | Stock Awards |
| Name | | Number of Shares or Units of Stock That Have Not Vested (a) | | Market Value of Shares or Units of Stock That Have Not Vested* (b) |
| James E. Pozzi | | 10,000 | | $ | 1,888,400 |
*Based on an assumed stock price of $188.84, which was the closing price of our Common Stock on December 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
PENSION BENEFITS TABLE
The following table provides information regarding benefits under our qualified defined benefit pension plan (the American National Employees Retirement Plan, or securities convertible intothe “Qualified Plan”) and non-qualified defined benefit pension plan (the American National Insurance Company Nonqualified Retirement Plan for Certain Salaried Employees, or exchangeablethe “Nonqualified Plan”). As noted in the “Retirement Benefits” section of the Compensation Discussion and Analysis above, participation and future benefit accruals under these defined benefit pension plans were frozen effective December 31, 2013, with no additional years of service credit or salary increase credit thereafter. For Mr. Walsh, the following table provides information regarding benefits under the Farm Family Employees Retirement Plan (the “Farm Family Plan”), which was frozen effective December 31, 1996. Mr. Merrill is not a participant in the Qualified Plan, the Nonqualified Plan or the Farm Family Plan, as he was hired after the freezing of such plans. Accordingly, Mr. Merrill has been omitted from the table below.
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| Name | | Plan Name | | Number of Years of Credited Service | | Present Value of Accumulated Benefit | | Payments During Last Fiscal Year |
| James E. Pozzi | | Qualified Plan | | 35.00 | | $ | 3,471,463 | | | $ | — | |
| | Nonqualified Plan | | 35.00 | | $ | 9,240,961 | | | $ | — | |
| Timothy A. Walsh | | Farm Family Plan | | 2.00 | | $ | 71,633 | | | $ | — | |
| David A. Behrens | | Qualified Plan | | 15.00 | | $ | 682,022 | | | $ | — | |
| | Nonqualified Plan | | 15.00 | | $ | 1,836,457 | | | $ | — | |
| J.D. Johnson | | Qualified Plan | | 6.79 | | $ | 536,219 | | | $ | — | |
| | Nonqualified Plan | | 6.79 | | $ | 174,640 | | | $ | — | |
| Hoyt J. Strickland | | Qualified Plan | | 35.00 | | $ | 639,559 | | | $ | — | |
| | Nonqualified Plan | | 35.00 | | $ | 117,077 | | | $ | — | |
The number of years of credited service is shown as of December 31, 2021. In connection with the freezing of the plans effective December 31, 2013, and December 31, 1996 in the case of the Farm Family Plan, no additional years of service were credited after such dates. The present value of the accumulated benefit under each plan is calculated using the December 31, 2021 FASB ASC 715-20 disclosure assumptions as follows:(a) discount rates of 2.86% for or options, warrants, calls, commitments or rightsthe Qualified Plan, 2.10% for the Nonqualified Plan, and 2.65% for the Farm Family Plan, (b) Pri-2012 Total Data Set Sex-distinct Retiree Mortality Tables with full generational projection using MP-2021, and (c) benefits converted to a lump sum using the average of any kind to acquire, any shares of capital stock or other voting or equity interests of any class or seriesthe August, September and October 2021 Lump Sum Segment Rates for the Qualified Plan and the Nonqualified Plan with the 2022 417(e) unisex mortality table prescribed by the Internal Revenue Service (the “IRS”) and using the November 2020 Lump Sum Segment Rates for the Farm Family Plan with the 2021 417(e) unisex mortality table prescribed by the IRS.
The Qualified Plan. The Qualified Plan covers substantially all employees and officers of the Company or its subsidiaries;as of December 31, 2013 and provides benefits based on the participant’s years of service and compensation, which for purposes of the Qualified Plan have been frozen as of such date. The monthly benefit payable under the plan at normal retirement age (usually age 65) for non-bargaining unit employees generally equals:
•amend or propose1.667% of the employee’s final average pay times years of service (up to amend the Company’s or its subsidiaries’ certificate of incorporation, bylaws or other comparable organizational documents, in each case, whether by merger, consolidation or otherwise;35 years) at December 31, 2013,
•authorize, recommend, propose, enterReduced by 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 employee’s pay for the 60 consecutive months prior to December 31, 2013 that produces the highest average (out of the prior 10 years). Pay includes base salary, overtime, bonus incentives, and stock dividends paid on restricted stock awards prior to the vesting of such awards, and gains on exercises of stock appreciation rights (no longer granted by the Company) and vesting of restricted stock awarded before July 25, 2002. In addition, “Social Security covered pay” is one-twelfth of the average of the Social Security wage bases for the 35-year period ending when the employee reaches Social Security retirement age.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
The benefit formula determines the employee's monthly benefit as a life annuity. Instead of taking a life annuity, the employee may elect one of the following options: (1) a 50%, 66 2/3%, 75% or 100% joint and survivor annuity; (2) a 10, 15 or 20-year period certain and life annuity benefit; (3) a life annuity with a Social Security leveling option; or (4) a lump sum benefit. Unless special IRS rules apply, benefits are not paid before employment ends, or age 65 if sooner and if elected by the employee. Mr. Pozzi and Mr. Johnson are the only NEOs eligible to commence in-service retirement benefits at this time, but neither has chosen to do so. Any in-service distributions of benefits paid would be determined according to the applicable plan terms for a life payout.
If an employee chooses one of these benefit options, the interest rate assumptions and mortality tables specified in the plan are used to adjust the benefit so it has the same value as the life annuity, 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 20 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.
If an employee retires after age 60, or after age 55 with at least 20 years of service, the employee may take an “early retirement” benefit, beginning immediately after employment ends. 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. Pozzi attained the normal retirement age of 65 in 2015, and Mr. Johnson attained the normal retirement age of 65 in 2017. Both are eligible for retirement. Mr. Behrens and Mr. Strickland are eligible for early retirement under the Qualified Plan.
The Nonqualified Plan. As with the Qualified Plan, participation and future benefit accruals under the Nonqualified Plan were frozen, with no additional years of service credit or salary increase credit, effective December 31, 2013. Benefits under the Qualified Plan are limited by the Code. Like many other large companies, therefore, we offered certain employees nonqualified “excess” benefit plans to 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 NEO’s annual retirement income benefit under the Qualified Plan exceeds the maximum amount payable from such plan, it will be paid from the Nonqualified Plan. Payment is made from our general assets and not from the assets of the Qualified Plan.
The maximum number of years of service counted for benefit service under the Nonqualified Plan is 35 years. If an employee retires after age 55 with at least 20 years of service, the employee may take an “early retirement” benefit under the Nonqualified Plan, beginning immediately after employment ends. 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. Pozzi attained the normal retirement age of 65 in 2015, and Mr. Johnson attained the normal retirement age of 65 in 2017. Both are eligible for retirement under the Nonqualified Plan. Mr. Strickland and Mr. Behrens are eligible for early retirement under the Nonqualified Plan.
The Farm Family Plan. Mr. Walsh is not a participant in the Qualified Plan or adoptthe Nonqualified Plan, and he is the only NEO who is a participant in the Farm Family Plan. Mr. Walsh is currently the President of certain subsidiaries that participated in the Farm Family Plan and was an employee of such companies beginning in 1995. The Farm Family Plan provides a benefit based upon two percent of average annual compensation multiplied by years of service, not to exceed 30. Mr. Walsh had two years of credited service under such plan at the time it was frozen effective December 31, 1996, with no additional years of service credit or agreementsalary increase credit thereafter. Upon attaining age 65, Mr. Walsh may receive his benefit under the plan as a lump sum or as an annuity paying $433.53 per month for life. He also qualifies for an early retirement benefit in accordance with the terms of completethe plan. The plan provides a surviving spouse’s benefit equal to fifty percent of the participant’s benefit, commencing upon the death of the participant and payable for the life of the surviving spouse.
ITEM 11. EXECUTIVE COMPENSATION — (Continued)
NONQUALIFIED DEFERRED COMPENSATION PLANS
Executive Plan
The table below has information about each NEO’s participation in our Executive Plan in 2021. The Executive Plan is discussed in the “Retirement Benefits” section of the Compensation Discussion and Analysis above.
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| Name | | Executive Contributions in Last Fiscal Year (a) | | Registrant Contributions in Last Fiscal Year (b) | | Aggregate Earnings in Last Fiscal Year (c) | | Aggregate Withdrawals/ Distributions in Last Fiscal Year (d) | | Aggregate Balance at Last Fiscal Year End (e) |
| James E. Pozzi | | $ | 199,628 | | | $ | 79,851 | | | $ | 546,652 | | | $ | — | | | $ | 2,996,332 | |
| Timothy A. Walsh | | $ | 41,474 | | | $ | 29,389 | | | $ | 65,290 | | | $ | — | | | $ | 525,872 | |
| Brody J. Merrill | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| David A. Behrens | | $ | 31,141 | | | $ | 31,141 | | | $ | 190,478 | | | $ | — | | | $ | 1,080,670 | |
| J.D. Johnson | | $ | 28,250 | | | $ | 16,650 | | | $ | 34,923 | | | $ | — | | | $ | 320,825 | |
| Hoyt J. Strickland | | $ | 17,182 | | | $ | 17,182 | | | $ | 74,546 | | | $ | — | | | $ | 534,576 | |
Column (a) – Executive Contributions in Last Fiscal Year. These amounts are included within the “Salary” and “Non-Equity Incentive Compensation” columns of the Summary Compensation Table above. Executive contributions are made each pay period during the fiscal year and are based on each NEO’s elected deferral percentage. Participants are fully vested as to these amounts at the time of contribution.
Column (b) – Registrant Contributions in Last Fiscal Year. As discussed in the “Retirement Benefits” section of the Compensation Discussion and Analysis above, these amounts include a Company matching component. These amounts are included within the “All Other Compensation” column of the Summary Compensation Table above. Participants are fully vested as to these amounts after three years of employment, or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalizationupon their earlier attaining of age 65 or other reorganizationa change in control of the Company, in either event while actively employed by the Company.
Column (c) – Aggregate Earnings in Last Fiscal Year. Earnings on amounts contributed to the Executive Plan are determined by investment selections made by each participant in investment alternatives that represent a subset of investment choices offered under our 401(k) Plan. Each participant in the Executive Plan can choose from approximately 21 mutual fund offerings. The 2021 investment returns for the investment choices in which one or more of the NEOs participated are as follows:
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| Fund | | Return | | Fund | | Return |
| American Balanced Fund | | 16.08% | | T. Rowe Price Equity Index 500 Fund | | 28.05% |
| T. Rowe Price Value Fund | | 29.42% | | T. Rowe Price Retirement 2015 Fund | | 9.74% |
| T. Rowe Price Capital Appreciation Fund | | 18.64% | | T. Rowe Price Retirement 2030 Fund | | 13.75% |
| T. Rowe Price Growth Stock Fund | | 19.83% | | T. Rowe Price Short Term Bond Fund | | (0.03)% |
| T. Rowe Price Small Cap Stock Fund | | 16.57% | | T. Rowe Price International Stock Fund | | 1.34% |
We do not provide any above-market or preferential earnings rates, nor do we guarantee that an officer’s investments will have positive earnings. Since these amounts are not preferential, they are not included in the Summary Compensation Table.
Column (d) – Aggregate Withdrawals/Distributions in Last Fiscal Year. None of the NEOs made withdrawals or received distributions from the Executive Plan during 2021.
Column (e) – Aggregate Balance at Last Fiscal Year End. The aggregate balance shown represents the sum of executive contributions, Company contributions and aggregate earnings, less any distributions or withdrawals, through December 31, 2021. Fiscal year 2014 was the first year of existence of the Executive Plan. Executive contributions and Company contributions for NEOs were included in the Summary Compensation Tables for years 2014 through 2020 if an NEO was a named executive officer for such years. The sum of executive contributions and Company contributions for such years for NEOs who were required to be included in the Summary Compensation Tables for all such years was as follows: for Mr. Pozzi, $1,407,533, and for Mr. Behrens, $488,703. The 2016 through 2020 Summary Compensation Tables included total executive contributions and Company contributions for Mr. Walsh of $257,579 and for Mr. Strickland of $136,951 for such years. The 2017 through 2020 Summary Compensation Tables included total executive contributions and Company contributions for Mr. Johnson of $130,325 for such years. Mr. Merrill was not included in the Summary Compensation Table for any of its subsidiaries;
•subject to certain limited exceptions (including permitting the Company to execute investment portfolio transactions in the ordinary course of business consistent with past practice and in accordance with its existing investment plan and investment guidelines), acquire or agree to acquire any business or any corporation, partnership, association or other business organization or division thereof;
•make or authorize capital expenditures that are, on an individual basis, in excess of 110% of the Company’s capital expenditure budget or in excess of 105% of the aggregate capital expenditure budget, except for (i) planned capital expenditures disclosed to Brookfield Reinsurance at signing of the Merger Agreement and (ii) reasonable emergency capital expenditures (after consultation with Brookfield Reinsurance) necessary to maintain its ability to operate its businesses in the ordinary course or for the safety of individuals, assets or the environment;such years 2014 through 2020.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS11. EXECUTIVE COMPENSATION — (Continued)
Farm Family Supplemental Profit Sharing Plan
•subject to certain limited exceptions, sell, lease, license, transfer, pledge, subject to any encumbrance or otherwise dispose of any of its or their assets or properties;
•incur, guarantee or assume any indebtedness, subject to certain limited exceptions, including investment portfolio transactionsTimothy A. Walsh was a participant in the ordinary courseFarm Family Supplemental Profit Sharing Plan, which became effective on January 1, 1997 and was frozen as of business consistentDecember 31, 2004. The purpose of such plan was to provide participants with past practice and other incurrencesadditional retirement benefits they would have received under the basic qualified retirement plan in absence of indebtedness not to exceed $10,000,000certain Code limitations. All contributions under the plan were made by the employer. Plan balances accrue interest quarterly at the “Prime Rate” published in the aggregate;
•“Money Rates” section of the enter into any material contract or reinsurance contract other thanWall Street Journal on the first business day of each calendar quarter. Mr. Walsh will begin receiving distributions from the plan at the same time and in the ordinary course of business consistent with past practice; and
•terminate, amend, modify, assign or waive any material rightsame manner as he receives distributions under any material contract or reinsurance contract except in the ordinary course of business consistent with past practice.Farm Family Plan.
The Merger Agreement permits the Company to continue to pay regular quarterly cash dividends not to exceed $0.82 per share of common stock prior to completion of the Merger.
The abovefollowing table provides information regarding Mr. Walsh’s participation in the Farm Family Supplemental Profit Sharing Plan:
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| Executive Contributions in Last Fiscal Year | | Registrant Contributions in Last Fiscal Year | | Aggregate Earnings in Last Fiscal Year* | | Aggregate Withdrawals/ Distributions in Last Fiscal Year | | Aggregate Balance at Last Fiscal Year End |
| $ | — | | | $ | — | | | $ | 12,752 | | | $ | — | | | $ | 399,306 | |
*These earnings are not above-market or preferential and thus are not reported in the Summary Compensation Table.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
This section describes and quantifies certain compensation that would become payable under existing plans and arrangements if an NEO’s employment had terminated or if there had been a change in control of our Company on December 31, 2021, given each NEO’s compensation and service levels as of such date and, if applicable, based on our closing stock price on December 31, 2021, which was $188.84.
Executive Severance Plan Payments upon Qualifying Termination
Each of the NEOs and certain other Company executive officers currently participate in the Company’s Executive Severance Plan (the “Severance Plan”), pursuant to which he or she is eligible to receive enhanced severance payments and benefits upon a summaryqualifying termination of certain materialemployment. Generally, a qualifying termination of employment includes a termination of the participant’s employment by the Company without “cause” or by the executive officer with “good reason.” Under the terms of the Merger AgreementSeverance Plan, such terms are generally defined as follows:
• “Cause” generally means: (i) failure or inability to perform any reasonably assigned duties, after written notice from the Board and, is qualifiedif curable, reasonable opportunity to cure such failure or inability; (ii) commission of an act, or plea of guilty or nolo contendere to a misdemeanor, in its entirety by the terms and conditionseither case involving dishonesty, fraud, theft, immoral conduct, bribery or extortion, or plea of the Merger Agreement, which was filed as an exhibitguilty or nolo contendere to the Company’s current report on Form 8-K filed on August 9, 2021.
Caution Regarding Forward-Looking Statements
Certain statements madeany felony; (iii) misconduct in this report, including but not limited to the accompanying consolidated financial statements, and the notes thereto appearing in Part II, Item 8, Financial Statements and Supplementary Data herein, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Item 7 ("MD&A"), and the exhibits and financial statement schedules filed as a part hereof or incorporated by reference herein, may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are indicated by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning, and include, without limitation, statements regarding the outlook of our business and expected financial performance, and certain statements relating to the COVID-19 pandemic and its potential effects on the Company. These forward-looking statements are subject to changes and uncertainties which are, in many instances, beyond our control and have been made based upon our assumptions, expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordanceconnection with our expectations, that the effect of future developments on us will be as anticipated, or that our risk management policies and procedures will be effective, particularly given the uncertainty relating to the COVID-19 pandemic. We do not make public 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. Forward-looking statements are not guarantees of future performance and involve various risks and uncertainties. Forward-looking statements relate to the transaction contemplated by the Merger Agreement (the "Proposed Transaction"), as well as to the Company’s financial and operating performance on a stand-alone basis prior to the consummation of the Merger or if the Merger is not consummated. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including without limitation risks, uncertainties and other factors discussed in Part I, Item 1A, Risk Factors, above and elsewhere in this report, and the following factors relating the Proposed Transaction:
•conditions to the closing of the Proposed Transaction may not be satisfied;
•regulatory approvals required for the Proposed Transaction may not be obtained, or required regulatory approvals may delay the Proposed Transaction or result in the imposition of conditions that could have a material adverse effect on the Company or Brookfield Reinsurance or cause certain conditions to closing not to be satisfied, which could result in the termination of the Merger Agreement;
•the timing of completion of the Proposed Transaction is uncertain;
•the business of the Company or Brookfield Reinsurance could suffer as a resultany of uncertainty surroundingits affiliates; (iv) material breach of any agreement with the Proposed Transaction;
•events, changesCompany or any affiliate thereof, and any written code of conduct and business ethics or other circumstances could occur that could give rise to the termination of the Merger Agreement;
•there are risks related to disruption of management’s attention from the ongoing business operationsmaterial written policy of the Company or Brookfield Reinsuranceany affiliate thereof relating to personal conduct; or (v) intentional wrongful act or omission that results in the restatement of the Company’s financial statements due to a violation of the Proposed Transaction;Sarbanes-Oxley Act of 2002.
• “Good reason” generally means the occurrence of any of the following without the officer’s express prior written consent: (i) a material reduction of or to his or her duties, authority, responsibilities or reporting relationship (however, such a change as the result of one or more corporate transactions, by itself, does not constitute a material reduction); (ii) a 10% or greater reduction in base salary or target annual cash bonus; (iii) a requirement that the officer relocate his or her primary work location more than 50 miles from his or her then-current primary work location as reflected in Company records; or (iv) in connection with a change in control, the failure of the Company to assign the Severance Plan to its successor or the failure of such successor to explicitly assume and agree to be bound by the Severance Plan.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS11. EXECUTIVE COMPENSATION — (Continued)
•Upon a qualifying termination of employment, a participant in the announcement or pendencySeverance Plan is generally entitled to the following severance benefits pursuant to the executive’s participation agreement thereunder:
• an amount equal to the participant’s “severance multiple” multiplied by the sum of the Proposed Transaction could affectparticipant’s annual base salary and annual bonus, payable as a lump sum within 15 days after the relationships of the Company or Brookfield Reinsurance with its clients,participant’s employment termination date; and operating results and business generally, including on our ability to retain and attract employees;
•if the outcome of any legal proceedings initiated againstparticipant timely elects COBRA continuation coverage, reimbursement from the Company or Brookfield Reinsurancefor the cost of such COBRA continuation coverage at the amount active employees pay for health coverage through a specified period following the announcementemployment termination date (or, if earlier, the date the participant becomes eligible for health insurance coverage under another employer’s plan).
Under the terms of the Proposed Transaction could adversely affect the Company or Brookfield Reinsurance, including their abilityNEOs’ respective participation agreements:
• Mr. Pozzi’s severance multiple is 0.5, regardless of whether a change in control has occurred. Mr. Pozzi also is eligible for COBRA reimbursement benefits for up to consummate the Proposed Transaction;six months after a qualifying termination (Mr. Pozzi’s qualifying termination must occur prior to May 31, 2022 in order to be eligible to receive severance benefits).
• Mr. Walsh’s severance multiple is (i) 2.0 for any qualifying termination within 18 months following a change in control and (ii) 1.0 for any other qualifying termination. Mr. Walsh also is eligible for COBRA reimbursement benefits for up to 18 months after a qualifying termination.
•the Company or Brookfield Reinsurance may Mr. Merrill’s severance multiple is (i) 1.5 for any qualifying termination within 18 months following a change in control and (ii) 1.0 for any other qualifying termination. Mr. Merrill also is eligible for COBRA reimbursement benefits for up to 12 months after a qualifying termination.
• Mr. Behrens’s severance multiple is 1.0, regardless of whether a change of control has occurred. Mr. Behrens also is eligible for COBRA reimbursement benefits for up to 12 months after a qualifying termination.
• Mr. Johnson’s severance multiple is 0.5, regardless of whether a change of control has occurred. Mr. Johnson also is eligible for COBRA reimbursement benefits for up to six months after a qualifying termination (Mr. Johnson’s qualifying termination must occur prior to May 31, 2022 in order to be adversely affected by other economic, business, and/or competitive factors as well as management’s responseeligible to anyreceive severance benefits).
• Mr. Strickland’s severance multiple is 1.0, regardless of the aforementioned factors.
The foregoing reviewwhether a change of important factors relatedcontrol has occurred. Mr. Strickland also is eligible for COBRA reimbursement benefits for up to the Proposed Transaction should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein and elsewhere, including the risk factors included in Brookfield Reinsurance’s Registration Statement on Form F-1 and in this 2021 Annual Report and other documents of the Company and Brookfield Reinsurance on file with the SEC. Neither the Company nor Brookfield Reinsurance undertakes any obligation to update, correct or otherwise revise any forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or Brookfield Reinsurance and/or any person acting on behalf of either of them are expressly qualified in their entirety by this paragraph. The information contained on any websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report on Form 10-K.12 months after a qualifying termination.
COVID-19 Response
On March 11, 2020,If any payments and benefits to be paid or provided to a participant in the World Health Organization formally declaredSeverance Plan, whether pursuant to the outbreakterms of the novel coronavirus COVID-19Severance Plan or otherwise, would be subject to “golden parachute” excise taxes under the Code, the payments and benefits will be a pandemic. A summary of significant actions the Company took in response to COVID-19 through December 31, 2020 is disclosed in our 2020 Annual Report on form 10-K filed with the SEC on March 4, 2021. Below is a summary of significant subsequent developments in our COVID-19 response:
•We continue to take steps to protect employees with the goals of maintaining their health and sustaining an adequate workforce, including employees working from home and offering flexibility for employees negotiating scheduling conflicts duereduced to the impactsextent necessary to avoid those excise taxes, but only if such a reduction of COVID-19, such as caring for family, alternative arrangements and shutdowns for business and schools, self-isolationpay or personal illness, including granting additional paid time off for vaccinations and to address these hardships.
•We suspended our summer Internship Program for 2020, andbenefits would result in 2021 piloted a program which combined both virtual and in-person elements for a small group of interns. In 2022, we will be offering a hybrid program with virtual and in-person elements, to an expanded group of interns.
•We have developed and are continually refining our return-to-office plans for our locations. Beginning in June 2021, we gradually re-introduced more employees to our office locations but had to lessen our in-office presence in the latter part of the year due to a surge in the Omicron variant. We are continually monitoring the situation with a longer-term plan to offer employees hybrid work schedules, where possible.
Although we have been able to maintain our business operations since the onset of the pandemic, no assurance can be given that these actions will continue to be successful, nor can we predict the level of disruption that will occur should the COVID-19 pandemic and its related macroeconomic risks continue for further extended periods of time. Given this uncertainty, we are unable to quantify with reasonable confidence the total expected impact of the COVID-19 pandemic on our future operations, financial condition, liquidity and results of operations. The wide-ranging social, economic and financial consequences of the COVID-19 pandemic and the possible effects of ongoing and future governmental action in response to COVID-19 compound this uncertainty. Additional information regarding risks and uncertainties relatedgreater after-tax benefit to the COVID-19 pandemic are set forth in Part I, Item 1A, Risk Factors. For additional information regarding the direct and indirect impact to mortality refer to Part II, Item 7, MD&A, Life.participant.
This MD&A should be readThe table below sets forth the amounts that would have been payable to the NEOs pursuant to the Severance Plan as of December 31, 2021, assuming a qualifying termination of employment of each of the NEOs as of such date. The severance amount consists of a cash payment equal to the sum of (i) the product of the NEO’s applicable “severance multiple” multiplied by the sum of the participant’s annual base salary and annual bonus and (ii) periodic reimbursement for COBRA premiums for a period of between six and eighteen months, based on the NEO’s current coverage levels, the aggregate value of which is shown in conjunctionthe table below. With respect to Mr. Walsh and Mr. Merrill, the severance multiple provided in the table below assumes a termination in connection with our consolidated financial statements and related notes includeda change of control, which for these two NEOs results in Part II, Item 8, Financial Statements and Supplementary Data.a higher severance multiple than for any other qualifying termination, as noted above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Severance Multiple | | Salary | | Target Bonus | | COBRA Reimbursement | | Total |
| James E. Pozzi | | 0.5 | | $ | 1,154,069 | | | $ | 1,154,069 | | | $ | 9,040 | | | $ | 1,163,109 | |
| Timothy A. Walsh | | 2.0 | | $ | 649,779 | | | $ | 487,334 | | | $ | 40,566 | | | $ | 2,314,792 | |
| Brody J. Merrill | | 1.5 | | $ | 350,006 | | | $ | 175,003 | | | $ | 27,044 | | | $ | 814,558 | |
| David A. Behrens | | 1.0 | | $ | 620,919 | | | $ | 434,643 | | | $ | 15,744 | | | $ | 1,071,306 | |
| J.D. Johnson | | 0.5 | | $ | 460,142 | | | $ | 253,078 | | | $ | 9,040 | | | $ | 365,650 | |
| Hoyt J. Strickland | | 1.0 | | $ | 460,142 | | | $ | 253,078 | | | $ | 18,079 | | | $ | 731,299 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS11. EXECUTIVE COMPENSATION — (Continued)
Overview
American National Group, Inc. ("ANAT")As a condition to participation in the Severance Plan, each participant agreed not to directly or indirectly solicit, hire, recruit, attempt to hire or recruit, or induce the termination of employment of any employee or agent of the Company for a period of twelve months following his or her date of employment termination. Furthermore, during the six-month period following the participant’s date of employment termination, such participant agreed not to directly or indirectly solicit or contact the Company’s current, former or prospective customers, agents, and distributors for purposes of offering or accepting goods or services similar to or competitive with those offered by the Company. This restriction applies to current or prospective customers, agents, or distributors (i) with whom the participant had contact as a Company employee or (ii) about whom the participant has trade secret or confidential information or information that is not publicly available. Each participant also agreed (x) not to disclose or misuse the Company’s confidential information and (y) not to disparage the Company or any of its current or former employees, officers, directors or any existing or prospective customers, agents, distributors or investors. These confidentiality and non-disparagement provisions are not subject to a time limit.
Restricted Stock and Termination of Employment
Pursuant to the ANICO 1999 Stock and Incentive Plan and award terms approved by the Board of Directors, shares of restricted stock issued to Mr. Pozzi vest upon death, disability, retirement with the consent of the Board of Directors, or upon a change of control of our Company. Such shares are forfeited upon other termination of employment. For purposes of the ANICO 1999 Stock and Incentive Plan, a change of control occurs if (i) there is a familychange in ownership of companies that has $31.3 billionour 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 assets, $24.3 billion in liabilities and $7.0 billion in stockholders' equityclause (i) above.
The aggregate market value of Mr. Pozzi’s unvested restricted stock as of December 31, 2021. American National Insurance Company ("ANICO"), founded in 1905 and headquartered in Galveston, Texas, and2021 was $1,888,400. The other ANAT subsidiaries offer a broad spectrumNEOs had no restricted stock issued to them as of products and services, which include life insurance, annuities, property and casualty insurance, health insurance, credit insurance, and pension products. The American National companies operate in all 50 states, the District of Columbia and Puerto Rico. In addition to ANICO, major subsidiaries include American National Life Insurance Company of Texas, American National Life Insurance Company of New York, American National Property and Casualty Company, Garden State Life Insurance Company, Standard Life and Accident Insurance Company, Farm Family Casualty Insurance Company and United Farm Family Insurance Company.such date.
Our business has beenBVUs and will continue to be influenced by several industry-wide, 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 to impact our overall business. Second, we discuss certain segment-specific trends we believe may impact individual segments or specific products within these segments.
General Trends
Our business, financial condition and resultsTermination of operations are materially affected by economic and financial market conditions. The U.S. and global economies, as well as the capital markets, continue to show mixed signals, and uncertainties continue to be significant factors in the markets in which we operate. Factors such as consumer spending, business investment, the volatility of the capital markets, the level of interest rates, unemployment, the level of participation in the workforce and the risk of inflation or deflation 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 have a material adverse effect on us. However, we believe those risks are somewhat mitigated by our financial strength, active enterprise risk management and disciplined underwriting for our products. Our diverse product mix and distribution channels across insurance segments is a strength that we expect will help us adapt to the volatile economic environment and give us the ability to serve the changing needs of our customers. Additionally, through our long-term business approach, we believe we are financially strong, and we are committed to providing a steady and reliable source of financial protection for policyholders.Employment
Interest RatesIn connection with its review of matters involving the Merger with Brookfield Reinsurance, the Board Compensation Committee reviewed the terms and conditions of the BVUs issued and outstanding under the LTIs for 2019, 2020 and 2021 (“:Covered BVUs”). As a result of that review, on August 5, 2021, the Committee approved a form of amendment (the “BVU Amendment”) for all Covered BVUs. All of the NEOs executed the BVU Amendment with respect to the Covered BVUs held by each of them. The low-interest rate environmentBVU amendment addresses the treatment of holders of Covered BVUs in the event their employment with the Company or an affiliate thereof is terminated without “cause” (as defined in the BVU Amendment). Following such a challenge for lifetermination without cause, and annuity insurers asfollowing the spreads on deposit-type contracts remain narrow, especially as interest rates have approached minimum crediting rates. Low market interest rates reduceend of the spreads betweenthree-year performance period applicable to each Covered BVU, the amounts we creditholder will be entitled to fixed annuity and individual life policyholders and the amounts we earna pro-rated payment with respect to their Covered BVUs (based on the investments that support these obligations. Our ALM Committee actively managesnumber of months in which such holder remained employed with the profitabilityCompany or an affiliate thereof during the applicable three-year performance period under such Covered BVUs). BVUs are forfeited in the event of these blocks of business. In previous years, we reduced the guaranteed minimum crediting rates on new fixed annuity contracts, which has afforded us the flexibilityany other termination prior to respond to the unusually low-interest rate environment. We have also reduced crediting rates on in-force contracts, where permitted to do so. These actions help mitigate the adverse impact of low interest rates on the profitability of these products, although sales volume may 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 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.settlement.
The interestBVU Amendment further addresses the mechanism for determining the value of Covered BVUs in the event of a “Change in Control” (as defined in the BVU Amendment). Upon such a Change in Control, the value of the then-outstanding Covered BVUs will be deemed to be equal to their target value (such that a compound annual growth rate environment affects estimated future profit projections, which could impact the amortization of our DAC assets and the estimates of policyholder liabilities. Significantly lower future estimated profits may cause us6.25% will be deemed to accelerate the amortization of DAC or require us to establish additional policyholder liabilities, thereby reducing earnings. We periodically review assumptionsbe achieved with respect to future earningsthe target number of such Covered BVUs)(the “Deemed BVU Value”). In the event of a Change in Control, if the holder remains employed until the end of the three-year performance period applicable to ensure they remain appropriate consideringeach Covered BVU, then 100% of the current interest rate environment.
Low interest rates are also challenging for property and casualty insurers. Investment incomeDeemed BVU Value will be payable to the holder during the first quarter of the calendar year immediately following the close of such performance period. If the holder is terminated without cause following a Change in Control, a pro-rated amount of the Deemed BVU Value would be payable to the holder following the end of the applicable three-year performance period, based on the number of months in which the holder was employed by the Company or an important element in earning an acceptable return on capital. Lower interest rates resulting in lower investment income require us to achieve better underwriting results. We have adjusted policy prices to help mitigateaffiliate during the adverse impact of low interest rates on our property and casualty business.applicable three-year performance period.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS11. EXECUTIVE COMPENSATION — (Continued)
Under the terms of the BVU Amendment, “Cause” and “Change in Control” are generally defined as follows:
Changing Regulatory Environment•:“Cause” means any of the following, as determined by the Board Compensation Committee in good faith:
◦recipient’s failure or inability to perform any reasonable assigned duties, after written notice from the Board Compensation Committee and, if curable, a reasonable opportunity to cure such failure or inability;
◦recipient’s commission of an act, or plea of guilty or nolo contendere to a misdemeanor, in either case involving dishonesty, fraud, theft, immoral conduct, bribery or extortion, or plea of guilty or nolo contendere to any felony;
◦recipient’s material breach of any agreement between recipient and the Company or one of its subsidiaries, including any written code of conduct and business ethics or other material written policy of the Company or one of its subsidiaries relating to personal conduct; or
◦recipient’s intentional wrongful act or omission that results in the restatement of the Company’s financial statements due to a violation of the Sarbanes-Oxley Act of 2002.
•“Change in Control” means the occurrence of any of the following events prior to the close of the applicable three-year performance period relating to a Covered BVU:
◦there is a change in ownership of the outstanding securities of the Company that causes any person (including any group of persons within the meaning of Rule 13d-5 under the Exchange Act) other than Moody National Bank, The insurance industry is primarily regulatedMoody Foundation, Moody Medical Research Institute and Moody Methodist Church (or any of their respective directors, managers or trustees) to become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s outstanding securities then entitled to vote for the election of directors;
◦the individuals who constitute the Board cease for any reason to constitute at least a majority thereof;
◦the state level, although some life and annuity products and servicesBoard’s approval of the sale of all or substantially all of the assets of the Company; or
◦the Board’s approval of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above; provided that, to the extent any amounts with respect to the Deemed BVU Value are also subject to U.S. federal regulation. WeSection 409A of the Code and such amounts are regularly subjectedconsidered to additional or changing regulation that requires us to update systems, change product structure, increasebe payable upon the amountoccurrence of reporting or adopt changes to distribution. These changes may increasea Change in Control, then no such payments will be made unless such Change in Control qualifies as a “change in control event” within the capital requirements for us and the industry, increase operating costs, change our operating practices and change our ability to provide products with pricing attractive to the marketplace.meaning of Treas. Reg. Section 1.409A-3(i)(5).
ImportancePursuant to the terms of Operating Efficiencies: The volatile economic environmentthe 2019, 2020 and costs associated2021 LTI, any amounts paid with greater regulation createrespect to Covered BVUs are not payable until the end of the three-year performance periods ending December 31, 2021, with respect to BVUs issued under the 2019 LTI, December 31, 2022, with respect to BVUs issued under the 2020 LTI, and December 31, 2023, with respect to BVUs issued under the 2021 LTI. Accordingly, if an NEO’s employment had been terminated on December 31, 2021, no amounts with respect to Covered BVUs would have been paid under the 2020 or 2021 LTI at such time. However, if an NEO had been terminated without cause on December 31, 2021, whether or not in connection with a further need for operating efficiencies. We manage our cost base while maintaining our commitmentchange in control event, he would have been entitled to provide superior customer servicereceive payment of amounts earned under the 2019 LTI, in the same manner and amount as described in the note to policyholders and agents. Investments in technology are coordinated through a disciplined project management process. We anticipate continuous improvement in our useColumn (c) of technologythe Summary Compensation Table above. In the event of any other termination as of December 31, 2021, the NEOs would not have been entitled to enhance our policyholders’ and agents’ experience and increase our overall operating effectiveness.receive payment of any amounts under the 2019 LTI.
Increased Role of Advanced Technology: The use of mobile technology has changed the way consumers want to conduct their business, including real-time access to information. Many customers expect to complete transactions in a digital format instead of traditional methods that require a phone call or submission of paper forms. Social media and other customer-facing technologies also reshape the way companies communicate and collaborate with key stakeholders, and new tools exist to better collect and analyze information for potential business opportunities and better management of risks. For example, we have mobile-enabled all internet-based access and leveraged social media channels to reach out to potential customers to promote awareness of the company, including the products and services offered. We expect that technology will continue to evolve, offering new and more effective ways to reach and service our customers and shareholders. We evaluate available and evolving technologies and incorporate those we believe offer appropriate benefits to the company and its customers.
Continued Challenges of Talent Attraction and Retention: Attracting qualified individuals and retaining existing employees continues to be a challenge for employers. Businesses have become extremely competitive in the ever-changing landscape of the talent marketplace. As a result, it is an increasing challenge to distinguish us as an employer of choice.
To address these challenges, we continue to seek out new and expanded uses for technology and social media that enhance our employer brand and educate candidates on the many benefits of working for us. Our planning and outreach efforts to develop a more diverse and inclusive workplace continue and help to strengthen the engagement of current employees as well as attract future employees. We continue to amplify the voice of our employees with regular surveys which help us grow and innovate. We actively value the perspectives that each employee brings and encourage broader employee influence on how decisions are made. As a result, we continue to experience increase in overall employee engagement. Providing robust career development conversations and career paths, personal growth opportunities and effective succession planning are also important elements of our retention and employee development efforts.
During the COVID-19 pandemic, the Company has devoted key resources to make employee health and safety a top priority. These efforts are having a positive impact as reflected in recent employee engagement survey results. Additionally, as we speak with candidates during the talent acquisition process, our precautions and protocols to ensure employee safety have been important to them when making the decision to join us. As we proceed though the pandemic, employee safety, productivity and retention are vital to meeting business goals and objectives.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS11. EXECUTIVE COMPENSATION — (Continued)
Life and Annuity
Effective management of invested assets and associated liabilities using crediting rates and, where applicable, financial hedging instruments (which we use as economic hedges of equity-indexed life and annuity products), is important to the success of our Life and Annuity segments. Asset “disintermediation,” the risk of large outflows of cash at times when it is disadvantageous to us to dispose of invested assets, is a risk associated with these segments as are rates of mortality and surrenders that exceed our assumptions.
Demographics: We believe a key driver shapingThe table below shows (1) the actionsnumber of Covered BVUs held by the NEOs as of December 31, 2021, (2) the applicable pro-rated number of Covered BVUs, based on the number of whole months of the life insurance industry isapplicable three-year performance periods during which the rising income protection, wealth accumulationNEO was employed by the Company, assuming a December 31, 2021 termination of each of the NEOs; and insurance needs(3) the amount that would be payable to each of an increasingthe NEOs at the end of the applicable three-year performance periods with respect to the pro-rated number of retirees. AsCovered BVUs, assuming achievement of target book value compound annual growth rate (i.e., the Deemed BVU Value). For a resulttermination in connection with a Change in Control, the Deemed BVU Value applies pursuant to the terms of increasing longevitythe BVU Amendment. Covered BVUs that were granted in 2019 are excluded, because they vested on December 31, 2021 and uncertainty regarding the Social Security System and an ongoing transition from defined benefit pension plans to 401(k) type retirement plans, retirees will need to accumulate sufficient savings to support retirement income requirements.were settled in cash in accordance with their terms in February 2022.
We believe we are well positioned to address | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 BVUs | | 2021 BVUs | |
|
| Name | | BVUs | | Pro-rated BVUs | | Value(1) | | BVUs | | Pro-rated BVUs | | Value(1) | | Total Value(1) |
| James E. Pozzi | | 27,876 | | 18,584 | | 2,229,151 | | 28,852 | | 9,617 | | 1,153,559 | | 3,382,710 |
| Timothy A. Walsh | | 3,738 | | 2,492 | | 298,915 | | 4,548 | | 1,516 | | 181,844 | | 480,759 |
| Brody J. Merrill | | - | | - | | - | | 500 | | 167 | | 20,032 | | 20,032 |
| David A. Behrens | | 3,899 | | 2,599 | | 311,750 | | 4,036 | | 1,345 | | 161,333 | | 473,083 |
| J.D. Johnson | | 2,223 | | 1,482 | | 177,766 | | 2,301 | | 767 | | 92,002 | | 269,768 |
| Hoyt J. Strickland | | 2,223 | | 1,482 | | 177,766 | | 2,301 | | 767 | | 92,002 | | 269,768 |
(1)The initial value of each BVU is $100. If the increasing need for savings tools and income protection. We believe our overall financial strength and broad distribution channels position us to respond with a varietytarget adjusted book value compound annual growth rate of products for individuals approaching retirement age, who seek information to plan for and manage their retirement needs. We believe our products that offer guaranteed income flows are well suited to serve this market.
Competitive Pressures: In recent years, the competitive landscape6.25% is achieved, 100% of the U.S. life insurance industry has shifted. Established insurers are competing againsttarget BVUs will be earned and each other and also against new market entrants that are developing products to attractearned BVU will settle in cash at an accumulated value of $119.95, the interestproduct of the growing number$100 initial Company BVU value multiplied by the target adjusted book value compound annual growth rate of retirees. Competition exists in terms of retaining and acquiring consumers’ business and also in terms of access to producers and distributors. Consolidation among distributors coupled with the aging sales force remains a challenge among insurers. In addition, the increased technological sophistication of consumers necessitates that insurers and distributors invest significant resources in technology to adapt to consumer expectations. We believe we possess sufficient scale, financial strength, resources and flexibility to compete effectively.6.25% (or $100 x 1.06253).
We believe we will continue to be competitive in the lifeNonqualified Deferred Compensation Plans and annuity markets through our broad lineTermination of products, diverse distribution channels, and consistent high level of customer service. We modify our products to meet customer needs and to expand our reach where we believe we can obtain profitable growth.Employment
Property and Casualty
We offer our personal and commercial property and casualty linesAssuming a change of business primarily through our multiple line agencies. We favorcontrol or a balanced, focused and collaborative approachtermination by reason of death, retirement or disability on December 31, 2021, each of the NEOs would have been entitled to both growth and profitability throughreceive the developmentaggregate balance of successful agencies.
To acquire and retain profitable business, we use sophisticated pricing models and risk segmentation, along with a focused distribution force. We believe this approach allows ushis Executive Plan account as of such date, as shown in Column (e) of the “Nonqualified Deferred Compensation Plans – Executive Plan” table above. In addition, assuming any of such events on December 31, 2021, Mr. Walsh would have been entitled to make product enhancements and offer programs that are charging an appropriate premium forreceive the risk.
Demand for property and casualty credit-related insurance products continues to increase. We continue to update credit-related insurance product offerings and pricing to meet changing market needs,aggregate balance of his Farm Family Supplemental Profit Sharing Plan account as wellof such date, as adding new agents to expand market shareshown in the credit-related insurance market. We are reviewing and implementing procedures to enhance customer service while, simultaneously, looking for efficiencies to reduce administrative costs.
Competitive Pressures: The property and casualty insurance industry remains highly competitive. Despite the competitive environment, we expect to identify profitable opportunities through our strong distribution channels, expanding geographic coverage, marketing efforts, new product development and pricing sophistication.“Nonqualified Deferred Compensation Plans – Farm Family Supplemental Profit Sharing Plan” table above.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Health
As a result of the Healthcare Acts of 2010 new opportunities were created in the limited benefit and supplemental product markets. In recent years, we built a portfolio of such products to be sold in the worksite market as well as to individuals. We believe that changes to the Healthcare Acts that removed the tax consequences for not having health coverage and the current removal of limitations on Short-Term Medical products could significantly increase our production. We constantly monitor the legislative environment for new changes that would impact our outlook on these products.
We also continue to expand our presence and product portfolio in the worksite market to generate new opportunities in the broker market, as well as developing and implementing a captive sales force.
We expect our Managing General Underwriter (“MGU”) business to remain stable during 2022. We generally retain only 10% of the premiums and risks produced by MGUs. The majority of the revenue generated from this business is fee income included in “Other income” of the Health segment’s operating results.
We have decided to exit the Medicare Supplement market due to increasing pricing pressures and deterioration of new sales and operational performance. Marketing efforts are refocused to MGU, Worksite and Individual Supplemental lines of business.
Sale of Equity Securities Portfolio
During the fourth quarter of 2021, we sold the majority of our equity securities portfolio. Such sale was based upon senior management's assessment of market conditions and the potential for changes in the U.S. federal corporate income tax rate. The sale resulted in net proceeds of $1.7 billion and did not have a significant impact on our stockholders' equity.
Proceeds from the sale of the equity securities portfolio will be reinvested primarily in fixed income investments. We expect that such sale, coupled with the reinvestment of proceeds in primarily fixed income investments, will have a positive impact on our net investment income and cash flows, as well as on the Risk Based Capital of our insurance company subsidiaries that held equity security investments. Such actions will also mitigate fluctuations in net income associated with non-cash earnings from net gains (losses) from the change in fair value of equity securities.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires estimates and assumptions that often involve a significant degree of judgment. These estimates and judgments include expectations of current and future mortality, morbidity, persistency, claims and claim adjustment expenses, recoverability of receivables, investment returns and interest rates which extend well into the future. In developing these estimates there is inherent uncertainty, and material changes to facts and circumstances may develop. Although variability is inherent in these estimates, we believe the amounts as reported are appropriate based upon the facts available upon compilation of the consolidated financial statements.
On an ongoing basis, management reviews the estimates and assumptions used in preparing the financial statements. If current facts and circumstances warrant modifications in estimates and assumptions, our financial position and results of operations as reported in the consolidated financial statements could change significantly.
A description of these critical accounting estimates is presented below. Also, see Part II, Item 8, Financial Statements and Supplementary Data — Notes to the Consolidated Financial Statements for additional information.
Future Policy Benefits
Life and Annuity Liability for Unpaid Claims
Life Reserving—Principal assumptions used in the determination of the reserves for future policy benefits are mortality, policy lapse rates, investment return, inflation, expenses and other contingent events as appropriate to the respective product type. Reserves for incurred but not reported (“IBNR”) claims on life policies are calculated using historical claims information. Reserves for interest-sensitive and variable universal life insurance policies are equal to the current account value calculated for the policyholder. Some of our universal life policies contain secondary guarantees, for which additional reserves are recorded based on the term of the policy.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Annuity Reserving—Reserves for payout annuities with more than insignificant amounts of mortality risk are calculated in accordance with the applicable accounting guidance for limited pay insurance contracts. Benefit and maintenance expense reserves are calculated by using assumptions reflecting our expectations of future costs, including an appropriate margin for adverse deviation. These assumptions are locked-in at issue and generally reflect pricing assumptions from that period. If the resulting reserve would otherwise cause profits to be recognized at the issue date, additional reserves are recorded. The resulting recognition of profits would be gradual over the expected life of the contract.
Reserves for fixed deferred annuities are established equivalent to the account value held on behalf of the policyholder. Reserves for indexed annuities are calculated in accordance with derivative accounting guidance which defines a host liability for return of principal and guaranteed interest, and an embedded derivative liability for funded benefits in excess of the host guarantee. Additional reserves for benefits that can exceed contract fund value, such as lifetime income riders, are determined as needed in accordance with the applicable accounting guidance. 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.
Key Assumptions—The following assumptions reflect our best estimates and may impact our life and annuity reserves:
•Future lapse rates will remain reasonably consistent with our current expectations;
•Mortality rates will remain reasonably consistent within standard industry mortality table ranges; and
•Future interest spreads will remain reasonably consistent with our current expectations.
Recoverability—At least annually, we test the adequacy of the net benefit reserves (policy benefit reserves less DAC) recorded for life insurance and annuity products. To perform the tests, we use our current best-estimate assumptions as to policyholder mortality, persistency, maintenance expenses and invested asset returns.
For interest-sensitive business, best-estimate assumptions are updated to reflect 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 profitability. In particular, changes in estimates of the future invested asset return have a large effect on the degree of reserve adequacy and DAC recoverability.
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 include margins for adverse deviation in the event that actual experience differs from the original assumptions.
Health Liability for Unpaid Claims
Health liabilities for unpaid claims are established using the following methods:
Completion Factor Approach—This method assumes that the historical claim patterns will be an accurate representation of unpaid claim liabilities. An estimate of the unpaid claims is calculated by subtracting period-to-date paid claims from an estimate of the ultimate “complete” payment for all incurred claims in the period. Completion factors are calculated which “complete” the current period-to-date payment totals for each incurred month to estimate the ultimate expected payout.
Tabular Claims Reserves—This method is used to calculate the reserves for long-term care and disability income blocks of business. These reserves rely on published valuation continuance tables created using industry experience regarding assumptions of continued morbidity and subsequent recovery. Reserves are calculated by applying these continuance tables, along with appropriate company experience adjustments, to the stream of contractual benefit payments. These expected benefit payments are discounted at the required interest rate.
Future Policy Benefits—Reserves 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.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Premium Deficiency Reserves—Deficiency reserves are established when the expected future claim payments and expenses for a classification of policies 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, future net investment income, and the expected benefit utilization patterns. We have established premium deficiency reserves for portions of the major medical business and the long-term care business that are in run-off. 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 Liability for Unpaid Claims and Claim Adjustment Expenses
Liability for unpaid claims and Claim Adjustment Expense (“CAE”)—Property and casualty liability for unpaid claims and CAE are established to provide for the estimated cost of settling and paying both reported as well as IBNR claims. The two major categories of CAE are defense and cost containment expense, and adjusting and other expense. The details of property and casualty liability for unpaid claims are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| | | Gross | | Ceded | | Net | | Gross | | Ceded | | Net |
| Case | | $ | 673,929 | | | $ | 71,408 | | | $ | 602,521 | | | $ | 628,729 | | | $ | 60,081 | | | $ | 568,648 | |
| IBNR | | 549,223 | | | 37,788 | | | 511,435 | | | 518,358 | | | 32,926 | | | 485,432 | |
| Total | | $ | 1,223,152 | | | $ | 109,196 | | | $ | 1,113,956 | | | $ | 1,147,087 | | | $ | 93,007 | | | $ | 1,054,080 | |
Case Reserves—Reserves for reported losses are determined on either a judgment or a formula basis, depending on the timing and type of the loss. The formula reserve is a fixed amount for each claim of a given type based on historical paid loss data for similar claims with a provision for claim inflation. Judgment reserve amounts replace initial formula reserves and are set for each loss based on facts and circumstances of each case and the expectation of damages. We regularly monitor the adequacy of reserves on a case-by-case basis and change the amount of such reserves as necessary.
IBNR—IBNR liabilities are estimated based on many variables including historical statistical information, inflation, legal environment, economic conditions, trends in claim severity and frequency as well as other factors affecting the adequacy of claim reserves. Loss and premium data is aggregated by exposure class and by accident year. IBNR liabilities are estimated by projecting ultimate losses on each class of business and subtracting paid losses and case reserves. Our overall reserve practice provides for ongoing claims evaluation and adjustment based on the development of related data and other relevant information pertaining to claims. Adjustments in aggregate reserves, if any, are included in the results of operations for the period during which such adjustments are made.
The property and casualty liabilities for unpaid claims are established to recognize future development on reported losses for each line of business. The estimation of these amounts is subject to significant uncertainty due to the volatile nature of property and casualty insurance liabilities. The estimation process is based significantly on the assumption that past developments are an appropriate predictor of future events and involves a variety of actuarial techniques that analyze experience, trends and other relevant factors. See the following paragraphs as well as Part II, Item 8, Financial Statements and Supplementary Data — Note 12, Liability for Unpaid Claims and Claim Adjustment Expenses, of the Notes to the Consolidated Financial Statements for additional information.
The evaluation process to determine liability for unpaid claims involves the collaboration of underwriting, claims and actuarial departments. The process also includes consultation with independent actuarial firms as part of our process of gaining reassurance that claims and CAE liability estimate sufficiently, all obligations arising from all losses incurred as of year-end.
Premium Deficiency Reserve—Deficiency reserves are recorded when the expected claims payments and policy maintenance costs for a product line exceed the expected premiums for that product line. The estimation of a deficiency reserve considers the current profitability of a product line using anticipated claims, CAE, and policy maintenance costs. The assumptions and methods used to determine the need for deficiency reserves are reviewed periodically for reasonableness. There were no reserves of this type at December 31, 2021 and December 31, 2020, respectively.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Property and Casualty Reserving Methodology—The following methods are utilized:
•Initial Expected Loss Ratio—This method calculates an estimate of ultimate losses by applying an estimated loss ratio to actual earned premium for each calendar/accident year. This method is appropriate for classes of business where the actual paid or reported loss experience is not yet mature enough to influence initial expectations of the ultimate loss ratios.
•Pegged Frequency and Severity—This method uses actual claims count data and emergence patterns of older accident periods to project the ultimate number of reported claims for a given accident year. A similar process projects the ultimate average severity per claim so that the product of the two projections results in a projection of ultimate loss for a given accident year.
•Bornhuetter-Ferguson—This method uses, as a starting point, either an assumed Initial Expected Loss Ratio Method or Pegged Frequency and Severity method and blends in the loss ratio or frequency and severity implied by the claims experience to date by using loss development patterns based on our historical experience. This method is generally appropriate where there are few reported claims and an unstable pattern of reported losses.
•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 total. This method is appropriate when there is a relatively stable pattern of loss and expense emergence and a relatively large number of reported claims.
•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 total. 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.
•Calendar Year Paid Adjusting and Other Expense to Paid Loss—This method uses a selected prior calendar years’ paid expense to paid loss ratio to project ultimate loss adjustment expenses for adjusting and other expense. 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 that a percentage of the expense is incurred when a claim is opened and the remaining percentage is paid throughout the claim's life.
The basis of our selected single point best estimate on a particular line of business is often a blended result 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.
Key Assumptions—The following assumptions reflect our best estimates and may impact our property and casualty reserves:
•The expected loss development patterns, estimated primarily using our historical loss experience;
•The expected loss ratios, claim frequency and severity, estimated primarily using our historical loss experience;
•Consistent claims handling, reserving and payment processes;
•No unusual growth patterns or unexpected changes in the mix of business; and
•No significant prospective changes in laws that would significantly affect future payouts.
Management believes our reserves at December 31, 2021 are adequate. New information, regulation, events or circumstances unknown at the original valuation date, however, may result in future development resulting in ultimate losses being significantly greater or less than the recorded reserves at December 31, 2021.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Deferred Policy Acquisition Costs (DAC)
We had a DAC asset of approximately $1.5 billion and $1.4 billion at December 31, 2021 and 2020, respectively. See Part II, Item 8, Financial Statements and Supplementary Data — Note 10, Deferred Policy Acquisition Costs, of the Notes to the Consolidated Financial Statements for additional details.
We believe the estimates used in our DAC calculations provide insight into how variations in assumptions and estimates would affect our business. The following table displays the sensitivity of reasonably likely changes in assumptions in the DAC amortization for our long-duration business at December 31, 2021 (in thousands):
| | | | | |
| Increase (Decrease) in DAC |
Increase in future investment margins of 25 basis points | $ | 50,772 | |
Decrease in future investment margins of 25 basis points | (57,127) | |
Decrease in future life mortality by 1% | 2,189 | |
Increase in future life mortality by 1% | (2,258) | |
Allowance for Credit Losses
On January 1, 2020, we adopted ASC 326, Financial Instruments—Credit Losses, accounting guidance related to the allowance for credit losses. The new standard significantly changed how entities measure credit losses for most financial assets and reinsurance recoverables that are not measured at fair value through net income. The guidance replaced the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. Refer to Part II, Item 8, Financial Statements and Supplementary Data — Note 4, Investment in Securities, and Note 5, Mortgage Loans, of the Notes to the Consolidated Financial Statements for further discussion of the accounting policies and methodologies for establishing the allowance for credit losses.
The accounting estimates relating to the allowance for credit losses over financial assets held at amortized cost have been evaluated and monitored since adoption and management has deemed these estimates to be critical for the following reasons:
•Changes in the provision for credit losses can be material to the financial position and results of operations for the Company;
•Estimates relating to the allowance for credit losses require us to project future cash flows, delinquencies, collateral values, occupancy rates, prepayments based on a reasonable and supportable forecast in order to estimate probability of default and the loss given default;
•The allowance for credit losses is also affected by factors outside of our control including, but not limited to, market volatility, deterioration in the credit or prospects of companies and governmental entities, political uncertainty, industry trends, pandemics, and trends in interest rates; and
•Management judgment is required to determine which models, methodologies, and scenario conditions are used to calculate the allowance for credit losses to produce a reasonable estimate that encompasses the expected lifetime credit losses.
Since our estimate for the allowance for credit losses relies on management judgment and is sensitive to factors outside of our control, as noted above, there are inherent uncertainties within the estimates. As a result, the changes in the allowance for credit losses could materially impact our consolidated financial statements.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Valuation of Financial Instruments
The fair value of available-for-sale fixed maturity and equity securities is determined by management using one of the three primary sources of information: the quoted prices in active markets, third-party pricing services, or independent broker quotations. Estimated fair value of securities based on quoted prices in active markets is readily and regularly available; therefore, valuation of these securities generally does not involve management judgment. For securities without quoted prices, fair value measurement is determined using third-party pricing services’ proprietary pricing applications. Typical inputs used by the models are relevant market information, benchmark curves, benchmark pricing of like securities, sector groupings and matrix pricing. Any securities remaining unpriced after utilizing the first two pricing methods are submitted to independent brokers for prices. We have analyzed the third-party pricing services and independent brokers’ valuation methodologies and related inputs, and have evaluated the various types of securities in our investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Management completes certain tests throughout the year and at year-end to determine that prices provided by our pricing services are reasonable.
The Company sells equity-indexed universal life and equity-indexed deferred annuity contracts with guaranteed minimum benefits, some of which contain embedded derivatives that are required to be bifurcated from a host reserve, separately accounted for, and measured at fair value. We utilize over-the-counter equity options to hedge our exposure to equity-indexed universal life and equity-indexed deferred annuity benefits, and the fair values for these options are sourced from broker quotations. Accounting guidance requires a fair value calculation as part of equity-indexed policy reserves. This is called the value of embedded derivative ("VED") and the other part of the indexed policy reserve is called the host reserve. The embedded derivative represents future benefit cash flows in excess of the minimum guarantee cash flows. The host covers the minimum guarantee cash flows. Both the VED and the host reserve are calculated by a vendor-sourced reserve valuation system. The VED calculation model incorporates assumptions related to current option pricing (such as implied volatility and interest rates), future policyholder behavior (such as surrenders and withdrawals), and factors affecting the value of future indexed interest periods (such as option budgets). These assumptions are evaluated annually by management with any changes in the estimated fair value resulting in a cumulative charge or credit to income from operations.
Litigation Contingencies
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 condition. 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, continues 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 statements.
Segments
Our insurance segments do not directly own assets. Rather, assets are allocated to support the liabilities and capital allocated to each segment. The mix of assets allocated to each of the insurance segments is intended to support the characteristics of the insurance liabilities within each segment including expected cash flows and pricing assumptions, and is intended to be sufficient to support each segment’s business activities. We have utilized this methodology consistently over all periods presented.
The Corporate and Other segment acts as the owner of all invested assets of the Company. The investment income from the invested assets is allocated to the insurance segments in accordance with the assets allocated to each insurance segment. Earnings of the Corporate and Other segment are derived from income related to invested assets not allocated to the insurance segments and from our non-insurance subsidiaries. All realized investment gains and losses, which includes other-than-temporary impairments (“OTTI”) and credit losses, are recorded in this segment.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Consolidated Results of Operations
The following sets forth the consolidated results of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | |
| Premiums | | $ | 2,301,053 | | | $ | 2,218,074 | | | $ | 2,182,794 | | | $ | 82,979 | | | $ | 35,280 | |
| Other policy revenues | | 359,707 | | | 310,746 | | | 305,256 | | | 48,961 | | | 5,490 | |
| Net investment income | | 1,171,654 | | | 976,152 | | | 1,180,907 | | | 195,502 | | | (204,755) | |
| Net realized investment gains | | 64,628 | | | 35,660 | | | 30,751 | | | 28,968 | | | 4,909 | |
| (Increase) decrease in investment credit loss | | 28,778 | | | (102,603) | | | — | | | 131,381 | | | (102,603) | |
| Net gains on equity securities | | 420,283 | | | 356,281 | | | 422,535 | | | 64,002 | | | (66,254) | |
| Other income | | 45,688 | | | 40,556 | | | 51,401 | | | 5,132 | | | (10,845) | |
| Total premiums and other revenues | | 4,391,791 | | | 3,834,866 | | | 4,173,644 | | | 556,925 | | | (338,778) | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | |
| Policyholder benefits | | 755,655 | | | 748,083 | | | 667,828 | | | 7,572 | | | 80,255 | |
| Claims incurred | | 1,192,155 | | | 1,121,742 | | | 1,151,166 | | | 70,413 | | | (29,424) | |
| Interest credited to policyholders’ account balances | | 448,654 | | | 321,042 | | | 511,999 | | | 127,612 | | | (190,957) | |
| Commissions for acquiring and servicing policies | | 640,097 | | | 553,600 | | | 532,634 | | | 86,497 | | | 20,966 | |
| Other operating expenses | | 571,869 | | | 515,413 | | | 524,888 | | | 56,456 | | | (9,475) | |
Change in deferred policy acquisition costs (1) | | (79,632) | | | (5,678) | | | (12,749) | | | (73,954) | | | 7,071 | |
| Total benefits, losses and expenses | | 3,528,798 | | | 3,254,202 | | | 3,375,766 | | | 274,596 | | | (121,564) | |
| Income before federal income taxes and other items | | $ | 862,993 | | | $ | 580,664 | | | $ | 797,878 | | | $ | 282,329 | | | $ | (217,214) | |
(1)A negative change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.
Comparison of the year ended December 31, 2021 to 2020
Earnings increased primarily due to the following:
•An increase in net investment income driven by increases from investment funds and mortgage loan profit participation and prepayment income
•A favorable change in investment credit loss due to improvement in our commercial mortgage loans driven by improvement in cash flows and a positive economic outlook from our properties, and improving conditions in travel and leisure
The increase in earnings was partially offset by the following:
•A decrease in Life segment earnings driven by an overall increase in mortality which includes claims directly and indirectly attributable to COVID-19
•A decrease in Property and Casualty segment earnings driven by an increase in net catastrophe losses and higher claim frequency in our personal automobile products as miles driven have increased
•An increase in operating expenses primarily due to Merger-related expenses of $21.5 million
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Life
Life segment financial results for the periods indicated were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | |
| Premiums | | $ | 412,769 | | | $ | 396,099 | | | $ | 359,419 | | | $ | 16,670 | | | $ | 36,680 | |
| Other policy revenues | | 336,136 | | | 295,263 | | | 288,061 | | | 40,873 | | | 7,202 | |
| Net investment income | | 277,962 | | | 261,389 | | | 263,788 | | | 16,573 | | | (2,399) | |
| Other income | | 1,577 | | | 2,084 | | | 1,967 | | | (507) | | | 117 | |
| Total premiums and other revenues | | 1,028,444 | | | 954,835 | | | 913,235 | | | 73,609 | | | 41,600 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | |
| Policyholder benefits | | 605,724 | | | 533,925 | | | 449,252 | | | 71,799 | | | 84,673 | |
| Interest credited to policyholders’ account balances | | 84,005 | | | 75,943 | | | 80,950 | | | 8,062 | | | (5,007) | |
| Commissions for acquiring and servicing policies | | 186,470 | | | 167,548 | | | 162,203 | | | 18,922 | | | 5,345 | |
| Other operating expenses | | 195,127 | | | 182,395 | | | 190,104 | | | 12,732 | | | (7,709) | |
Change in deferred policy acquisition costs (1) | | (50,134) | | | (53,756) | | | (26,036) | | | 3,622 | | | (27,720) | |
| Total benefits, losses and expenses | | 1,021,192 | | | 906,055 | | | 856,473 | | | 115,137 | | | 49,582 | |
| Income before federal income taxes and other items | | $ | 7,252 | | | $ | 48,780 | | | $ | 56,762 | | | $ | (41,528) | | | $ | (7,982) | |
(1)A negative change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.
Comparison of the year ended December 31, 2021 to 2020
Earnings for our Life segment decreased primarily due to the following:
•An overall increase in mortality which includes claims directly and indirectly attributable to COVID-19
The decrease in earnings was partially offset by the following:
•Strong persistency resulting in an increase in premiums and other policy revenues
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Life Insurance Sales
The following table presents life insurance sales as measured by annualized premium, which allows a comparison of new policies sold by an insurance company during the period (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Traditional Life | | $ | 64,178 | | | $ | 62,044 | | | $ | 56,681 | | | $ | 2,134 | | | $ | 5,363 | |
| Universal Life | | 32,989 | | | 28,900 | | | 28,673 | | | 4,089 | | | 227 | |
| Indexed UL | | 36,333 | | | 30,643 | | | 36,906 | | | 5,690 | | | (6,263) | |
| | | | | | | | | | |
| Total recurring | | 133,500 | | | 121,587 | | | 122,260 | | | 11,913 | | | (673) | |
Single and excess (1) | | 2,097 | | | 1,509 | | | 2,193 | | | 588 | | | (684) | |
Credit life (1) | | 7,714 | | | 8,140 | | | 10,723 | | | (426) | | | (2,583) | |
| Total annualized premium | | $ | 143,311 | | | $ | 131,236 | | | $ | 135,176 | | | $ | 12,075 | | | $ | (3,940) | |
(1)Weighted amounts with single and excess premiums counted at 10%
Life insurance sales are based on the total yearly premium that insurance companies would expect to receive if all recurring premium policies remain in-force, plus 10% of single and excess premiums. Life insurance sales measure activity associated with gaining new insurance business in the current period, and includes deposits received related to interest sensitive life and universal life-type products. Whereas GAAP premium revenues are associated with policies sold in current and prior periods, and deposits received related to interest sensitive life and universal life-type products are recorded in a policyholder account which is reflected as a liability. Therefore, a reconciliation of premium revenues and insurance sales is not meaningful.
Total Life sales increased 9.2% during the twelve months ended December 31, 2021 compared to 2020 as new life sales rebounded from the COVID-19 economic uncertainties and social distancing practices during 2020.
Policy In-force Information
The following table summarizes changes in the Life segment’s in-force amounts (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Life insurance in-force | | | | | | | | | | |
| Traditional life | | $ | 98,142,544 | | | $ | 91,920,577 | | | $ | 84,129,193 | | | $ | 6,221,967 | | | $ | 7,791,384 | |
| Interest-sensitive life | | 38,789,008 | | | 36,326,621 | | | 33,975,092 | | | 2,462,387 | | | 2,351,529 | |
| Total life insurance in-force | | $ | 136,931,552 | | | $ | 128,247,198 | | | $ | 118,104,285 | | | $ | 8,684,354 | | | $ | 10,142,913 | |
The following table summarizes changes in the Life segment’s number of policies in-force:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Number of policies in-force | | | | | | | | | | |
| Traditional life | | 1,696,145 | | | 1,832,536 | | | 1,911,305 | | | (136,391) | | | (78,769) | |
| Interest-sensitive life | | 281,380 | | | 269,668 | | | 256,146 | | | 11,712 | | | 13,522 | |
| Total number of policies in-force | | 1,977,525 | | | 2,102,204 | | | 2,167,451 | | | (124,679) | | | (65,247) | |
Life insurance in-force increased during the twelve months ended December 31, 2021 compared to 2020 despite a reduction of policies in-force due to an increase in sales of higher face amount policies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Change in Deferred Policy Acquisition Costs
The change in DAC represents acquisition costs capitalized less the amortization of existing DAC. The following shows the components of the change in DAC (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Acquisition cost capitalized | | $ | (161,898) | | | $ | (148,142) | | | $ | (139,336) | | | $ | (13,756) | | | $ | (8,806) | |
| Amortization of DAC | | 111,764 | | | 94,386 | | | 113,300 | | | 17,378 | | | (18,914) | |
| Change in DAC | | $ | (50,134) | | | $ | (53,756) | | | $ | (26,036) | | | $ | 3,622 | | | $ | (27,720) | |
Reinsurance
The table below summarizes reinsurance reserves and premium amounts assumed and ceded (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Reserves | | Premiums |
| | | Years ended December 31, | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Reinsurance assumed | | $ | 2,902 | | | $ | 1,067 | | | $ | 1,103 | | | $ | 5,035 | | | $ | 1,419 | | | $ | 507 | |
| Reinsurance ceded | | (221,898) | | | (195,251) | | | (203,011) | | | (87,721) | | | (77,444) | | | (86,017) | |
| Total | | $ | (218,996) | | | $ | (194,184) | | | $ | (201,908) | | | $ | (82,686) | | | $ | (76,025) | | | $ | (85,510) | |
We use reinsurance to mitigate certain risks to the Life segment. During 2021, our retention limits were $5.0 million for issue ages 75 and under, and $2.0 million for issue ages 76 through 80, and $1.0 million for issue ages 81 and older for traditional and universal life. In our Life segment, we currently retain 100% of newly developed permanent and term products up to our retention limit and cede the excess. American National utilizes facultative reinsurance when a case requires support that does not follow the Company’s standard underwriting guidelines. Accidental death and premium waiver benefits are mostly retained on new business. The reduction in reinsurance ceded is due to a change in retention limits effective January 1, 2019.
For 2021, the companies to whom we have ceded reinsurance for the Life segment are shown below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | |
| Reinsurer | | A.M. Best Rating (1) | | Ceded Premium | | Percentage of Ceded Premium |
| Swiss Re Life & Health of America Inc. | | A+ | | $ | 25,133 | | | 30.1 | % |
| SCOR Global Life Reinsurance Company of Delaware | | A+ | | 18,039 | | | 21.6 | |
| Munich American Reassurance Company | | A+ | | 13,091 | | | 15.7 | |
| Canada Life Reinsurance | | A+ | | 7,543 | | | 9.0 | |
| Reinsurance Group of America | | A+ | | 5,576 | | | 6.7 | |
| General Re Life Corporation | | A++ | | 4,807 | | | 5.8 | |
| Other Reinsurers with no single company with greater than 5% of the total ceded premium | | | | 9,262 | | | 11.1 | |
| Total life reinsurance ceded | | | | $ | 83,451 | | | 100.0 | % |
(1)A.M. Best rating as of the most current information available February 9, 2022.
In addition, reinsurance is used in the credit life business primarily to provide producers of credit-related insurance products the opportunity to participate in the underwriting risk through producer-owned captive reinsurance companies often domiciled outside of the United States. A majority of the treaties entered into by our Specialty Markets Group are written on a 100% coinsurance basis with benefit limits of $0.1 million on credit life.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Annuity
Annuity segment financial results for the periods indicated were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | |
| Premiums | | $ | 74,925 | | | $ | 92,866 | | | $ | 147,139 | | | $ | (17,941) | | | $ | (54,273) | |
| Other policy revenues | | 23,571 | | | 15,483 | | | 17,195 | | | 8,088 | | | (1,712) | |
| Net investment income | | 629,417 | | | 570,003 | | | 663,895 | | | 59,414 | | | (93,892) | |
| Other income | | 3,282 | | | 2,716 | | | 2,727 | | | 566 | | | (11) | |
| Total premiums and other revenues | | 731,195 | | | 681,068 | | | 830,956 | | | 50,127 | | | (149,888) | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | |
| Policyholder benefits | | 149,931 | | | 214,158 | | | 218,576 | | | (64,227) | | | (4,418) | |
| Interest credited to policyholders’ account balances | | 364,649 | | | 245,099 | | | 431,049 | | | 119,550 | | | (185,950) | |
| Commissions for acquiring and servicing policies | | 98,842 | | | 55,910 | | | 71,350 | | | 42,932 | | | (15,440) | |
| Other operating expenses | | 53,379 | | | 48,359 | | | 50,507 | | | 5,020 | | | (2,148) | |
Change in deferred policy acquisition costs (1) | | (22,838) | | | 48,298 | | | 9,474 | | | (71,136) | | | 38,824 | |
| Total benefits, losses and expenses | | 643,963 | | | 611,824 | | | 780,956 | | | 32,139 | | | (169,132) | |
| Income before federal income taxes and other items | | $ | 87,232 | | | $ | 69,244 | | | $ | 50,000 | | | $ | 17,988 | | | $ | 19,244 | |
(1)A negative change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.
Comparison of the year ended December 31, 2021 to 2020
Earnings for our Annuity segment increased primarily due to the following:
•An increase in net investment income due to higher option gains resulting from favorable market conditions
•A favorable mark-to-market impact to equity-indexed annuity reserves primarily due to higher treasury rates
•Lower DAC amortization for fixed deferred products due to an increase in estimated gross profits driven by higher projected future interest rates compared to previous expectations
The increase in earnings was partially offset by the following:
•A change in estimate in the fourth quarter of 2020 related to our equity-indexed annuity products that resulted in an increase of $23.0 million in earnings from our Annuity segment. The impacts of the change in estimate consist of an increase to policyholder benefits of $47.1 million, deferred policy acquisition costs of $26.3 million and a reduction in interest credited to policyholders' account balances of $96.4 million
Annuity premium and deposit amounts received are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Fixed deferred annuity | | $ | 920,541 | | | $ | 366,384 | | | $ | 944,128 | | | $ | 554,157 | | | $ | (577,744) | |
| Single premium immediate annuity | | 90,336 | | | 125,175 | | | 203,314 | | | (34,839) | | | (78,139) | |
| Equity-indexed deferred annuity | | 793,068 | | | 394,178 | | | 330,744 | | | 398,890 | | | 63,434 | |
| Variable deferred annuity | | 62,719 | | | 60,279 | | | 69,178 | | | 2,440 | | | (8,899) | |
| Total premium and deposits | | 1,866,664 | | | 946,016 | | | 1,547,364 | | | 920,648 | | | (601,348) | |
| Less: Policy deposits | | 1,791,739 | | | 853,150 | | | 1,400,225 | | | 938,589 | | | (547,075) | |
| Total earned premiums | | $ | 74,925 | | | $ | 92,866 | | | $ | 147,139 | | | $ | (17,941) | | | $ | (54,273) | |
Annuity premiums and deposits increased primarily for equity-indexed and fixed deferred products during the year ended December 31, 2021 compared to 2020 reflecting improved competitiveness of the product. The decrease in earned premium is due to a decline in single premium annuity sales.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Change in Deferred Policy Acquisition Costs
The change in DAC represents acquisition costs capitalized less the amortization of existing DAC, which is calculated in proportion to expected gross profits. The following shows the components of the change in DAC (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Acquisition cost capitalized | | $ | (99,971) | | | $ | (55,411) | | | $ | (70,272) | | | $ | (44,560) | | | $ | 14,861 | |
| Amortization of DAC | | 77,133 | | | 103,709 | | | 79,746 | | | (26,576) | | | 23,963 | |
| Change in DAC | | $ | (22,838) | | | $ | 48,298 | | | $ | 9,474 | | | $ | (71,136) | | | $ | 38,824 | |
The change in acquisition costs capitalized relates to increased commissions from sales. The change in amortization of DAC includes the unlocking of assumptions to our equity-indexed annuities largely offset by the effects of increases in interest rates, and as mentioned above, the change in estimate related to our equity-indexed annuities resulted in a $26.3 million increase in the amortization of DAC in 2020.
Shown below are the changes in reserve (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Fixed deferred annuity | | | | | | |
| Reserve, beginning of period | | $ | 6,635,203 | | | $ | 6,893,174 | | | $ | 6,773,603 | |
| Premiums | | 920,541 | | | 366,384 | | | 944,128 | |
| Death and other benefits | | (234,912) | | | (215,330) | | | (237,346) | |
| Surrenders | | (484,048) | | | (594,253) | | | (787,617) | |
| Fees | | (1,557) | | | (968) | | | (2,616) | |
| Interest and mortality | | 184,060 | | | 186,196 | | | 203,022 | |
| Reserve, end of period | | 7,019,287 | | | 6,635,203 | | | 6,893,174 | |
| Equity-indexed annuity | | | | | | |
| Reserve, beginning of period | | 4,097,012 | | | 3,985,165 | | | 3,668,645 | |
| Premiums | | 793,068 | | | 394,178 | | | 330,744 | |
| Death and other benefits | | (57,070) | | | (48,451) | | | (40,670) | |
| Surrenders | | (298,181) | | | (331,359) | | | (193,957) | |
| Fees | | (3,358) | | | (2,990) | | | (3,640) | |
| Interest and mortality | | 176,620 | | | 100,469 | | | 224,043 | |
| | | | | | |
| Reserve, end of period | | 4,708,091 | | | 4,097,012 | | | 3,985,165 | |
| Single premium immediate annuity | | | | | | |
| Reserve, beginning of period | | 1,851,955 | | | 1,874,942 | | | 1,826,137 | |
| Premiums | | 90,336 | | | 125,175 | | | 203,314 | |
| Payments | | (203,115) | | | (218,469) | | | (216,782) | |
| Interest and mortality | | 60,767 | | | 70,307 | | | 62,273 | |
| Reserve, end of period | | 1,799,943 | | | 1,851,955 | | | 1,874,942 | |
| Variable deferred annuity | | | | | | |
| Reserve, beginning of period | | 418,508 | | | 385,735 | | | 332,898 | |
| Premiums | | 62,719 | | | 60,279 | | | 69,178 | |
| Other flows | | 614 | | | 1,356 | | | (97) | |
| Surrenders | | (79,465) | | | (87,068) | | | (85,994) | |
| Fees | | (5,262) | | | (4,479) | | | (4,703) | |
| Change in market value and other | | 58,036 | | | 62,685 | | | 74,453 | |
| Reserve, end of period | | 455,150 | | | 418,508 | | | 385,735 | |
| Total reserve, end of period | | $ | 13,982,471 | | | $ | 13,002,678 | | | $ | 13,139,016 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Interest and Mortality Margin
Margins decreased for fixed annuities over the past two years due to declining portfolio rates and increased for indexed annuities in 2020 due to the aforementioned change in estimate. The increased margin for indexed annuities was sustained in 2021 due to the favorable impact of increases in treasury rates on mark-to-market reserves. The following table summarizes the interest margin due to the impact of the investment performance, interest credited to policyholder’s account balances, and the end of period assets measured by account balance (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Fixed annuity | | | | | | | | | | |
| Fixed investment income | | $ | 352,392 | | | $ | 369,795 | | | $ | 384,700 | | | $ | (17,403) | | | $ | (14,905) | |
| Interest credited and mortality | | (244,827) | | | (256,503) | | | (265,295) | | | 11,676 | | | 8,792 | |
| Interest and mortality margin | | 107,565 | | | 113,292 | | | 119,405 | | | (5,727) | | | (6,113) | |
| Equity-indexed annuity | | | | | | | | | | |
| Fixed investment income | | 174,479 | | | 160,271 | | | 152,101 | | | 14,208 | | | 8,170 | |
| Option return | | 102,546 | | | 39,937 | | | 127,094 | | | 62,609 | | | (87,157) | |
| Interest credited and mortality | | (176,620) | | | (100,469) | | | (224,043) | | | (76,151) | | | 123,574 | |
| Interest and mortality margin | | 100,405 | | | 99,739 | | | 55,152 | | | 666 | | | 44,587 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Variable annuity | | | | | | | | | | |
| Separate account management fees | | 5,073 | | | 4,164 | | | 4,122 | | | 909 | | | 42 | |
| Interest and mortality margin | | 5,073 | | | 4,164 | | | 4,122 | | | 909 | | | 42 | |
| Total interest and mortality margin | | $ | 213,043 | | | $ | 217,195 | | | $ | 178,679 | | | $ | (4,152) | | | $ | 38,516 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Health
Health segment financial results for the periods indicated were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | |
| Premiums | | $ | 143,484 | | | $ | 168,805 | | | $ | 165,035 | | | $ | (25,321) | | | $ | 3,770 | |
| Net investment income | | 8,153 | | | 8,637 | | | 9,467 | | | (484) | | | (830) | |
| Other income | | 21,743 | | | 19,598 | | | 20,762 | | | 2,145 | | | (1,164) | |
| Total premiums and other revenues | | 173,380 | | | 197,040 | | | 195,264 | | | (23,660) | | | 1,776 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | |
| Claims incurred | | 98,029 | | | 116,122 | | | 109,013 | | | (18,093) | | | 7,109 | |
| Commissions for acquiring and servicing policies | | 24,231 | | | 30,182 | | | 31,624 | | | (5,951) | | | (1,442) | |
| Other operating expenses | | 42,284 | | | 39,265 | | | 41,475 | | | 3,019 | | | (2,210) | |
Change in deferred policy acquisition costs (1) | | 3,537 | | | (307) | | | 1,382 | | | 3,844 | | | (1,689) | |
| Total benefits, losses and expenses | | 168,081 | | | 185,262 | | | 183,494 | | | (17,181) | | | 1,768 | |
| Income before federal income taxes and other items | | $ | 5,299 | | | $ | 11,778 | | | $ | 11,770 | | | $ | (6,479) | | | $ | 8 | |
(1)A negative change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.
Comparison of the year ended December 31, 2021 to 2020
Earnings for our Health segment decreased primarily due to the following:
•An increase in the amortization of deferred policy acquisition costs ("DAC") related to corrective actions impacting contract issue and administration processes, as well as an increase in claims in our Worksite line of business driven by short-term disability
•A reduction in premiums and an increase in DAC amortization driven by policy lapses in our Medicare Supplement line of business
The decrease in earnings was partially offset by the following:
•An increase in fee income from various MGU programs
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Health earned premiums for the periods indicated were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Medicare Supplement | | $ | 70,679 | | | $ | 85,201 | | | $ | 78,779 | | | $ | (14,522) | | | $ | 6,422 | |
| MGU | | 20,285 | | | 22,166 | | | 27,205 | | | (1,881) | | | (5,039) | |
| Supplemental insurance | | 14,076 | | | 18,586 | | | 21,633 | | | (4,510) | | | (3,047) | |
| Credit Health | | 13,140 | | | 14,576 | | | 17,938 | | | (1,436) | | | (3,362) | |
| Medical expense | | 7,475 | | | 8,541 | | | 9,496 | | | (1,066) | | | (955) | |
| Worksite | | 13,002 | | | 14,594 | | | 4,817 | | | (1,592) | | | 9,777 | |
| Group health | | 1,766 | | | 1,809 | | | 1,964 | | | (43) | | | (155) | |
| All other | | 3,061 | | | 3,332 | | | 3,203 | | | (271) | | | 129 | |
| Total | | $ | 143,484 | | | $ | 168,805 | | | $ | 165,035 | | | $ | (25,321) | | | $ | 3,770 | |
Policy lapses as a result of rate increases drove a decrease in premiums for Medicare Supplement during 2021. In addition, Supplemental insurance premiums decreased due to a reduction in sales across all product lines, primarily in short-term medical.
Health claims incurred for the periods indicated were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Medicare Supplement | | $ | 54,324 | | | $ | 66,492 | | | $ | 63,705 | | | $ | (12,168) | | | $ | 2,787 | |
| MGU | | 15,219 | | | 19,657 | | | 23,498 | | | (4,438) | | | (3,841) | |
| Supplemental insurance | | 7,409 | | | 9,945 | | | 8,508 | | | (2,536) | | | 1,437 | |
| Credit Health | | 3,673 | | | 3,501 | | | 3,400 | | | 172 | | | 101 | |
| Medical expense | | 5,434 | | | 7,212 | | | 5,857 | | | (1,778) | | | 1,355 | |
| Worksite | | 9,744 | | | 6,732 | | | 1,958 | | | 3,012 | | | 4,774 | |
| Group health | | 578 | | | 1,142 | | | 639 | | | (564) | | | 503 | |
| All other | | 1,648 | | | 1,441 | | | 1,448 | | | 207 | | | (7) | |
| Total | | $ | 98,029 | | | $ | 116,122 | | | $ | 109,013 | | | $ | (18,093) | | | $ | 7,109 | |
Medicare Supplement claims decreased driven by policy lapses. In addition, claims experience for our Medical Expense, MGU and Supplemental health lines of business improved but was partially offset by an increase in short-term disability claims from our Worksite line of business.
Change in Deferred Policy Acquisition Costs
The following table presents the components of the change in DAC (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Acquisition cost capitalized | | $ | (14,369) | | | $ | (15,926) | | | $ | (19,940) | | | $ | 1,557 | | | $ | 4,014 | |
| Amortization of DAC | | 17,906 | | | 15,619 | | | 21,322 | | | 2,287 | | | (5,703) | |
| Change in DAC | | $ | 3,537 | | | $ | (307) | | | $ | 1,382 | | | $ | 3,844 | | | $ | (1,689) | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Reinsurance
We cede or retrocede the majority of the premium and risk associated with our stop-loss and other MGU programs. We maintain reinsurance on a quota share basis for our long-term care and long-term disability income business.
For 2021, the companies to which we have ceded reinsurance for the Health segment are shown below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | |
| Reinsurer | | A.M. Best Rating (1) | | Ceded Premium | | Percentage of Ceded Premium |
| Roundstone Insurance, Ltd. | | N/A (2) | | $ | 84,287 | | | 29.4 | % |
| RGA Reinsurance Company | | A+ | | 39,975 | | | 13.9 | |
| AXIS Insurance Company | | A | | 26,455 | | | 9.2 | |
| PartnerRe America Insurance Company | | A+ | | 21,811 | | | 7.6 | |
| Swiss Re Life & Health America Inc. | | A+ | | 16,098 | | | 5.6 | |
| Transatlantic Reinsurance Company | | A+ | | 15,516 | | | 5.4 | |
| AmFirst Insurance Company | | A- | | 15,403 | | | 5.4 | |
| Other reinsurers with no single company with greater than 5.0% of the total ceded premium | | | | 67,543 | | | 23.5 | |
| Total health reinsurance ceded | | | | $ | 287,088 | | | 100.0 | % |
(1)A.M. Best rating as of the most current information available February 9, 2022.
(2)N/A reflects no A.M. Best rating available.
We also utilize reinsurance in our credit health business. In certain cases, we may also reinsure the policy written through non-U.S. producer-owned captive reinsurers to allow the dealer to participate in the performance of these credit health contracts. A majority of the treaties entered into by our Specialty Markets Group are written on a 100% coinsurance basis with benefit limits of $1,000 per month.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Property and Casualty
Property and Casualty segment financial results for the periods indicated were as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | |
| Net premiums written | | $ | 1,726,151 | | | $ | 1,590,740 | | | $ | 1,546,144 | | | $ | 135,411 | | | $ | 44,596 | |
| Net premiums earned | | $ | 1,669,875 | | | $ | 1,560,304 | | | $ | 1,511,201 | | | $ | 109,571 | | | $ | 49,103 | |
| Net investment income | | 62,140 | | | 63,949 | | | 64,263 | | | (1,809) | | | (314) | |
| Other income | | 15,807 | | | 12,779 | | | 11,897 | | | 3,028 | | | 882 | |
| Total premiums and other revenues | | 1,747,822 | | | 1,637,032 | | | 1,587,361 | | | 110,790 | | | 49,671 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | |
| Claims incurred | | 1,094,126 | | | 1,005,620 | | | 1,042,153 | | | 88,506 | | | (36,533) | |
| Commissions for acquiring and servicing policies | | 330,554 | | | 299,960 | | | 267,457 | | | 30,594 | | | 32,503 | |
| Other operating expenses | | 213,486 | | | 202,503 | | | 201,580 | | | 10,983 | | | 923 | |
Change in deferred policy acquisition costs (1) | | (10,197) | | | 87 | | | 2,431 | | | (10,284) | | | (2,344) | |
| Total benefits, losses and expenses | | 1,627,969 | | | 1,508,170 | | | 1,513,621 | | | 119,799 | | | (5,451) | |
| Income before federal income taxes and other items | | $ | 119,853 | | | $ | 128,862 | | | $ | 73,740 | | | $ | (9,009) | | | $ | 55,122 | |
| Loss and loss adjustment expense ratio | | 65.5 | % | | 64.5 | % | | 69.0 | % | | 1.0 | % | | (4.5) | % |
| Underwriting expense ratio | | 32.0 | | | 32.2 | | | 31.2 | | | (0.2) | | | 1.0 | |
| Combined ratio | | 97.5 | % | | 96.7 | % | | 100.2 | % | | 0.8 | % | | (3.5) | % |
| Less: Impact of catastrophe events on combined ratio | | 9.4 | | | 9.2 | | | 5.9 | | | 0.2 | | | 3.3 | |
| Combined ratio without impact of catastrophe events | | 88.1 | % | | 87.5 | % | | 94.3 | % | | 0.6 | % | | (6.8) | % |
| Gross catastrophe losses | | $ | 184,803 | | | $ | 176,824 | | | $ | 91,265 | | | $ | 7,979 | | | $ | 85,559 | |
| Net catastrophe losses | | $ | 154,871 | | | $ | 140,512 | | | $ | 89,063 | | | $ | 14,359 | | | $ | 51,449 | |
(1)A negative change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.
Comparison of the year ended December 31, 2021 to 2020
Earnings for our Property and Casualty segment decreased primarily due to the following:
•An increase in net catastrophe losses and higher claim frequency in our personal automobile products as miles driven have increased
The decrease in earnings was partially offset primarily due to the following:
•Improvement in the combined ratio for our commercial and specialty markets products
Additional Information:
•Net premiums written and earned were reduced by COVID-19 relief policy credits of $1.9 million for personal automobile policies in 2021 compared to $16.8 million for the same period in 2020. Policy credits were $0.9 million for commercial automobile policies in 2020
•The increase in commissions was primarily attributable to an increase in premiums written for our specialty markets products. The growth in specialty markets products was also the primary driver for the increase in operating expenses and the deferral of policy acquisition expenses outpacing amortization
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Products
Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 52% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 30% of net premiums written; and (iii) Specialty Markets Group products, marketed through independent managing general agents and managing general underwriters, representing 18% of net premiums written.
Personal Products
Personal Products results for the periods indicated were as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Net premiums written | | | | | | | | | | |
| Automobile | | $ | 535,653 | | | $ | 540,645 | | | $ | 569,675 | | | $ | (4,992) | | | $ | (29,030) | |
| Homeowner | | 304,473 | | | 286,560 | | | 266,849 | | | 17,913 | | | 19,711 | |
| Other Personal | | 54,070 | | | 52,290 | | | 50,834 | | | 1,780 | | | 1,456 | |
| Total net premiums written | | $ | 894,196 | | | $ | 879,495 | | | $ | 887,358 | | | $ | 14,701 | | | $ | (7,863) | |
| Net premiums earned | | | | | | | | | | |
| Automobile | | $ | 537,356 | | | $ | 536,376 | | | $ | 559,524 | | | $ | 980 | | | $ | (23,148) | |
| Homeowner | | 290,084 | | | 274,350 | | | 251,228 | | | 15,734 | | | 23,122 | |
| Other Personal | | 53,163 | | | 51,552 | | | 49,475 | | | 1,611 | | | 2,077 | |
| Total net premiums earned | | $ | 880,603 | | | $ | 862,278 | | | $ | 860,227 | | | $ | 18,325 | | | $ | 2,051 | |
| Loss and loss adjustment expense ratio | | | | | | | | | | |
| Automobile | | 69.1 | % | | 59.5 | % | | 72.7 | % | | 9.6 | % | | (13.2) | % |
| Homeowner | | 88.6 | % | | 87.7 | % | | 79.2 | % | | 0.9 | % | | 8.5 | % |
| Other Personal | | 54.3 | % | | 62.0 | % | | 58.0 | % | | (7.7) | % | | 4.0 | % |
| Personal lines loss and loss adjustment expense ratio | | 74.6 | % | | 68.6 | % | | 73.8 | % | | 6.0 | % | | (5.2) | % |
| Combined Ratio | | | | | | | | | | |
| Automobile | | 93.2 | % | | 83.9 | % | | 95.9 | % | | 9.3 | % | | (12.0) | % |
| Homeowner | | 118.5 | % | | 118.9 | % | | 112.1 | % | | (0.4) | % | | 6.8 | % |
| Other Personal | | 84.5 | % | | 94.4 | % | | 99.1 | % | | (9.9) | % | | (4.7) | % |
| Personal lines combined ratio | | 101.0 | % | | 95.7 | % | | 100.8 | % | | 5.3 | % | | (5.1) | % |
Comparison of the year ended December 31, 2021 to 2020
Automobile: Net premiums written decreased primarily due to fewer policies in-force. Net premiums earned increased primarily due to a decrease in COVID-19 relief policy credits which were $1.9 million in 2021 compared to $16.8 million in 2020. The loss and loss adjustment expense and combined ratios increased primarily due to an increase in claim frequency compared to the prior year due to the lessening impact of COVID-19.
Homeowners: Net premiums written and earned increased primarily due to rate increases.
Other Personal: These products include coverages for personal property and liability not covered within home and auto policies, such as watercraft, personal umbrella, and rental owners. Net premiums written and earned increased due to rate increases in the rental owners product. The loss and loss adjustment expense and combined ratios improved due to fewer non-catastrophe losses.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Commercial Products
Commercial Products results for the periods indicated were as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Net premiums written | | | | | | | | | | |
| Agricultural Business | | $ | 180,575 | | | $ | 165,112 | | | $ | 154,408 | | | $ | 15,463 | | | $ | 10,704 | |
| Automobile | | 140,058 | | | 128,701 | | | 122,938 | | | 11,357 | | | 5,763 | |
| Business Owner | | 87,209 | | | 80,383 | | | 72,008 | | | 6,826 | | | 8,375 | |
| Workers Compensation | | 70,901 | | | 69,092 | | | 74,077 | | | 1,809 | | | (4,985) | |
| Other Commercial | | 36,541 | | | 33,205 | | | 36,454 | | | 3,336 | | | (3,249) | |
| Total net premiums written | | $ | 515,284 | | | $ | 476,493 | | | $ | 459,885 | | | $ | 38,791 | | | $ | 16,608 | |
| Net premiums earned | | | | | | | | | | |
| Agricultural Business | | $ | 173,686 | | | $ | 161,450 | | | $ | 150,632 | | | $ | 12,236 | | | $ | 10,818 | |
| Automobile | | 135,301 | | | 126,365 | | | 116,329 | | | 8,936 | | | 10,036 | |
| Business Owner | | 83,485 | | | 76,920 | | | 69,109 | | | 6,565 | | | 7,811 | |
| Workers Compensation | | 70,783 | | | 70,179 | | | 75,648 | | | 604 | | | (5,469) | |
| Other Commercial | | 35,980 | | | 32,919 | | | 35,603 | | | 3,061 | | | (2,684) | |
| Total net premiums earned | | $ | 499,235 | | | $ | 467,833 | | | $ | 447,321 | | | $ | 31,402 | | | $ | 20,512 | |
| Loss and loss adjustment expense ratio | | | | | | | | | | |
| Agricultural Business | | 55.1 | % | | 56.4 | % | | 63.4 | % | | (1.3) | % | | (7.0) | % |
| Automobile | | 65.5 | % | | 76.6 | % | | 84.5 | % | | (11.1) | % | | (7.9) | % |
| Business Owner | | 73.4 | % | | 86.1 | % | | 54.8 | % | | (12.7) | % | | 31.3 | % |
| Workers Compensation | | 65.2 | % | | 51.7 | % | | 55.6 | % | | 13.5 | % | | (3.9) | % |
| Other Commercial | | 52.8 | % | | 70.2 | % | | 50.8 | % | | (17.4) | % | | 19.4 | % |
| Commercial lines loss and loss adjustment expense ratio | | 62.2 | % | | 67.0 | % | | 65.2 | % | | (4.8) | % | | 1.8 | % |
| Combined ratio | | | | | | | | | | |
| Agricultural Business | | 91.1 | % | | 93.9 | % | | 101.2 | % | | (2.8) | % | | (7.3) | % |
| Automobile | | 88.0 | % | | 99.0 | % | | 109.3 | % | | (11.0) | % | | (10.3) | % |
| Business Owner | | 107.2 | % | | 120.8 | % | | 93.6 | % | | (13.6) | % | | 27.2 | % |
| Workers Compensation | | 80.5 | % | | 68.5 | % | | 73.4 | % | | 12.0 | % | | (4.9) | % |
| Other Commercial | | 93.7 | % | | 109.9 | % | | 92.8 | % | | (16.2) | % | | 17.1 | % |
| Commercial lines combined ratio | | 91.7 | % | | 97.0 | % | | 96.8 | % | | (5.3) | % | | 0.2 | % |
Comparison of the year ended December 31, 2021 to 2020
Agricultural Business: Our agricultural business product allows policyholders to customize and cover their agriculture exposure using a package policy, which includes coverage for residences and household contents, farm and ranch buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased primarily due to increases in policies in-force and rate increases.
Commercial Automobile: Net premiums written and earned increased primarily due to rate increases. The loss and loss adjustment expense and combined ratios improved primarily due to favorable prior year claim development and rate increases.
Business Owner: Our business owner product allows policyholders to customize and cover their property and liability exposures using a package policy. Net premiums written and earned increased primarily due to increases in policies in-force and rate increases. The loss and loss adjustment expense and combined ratios improved primarily due to more favorable claim development compared to prior year.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Workers Compensation: The loss and loss adjustment expense and combined ratios increased primarily due to an increase in claim severity.
Other Commercial: Other commercial products primarily provide umbrella and other liability coverages. Net premiums written and earned increased primarily due to an increase in premium for umbrella products. The loss and loss adjustment expense and combined ratios improved primarily due to favorable prior year claim development.
Specialty Markets Products
Specialty markets products results for the periods indicated were as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Net premiums written | | $ | 316,671 | | | $ | 234,752 | | | $ | 198,901 | | | $ | 81,919 | | | $ | 35,851 | |
| Net premiums earned | | 290,035 | | | 230,192 | | | 203,653 | | | 59,843 | | | 26,539 | |
| Loss and loss adjustment expense ratio | | 43.4 | % | | 43.7 | % | | 56.8 | % | | (0.3) | % | | (13.1) | % |
| Combined ratio | | 96.8 | % | | 99.7 | % | | 104.7 | % | | (2.9) | % | | (5.0) | % |
Specialty markets products provide protection to borrowers and the creditors that extend credit to them. Products offer coverage against unpaid indebtedness as a result of death, disability, involuntary unemployment or untimely loss to the collateral securing a personal or mortgage loan. Specialty markets products also include renters, mortgage security, aviation, and private flood insurance.
Comparison of the year ended December 31, 2021 to 2020
Net written and earned premiums increased primarily due to higher production on renters products and the addition of new accounts related to the investor property protection products. The loss and loss adjustment expense and combined ratios improved primarily due to lower losses for Credit GAP products, partially offset by an increase in net catastrophe losses from $4.2 million in 2020 to $12.3 million in 2021.
Reinsurance
We reinsure a portion of the risks that we underwrite to manage our loss exposure. In return for ceded premiums, reinsurers assume a portion of the claims incurred. In addition to our reinsurance coverage, we are partially protected by the Terrorism Risk Insurance Program Reauthorization Act of 2015 and its predecessors. We participate in the National Flood Insurance Program administered by the Federal Emergency Management Agency.
During 2021, we retained the first $2.0 million of loss per risk. Our catastrophe reinsurance retention covering property and casualty companies in total is $35.0 million.
The following table summarizes the Company’s catastrophe reinsurance coverage effective during 2021:
| | | | | | | | |
Layer of Loss | | Catastrophe Reinsurance Coverage In-Force |
Less than $35.0 million | | 100% of loss retained except for certain losses covered by the Property Catastrophe Top and Drop and Aggregate Property Catastrophe Excess covers (coverage described below)
|
| | |
$35.0 million - $470.0 million | | 95% of multiple peril losses covered by Corporate Program (1) (all perils)
|
| | |
$470.0 million - $500.0 million | | 100% of multiple peril losses covered by Corporate Program (1) (all perils)
|
| | |
| | |
(1)The Corporate Program covers all non-credit property and casualty business, subject to certain limits and is not specific to the Company or any of its subsidiaries or any state or region. The program also covers the renters, mortgage security, investor protection, and auto GAP business written by the Specialty Markets Group.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Each per-event coverage above includes one automatic reinstatement except for a 12.5% portion of the Corporate Program (12.5% of $35.0 million to $470.0 million). The automatic reinstatement requires us to pay additional reinsurance premium for any losses into each reinsurance layer. The reinstatement premium is prorated by the percentage of actual loss to the coverage, with the exception of 47.5% of losses from $35.0 million to $100.0 million, that reflects a 50% reduction on the prorated amount. The 12.5% placement of non-reinstateable coverage reduces the amount of reinstatement premium we are obligated to pay.
The Property Catastrophe Top and Drop cover consists of $30.0 million of annual limit available either wholly or in part across two layers of coverage. The first layer is 100% of $30.0 million excess of $470.0 million on an occurrence basis. The second layer provides aggregate protection where subject loss is $15.0 million excess of $20.0 million of each catastrophe, and recoveries follow satisfaction of a $15.0 million annual aggregate deductible. The second layer acts to reduce the retention on large second and third catastrophe events to $20.0 million following a first large catastrophe. This cover was placed at 100% for 2021 and does not include a reinstatement.
The Aggregate Property Catastrophe Excess cover provides for $30.0 million of limit excess of $160.0 million of aggregated catastrophe losses. Qualifying losses include amounts of retained losses net of other reinsurance below $35.0 million on Property Claims Services (“PCS”) declared catastrophe events and internally declared catastrophe events exceeding $5.0 million. This cover was placed at 55% for 2021 and does not include a reinstatement.
We use multiple reinsurers with each reinsurer absorbing part of the overall risk ceded. The primary reinsurers in the 2021 programs and the coverage each provides are shown in the following table:
| | | | | | | | | | | | | | | | | | | | |
| | | A.M. Best Rating (1) | | Percent of Risk Covered |
| Reinsurer | | Non–Catastrophe | | Catastrophe |
| Lloyd’s Syndicates | | A | | 56.3 | % | | 37.8 | % |
| Hannover Re | | A+ | | 19.6 | | | 2.2 | |
| Convex | | A- | | 5.1 | | | 4.6 | |
| Swiss Re | | A+ | | 2.8 | | | 6.5 | |
| Fidelis | | A | | — | | | 9.0 | |
| Other Reinsurers with no single company with greater than a 4.6% share | | | | 16.2 | | | 39.9 | |
| Total reinsurance coverage | | | | 100.0 | % | | 100.0 | % |
(1)A.M. Best rating as of the most current information available February 9, 2022.
Reserve Development
While we believe that our claims reserves at December 31, 2021 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in 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, 2021 and claims expected to arise from unexpired periods of risk is uncertain. There are many other possible changes that would cause losses to increase or decrease, which include but are not limited to claim severity; the expected level of reported claims; judicial action changing the scope or liability of coverage; the regulatory, social and economic environment; and unexpected changes in loss inflation. For additional information regarding prior year development of our claims and CAE reserves, refer to Part II, Item 8, Financial Statements and Supplementary Data — Note 12, Liability for Unpaid Claims and Claim Adjustment Expenses, of the Notes to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Corporate and Other
Corporate and Other segment financial results for the periods indicated were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change over prior year |
| | | 2021 | | 2020 | | 2019 | | 2020 | | 2019 |
| OTHER REVENUES | | | | | | | | | | |
| Net investment income | | $ | 193,982 | | | $ | 72,174 | | | $ | 179,494 | | | $ | 121,808 | | | $ | (107,320) | |
| Net realized investment gains | | 64,628 | | | 35,660 | | | 30,751 | | | 28,968 | | | 4,909 | |
| (Increase) decrease in investment credit loss* | | 28,778 | | | (102,603) | | | — | | | 131,381 | | | (102,603) | |
| Net gains on equity securities | | 420,283 | | | 356,281 | | | 422,535 | | | 64,002 | | | (66,254) | |
| Other income | | 3,279 | | | 3,379 | | | 14,048 | | | (100) | | | (10,669) | |
| Total other revenues | | 710,950 | | | 364,891 | | | 646,828 | | | 346,059 | | | (281,937) | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | |
| Other expenses | | 67,593 | | | 42,891 | | | 41,222 | | | 24,702 | | | 1,669 | |
| Total benefits, losses and expenses | | 67,593 | | | 42,891 | | | 41,222 | | | 24,702 | | | 1,669 | |
| Income before federal income taxes and other items | | $ | 643,357 | | | $ | 322,000 | | | $ | 605,606 | | | $ | 321,357 | | | $ | (283,606) | |
*Effective January 1, 2020, the Company adopted ASU No. 2016-13. Adoption of this guidance resulted in an allowance for credit losses primarily on our commercial mortgage loans and related off-balance sheet unfunded loan commitments, held-to-maturity bonds and reinsurance recoverables. The results for 2019 have not been restated to conform to the current presentation.
Comparison of the year ended December 31, 2021 to 2020
Earnings for our Corporate and Other segment increased primarily due to the following:
•A favorable change in investment credit loss due to improvement in our commercial mortgage loans driven by improvement in cash flows and a positive economic outlook from our properties, and improving conditions in travel and leisure
•An increase in net investment income from investment funds and mortgage loan profit participation and prepayment income
•An increase in net gains on equity securities due to more favorable market conditions in 2021 compared to the negative impact from the pandemic in 2020 on the fair value of our equity securities
The increase in earnings was partially offset primarily by the following:
• An increase in operating expenses primarily due to Merger-related expenses of $21.5 million
Investments
We manage our investment portfolio to optimize the rate of return commensurate with sound and prudent asset selection and to maintain a well-diversified portfolio in support of our products and capital. Our investment operations are regulated primarily by the state insurance departments where our insurance companies are domiciled. Investment activities, including setting investment policies and defining acceptable risk levels, are subject to oversight by our Board of Directors, which is assisted by our Finance Committee, ALM Committee and Enterprise Risk Management Committee.
Our insurance and annuity products are generally supported by investment-grade bonds and commercial mortgage loans. We also invest in equity options as a hedge for our indexed products. We purchase fixed maturity securities and designate them as either held-to-maturity or available-for-sale considering our estimated future cash flow needs. We also monitor the composition of our fixed maturity securities classified as held-to-maturity and available-for-sale and adjust the mix within the portfolio as investments mature or new investments are purchased.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
The following summarizes the carrying values of our invested assets by asset class (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| Fixed maturity, bonds held-to-maturity, at amortized cost | | $ | 7,088,981 | | | 28.3 | % | | $ | 7,354,970 | | | 29.2 | % |
| Fixed maturity, bonds available-for-sale, at fair value | | 8,380,248 | | | 33.5 | | | 7,597,180 | | | 30.1 | |
| Equity securities, at fair value | | 135,433 | | | 0.5 | | | 2,070,766 | | | 8.2 | |
| Mortgage loans on real estate, net of allowance | | 5,199,334 | | | 20.8 | | | 5,242,531 | | | 20.8 | |
| Policy loans | | 365,208 | | | 1.5 | | | 373,014 | | | 1.5 | |
Real estate and real estate partnerships, net of accumulated depreciation (1) | | 928,412 | | | 3.7 | | | 960,572 | | | 3.8 | |
Investment funds (1) | | 961,763 | | | 3.8 | | | 477,135 | | | 1.9 | |
| Short-term investments | | 1,840,732 | | | 7.4 | | | 1,028,379 | | | 4.1 | |
| Other invested assets | | 125,795 | | | 0.5 | | | 94,415 | | | 0.4 | |
| Total investments | | $ | 25,025,906 | | | 100.0 | % | | $ | 25,198,962 | | | 100.0 | % |
(1)Refer to Part II, Item 8, Financial Statements and Supplementary Data — Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Consolidated Financial Statements for explanation of prior year retrospective adjustment
The decrease in our total investments at December 31, 2021 compared to December 31, 2020 was a result of a decrease in held-to-maturity bonds and the sale of equity securities which caused a temporary increase in cash which we intend to reinvest.
Bonds—We allocate most of our fixed maturity securities to support our insurance business. At December 31, 2021, our fixed maturity securities had an estimated fair value of $15.8 billion, which was $0.6 billion, or 4.2%, above amortized cost. At December 31, 2020, our fixed maturity securities had an estimated fair value of $15.6 billion, which was $1.2 billion, or 8.0%, above amortized cost. Unrealized gains decreased on our fixed maturity due to an increase in benchmark ten-year interest rates. For additional information regarding unrealized gains and losses, refer to Part II, Item 7, Investments, Net Unrealized Gains and Losses table. The estimated fair value for securities due in one year or less was $1.4 billion as of December 31, 2021 and $1.1 billion as of December 31, 2020. For additional information regarding total bonds by credit quality rating, refer to Part II, Item 8, Financial Statements and Supplementary Data — Note 4, Investments in Securities, of the Notes to the Consolidated Financial Statements.
Equity Securities—We have invested in the equity securities of companies traded on national U.S. stock exchanges. See Part II, Item 8, Financial Statements and Supplementary Data — Note 4, Investments in Securities, of the Notes to the Consolidated Financial Statements for the unrealized and realized gains and losses of equity securities. The Company sold the majority of its equity securities portfolio in the fourth quarter of 2021. For additional information regarding the Sale of Equity Securities Portfolio, see General Trends above.
Mortgage Loans—We invest in commercial mortgage loans that are diversified by property-type and geography. 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 generally carried at outstanding principal balances, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of allowances. The weighted average coupon yield on the principal funded for mortgage loans was 4.6% and 4.8% at December 31, 2021 and 2020, respectively. For additional information regarding mortgage loans refer to Part II, Item 8, Financial Statements and Supplementary Data — Note 5, Mortgage Loans, of the Notes to the Consolidated Financial Statements.
Policy Loans—For certain life insurance products, policyholders may borrow funds using the policy’s cash value as collateral. The maximum amount of the policy loan depends upon the policy’s surrender value. As of December 31, 2021, we had $365.2 million in policy loans with a loan to surrender value of approximately 54%, and at December 31, 2020, we had $373.0 million in policy loans with a loan to surrender value of approximately 56%. Interest rates on policy loans primarily range from 3.0% to 12.0% 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 policy’s benefits.
Real Estate and Real Estate Partnerships—We invest in commercial real estate where positive cash flows and/or appreciation in value is expected. Real estate may be owned directly by our insurance companies or non-insurance affiliates or indirectly in joint ventures with real estate developers or investors we determine share our perspective regarding risk and return relationships. The carrying value of real estate is stated at cost, less accumulated depreciation and impairments, if any. Depreciation is provided over the estimated useful lives of the properties. The carrying value of our real estate partnerships is determined by using the equity method of accounting.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Investment Funds—Our investment funds are primarily comprised of senior secured and second lien private loans that are secured by assets, revenues and credit/balance sheet lending. We recognize our share of fund earnings in net investment income on a one-quarter lag under the equity method of accounting. Cash distributions are received from fund earnings and from liquidation of underlying investments.
Short-Term Investments—Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor’s and Moody’s, respectively. The amount fluctuates depending on our view of the desirability of investing in the available long-term investment opportunities and our liquidity needs, including mortgage investment-funding commitments.
Other Invested Assets—Other invested assets are comprised primarily of pooled loans to mid-sized businesses which are initiated and administered by third-party managers and are carried at fair value. Other invested assets also include equity-indexed options, carried at fair value, net of collateral provided by counterparties; such collateral is restricted to the Company’s use. Additionally, other invested assets include FHLB capital stock, mineral rights, mezzanine loans and lease financing arrangements, all of which are carried at cost.
Net Investment Income and Net Realized Gains (Losses)
Net investment income increased $195.5 million during 2021 compared to 2020 primarily due to higher gains on options, an increase in investment income from investment funds and mortgage loan prepayment and profit participation income.
Interest income on mortgage loans is accrued on the principal amount of the loan at the contractual interest rate. Accretion of discounts is recorded using the effective yield method. Interest income, accretion of discounts and prepayment fees are reported in net investment income. Interest is not accrued on loans generally more than 90 days past due or when the collection of interest is not considered probable. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in net investment income in the period received.
Net realized investment gains increased $29.0 million during 2021 compared to 2020 primarily attributable to realized gains from bonds. Net realized investment gains (losses) are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Bonds | | $ | 54,941 | | | $ | 23,318 | | | $ | 16,361 | |
| Mortgage loans | | (768) | | | — | | | (2,412) | |
| Real estate | | 10,240 | | | 12,401 | | | 25,555 | |
| Other invested assets | | 215 | | | (59) | | | (1,785) | |
| Total | | $ | 64,628 | | | $ | 35,660 | | | $ | 37,719 | |
Net Unrealized Gains and Losses
The unrealized gains and losses of our fixed maturity securities investment portfolio are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, | | |
| | 2021 | | 2020 | | Change over prior year |
| Held-to-maturity | | | | | | |
| Gains | | $ | 394,900 | | | $ | 639,648 | | | $ | (244,748) | |
| Losses | | (25,092) | | | (11,437) | | | (13,655) | |
| Net gains | | 369,808 | | | 628,211 | | | (258,403) | |
Available-for-sale | | | | | | |
| Gains | | 321,861 | | | 548,996 | | | (227,135) | |
| Losses | | (39,097) | | | (17,476) | | | (21,621) | |
| Net gains | | 282,764 | | | 531,520 | | | (248,756) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total | | $ | 652,572 | | | $ | 1,159,731 | | | $ | (507,159) | |
The net change in the unrealized gains on fixed maturity securities between December 31, 2021 and December 31, 2020 is primarily attributable to the increase in benchmark ten-year interest rates which were 1.5% and 0.9%, respectively. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Liquidity
ANAT's source of liquidity is solely derived from dividends received from its wholly owned subsidiary, ANICO.
The primary use of cash has been and is expected to continue to be payment of policyholder benefits and claims incurred. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management considers our current liquidity position to be sufficient to meet anticipated demands over the next twelve months.
Our contractual obligations are not expected to have a significant negative impact to cash flows from operations. American National has agreed to pay our financial advisor in connection with the Merger, Citigroup Global Markets Inc. ("Citi"), for its Merger-related services an aggregate fee of $40.0 million, of which $3.0 million was paid upon delivery of Citi’s fairness opinion related to the Merger entered into on August 6, 2021 and the remaining $37.0 million is payable contingent upon consummation of the Merger, which has not been reflected in the consolidated statement of operations. In addition, the Company agreed to reimburse Citi for expenses, including fees and expenses of counsel, and to indemnify Citi and related parties against certain liabilities, including liabilities under federal securities laws, arising from Citi’s engagement.
In April 2020, the Company borrowed $500 million from the Federal Home Loan Bank of Dallas' COVID-19 Relief Advance Program. As of December 31, 2021, there are no advances outstanding; the final advance was repaid on its maturity date of April 28, 2021. The available liquidity at February 9, 2022 was approximately $879.3 million.
As a result of the impacts of COVID-19, state insurance departments across the country issued regulations that required us not to cancel policies for non-payment for varying amounts of time but generally for at least 90-day periods which began in March and April of 2020. The cancellation and grace periods have been lifted in most states.
Our defined benefit plans are frozen and currently adequately funded; however, low interest rates, increased longevity of participants, and rising Pension Benefit Guaranty Corporation (“PBGC”) premiums may cause us to increase our funding of the plans.
We are currently evaluating the renovation and modernization of our home office facilities. This could result in capital expenditures that could aggregate to approximately $100.0 million over a three-year period; however, current uncertainties relating to the COVID-19 pandemic have caused us to delay this project at this time. There are no other unusually large capital expenditures expected in the next 12-24 months.
We have consistently paid dividends to our stockholders and expect to continue this tradition in the foreseeable future. There are no other known trends or uncertainties regarding product pricing, changes in product lines or rising costs that are expected to have a significant impact to cash flows from operations, although uncertainties relating to the COVID-19 pandemic could still significantly impact one or more of these items.
Funds received as premium payments and deposits that are not used for liquidity requirements are generally invested in bonds and commercial mortgages. Funds are invested with the intent that income from the investments and proceeds from the maturities will meet our ongoing cash flow needs. We historically have not had to liquidate invested assets in order to cover cash flow needs. We believe our portfolio of highly liquid bonds and available-for-sale investment securities coupled with our ability to borrow funds through the FHLB, are sufficient to meet future liquidity needs as necessary.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
As a result of the economic impact associated with COVID-19, American National modified 93 mortgage loans with a total balance of $1.6 billion during 2020. These modifications were in the form of forbearance of principal and interest payments for up to six months, extensions of maturity dates, and/or provisions for interest only payments. The modifications were primarily related to our loans to hotels, retail and parking operations. Due to the ongoing economic stress brought on by the pandemic, additional modifications for 33 of these loans with a total balance of $725.7 million were made during 2021. These additional modifications extended the forbearance of principal and interest payments and interest only provisions with a requirement for the payment of at least 20% of the total interest due during the extended modification period. The modified loans had an aggregate deferred interest of $5.6 million as of December 31, 2021. There are no commitments to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring during the periods presented. The decrease in loans determined to be a troubled debt restructuring during 2021 is primarily attributable to improved economic conditions after lifting of COVID-19 related restrictions.
The Company holds collateral of $264.2 million at December 31, 2021 to offset exposure from its derivative counterparties. Cash flows associated with collateral received from counterparties change as the market value of the underlying derivative contract changes.
Our cash and cash equivalents and short-term investment position increased from $1.4 billion at December 31, 2020 to $3.8 billion at December 31, 2021. The increase primarily relates to the fourth quarter 2021 sale of a majority of the Company's equity securities portfolio which resulted in an excess cash position. We intend to reinvest the cash proceeds consistent with our investment guidelines during 2022.
A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flows from operations. A.M. Best has placed American National’s issuer credit and financial strength ratings under review with developing implications and S&P Global Ratings has placed the ratings on CreditWatch with negative implications of which are due to the pending Merger with Brookfield Reinsurance.
Further information regarding additional sources or uses of cash is described in Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements.
Capital Resources
Our capital resources are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 | | 2019 |
| American National stockholders’ equity, excluding accumulated other comprehensive income (“AOCI”), net of tax | | $ | 6,847,314 | | | $ | 6,236,100 | | | $ | 5,890,231 | |
| Accumulated other comprehensive income | | 147,054 | | | 222,170 | | | 99,518 | |
| Total American National stockholders’ equity | | $ | 6,994,368 | | | $ | 6,458,270 | | | $ | 5,989,749 | |
We have notes payable relating to borrowings by real estate joint ventures that we consolidate into our financial statements that are not part of our capital resources. The lenders for the notes payable generally have no recourse against us in the event of default by the joint ventures. Therefore, the liability of American National relating to notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $3.0 million at December 31, 2021 and 2020.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
The changes in our capital resources are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended |
| | | 2021 | | 2020 |
| | | Capital and Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | Capital and Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Net income attributable to American National | | $ | 699,325 | | | $ | — | | | $ | 699,325 | | | $ | 467,505 | | | $ | — | | | $ | 467,505 | |
| Dividends to shareholders | | (88,190) | | | — | | | (88,190) | | | (88,190) | | | — | | | (88,190) | |
| Change in net unrealized gains on debt securities | | — | | | (142,854) | | | (142,854) | | | — | | | 134,315 | | | 134,315 | |
| Foreign currency transaction and translation adjustment | | — | | | 62 | | | 62 | | | — | | | 235 | | | 235 | |
| Defined benefit pension plan adjustment | | — | | | 67,676 | | | 67,676 | | | — | | | (11,898) | | | (11,898) | |
Cumulative effect of accounting changes (1) | | — | | | — | | | — | | | (33,500) | | | — | | | (33,500) | |
| Other | | 79 | | | — | | | 79 | | | 54 | | | — | | | 54 | |
| Total | | $ | 611,214 | | | $ | (75,116) | | | $ | 536,098 | | | $ | 345,869 | | | $ | 122,652 | | | $ | 468,521 | |
(1)Result of adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Statutory Capital and Surplus and Risk-based Capital
Statutory capital and surplus is the capital of our insurance companies reported in accordance with accounting practices prescribed or permitted by the applicable state insurance departments. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level of at least 100% of the company action level RBC are required to take certain actions. At December 31, 2021 and December 31, 2020, ANICO’s statutory capital and surplus was $4.0 billion and $3.6 billion, respectively. ANICO and each of our insurance subsidiaries had statutory capital and surplus at December 31, 2021 and 2020 above 200% of the company action level except ANPAC Louisiana Insurance Company ("ANPLA"), which had an RBC level of 194% at December 31, 2020, which increased to 242% at December 31, 2021.
The achievement of long-term growth will require growth in our insurance subsidiaries’ statutory capital and surplus. Our subsidiaries may obtain additional statutory capital through various sources, such as retained statutory earnings or equity contributions from us.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | Total | | Less than
1 year | | 1-3 years | | 3-5 years | | More than
5 years |
Life insurance obligations (1) | | $ | 4,504,925 | | | $ | (58,739) | | | $ | (116,014) | | | $ | (36,030) | | | $ | 4,715,708 | |
Annuity obligations (1) | | 15,483,714 | | | 1,373,520 | | | 3,496,133 | | | 2,434,695 | | | 8,179,366 | |
Property and casualty insurance obligations (2) | | 1,098,017 | | | 487,133 | | | 371,074 | | | 138,250 | | | 101,560 | |
Health insurance obligations (3) | | 263,837 | | | 183,260 | | | 29,599 | | | 9,428 | | | 41,550 | |
| Purchase obligations | | | | | | | | | | |
| Commitments to purchase and fund investments | | 899,017 | | | 361,222 | | | 321,503 | | | 95,230 | | | 121,062 | |
| Mortgage loan commitments | | 647,841 | | | 424,971 | | | 222,870 | | | — | | | — | |
| Lease obligations | | 12,680 | | | 4,300 | | | 6,612 | | | 1,685 | | | 83 | |
Defined benefit pension plans (4) | | 60,145 | | | 17,638 | | | 14,362 | | | 10,834 | | | 17,311 | |
Notes payable (5) | | 149,248 | | | 75,293 | | | 73,955 | | | — | | | — | |
| Total | | $ | 23,119,424 | | | $ | 2,868,598 | | | $ | 4,420,094 | | | $ | 2,654,092 | | | $ | 13,176,640 | |
(1)Life and annuity obligations include undiscounted estimated claim, benefit, surrender and commission obligations offset by expected future premiums and deposits on in-force insurance policies and annuity contracts. All amounts are gross of any reinsurance recoverable. Estimated claim, benefit and surrender obligations are based on mortality and lapse assumptions 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. As a result, the estimated obligations for insurance liabilities included in the table exceed the liabilities recorded in the liability for future policy benefits and policy and contract claims. Due to the significance of the assumptions used, the amounts presented could materially differ from actual payments. Separate account obligations have not been included in the table 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 and are presented in the less than one-year category. All estimated cash payments are net of estimated future premiums on policies currently in-force net of future policyholder dividends payable. The participating policyholders’ share obligation included in other policyholder funds and the 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)Includes undiscounted case reserves for reported claims and reserves for IBNR with the timing of future payments based on our historical payment patterns. The timing of these payments may vary significantly from the pattern shown in the preceding table. The ultimate losses may vary materially from the recorded amounts, which are our best estimates.
(3)Reflects estimated future claim payments for claims incurred based on mortality and morbidity assumptions that are consistent with historical claims experience. These are not discounted with interest and will exceed the liabilities recorded in reserves for future claim payment, which are discounted with interest. Due to the significance of the assumptions used, the amounts presented could materially differ from actual payments.
(4)Estimated payments through continuing operations for benefit obligations of the non-qualified defined benefit pension plan. A liability has been established for the full amount of benefits accrued.
(5)The estimated payments due by period for notes payable reflect the contractual maturities of principal for amounts borrowed by real estate joint ventures and collateralized by real-estate owned by the respective entity. The entity's liability is limited to its investment in the respective joint venture. See Part II, Item 8, Financial Statements and Supplementary Data — Note 6, Real Estate and Other Investments, of the Notes to the Consolidated Financial Statements for additional details.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS11. EXECUTIVE COMPENSATION — (Continued)
Off-Balance Sheet Arrangements
We have off-balance sheet arrangements relating to third-party marketing operation bank loans as discussed in Part II, Item 8, Financial Statements and Supplementary Data — Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements. We could be exposed to a liability for these loans, which are supported by the cash value of the underlying insurance contracts. The cash value of the life insurance policies is designed to always equal or exceed the balance of the loans. Accordingly, management does not foresee any material loss related to these arrangements.
Related-Party Transactions
We have various agency, consulting and service arrangements with individuals and entities considered to be related parties. Each of these arrangements has been reviewed and approved by our Audit Committee, which retains final decision-making authority for these transactions. The amounts involved, both individually and in the aggregate, with these arrangements are not material to any segment or to our overall operations. For additional details see Part II, Item 8, Financial Statements and Supplementary Data — Note 20, Related Party Transactions, of the Notes to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investments and some of our products are subject to various market risks associated with changes in interest rates, credit spreads, issuer defaults, equity prices and market indices. Adverse changes due to these market risks may occur as a result of various factors, including changes in market liquidity, risk tolerances and market perceptions of creditworthiness.
We emphasize prudent risk management throughout all our operations. Our enterprise risk management procedures help us to identify, prioritize and manage various risks including market risk. Under the leadership of our Board of Directors and Corporate Risk Officer, we have instituted a framework based on the principles of enterprise risk management designed to provide reasonable assurance regarding the achievement of our strategic objectives. Related activities include:
•identifying evolving and potential risks and events that may affect us;
•managing risks within our risk profile;
•appropriate escalation of risks and disclosure of any risk limit breaches within the enterprise, along with the correction method if appropriate;
•tracking actual risk levels against predetermined thresholds; and
•monitoring our capital adequacy.
We expect ongoing enterprise risk management efforts will expand the management tools used to support an efficient allocation of capital and enhance the measurement of possible diversification benefits across business segments and risk classes.
A key component of our risk management program is our ALM Committee. The ALM Committee monitors the level of our risk exposure in managing our assets and liabilities to attain the desired risk-return profile for our diverse mix of assets and liabilities and their resultant cash flows. This process includes maintaining adequate reserves, monitoring claims and surrender experience, managing interest rate spreads, evaluating alternate investment strategies and protecting against disintermediation risk for life insurance and annuity products.
As a part of the ALM process, we have asset portfolios for each major line of business, which represent the investment strategies used to fund liabilities within acceptable levels of risk. We monitor these strategies through regular review of portfolio metrics, such as effective duration, yield curve sensitivity and liquidity. In executing these ALM 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 ALM goals and objectives. Our Finance Committee and ALM Committee also review the risks associated with evaluation of alternate investment strategies and the specific investments made to support our business and the consistency of such strategies and investments with our overall investment strategy.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — (Continued)
Interest Rate Risk
Interest rate risk is the risk that the value of our interest sensitive assets or liabilities will change with changes in market interest rates. The fair market value of fixed maturity securities is inversely related to changes in market interest rates. As interest rates fall, the cash flow from the interest coupon and dividend streams of existing fixed rate investments becomes more valuable and the market values of fixed maturity securities rise. As interest rates rise, the reverse occurs and the market value of fixed maturity securities falls. These general assumptions hold all other variables influencing the values of fixed maturity securities constant and would not fully reflect any prepayment to the portfolio, changes in corporate spreads or non-parallel changes in interest rates for different maturities, or changes in credit quality, any of which could cause changes in the values of fixed maturity securities that differ materially from our assumptions and estimates.
The carrying values of our investment in fixed maturity securities, which comprise 61.8% of our portfolio, are summarized below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| | | Amount | | Percent | | Amount | | Percent |
| Fixed maturity, bonds held-to-maturity | | $ | 7,088,981 | | | 45.8 | % | | $ | 7,354,970 | | | 49.2 | % |
| Fixed maturity, bonds available-for-sale | | 8,380,248 | | | 54.2 | | | 7,597,180 | | | 50.8 | |
| Net unrealized gains on available-for-sale bonds | | 282,764 | | | 3.4 | | | 531,520 | | | 7.0 | |
The unrealized gain on available-for-sale bonds was primarily the result of an increase in unrealized gains on corporate debt securities. Information regarding our unrealized gains or losses is disclosed in Note 4, Investments in Securities, of the Notes to the Consolidated Financial Statements. Our exposure to cash flow changes is discussed further in the Liquidity and Capital Resources section of the MD&A.
Our mortgage loans also have interest rate risk. As of December 31, 2021, these mortgage loans have fixed rates ranging from 3.25% to 10.0%. Most of the mortgage loan contracts require periodic payments of both principal and interest, and have amortization periods of three to 30 years. Many of our mortgage loans contain prepayment restrictions or fees or both that reduce the risk of payment before maturity or compensate us for all or a portion of the investment income lost through early payment of the loan principal.
Rising interest rates can cause increases in policy loans associated with life insurance policies and surrenders relating to life insurance or annuities. Policyholders may move their assets into new products offering higher rates if there were sudden or significant changes in interest rates. We may have to sell assets earlier than anticipated to pay for these withdrawals. Our life insurance and annuity product designs reduce the financial impact of early surrenders through the use of restrictions on withdrawal, surrender charges and market value adjustment features. ALM guidelines, including duration targets and asset allocation tolerances, help ensure this risk is managed within the constraints of established criteria. Consistent monitoring of and periodic changes to our product pricing help us to better match the duration of assets and liabilities.
Falling interest rates can have an adverse impact on our general account annuities. We aim to manage interest margin, which is the difference between yields on investments supporting our liabilities and amounts credited to policyholder account balances and reserves. As portfolio yields decline, we can reduce crediting rates on some deferred annuities, to a limit defined by contractual minimum guarantees, but we cannot adjust immediate annuity benefits and reserves. Assuming a 10 basis point decline in current portfolio yield, our annual interest margin would decline $7.1 million.
Interest Rate sensitivity analysis: The table below shows the estimated change in pre-tax market values of our investments in fixed maturity securities caused by instantaneous, one time parallel shifts in the corresponding year-end U.S. Treasury yield curves of +/- 100bps and +/- 50bps (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Increase (Decrease) in Market Value Given an Interest Rate
Increase (Decrease) of Basis Points |
| | | (100) | | (50) | | 50 | | 100 |
| December 31, 2021 | | $ | 824,630 | | | $ | 402,145 | | | $ | (384,130) | | | $ | (753,265) | |
| December 31, 2020 | | 703,957 | | | 345,427 | | | (333,613) | | | (658,118) | |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — (Continued)
Credit Risk
We are exposed to credit risk, which is the uncertainty of whether a counterparty will honor its obligation under the terms of a security, loan or contract. To help manage credit risk, we have an Investment Plan approved by our Board of Directors. This plan provides issuer and geographic concentration limits, investment size limits, mortgage loan-to-value guidelines and other applicable investment parameters. Investment activity, including the setting of investment policies and defining acceptable risk levels, is subject to review by our Board of Directors, Finance Committee and, to a certain extent, by the Enterprise Risk Management Committee.
We are also exposed to risks created by changes in market prices and cash flows associated with fluctuations in the credit spread or the market’s perception of the relative risk and reward to hold fixed maturity securities of borrowers with different credit characteristics or credit ratings. Credit spread widening will reduce the fair value of our existing investment portfolio and will increase investment income on new purchases. Credit spread tightening would have the opposite effect. Information regarding the credit quality of our fixed maturity securities can be found in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Investments section of the MD&A.
We are subject to credit risk associated with our reinsurance agreements. While we believe our reinsurers are reputable and have the financial strength to meet their obligations to us, reinsurance does not eliminate our liability to pay our policyholders, and we remain primarily liable to our policyholders for the risks we insure. We regularly monitor the financial strength of our reinsurers and the levels of concentration to individual reinsurers to verify they meet established thresholds.
The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by the counterparties. The Company has a policy of only dealing with counterparties it believes are creditworthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The Company holds collateral in cash and notes secured by U.S. government backed assets. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less the fair value of collateral held. For additional information regarding counterparties used and collateral received, see Part II, Item 8, Financial Statements and Supplementary Data — Note 7, Derivative Instruments, of the Notes to the Consolidated Financial Statements.
We are exposed to risks on our mortgage loans when there are economic disruptions, such as the COVID-19 pandemic. The challenging economic conditions impair borrowers' ability to meet loan terms. The Company granted concessions to certain mortgage loan borrowers during 2021 and 2020. For additional information regarding the impact of COVID-19 to mortgage loans, see Part II, Item 8, Financial Statements and Supplementary Data — Note 5, Mortgage Loans, of the Notes to the Consolidated Financial Statements.
Equity Risk
Equity risk is the risk that we will incur realized or unrealized losses due to changes in the overall equity investment markets or specific investments within our portfolio. As a result of FASB issued guidance, the change in fair value of equity securities is recognized in earnings, which could increase the level of volatility in our consolidated statements of operations. At December 31, 2021, we held approximately $135.4 million of equity investments, approximately 0.5% of total investment assets, which are subject to equity risk. Our exposure to the equity markets is managed by sector and individual security and is intended to track the S&P 500 with minor variations. We mitigate our equity risk by diversification of the investment portfolio.
We also have equity risk associated with the equity-indexed life and annuity products we issue. We have entered into derivative transactions, primarily over-the-counter equity call options, to hedge our exposure to equity-index changes.
Recent Accounting Pronouncements
Refer to Part II, Item 8, Financial Statements and Supplementary Data — Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements not yet adopted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Annual Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
American National Group, Inc.
Galveston, Texas
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of American National Group, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for the years ended December 31, 2021 and 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework(2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Policyholders’ Account Balances – Valuation of embedded derivative liabilities for equity-indexed contracts — Refer to Notes 7 and 9 to the financial statements
Critical Audit Matter Description
The Company sells equity-indexed universal life and equity-indexed deferred annuity contracts with guaranteed minimum benefits, some of which contain embedded derivatives that are required to be bifurcated from a host reserve, separately accounted for, and measured at fair value. The embedded derivative represents future benefit cash flows in excess of the minimum guaranteed cash flows. As of December 31, 2021, the fair value of the embedded derivative liabilities was $833 million. Management utilizes various assumptions in order to measure the fair value of the embedded derivatives including assumptions related to lapse rate and equity volatility. These assumptions are evaluated annually by management with any changes in the estimated fair value resulting in a cumulative charge or credit to income from operations.
Given the valuation of the embedded derivative liabilities is sensitive to changes in these assumptions, the related audit effort in evaluating management’s selection of the assumptions related to the lapse rate and equity volatility required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial and fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the lapse rate and equity volatility assumptions selected by management for the valuation of embedded derivative liabilities included the following, among others:
•We tested the effectiveness of management’s controls over the valuation of embedded derivative liabilities, including those over the development, selection, and implementation of the assumptions related to lapse rate and equity volatility.
•With the assistance of our fair value specialists, we tested the completeness and accuracy of the underlying data used to determine the equity volatility assumptions.
•We tested the completeness and accuracy of the historical company experience used to determine the lapse rate assumptions.
•With the assistance of our actuarial specialists, we evaluated the appropriateness of the assumptions, evaluated the consistency of the selected assumptions used in the Company’s valuation model, and tested the mathematical accuracy of the valuation model.
Policy and Contract Claims – Property and casualty liability for unpaid claims and claim adjustment expenses — Refer to Notes 2 and 12 to the financial statements
Critical Audit Matter Description
The Company establishes a liability for unpaid claims and claim adjustment expenses to provide for the estimated costs of paying claims under property and casualty insurance policies written by the Company. The property and casualty liability for unpaid claims is included within Policy and Contract Claims in the statements of financial position, which had a balance of $1.7 billion as of December 31, 2021. This liability, which includes estimates for both claims that have been reported and claims that have been incurred but not reported, represents the estimate of all claim and claim adjustment expenses associated with processing and settling the claims. The liability for unpaid claims is estimated using actuarial assumptions for loss development patterns that are based upon the Company’s historical experience and consider the effects of current developments, anticipated trends and risk management programs.
Given the subjectivity of estimating the ultimate cost to settle the liability for property and casualty insurance reported and incurred but not reported claims, the related audit effort in evaluating the assumptions for loss development patterns required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the assumptions for loss development patterns selected by management to estimate the property and casualty liability for unpaid claims and claim adjustment expenses included the following, among others:
•We tested the effectiveness of management’s controls over the property and casualty liability for unpaid claims and claim adjustment expenses, including those over the development, selection, and implementation of the assumptions for loss development patterns used in the actuarial estimates.
•With the assistance of our actuarial specialists, we tested the completeness and accuracy of the underlying data, including historical claims, used to determine the assumptions for loss development patterns, evaluated the appropriateness of the assumptions, evaluated the consistency of the selected assumptions used in the Company’s valuation model, and tested the mathematical accuracy of the valuation model.
•We evaluated the reasonableness of the Company’s estimated property and casualty liability for unpaid losses and loss adjustment expenses by comparing to those independently derived by our actuarial specialists.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2022
We have served as the Company's auditor since 2020.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
American National Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of operations, comprehensive income, changes in equity, and cash flows of American National Group, Inc. (formerly American National Insurance Company) and subsidiaries (the Company) for the year ended December 31, 2019, and the related notes and financial statement schedules II to IV (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2000 to 2020.
Houston, Texas
February 28, 2020
AMERICAN NATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except share data)
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| ASSETS | | | | |
| Fixed maturity, bonds held-to-maturity, at amortized cost, net of allowance for credit losses of $13,129 in 2021 and $12,442 in 2020 (Fair value $7,458,789 in 2021 and $7,983,181 in 2020) | | $ | 7,088,981 | | | $ | 7,354,970 | |
| Fixed maturity, bonds available-for-sale, at fair value (Allowance for credit losses of $10,310 in 2021 and $7,482 in 2020) (Amortized cost $8,107,794 in 2021 and $7,073,142 in 2020) | | 8,380,248 | | | 7,597,180 | |
| Equity securities, at fair value (Cost $94,732 in 2021 and $754,625 in 2020) | | 135,433 | | | 2,070,766 | |
| Mortgage loans on real estate, net of allowance for credit losses of $97,079 in 2021 and $125,703 in 2020 | | 5,199,334 | | | 5,242,531 | |
| Policy loans | | 365,208 | | | 373,014 | |
| Real estate and real estate partnerships, net of accumulated depreciation of $287,387 in 2021 and $269,626 in 2020 | | 928,412 | | | 960,572 | |
| Investment funds | | 961,763 | | | 477,135 | |
| Short-term investments | | 1,840,732 | | | 1,028,379 | |
| Other invested assets | | 125,795 | | | 94,415 | |
| Total investments | | 25,025,906 | | | 25,198,962 | |
| Cash and cash equivalents | | 1,930,882 | | | 339,947 | |
| | | | |
| Accrued investment income | | 192,913 | | | 216,389 | |
| Reinsurance recoverables, net of allowance for credit losses of $14,553 in 2021 and $14,353 in 2020 | | 459,621 | | | 414,359 | |
| Prepaid reinsurance premiums | | 47,789 | | | 42,804 | |
| Premiums due and other receivables | | 382,562 | | | 351,972 | |
| Deferred policy acquisition costs | | 1,498,124 | | | 1,360,211 | |
| Property and equipment, net of accumulated depreciation of $302,936 in 2021 and $281,738 in 2020 | | 137,466 | | | 121,578 | |
| | | | |
| Prepaid pension | | 167,587 | | | 80,526 | |
| Other assets | | 156,768 | | | 155,600 | |
| Separate account assets | | 1,320,703 | | | 1,185,467 | |
| Total assets | | $ | 31,320,321 | | | $ | 29,467,815 | |
| LIABILITIES | | | | |
| Future policy benefits | | | | |
| Life | | $ | 3,216,626 | | | $ | 3,149,067 | |
| Annuity | | 1,598,365 | | | 1,617,774 | |
| Health | | 45,715 | | | 49,658 | |
| Policyholders’ account balances | | 13,879,198 | | | 12,812,155 | |
| Policy and contract claims | | 1,692,295 | | | 1,575,288 | |
| Unearned premium reserve | | 1,013,830 | | | 956,343 | |
| Other policyholder funds | | 379,545 | | | 358,601 | |
| Liability for retirement benefits | | 79,089 | | | 70,254 | |
| Notes payable | | 149,248 | | | 153,703 | |
| Deferred tax liabilities, net | | 200,510 | | | 478,347 | |
| Current tax payable | | 321,926 | | | 10,372 | |
| Federal Home Loan Bank advance | | — | | | 250,000 | |
| Other liabilities | | 421,212 | | | 335,219 | |
| Separate account liabilities | | 1,320,703 | | | 1,185,467 | |
| Total liabilities | | 24,318,262 | | | 23,002,248 | |
| EQUITY | | | | |
| American National Group, Inc. stockholders’ equity: | | | | |
| Common stock, $0.01 par value; 50,000,000 shares authorized; 26,887,200 shares issued and outstanding in 2021 and 2020 | | 269 | | | 269 | |
| Additional paid-in capital | | 47,762 | | | 47,683 | |
| Accumulated other comprehensive income | | 147,054 | | | 222,170 | |
| Retained earnings | | 6,799,283 | | | 6,188,148 | |
| | | | |
| Total American National stockholders’ equity | | 6,994,368 | | | 6,458,270 | |
| Noncontrolling interest | | 7,691 | | | 7,297 | |
| Total stockholders' equity | | 7,002,059 | | | 6,465,567 | |
| Total liabilities and stockholders' equity | | $ | 31,320,321 | | | $ | 29,467,815 | |
See accompanying notes to the consolidated financial statements.
AMERICAN NATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| PREMIUMS AND OTHER REVENUES | | | | | | |
| Premiums | | | | | | |
| Life | | $ | 412,769 | | | $ | 396,099 | | | $ | 359,419 | |
| Annuity | | 74,925 | | | 92,866 | | | 147,139 | |
| Health | | 143,484 | | | 168,805 | | | 165,035 | |
| Property and casualty | | 1,669,875 | | | 1,560,304 | | | 1,511,201 | |
| Other policy revenues | | 359,707 | | | 310,746 | | | 305,256 | |
| Net investment income | | 1,171,654 | | | 976,152 | | | 1,180,907 | |
| Net realized investment gains | | 64,628 | | | 35,660 | | | 37,719 | |
| Other-than-temporary impairments | | — | | | — | | | (6,968) | |
| (Increase) decrease in investment credit loss | | 28,778 | | | (102,603) | | | — | |
| Net gains on equity securities | | 420,283 | | | 356,281 | | | 422,535 | |
| Other income | | 45,688 | | | 40,556 | | | 51,401 | |
| Total premiums and other revenues | | 4,391,791 | | | 3,834,866 | | | 4,173,644 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | |
| Policyholder benefits | | | | | | |
| Life | | 605,724 | | | 533,925 | | | 449,252 | |
| Annuity | | 149,931 | | | 214,158 | | | 218,576 | |
| Claims incurred | | | | | | |
| Health | | 98,029 | | | 116,122 | | | 109,013 | |
| Property and casualty | | 1,094,126 | | | 1,005,620 | | | 1,042,153 | |
| Interest credited to policyholders’ account balances | | 448,654 | | | 321,042 | | | 511,999 | |
| Commissions for acquiring and servicing policies | | 640,097 | | | 553,600 | | | 532,634 | |
| Other operating expenses | | 571,869 | | | 515,413 | | | 524,888 | |
| Change in deferred policy acquisition costs | | (79,632) | | | (5,678) | | | (12,749) | |
| Total benefits, losses and expenses | | 3,528,798 | | | 3,254,202 | | | 3,375,766 | |
| Income before federal income tax and other items | | 862,993 | | | 580,664 | | | 797,878 | |
| Less: Provision (benefit) for federal income taxes | | | | | | |
| Current | | 408,551 | | | 57,697 | | | 87,032 | |
| Deferred | | (241,966) | | | 58,910 | | | 78,385 | |
| Total provision for federal income taxes | | 166,585 | | | 116,607 | | | 165,417 | |
| Income after federal income tax | | 696,408 | | | 464,057 | | | 632,461 | |
| | | | | | |
| Other components of net periodic pension benefit (costs), net of tax | | 3,574 | | | 4,456 | | | (684) | |
| Net income | | 699,982 | | | 468,513 | | | 631,777 | |
Less: Net income attributable to noncontrolling interest, net of tax | | 657 | | | 1,008 | | | 11,414 | |
| Net income attributable to American National | | $ | 699,325 | | | $ | 467,505 | | | $ | 620,363 | |
| Amounts available to American National common stockholders | | | | | | |
| Earnings per share | | | | | | |
| Basic | | $ | 26.02 | | | $ | 17.39 | | | $ | 23.08 | |
| Diluted | | 26.01 | | | 17.38 | | | 23.07 | |
| Weighted average common shares outstanding | | 26,877,200 | | | 26,878,679 | | | 26,882,691 | |
| Weighted average common shares outstanding and dilutive potential common shares | | 26,884,679 | | | 26,887,125 | | | 26,891,243 | |
See accompanying notes to the consolidated financial statements.
AMERICAN NATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Net income | | $ | 699,982 | | | $ | 468,513 | | | $ | 631,777 | |
| Other comprehensive income (loss), net of tax | | | | | | |
| Change in net unrealized gains (losses) on securities | | (142,854) | | | 134,315 | | | 184,156 | |
| Foreign currency transaction and translation adjustments | | 62 | | | 235 | | | 390 | |
| Defined benefit pension plan adjustment | | 67,676 | | | (11,898) | | | 15,495 | |
| Total other comprehensive income (loss), net of tax | | (75,116) | | | 122,652 | | | 200,041 | |
| Total comprehensive income | | 624,866 | | | 591,165 | | | 831,818 | |
| Less: Comprehensive income attributable to noncontrolling interest | | 657 | | | 1,008 | | | 11,414 | |
| Total comprehensive income attributable to American National | | $ | 624,209 | | | $ | 590,157 | | | $ | 820,404 | |
See accompanying notes to the consolidated financial statements.
AMERICAN NATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Noncontrolling Interest | | Total Equity |
| Balance at December 31, 2018 | $ | 30,832 | | | $ | 20,694 | | | $ | (99,738) | | | $ | 5,413,952 | | | $ | (108,492) | | | $ | 14,267 | | | $ | 5,271,515 | |
| | | | | | | | | | | | | |
| Reissuance of treasury shares | — | | | 237 | | | — | | | — | | | 23 | | | — | | | 260 | |
| Amortization of restricted stock | — | | | 80 | | | — | | | — | | | — | | | — | | | 80 | |
| Cumulative effect of accounting change | — | | | — | | | (785) | | | 785 | | | — | | | — | | | — | |
| Other comprehensive income | — | | | — | | | 200,041 | | | — | | | — | | | — | | | 200,041 | |
| Net income attributable to American National | — | | | — | | | — | | | 620,363 | | | — | | | — | | | 620,363 | |
| Cash dividends to common stockholders (declared per share of $3.28) | — | | | — | | | — | | | (88,243) | | | — | | | — | | | (88,243) | |
| Contributions | — | | | — | | | — | | | — | | | — | | | 388 | | | 388 | |
| Distributions | — | | | — | | | — | | | — | | | — | | | (20,055) | | | (20,055) | |
| Net income attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | 11,414 | | | 11,414 | |
| Balance at December 31, 2019 | $ | 30,832 | | | $ | 21,011 | | | $ | 99,518 | | | $ | 5,946,857 | | | $ | (108,469) | | | $ | 6,014 | | | $ | 5,995,763 | |
| | | | | | | | | | | | | |
| Reclassification of par value due to reorganization | (26,618) | | | 26,618 | | | — | | | — | | | — | | | — | | | — | |
| Retirement of treasury shares | (3,945) | | | — | | | — | | | (104,524) | | | 108,469 | | | — | | | — | |
| Amortization of restricted stock | — | | | 54 | | | — | | | — | | | — | | | — | | | 54 | |
| Cumulative effect of accounting change | — | | | — | | | — | | | (33,500) | | | — | | | — | | | (33,500) | |
| Other comprehensive income | — | | | — | | | 122,652 | | | — | | | — | | | — | | | 122,652 | |
| Net income attributable to American National | — | | | — | | | — | | | 467,505 | | | — | | | — | | | 467,505 | |
| Cash dividends to common stockholders (declared per share of $3.28) | — | | | — | | | — | | | (88,190) | | | — | | | — | | | (88,190) | |
| Contributions | — | | | — | | | — | | | — | | | — | | | 856 | | | 856 | |
| Distributions | — | | | — | | | — | | | — | | | — | | | (581) | | | (581) | |
| Net income attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | 1,008 | | | 1,008 | |
| Balance at December 31, 2020 | $ | 269 | | | $ | 47,683 | | | $ | 222,170 | | | $ | 6,188,148 | | | $ | — | | | $ | 7,297 | | | $ | 6,465,567 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Amortization of restricted stock | — | | | 79 | | | — | | | — | | | — | | | — | | | 79 | |
| | | | | | | | | | | | | |
| Other comprehensive loss | — | | | — | | | (75,116) | | | — | | | — | | | — | | | (75,116) | |
| Net income attributable to American National | — | | | — | | | — | | | 699,325 | | | — | | | — | | | 699,325 | |
| Cash dividends to common stockholders (declared per share of $3.28) | — | | | — | | | — | | | (88,190) | | | — | | | — | | | (88,190) | |
| Contributions | — | | | — | | | — | | | — | | | — | | | 386 | | | 386 | |
| Distributions | — | | | — | | | — | | | — | | | — | | | (649) | | | (649) | |
| Net income attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | 657 | | | 657 | |
| Balance at December 31, 2021 | $ | 269 | | | $ | 47,762 | | | $ | 147,054 | | | $ | 6,799,283 | | | $ | — | | | $ | 7,691 | | | $ | 7,002,059 | |
See accompanying notes to the consolidated financial statements.
AMERICAN NATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| OPERATING ACTIVITIES | | | | | | |
| Net income | | $ | 699,982 | | | $ | 468,513 | | | $ | 631,777 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Net realized investment gains | | (64,628) | | | (35,660) | | | (37,719) | |
| Other-than-temporary impairments | | — | | | — | | | 6,968 | |
| Increase (decrease) in investment credit loss | | (28,778) | | | 102,603 | | | — | |
| Accretion of premiums, discounts and loan origination fees | | 18,932 | | | 9,479 | | | (4,394) | |
| Net capitalized interest on policy loans and mortgage loans | | (31,620) | | | (30,367) | | | (34,081) | |
| Depreciation | | 49,983 | | | 52,551 | | | 53,160 | |
| | | | | | |
| | | | | | |
| Interest credited to policyholders’ account balances | | 448,654 | | | 321,042 | | | 511,999 | |
| Charges to policyholders’ account balances | | (359,707) | | | (310,746) | | | (305,256) | |
| Deferred federal income tax expense (benefit) | | (241,966) | | | 58,910 | | | 78,385 | |
| Income from equity method investments | | (188,677) | | | (42,467) | | | (103,501) | |
| Distributions from unconsolidated affiliates | | 150,024 | | | 82,045 | | | 111,848 | |
| Changes in: | | | | | | |
| Policyholder liabilities | | 271,202 | | | 210,397 | | | 145,396 | |
| Deferred policy acquisition costs | | (79,632) | | | (5,678) | | | (12,749) | |
| Reinsurance recoverables | | (45,262) | | | (2,529) | | | 15,645 | |
| Premiums due and other receivables | | (30,590) | | | (10,048) | | | 3,780 | |
| Prepaid reinsurance premiums | | (4,985) | | | 1,865 | | | 8,952 | |
| Accrued investment income | | 23,476 | | | (15,533) | | | (12,227) | |
| Current tax payable | | 311,554 | | | 339 | | | 18,893 | |
| Liability for retirement benefits | | 7,440 | | | (13,765) | | | (8,454) | |
| Fair value of option securities | | (127,681) | | | (51,931) | | | (144,978) | |
| Fair value of equity securities | | (420,283) | | | (356,281) | | | (422,535) | |
| Other, net | | (6,651) | | | (100,276) | | | 5,503 | |
| Net cash provided by operating activities | | 350,787 | | | 332,463 | | | 506,412 | |
| INVESTING ACTIVITIES | | | | | | |
| Proceeds from sale/maturity/prepayment of: | | | | | | |
| Held-to-maturity securities | | 1,274,488 | | | 1,615,811 | | | 864,481 | |
| Available-for-sale securities | | 1,224,242 | | | 977,051 | | | 500,724 | |
| Equity securities | | 2,467,165 | | | 117,866 | | | 294,798 | |
| Real estate and real estate partnerships | | 21,139 | | | 61,548 | | | 66,725 | |
| Mortgage loans | | 951,602 | | | 522,900 | | | 837,732 | |
| Policy loans | | 51,105 | | | 52,767 | | | 48,079 | |
| Other invested assets | | 239,767 | | | 148,101 | | | 120,455 | |
| Disposals of property and equipment | | 65 | | | 268 | | | 69 | |
| Distributions from real estate and real estate partnerships | | 120,019 | | | 6,866 | | | 61,075 | |
| Distributions from investment funds | | 131,186 | | | 91,178 | | | 37,926 | |
| Payment for the purchase/origination of: | | | | | | |
| Held-to-maturity securities | | (944,443) | | | (498,149) | | | (1,468,253) | |
| Available-for-sale securities | | (2,244,974) | | | (1,473,808) | | | (528,495) | |
| Equity securities | | (93,663) | | | (131,238) | | | (49,016) | |
| Real estate and real estate partnerships | | (12,252) | | | (31,518) | | | (24,163) | |
| Mortgage loans | | (854,496) | | | (752,244) | | | (784,408) | |
| Policy loans | | (20,527) | | | (22,338) | | | (27,722) | |
| Other invested assets | | (164,426) | | | (98,371) | | | (109,074) | |
| Additions to property and equipment | | (37,150) | | | (39,863) | | | (21,402) | |
| Contributions to real estate and real estate partnerships | | (123,061) | | | (119,463) | | | (85,105) | |
| Contributions to investment funds | | (591,324) | | | (256,638) | | | (185,140) | |
| Change in short-term investments | | (812,353) | | | (603,058) | | | (190,511) | |
| Change in collateral held for derivatives | | 20,604 | | | (15,648) | | | 107,133 | |
| Other, net | | 2,633 | | | 2,657 | | | 10,369 | |
| Net cash provided by (used in) investing activities | | 605,346 | | | (445,323) | | | (523,723) | |
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AMERICAN NATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| FINANCING ACTIVITIES | | | | | | |
| Policyholders’ account deposits | | 2,229,554 | | | 1,232,520 | | | 1,770,646 | |
| Policyholders’ account withdrawals | | (1,251,458) | | | (1,388,649) | | | (1,481,234) | |
| Proceeds from Federal Home Loan Bank borrowings | | — | | | 500,000 | | | — | |
| Repayment of Federal Home Loan Bank borrowings | | (250,000) | | | (250,000) | | | — | |
| Change in notes payable | | (4,455) | | | (4,294) | | | 20,034 | |
| Dividends to stockholders | | (88,190) | | | (88,190) | | | (88,243) | |
| Payments to noncontrolling interest | | (649) | | | (581) | | | (20,055) | |
| Net cash provided by financing activities | | 634,802 | | | 806 | | | 201,148 | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 1,590,935 | | | (112,054) | | | 183,837 | |
| Cash and cash equivalents at beginning of the period | | 339,947 | | | 452,001 | | | 268,164 | |
| Cash and cash equivalents at end of the period | | $ | 1,930,882 | | | $ | 339,947 | | | $ | 452,001 | |
| | | | | | |
| Supplemental cash flow information: | | | | | | |
| Interest paid | | $ | 387 | | | $ | 805 | | | $ | — | |
| Income taxes paid, net | | 89,600 | | | 50,800 | | | 86,440 | |
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Operations
American National Group, Inc. ("ANAT" or the "Company"), through its consolidated subsidiaries (collectively “American National”) offers a broad portfolio of insurance products, including individual and group life insurance, annuities, health insurance, and property and casualty insurance. Business is conducted in all 50 states, the District of Columbia, and Puerto Rico.
On August 6, 2021, ANAT entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Brookfield Asset Management Reinsurance Partners Ltd. (“Brookfield Reinsurance”), an exempted company limited by shares existing under the laws of Bermuda, and Freestone Merger Sub Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Brookfield Reinsurance (“Merger Sub”). On the terms and subject to the conditions of the Merger Agreement, at the closing, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving entity, which will become an indirect, wholly-owned subsidiary of Brookfield Reinsurance. The Merger was unanimously approved by the Company’s board of directors. The Merger has received the requisite stockholder approval required under Delaware law. The only remaining significant closing condition pursuant to the Merger is the required regulatory approval from the insurance authorities in Texas, Missouri, New York, Louisiana and California.
Note 2 – Summary of Significant Accounting Policies and Practices
The consolidated financial statements and notes thereto have been prepared in conformity with GAAP and are reported in U.S. currency. American National consolidates entities that are wholly-owned and those in which American National owns less than 100% but controls the voting rights, as well as variable interest entities in which American National is the primary beneficiary. Intercompany balances and transactions with consolidated entities have been eliminated. Investments in unconsolidated affiliates, which include real estate partnerships and investment funds, are accounted for using the equity method of accounting. Certain amounts in prior years have been reclassified to conform to current year presentation.
During the first quarter of 2021, we reclassified the Company's earnings from equity method investments in the condensed consolidated statements of operations from "Equity in earnings of unconsolidated affiliates" to "Net investment income." For the years ended December 31, 2020 and 2019, $42.5 million and $103.5 million were reclassified, with no impact to net income. We also reclassified the related asset balances in the consolidated statements of financial position from "Investments in unconsolidated affiliates" to "Real estate and real estate partnerships" and "Investment funds," with no impact to total assets. Management believes these reclassifications result in increased transparency to the users of the financial statements as it relates to the Company's invested assets and the performance of these investments that are tied to the primary operations of the Company.
The preparation of the consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported consolidated financial statement balances. Actual results could differ from those estimates.
Investments
Investment securities are comprised of bonds classified as held-to-maturity that are carried at amortized cost net of credit loss allowance and bonds classified as available-for-sale that are carried at fair value. In addition, equity investments, other than those accounted for under the equity method or those that result in consolidation of the investee, are measured at fair value with changes in fair value recognized in earnings.
Mortgage loans on real estate are stated at unpaid principal balance, adjusted for any unamortized discount, deferred expenses, and allowances. Accretion of discounts is recorded using the effective yield method. Interest income, prepayment fees, and accretion of discounts and origination fees are reported in “Net investment income” in the consolidated statements of operations. Interest income earned is accrued on the principal amount of the loan based on contractual interest rate. However, interest ceases to accrue for loans on which interest is more than 90 days past due, when the collection of interest is not probable, or when a loan is in foreclosure. Income on past due loans is reported on a cash basis. When a loan becomes current, it is placed back into accrual status. Cash receipts on impaired loans are recorded as a reduction of principal, interest income, expense reimbursement, or other manner in accordance with the loan agreement. In the consolidated statements of operations, gains and losses from the sale of loans are reported in “Net realized investment gains,” and changes in allowances are reported in "(Increase) decrease in investment credit loss."
Note 2 – Summary of Significant Accounting Policies and Practices — (Continued)
Mortgage loans are presented net of the Company's recorded allowance for expected credit loss, which represents the portion of amortized cost basis on mortgage loans that the Company does not expect to collect. In determining the Company’s allowance for credit losses, management: (i) pools and evaluates mortgage loans with similar risk characteristics, (ii) considers expected lifetime credit losses adjusted for prepayments and extensions, and (iii) considers past events, current economic conditions and forecasts of future economic conditions. The allowance is calculated quarterly for each property type based on inputs unique to each loan property type.
On an ongoing basis, mortgage loans with dissimilar risk characteristics (i.e., loans with significant declines in credit quality), collateral dependent mortgage loans (i.e., when the borrower is experiencing financial difficulty, including when foreclosure is reasonably possible or probable), and reasonably expected troubled debt restructurings (i.e., the Company grants concessions to a borrower that is experiencing financial difficulties) may be evaluated individually for credit loss. The allowance for credit losses for loans evaluated individually is established using the same methodologies for the overall commercial portfolio segment except for collateral dependent loans. The allowance for a collateral dependent loan is established as the excess of amortized cost over the estimated fair value of the loan’s underlying collateral, less selling cost when foreclosure is probable. Accordingly, the change in the estimated fair value of collateral dependent loans is recorded as a change in the allowance for credit losses which is recorded on a quarterly basis as a charge or credit to earnings.
Policy loans are carried at the outstanding balance plus any accrued interest which approximates fair value.
Investment real estate including related improvements are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the asset (typically 15 to 50 years). Rental income is recognized on a straight-line basis over the term of the respective lease. American National classifies a property as held-for-sale if it commits to a plan to sell a property within one year and actively markets the property in its current condition for a price that is reasonable in comparison to its estimated fair value. Real estate held-for-sale is stated at the lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated while it is classified as held-for-sale. American National periodically reviews its investment real estate for impairment and tests properties for recoverability whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable and the carrying value of the property exceeds its estimated fair value. Properties whose carrying values are greater than their undiscounted cash flows are written down to their estimated fair value, with the impairment loss included as an adjustment to “Net realized investment gains” in the consolidated statements of operations. Impairment losses are based upon the estimated fair value of real estate, which is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks as well as other appraisal methods. Real estate acquired upon foreclosure is recorded at the lower of its cost or its estimated fair value at the date of foreclosure.
Real estate joint ventures and other limited partnership interests in which the Company has more than a minor interest or influence over the investee’s operations, but it does not have a controlling interest and is not the primary beneficiary, are accounted for using the equity method. These investments are reported as "Real estate and real estate partnerships” in the consolidated statements of financial position. For certain joint ventures, American National records its share of earnings using a lag methodology of one to three months when timely financial information is not available, and the contractual right does not exist to receive such financial information. In addition to the investees’ impairment analysis of their underlying investments, American National routinely evaluates its investments in those investees for impairments. American National considers financial and other information provided by the investee, other known information, and inherent risks in the underlying investments, as well as future capital commitments, in determining whether impairment has occurred. When an impairment is deemed to have occurred at the joint venture level, American National recognizes its share as an adjustment to “Net investment income” to record the investment at its fair value. When an impairment results from American National’s separate analysis, an adjustment is made through “Net realized investment gains” to record the investment at its fair value.
Investment funds are primarily comprised of senior secured and second lien private loans that are secured by assets, revenues and credit/balance sheet lending. We recognize our share of the fund’s earnings in net investment income on a one-quarter lag under the equity method of accounting. Cash distributions are received from the earnings and from liquidation of underlying investments. All investment funds are reevaluated quarterly by the fund manager and are audited annually by an independent audit firm.
Short-term investments comprised of commercial paper are carried at amortized cost, which approximates fair value. Short-term investments have a maturity of less than one year.
Note 2 – Summary of Significant Accounting Policies and Practices — (Continued)
Other invested assets comprised primarily of equity-indexed options are carried at fair value and may be collateralized by counterparties; such collateral is restricted to the Company’s use. Separately managed accounts and Federal Home Loan Bank stock are also included in other invested assets and are carried at cost or market value if available from the account manager. Other invested assets also include tax credit partnerships and mineral rights less allowance for depletion, where applicable.
Credit losses on fixed maturity securities, held-to-maturity, receive a lifetime expected credit loss allowance upon initial recognition of the security representing the net amount expected to be collected. Expected credit losses are measured on a collective (pool) basis by major security type with the credit loss allowance determined based on the difference between the net present value of the expected cash flows from those pooled securities with the amortized cost basis. The expected cash flows are discounted at the effective interest rate of the security and consider historical credit loss information that is adjusted for current market conditions and reasonable and supportable economic forecasts based upon a third-party valuation model. The valuation model calculates expected cash flows based on scenario conditioned probability of default and loss given default. Probability of default measures the likelihood of default over a specified time period, and the loss given default measures the amount that the Company could lose in the event of a counterparty default.
For fixed maturity securities, available-for-sale, in unrealized loss positions which American National does not intend to sell and for which it is not more-likely-than-not that it will be required to sell before its anticipated recovery, American National assesses whether the amortized cost basis of securities will be recovered by comparing the net present value of the expected cash flows from those securities with its amortized cost basis. Management estimates the expected cash flows using a third-party valuation model similar to that used for held-to-maturity securities. The net present value of the expected cash flows is calculated by discounting management’s best estimate of expected cash flows at the effective interest rate implicit in the fixed maturity security when acquired. If the net present value of the expected cash flows is less than the amortized cost, a credit loss allowance is recorded. The credit loss is recorded as the excess of amortized cost over the net present value of the expected cash flows limited by the amount the fair value is less than the amortized cost (fair-value floor). If the fair value is less than the net present value of its expected cash flows at the impairment measurement date, a non-credit loss exists which is recorded in other comprehensive income (loss) for the difference between the fair value and the net present value of the expected cash flows.
Additions to or releases of the allowance on all fixed maturity securities are reported in “(Increase) decrease in investment credit loss” in the consolidated statements of operations.
Prior to January 1, 2020, an other-than-temporary impairment (“OTTI”) loss was recorded when management believed the carrying value would not be realized. After the recognition of a credit loss, fixed maturity securities were accounted for as if they had been purchased on the OTTI measurement date, with a cost basis equal to their previous amortized cost less the related OTTI losses recognized in earnings. The new cost basis of an other-than-temporarily impaired security was not adjusted for subsequent increases in estimated fair value. Should there have been a significant increase in the estimate of cash flows expected to be collected from previously impaired securities, the increase would have been accounted for prospectively by accreting it as interest income over its remaining life.
Derivative instruments in the form of equity-indexed options are purchased to hedge against future interest rate increases in liabilities indexed to market rates and are recorded in the consolidated statements of financial position within other invested assets at fair value, net of collateral provided by counterparties. The change in fair value of derivative assets and liabilities is reported in the consolidated statements of operations as “Net investment income” and “Interest credited to policyholders’ account balances,” respectively. American National does not apply hedge accounting treatment to its derivative instruments. The Company uses derivative instruments to hedge its business risk and holds collateral to offset exposure from its counterparties. Collateral that supports credit risk is reported in the consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.
Cash and cash equivalents have durations that do not exceed 90 days at the date of acquisition, include cash on-hand and in banks, as well as amounts invested in money market funds, and are reported as “Cash and cash equivalents” in the consolidated statements of financial position.
Property and equipment consist of buildings occupied by American National, data processing equipment, software, furniture and equipment, and automobiles which are carried at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the asset (typically 3 to 50 years).
Note 2 – Summary of Significant Accounting Policies and Practices — (Continued)
Insurance specific assets and liabilities
Deferred policy acquisition costs (“DAC”) are capitalized costs related directly to the successful acquisition of new or renewal insurance contracts. Significant costs are incurred to acquire insurance and annuity contracts, including commissions and certain underwriting, policy issuance, and processing expenses.
DAC on traditional life, including limited-pay contracts, and health products is amortized with interest over the anticipated premium-paying period of the related policies in proportion to the ratio of annual premium revenue expected to be received over the life of the policies. Expected premium revenue is estimated by using the same mortality, morbidity, and withdrawal assumptions used in computing liabilities for future policy benefits. DAC is reduced by a provision for possible inflation of maintenance and settlement expenses determined by means of grading interest rates.
DAC on universal life and investment-type contracts is amortized as a level percentage of the present value of anticipated gross profits from investment yields, mortality, and surrender charges. The effect of the realization of unrealized gains (losses) on DAC is recognized within AOCI in the consolidated statements of financial position as of the reporting date. A change in interest rates could have a significant impact on DAC calculated for these contracts.
DAC associated with property and casualty business is amortized over the coverage period of the related policies, in relation to premiums earned.
DAC on participating whole life products is amortized in proportion to estimated gross margins. Estimated gross margins are equal to premiums, plus investment income, less benefits, less expenses not included in DAC, less the change in reserves, less dividends.
For short-duration and long-duration contracts, DAC is grouped consistent with the manner in which insurance contracts are acquired, serviced, and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of DAC for short-duration contracts.
Liabilities for future policy benefits for traditional products 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 the policies were issued. Estimates are based on historical experience adjusted 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.
Policyholders’ account balances represent the contract value that has accrued to the benefit of the policyholders related to universal-life and investments-type contracts. For fixed products, these are generally equal to the accumulated deposits plus interest credited, reduced by withdrawals, payouts, and accumulated policyholder assessments. Indexed product account balances are equal to the sum of host and embedded derivative reserves computed per derivative accounting guidance.
Liabilities for unpaid claims and claim adjustment expenses (“CAE”) are established to provide for the estimated costs of paying claims. These reserves include estimates for both case reserves and IBNR claim liabilities. Case reserves include the liability for reported but unpaid claims. IBNR liabilities include a provision for potential development on case reserves, losses on claims currently closed which may reopen in the future, as well as IBNR claims. These liabilities 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.
Reinsurancerecoverables are estimated amounts due to American National from reinsurers related to paid and unpaid ceded claims and CAE and are presented net of a reserve for collectability. Recoveries of gross ultimate losses under our non-catastrophe reinsurance are estimated by a review of individual large claims and the ceded portion of IBNR using assumed distribution of loss by percentage retained. Recoveries of gross ultimate losses under our catastrophe reinsurance are estimated by applying reinsurance treaty terms to estimates of gross ultimate losses. The most significant assumption is the average size of the individual losses for those claims that have occurred but have not yet been reported and our estimate of gross ultimate losses. The ultimate amount of the reinsurance ceded recoverable is unknown until all losses settle.
Note 2 – Summary of Significant Accounting Policies and Practices — (Continued)
Separate account assets and liabilities
Separate account assets and liabilities are funds that are held separate from the general assets and liabilities of American National. Separate account assets include funds representing the investments of variable insurance product contract holders, who bear the investment risk of such funds. Investment income and investment gains and losses from these separate funds accrue to the benefit of the contract holders. American National reports separately, as assets and liabilities, investments held in such 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 National’s 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. In addition, American National's qualified pension plan assets are included in separate accounts. 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 statements of operations. Separate accounts are established in conformity with insurance laws and are not chargeable with liabilities that arise from any other business of American National.
Premiums, benefits, claims incurred, and expenses
Traditional ordinary life 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 term of the insurance contracts.
Annuity premiums received on limited-pay and supplemental annuity contracts involving a significant life contingency are recognized as revenue when due. Deferred annuity premiums are recorded as deposits rather than recognized as revenue. Revenues from deferred annuity contracts are principally surrender charges and, in the case of variable annuities, administrative fees assessed to contract holders.
Universal life and single premium whole life revenues represent amounts assessed to policyholders including mortality charges, surrender charges actually paid, and earned policy service fees. Amounts included in expenses are benefits in excess of account balances returned to policyholders.
Property and casualty premiums are recognized as revenue over the period of the contract in proportion to the amount of insurance protection, which is generally evenly over the contract period, net of reinsurance ceded. Claims incurred consist of claims and CAE paid and the change in reserves, net of reinsurance received and recoverable.
Participating insurance policies
Participating business comprised approximately 4.0% of the life insurance in-force at December 31, 2021 and 16.5% of life premiums in 2021.
For the majority of this participating business, profits earned 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). Dividends to participating policyholders were $8.1 million, $7.0 million, and $8.4 million for the years ended 2021, 2020, and 2019, respectively. Income of $18.3 million, $5.8 million, and $34.0 million was allocated to participating policyholders for the years ended 2021, 2020, and 2019, respectively.
For all other participating business, 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.
Federal income taxes
American National files a consolidated life and non-life federal income tax return. Certain subsidiaries that are consolidated for financial reporting are not eligible to be included in the consolidated federal income tax return; accordingly, they file separate returns.
Note 2 – Summary of Significant Accounting Policies and Practices — (Continued)
Deferred income tax assets and liabilities are recognized to reflect the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases. Deferred taxes are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled.
American National recognizes tax benefits on uncertain tax positions if it is “more-likely-than-not” the position based on its technical merits will be sustained by taxing authorities. American National recognizes the largest benefit that is greater than 50% likely of being ultimately realized upon settlement. Tax benefits not meeting the “more-likely-than-not” threshold, if applicable, are included with “Other liabilities” in the consolidated statements of financial position. American National recognizes interest expense and penalties related to uncertain tax positions, if applicable, as income tax expense in the consolidated statements of operations. Accrued interest expense and penalties related to uncertain tax positions are reported as "Other liabilities" in the consolidated statements of financial position.
Pension and postretirement benefit plans
Pension and postretirement benefit obligations and costs for our frozen benefit plans are estimated using assumptions including demographic factors such as retirement age and mortality.
American National uses 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. For this purpose, a hypothetical bond portfolio to match the expected monthly benefit payments under the pension plan was constructed with the resulting yield of the portfolio used as a discount rate.
In developing the investment return assumption, we relied on a model that utilizes the following factors:
•Current yield to maturity of fixed income securities
•Forecasts of inflation, GDP growth, and total return for each asset class
•Historical plan performance
•Target asset allocation
•Standard deviations and correlations related to historical and expected future returns of each asset class and inflation
The resulting assumption is the assumed rate of return for the plans’ target asset allocation, net of investment expenses, and reflects anticipated returns of the plans’ current and future assets.
Using this approach, the calculated return will fluctuate from year to year; however, it is American National’s policy to hold this long-term assumption relatively constant.
Stock-based compensation
Stock Appreciation Rights(“SARs”) liability and compensation cost is based on the fair value of the grants and is remeasured each reporting period through the settlement date. The fair value of the SARs is calculated using the Black-Scholes-Merton option-pricing model. The key assumptions used in the model include: the grant date and remeasurement date stock prices, expected life of the SARs, and the risk-free rate of return. The compensation liability related to the SAR award is reported as “Other liabilities” in the consolidated statements of financial position.
Restricted Stock (“RS”) equity and compensation cost is based on the fair value of the underlying stock at grant date. The compensation cost accrued is reported as “Additional paid-in capital” in the consolidated statements of financial position.
Restricted Stock Units (“RSUs”) are settled in cash, resulting in classifying RSUs as a liability award. The liability is remeasured each reporting period through the vesting date and is adjusted for changes in fair value. The compensation liability related to the RSUs is reported as “Other Liabilities” in the consolidated statements of financial position.
Litigation contingencies
Existing and potential litigation is reviewed quarterly to determine if any adjustments to liabilities for possible losses are necessary. Reserves for losses are established whenever they are probable and reasonably estimable. If no one estimate within the range of possible losses is more probable than any other, a reserve is recorded based on the lowest amount of the range.
Note 3 – Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
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Standard | Description | Effective Date and Method of Adoption | Impact on Financial Statements |
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ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | The amendments simplify the accounting for income taxes by removing certain exceptions in the existing guidance including those related to intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments require that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax as well as other minor changes. | This standard became effective for the Company for all annual and interim periods beginning January 1, 2021. The new guidance specifies which amendments should be applied prospectively, retrospective to all periods presented or on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. | The adoption of this standard did not have a material impact to the Company's Consolidated Financial Statements or Notes to the Consolidated Financial Statements. |
Future Adoption of New Accounting Standards — The FASB issued the following accounting guidance relevant to American National:
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Standard | Description | Effective Date and Method of Adoption | Impact on Financial Statements |
ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts | The guidance will improve the timeliness of recognizing changes in the liability for future policy benefits for traditional and limited payment long-duration contracts and will modify the rate used to discount future cash flows. The guidance will also simplify the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts (market risk benefits), simplify the amortization of deferred acquisition costs and add significant qualitative and quantitative disclosures. | This standard will become effective for the Company for all annual and interim periods beginning January 1, 2023, which was extended from the previous effective date of January 1, 2022 through the issuance of ASU 2020-11. The guidance allows for one of two adoption methods, a modified retrospective transition or a full retrospective transition except for the changes to accounting for market risk benefits which will require a retrospective transition. | Considerable progress in the implementation of the new standard has been made; however, we have not yet estimated the impact the new guidance will have on the consolidated financial statements. Accounting and actuarial policy elections have mostly been determined, data flows are being established, actuarial models are being developed, and implementation of a financial reporting disclosure system is in progress. |
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ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | The amendments in this guidance provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. | The amendments in this guidance are effective for all entities as of March 12, 2020 and will sunset through December 31, 2022, at which time the application of exceptions and optional expedients will no longer be permitted. The FASB is currently deliberating an ASU that would extend the sunset date through December 31, 2024. | The inventory of LIBOR exposures has been completed and is primarily limited to floating rate bonds, alternative investments, and borrowings within joint venture investments. Some of the contracts included in these categories will mature prior to December 31, 2021, the start of LIBOR rates cessations. The transition from LIBOR is expected to result in an immaterial impact to the Company's Consolidated Financial Statements or Notes to the Consolidated Financial Statements. |
Note 4 – Investment in Securities
The cost or amortized cost and fair value of investments in securities are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
| Fixed maturity, bonds held-to-maturity | | | | | | | | | | |
| U.S. treasury and government | | $ | 12,284 | | | $ | — | | | $ | (287) | | | $ | — | | | $ | 11,997 | |
| U.S. states and political subdivisions | | 104,039 | | | 1,676 | | | (1,906) | | | — | | | 103,809 | |
| Foreign governments | | 14,369 | | | 137 | | | (159) | | | — | | | 14,347 | |
| Corporate debt securities | | 6,810,518 | | | 388,726 | | | (21,213) | | | (11,467) | | | 7,166,564 | |
| Residential mortgage-backed securities | | 48,491 | | | 2,684 | | | (481) | | | (516) | | | 50,178 | |
| Collateralized debt securities | | 112,409 | | | 1,677 | | | (1,046) | | | (1,146) | | | 111,894 | |
| | | | | | | | | | |
| Total bonds held-to-maturity | | 7,102,110 | | | 394,900 | | | (25,092) | | | (13,129) | | | 7,458,789 | |
| Fixed maturity, bonds available-for-sale | | | | | | | | | | |
| U.S. treasury and government | | 26,887 | | | 121 | | | (255) | | | — | | | 26,753 | |
| U.S. states and political subdivisions | | 1,028,331 | | | 51,124 | | | (2,312) | | | (14) | | | 1,077,129 | |
| Foreign governments | | 5,000 | | | 841 | | | — | | | — | | | 5,841 | |
| Corporate debt securities | | 6,809,610 | | | 268,964 | | | (35,285) | | | (7,141) | | | 7,036,148 | |
| Residential mortgage-backed securities | | 32,234 | | | 342 | | | (341) | | | (268) | | | 31,967 | |
| Collateralized debt securities | | 205,732 | | | 469 | | | (904) | | | (2,887) | | | 202,410 | |
| Total bonds available-for-sale | | 8,107,794 | | | 321,861 | | | (39,097) | | | (10,310) | | | 8,380,248 | |
| Total investments in fixed maturity | | $ | 15,209,904 | | | $ | 716,761 | | | $ | (64,189) | | | $ | (23,439) | | | $ | 15,839,037 | |
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| | | December 31, 2020 |
| | | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
| Fixed maturity, bonds held-to-maturity | | | | | | | | | | |
| U.S. treasury and government | | $ | 7,733 | | | $ | 11 | | | $ | — | | | $ | — | | | $ | 7,744 | |
| U.S. states and political subdivisions | | 109,445 | | | 4,101 | | | (11) | | | — | | | 113,535 | |
| Foreign governments | | 3,851 | | | 374 | | | — | | | — | | | 4,225 | |
| Corporate debt securities | | 6,992,095 | | | 623,233 | | | (9,117) | | | (7,475) | | | 7,598,736 | |
| Residential mortgage-backed securities | | 114,579 | | | 5,065 | | | (1,464) | | | (452) | | | 117,728 | |
| Collateralized debt securities | | 139,709 | | | 6,864 | | | (845) | | | (4,515) | | | 141,213 | |
| | | | | | | | | | |
| Total bonds held-to-maturity | | 7,367,412 | | | 639,648 | | | (11,437) | | | (12,442) | | | 7,983,181 | |
| Fixed maturity, bonds available-for-sale | | | | | | | | | | |
| U.S. treasury and government | | 28,766 | | | 418 | | | (1) | | | — | | | 29,183 | |
| U.S. states and political subdivisions | | 1,066,627 | | | 73,976 | | | (145) | | | — | | | 1,140,458 | |
| Foreign governments | | 14,995 | | | 1,393 | | | — | | | — | | | 16,388 | |
| Corporate debt securities | | 5,887,756 | | | 471,205 | | | (17,207) | | | (7,275) | | | 6,334,479 | |
| Residential mortgage-backed securities | | 20,544 | | | 964 | | | (29) | | | (188) | | | 21,291 | |
| Collateralized debt securities | | 54,454 | | | 1,040 | | | (94) | | | (19) | | | 55,381 | |
| | | | | | | | | | |
| Total bonds available-for-sale | | 7,073,142 | | | 548,996 | | | (17,476) | | | (7,482) | | | 7,597,180 | |
| Total investments in fixed maturity | | $ | 14,440,554 | | | $ | 1,188,644 | | | $ | (28,913) | | | $ | (19,924) | | | $ | 15,580,361 | |
Note 4 – Investment in Securities — (Continued)
The amortized cost and fair value, by contractual maturity, of fixed maturity securities are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | Bonds Held-to-Maturity | | Bonds Available-for-Sale |
| | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Due in one year or less | | $ | 853,273 | | | $ | 865,103 | | | $ | 574,056 | | | $ | 580,191 | |
| Due after one year through five years | | 2,232,939 | | | 2,355,707 | | | 3,015,864 | | | 3,156,717 | |
| Due after five years through ten years | | 2,969,115 | | | 3,145,270 | | | 2,474,224 | | | 2,576,325 | |
| Due after ten years | | 1,046,783 | | | 1,092,709 | | | 2,043,650 | | | 2,067,015 | |
| Total | | $ | 7,102,110 | | | $ | 7,458,789 | | | $ | 8,107,794 | | | $ | 8,380,248 | |
Actual maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Residential and commercial mortgage-backed securities, which are not due at a single maturity, have been presented based on the year of final contractual maturity.
Proceeds from sales of bonds available-for-sale, with the related gross realized gains and losses, are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Proceeds from sales of fixed maturity, bonds available-for-sale | | $ | 55,558 | | | $ | 164,372 | | | $ | 45,017 | |
| Gross realized gains | | 59 | | | 624 | | | 250 | |
| Gross realized losses | | — | | | (4,145) | | | (1,124) | |
Gains and losses are determined using specific identification of the securities sold. There was no transfer of bonds from held-to-maturity to available-for-sale during 2021. During 2020, bonds below investment grade with a carrying value of $142.7 million, were transferred from held-to-maturity to available-for-sale after a deterioration in the issuers’ creditworthiness.
In accordance with various regulations, American National has bonds on deposit with regulating authorities with a carrying value of $53.5 million and $47.7 million at December 31, 2021 and 2020, respectively. In addition, American National has pledged bonds in connection with agreements and transactions, such as financing and reinsurance agreements. The carrying value of bonds pledged was $67.1 million and $111.0 million at December 31, 2021 and 2020, respectively.
The components of the change in net unrealized gains (losses) on debt securities are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Bonds available-for-sale: change in unrealized gains (losses) | | $ | (248,756) | | | $ | 242,105 | | | $ | 335,473 | |
| Adjustments for | | | | | | |
| Deferred policy acquisition costs | | 58,281 | | | (68,474) | | | (87,003) | |
| Participating policyholders’ interest | | 8,275 | | | (3,010) | | | (16,056) | |
| Deferred federal income tax benefit (expense) | | 39,346 | | | (36,306) | | | (48,258) | |
| Change in net unrealized gains (losses) on debt securities, net of tax | | $ | (142,854) | | | $ | 134,315 | | | $ | 184,156 | |
The components of the change in net gains on equity securities are shown below (in thousands):
| | | | | | | | | | | |
| | Years ended December 31, |
| 2021 | | 2020 |
| Unrealized gains on equity securities | $ | 38,771 | | | $ | 349,999 | |
| Net gains on equity securities sold | 381,512 | | | 6,282 | |
| Net gains on equity securities | $ | 420,283 | | | $ | 356,281 | |
Note 4 – Investment in Securities — (Continued)
The gross unrealized losses and fair value of bonds available-for-sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position due to market factors are shown below (in thousands, except number of issues):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Less than 12 months | | 12 months or more | | Total |
| | Number of Issues | | Gross Unrealized Losses | | Fair Value | | Number of Issues | | Gross Unrealized Losses | | Fair Value | | Number of Issues | | Gross Unrealized Losses | | Fair Value |
| Fixed maturity, bonds available-for-sale | | | | | | | | | | | | | | | | | |
| U.S. treasury and government | 10 | | | $ | (230) | | | $ | 18,378 | | | 1 | | | $ | (25) | | | $ | 2,844 | | | 11 | | | $ | (255) | | | $ | 21,222 | |
| U.S. states and political subdivisions | 13 | | | (618) | | | 50,025 | | | 4 | | | (1,694) | | | 33,644 | | | 17 | | | (2,312) | | | 83,669 | |
| Corporate debt securities | 184 | | | (27,335) | | | 1,596,811 | | | 32 | | | (7,950) | | | 146,597 | | | 216 | | | (35,285) | | | 1,743,408 | |
| Residential mortgage-backed securities | 2 | | | (339) | | | 13,193 | | | 2 | | | (2) | | | 496 | | | 4 | | | (341) | | | 13,689 | |
| Collateralized debt securities | 26 | | | (885) | | | 191,342 | | | 3 | | | (19) | | | 4,447 | | | 29 | | | (904) | | | 195,789 | |
| Total | 235 | | | $ | (29,407) | | | $ | 1,869,749 | | | 42 | | | $ | (9,690) | | | $ | 188,028 | | | 277 | | | $ | (39,097) | | | $ | 2,057,777 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Less than 12 months | | 12 months or more | | Total |
| | Number of Issues | | Gross Unrealized Losses | | Fair Value | | Number of Issues | | Gross Unrealized Losses | | Fair Value | | Number of Issues | | Gross Unrealized Losses | | Fair Value |
| Fixed maturity, bonds available-for-sale | | | | | | | | | | | | | | | | | |
| U.S. treasury and government | 1 | | | $ | (1) | | | $ | 2,868 | | | — | | | $ | — | | | $ | — | | | 1 | | | $ | (1) | | | $ | 2,868 | |
| U.S. states and political subdivisions | 2 | | | (145) | | | 10,205 | | | — | | | — | | | — | | | 2 | | | (145) | | | 10,205 | |
| Corporate debt securities | 43 | | | (8,507) | | | 270,249 | | | 8 | | | (8,700) | | | 13,270 | | | 51 | | | (17,207) | | | 283,519 | |
| Residential mortgage-backed securities | 1 | | | (21) | | | 1,391 | | | 3 | | | (8) | | | 593 | | | 4 | | | (29) | | | 1,984 | |
| Collateralized debt securities | 3 | | | (93) | | | 12,752 | | | 1 | | | (1) | | | 158 | | | 4 | | | (94) | | | 12,910 | |
| | | | | | | | | | | | | | | | | |
| Total | 50 | | | $ | (8,767) | | | $ | 297,465 | | | 12 | | | $ | (8,709) | | | $ | 14,021 | | | 62 | | | $ | (17,476) | | | $ | 311,486 | |
A number of assumptions and estimates are inherent in evaluating whether an allowance for credit loss is necessary, which include 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. Based on this evaluation, unrealized losses on bonds available-for-sale where an allowance for credit loss was not recorded were concentrated in the Company's fixed maturity securities within the finance and investment sector.
Equity securities by market sector distribution are shown below, based on fair value:
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| Consumer goods | | 9.6 | % | | 19.3 | % |
| Energy and utilities | | 6.4 | | | 5.2 | |
| Finance | | 35.6 | | | 21.6 | |
| Healthcare | | 9.0 | | | 15.0 | |
| Industrials | | 3.5 | | | 7.4 | |
| Information technology | | 15.1 | | | 27.1 | |
| Other | | 20.8 | | | 4.4 | |
| Total | | 100.0 | % | | 100.0 | % |
Note 4 – Investment in Securities — (Continued)
Allowance for Credit Losses
Held-to-Maturity Securities—Management measures expected credit losses on bonds held-to-maturity on a qualitative adjustment basis by major security type: corporate bonds, structured products, municipals, specialty products and treasuries. Accrued interest receivable on held-to maturity debt securities are excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current market conditions and reasonable and supportable economic forecasts based upon a third-party valuation model.
Available-for-Sale Securities—For available-for-sale bonds in an unrealized loss position, the Company first assesses whether it intends to sell the security or will be required to sell the security before recovery of its amortized cost basis. If either of these criteria are met, the security’s amortized cost basis is written down to fair value through income. For bonds available-for-sale that do not meet either indicated criteria, the Company evaluates whether the decline in fair value has resulted from credit events or market factors. In making this assessment, management first calculates the extent to which fair value is less than amortized cost, and then may consider any changes to the rating of the security by a rating agency, and any specific conditions related to the security. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded through income, limited to the amount fair value is less than amortized cost. Any remaining unrealized loss is recognized in other comprehensive income.
When the discounted cash flow method is used to determine the allowance for credit losses, management's estimates incorporate expected prepayments, if any. Model inputs are considered reasonable and supportable for three years. A mean reversion is applied in years four and five. Credit loss allowance is not measured on accrued interest receivable because the balance is written off to net investment income in a timely manner, within 90 days. Changes in the allowance for credit losses are recognized through the consolidated statement of operations as (increase) decrease in investment credit loss.
No accrued interest receivables were written off as of December 31, 2021.
The rollforward of the allowance for credit losses for bonds held-to-maturity is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Corporate Debt Securities | | Collateralized Debt Securities | | Residential Mortgage-Backed Securities | | Total |
| Balance at January 1, 2021 | | | | | $ | (7,475) | | $ | (4,515) | | | $ | (452) | | | $ | (12,442) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Purchases | | | | | (1,412) | | (168) | | | — | | | (1,580) |
| Disposition | | | | | 441 | | 551 | | | — | | | 992 |
| Provision | | | | | (3,021) | | 2,986 | | | (64) | | | (99) |
| | | | | | | | | | | |
| Balance at December 31, 2021 | | | | | $ | (11,467) | | $ | (1,146) | | | $ | (516) | | | $ | (13,129) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Foreign Governments | | Corporate Debt Securities | | Collateralized Debt Securities | | Residential Mortgage-Backed Securities | | Total |
| Balance at January 1, 2020 | | | $ | 4 | | $ | (18,563) | | $ | (2,968) | | | $ | (137) | | | $ | (21,664) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Purchases | | | — | | (783) | | (329) | | | 134 | | | (978) |
| Disposition | | | — | | 9,501 | | 800 | | | — | | | 10,301 |
| Provision | | | (4) | | 2,370 | | (2,018) | | | (449) | | | (101) |
| | | | | | | | | | | |
| Balance at December 31, 2020 | | | $ | — | | $ | (7,475) | | $ | (4,515) | | | $ | (452) | | | $ | (12,442) |
Note 4 – Investment in Securities — (Continued)
The rollforward of the allowance for credit losses for available-for-sale debt securities is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and Government | | U.S. State and Political Subdivisions | | | | Corporate Debt Securities | | Collateralized Debt Securities | | Residential Mortgage-Backed Securities | | Total |
| Beginning balance at January 1, 2021 | $ | — | | | $ | — | | | | | $ | (7,275) | | | $ | (19) | | | $ | (188) | | $ | (7,482) | |
| Increase in allowance related to purchases | — | | | — | | | | | (3,158) | | | (538) | | | — | | (3,696) | |
| Reduction in allowance related to disposition | — | | | — | | | | | 4,117 | | | 182 | | | — | | 4,299 | |
| Allowance on securities that had an allowance recorded in a previous period | 3 | | | 12 | | | | | 3,680 | | | (1,507) | | | (29) | | 2,159 | |
| Allowance on securities where credit losses were not previously recorded | (3) | | | (26) | | | | | (4,505) | | | (1,005) | | | (51) | | (5,590) | |
| Balance at December 31, 2021 | $ | — | | | $ | (14) | | | | | $ | (7,141) | | | $ | (2,887) | | | $ | (268) | | $ | (10,310) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Corporate Debt Securities | | Collateralized Debt Securities | | Residential Mortgage-Backed Securities | | Total |
| Beginning balance at January 1, 2020 | | | | | | | $ | — | | | $ | — | | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Increase in allowance related to purchases | | | | | | | (217) | | | — | | | — | | (217) | |
| Reduction in allowance related to disposition | | | | | | | 63 | | | 6 | | | 3 | | 72 | |
| Allowance on securities that had an allowance recorded in a previous period | | | | | | | (1,074) | | | (25) | | | (191) | | (1,290) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Allowance on securities where credit losses were not previously recorded | | | | | | | (6,047) | | | — | | | — | | (6,047) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance at December 31, 2020 | | | | | | | $ | (7,275) | | | $ | (19) | | | $ | (188) | | $ | (7,482) | |
Credit Quality Indicators
The Company monitors the credit quality of bonds held-to-maturity through the use of credit ratings, which are updated on a monthly basis. Information is also gathered regarding the asset performance of held-to-maturity bonds. The two traditional metrics for assessing interest rate risks are interest-coverage ratios and capitalization ratios, which can also be used in the assessment of credit risk. These risks are mitigated through the diversification of bond investments. Categories of diversification include credit ratings, geographic locations, maturities, and market sector.
The credit quality indicators for the amortized cost of bonds held-to-maturity are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Amortized cost of bonds held-to-maturity by credit rating |
| Fixed maturity, bonds held-to-maturity | | AAA | | AA | | A | | BBB | | BB and below | | Total |
| U.S. treasury and government | | $ | — | | $ | 12,284 | | $ | — | | $ | — | | | $ | — | | | $ | 12,284 |
| U.S. state and political subdivisions | | 14,364 | | 49,327 | | 9,188 | | 25,770 | | | 5,390 | | | 104,039 |
| Foreign governments | | — | | 13,355 | | 1,014 | | — | | | — | | | 14,369 |
| Corporate debt securities | | 31,176 | | 400,666 | | 3,212,688 | | 3,061,595 | | | 104,393 | | | 6,810,518 |
| Collateralized debt securities | | — | | — | | 66,715 | | 40,858 | | | 4,836 | | | 112,409 |
| Residential mortgage-backed securities | | — | | 47,304 | | — | | — | | | 1,187 | | | 48,491 |
| Total | | $ | 45,540 | | $ | 522,936 | | $ | 3,289,605 | | $ | 3,128,223 | | | $ | 115,806 | | | $ | 7,102,110 |
Note 4 – Investment in Securities — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized cost of bonds held-to-maturity by credit rating |
| Fixed maturity, bonds held-to-maturity | AAA | | AA | | A | | BBB | | BB and below | | Total |
| U.S. treasury and government | $ | — | | $ | 7,733 | | $ | — | | $ | — | | | $ | — | | | $ | 7,733 |
| U.S. state and political subdivisions | 25,831 | | 43,964 | | 34,893 | | — | | | 4,757 | | | 109,445 |
| Foreign governments | — | | 2,820 | | 1,031 | | — | | | — | | | 3,851 |
| Corporate debt securities | 1,956 | | 262,830 | | 2,976,571 | | 3,647,496 | | | 103,242 | | | 6,992,095 |
| Collateralized debt securities | — | | — | | 107,795 | | 31,914 | | | — | | | 139,709 |
| Residential mortgage-backed securities | — | | 112,995 | | — | | — | | | 1,584 | | | 114,579 |
| Total | $ | 27,787 | | $ | 430,342 | | $ | 3,120,290 | | $ | 3,679,410 | | | $ | 109,583 | | | $ | 7,367,412 |
Note 5 – Mortgage Loans
Generally, commercial mortgage loans are secured by first liens on income-producing real estate. American National attempts to maintain a diversified portfolio by considering both the location of the underlying collateral as well as the type of mortgage loan. The geographic categories come from the U.S. Census Bureau's "Census Regions and Divisions of the United States." The distribution based on carrying amount of mortgage loans by location is as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Amount | | Percentage | | Amount | | Percentage |
| East North Central | $ | 747,661 | | | 14.4 | % | | $ | 783,614 | | | 14.9 | % |
| East South Central | 117,574 | | | 2.3 | | | 146,052 | | | 2.8 | |
| Mountain | 1,250,562 | | | 24.0 | | | 1,284,555 | | | 24.5 | |
| Pacific | 878,820 | | | 16.9 | | | 806,426 | | | 15.4 | |
| South Atlantic | 627,295 | | | 12.0 | | | 619,405 | | | 11.8 | |
| West South Central | 1,261,659 | | | 24.3 | | | 1,313,848 | | | 25.1 | |
| Other | 315,763 | | | 6.1 | | | 288,631 | | | 5.5 | |
| Total | $ | 5,199,334 | | | 100.0 | % | | $ | 5,242,531 | | | 100.0 | % |
As of December 31, 2021 and 2020, loans in foreclosure and loans foreclosed are as follows (in thousands, except number of loans):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Foreclosure and foreclosed | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| In foreclosure | — | | | $ | — | | | 1 | | | $ | 5,168 | |
| Filed for bankruptcy* | — | | | — | | | 1 | | | 9,230 | |
| Total in foreclosure | — | | | $ | — | | | 2 | | | $ | 14,398 | |
| | | | | | | |
| Foreclosed | 1 | | | $ | 5,168 | | | 2 | | | $ | 8,603 | |
*Borrower filed for bankruptcy after foreclosure proceedings had begun.
Note 5 – Mortgage Loans — (Continued)
The age analysis of past due loans is shown below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | More Than 90 Days Past Due | | | | | | Total |
| December 31, 2021 | | | | Total | | Current | | Amount | | Percentage |
| Apartment | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 522,595 | | | $ | 522,595 | | | 9.9 | % |
| Hotel | — | | | — | | | — | | | — | | | 962,345 | | | 962,345 | | | 18.2 | |
| Industrial | — | | | — | | | — | | | — | | | 912,645 | | | 912,645 | | | 17.2 | |
| Office | — | | | — | | | — | | | — | | | 1,347,384 | | | 1,347,384 | | | 25.4 | |
| Parking | — | | | — | | | — | | | — | | | 392,310 | | | 392,310 | | | 7.4 | |
| Retail | 4,872 | | | — | | | — | | | 4,872 | | | 838,163 | | | 843,035 | | | 15.9 | |
| Storage | — | | | — | | | — | | | — | | | 163,685 | | | 163,685 | | | 3.1 | |
| Other | — | | | — | | | — | | | — | | | 152,414 | | | 152,414 | | | 2.9 | |
| Total | $ | 4,872 | | | $ | — | | | $ | — | | | $ | 4,872 | | | $ | 5,291,541 | | | $ | 5,296,413 | | | 100.0 | % |
| Allowance for credit losses | | | | | | | | | | | (97,079) | | | |
| Total, net of allowance | | | | | | | | | | | $ | 5,199,334 | | | |
| December 31, 2020 | | | | | | | | | | | | | |
| Apartment | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 557,159 | | | $ | 557,159 | | | 10.5 | % |
| Hotel | 30,315 | | | 30,158 | | | — | | | 60,473 | | | 853,522 | | | 913,995 | | | 17.0 | |
| Industrial | 14,930 | | | — | | | 5,168 | | | 20,098 | | | 836,105 | | | 856,203 | | | 15.9 | |
| Office | 24,804 | | | — | | | 9,230 | | | 34,034 | | | 1,522,197 | | | 1,556,231 | | | 29.0 | |
| Parking | 48,825 | | | 29,355 | | | — | | | 78,180 | | | 286,107 | | | 364,287 | | | 6.8 | |
| Retail | 4,991 | | | — | | | 25,779 | | | 30,770 | | | 760,907 | | | 791,677 | | | 14.7 | |
| Storage | — | | | — | | | — | | | — | | | 165,561 | | | 165,561 | | | 3.1 | |
| Other | — | | | — | | | — | | | — | | | 163,121 | | | 163,121 | | | 3.0 | |
| Total | $ | 123,865 | | | $ | 59,513 | | | $ | 40,177 | | | $ | 223,555 | | | $ | 5,144,679 | | | $ | 5,368,234 | | | 100.0 | % |
| Allowance for credit losses | | | | | | | | | | | (125,703) | | | |
| Total, net of allowance | | | | | | | | | | | $ | 5,242,531 | | | |
As a result of the economic impact associated with COVID-19, American National modified 93 loans with a total balance of $1.6 billion during 2020. These modifications were in the form of forbearance of principal and interest payments for up to six months, extensions of maturity dates, and/or provision for interest only payments. The modifications were primarily related to our loans to hotels, retail and parking operations. Due to ongoing economic stress brought on by the pandemic, additional modifications for 33 of these loans with a total balance of $725.7 million were made during 2021. These additional modifications extended the forbearance of principal and interest payments and interest only provisions with a requirement for the payment of at least 20% of the total interest due during the extended modification period. The modified loans had an aggregate deferred interest of $5.6 million as of December 31, 2021.
There were no unamortized purchase discounts as of December 31, 2021 and 2020. Total mortgage loans were net of unamortized origination fees of $27.5 million and $26.1 million at December 31, 2021 and 2020, respectively. No unearned income is included in these amounts.
Note 5 – Mortgage Loans — (Continued)
Troubled Debt Restructurings
American National has granted concessions to certain mortgage loan borrowers. Concessions are generally one of, or a combination of, a delay in payment of principal or interest, a reduction of the contractual interest rate or an extension of the maturity date. Loans that have these concessions could be classified as troubled debt restructurings. The carrying value could change based on the expected recovery of the loan, which is evaluated quarterly. Loan modifications executed due to COVID-19 resulting in a total delay of more than six months were evaluated for troubled debt restructuring status under current GAAP guidance.
American National considers the amount, timing and extent of concessions in determining credit loss allowances for loan losses recorded in connection with a troubled debt restructuring.
Loans determined to be troubled debt restructuring during the periods presented are as follows (in thousands, except number of loans):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 |
| | | Number of Loans | | Recorded Investment
Pre-Modification | | Recorded Investment
Post-Modification | | Number of Loans | | Recorded Investment
Pre-Modification | | Recorded Investment
Post-Modification |
| Office | | 2 | | | $ | 37,985 | | | $ | 37,985 | | | 7 | | | $ | 76,220 | | | $ | 76,220 | |
| Retail | | 3 | | | 32,325 | | | 32,325 | | | 6 | | | 79,943 | | | 79,943 | |
| Industrial | | — | | | — | | | — | | | 2 | | | 11,565 | | | 11,565 | |
| Hotel | | — | | | — | | | — | | | 34 | | | 811,131 | | | 811,131 | |
| Parking | | 1 | | | 9,257 | | | 9,257 | | | 16 | | | 248,465 | | | 248,465 | |
| Storage | | 1 | | | 8,890 | | | 8,890 | | | — | | | — | | | — | |
| Apartment | | — | | | — | | | — | | | 2 | | | 40,097 | | | 40,097 | |
| | | | | | | | | | | | |
| Total | | 7 | | | $ | 88,457 | | | $ | 88,457 | | | 67 | | | $ | 1,267,421 | | | $ | 1,267,421 | |
For the year ended December 31, 2021, a total of 72 loans with a recorded investment of $1.3 billion were designated as a troubled debt restructuring. There are no commitments to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring during the periods presented. The decrease in loans determined to be a troubled debt restructuring in 2021 is primarily attributable to improved economic conditions after lifting of COVID-19 related restrictions.
Note 5 – Mortgage Loans — (Continued)
Allowance for Credit Losses
Mortgage loans on real estate are stated at unpaid principal balance, adjusted for any unamortized discount, deferred expenses and allowances. The allowance for credit losses is based upon the current expected credit loss model. The model considers past loss experience, current economic conditions, and reasonable and supportable forecasts of future conditions. Reversion for the allowance calculation is implicit in the models used to determine the allowance. The methodology uses a discounted cash flow approach based on expected cash flows.
The rollforward of the allowance for credit losses for mortgage loans is shown below (in thousands):
| | | | | |
| Commercial Mortgage Loans |
Balance at January 1, 2021 | $ | (125,703) | |
| |
| |
| |
| |
Provision | 28,624 | |
| |
Balance at December 31, 2021 | $ | (97,079) | |
| | | | | |
| Commercial Mortgage Loans |
Balance at January 1, 2020 | $ | (19,160) | |
| |
| |
| |
Cumulative adjustment at January 1, 2020 | (11,216) | |
Provision | (95,327) | |
| |
Balance at December 31, 2020 | $ | (125,703) | |
The change in allowance in 2021 was primarily driven by the favorable response of the hospitality and retail industries to re-opening of the economy and resulting increases in travel and brick-and-mortar shopping.
Note 5 – Mortgage Loans — (Continued)
The asset and allowance balances for credit losses for mortgage loans by property-type are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Asset Balance | | Allowance | | Asset Balance | | Allowance |
| Apartment | $ | 522,595 | | | $ | (1,366) | | | $ | 557,159 | | | $ | (8,845) | |
| Hotel | 962,345 | | | (39,272) | | | 913,995 | | | (45,596) | |
| Industrial | 912,645 | | | (4,051) | | | 856,203 | | | (2,516) | |
| Office | 1,347,384 | | | (26,988) | | | 1,556,231 | | | (33,373) | |
| Parking | 392,310 | | | (16,037) | | | 364,287 | | | (18,178) | |
| Retail | 843,035 | | | (6,685) | | | 791,677 | | | (10,856) | |
| Storage | 163,685 | | | (459) | | | 165,561 | | | (2,509) | |
| Other | 152,414 | | | (2,221) | | | 163,121 | | | (3,830) | |
| Total | $ | 5,296,413 | | | $ | (97,079) | | | $ | 5,368,234 | | | $ | (125,703) | |
Credit Quality Indicators
Mortgage loans are segregated by property-type and quantitative and qualitative allowance factors are applied. Qualitative factors are developed quarterly based on the pooling of assets with similar risk characteristics and historical loss experience adjusted for the expected trend in the current market environment. Credit losses are pooled by property-type as it represents the most similar and reliable risk characteristics in our portfolio. The amortized cost of mortgage loans by year of origination by property-type are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| Apartment | $ | 50,747 | | | $ | 79,673 | | | $ | 210,011 | | | $ | 22,166 | | | $ | 122,472 | | | $ | 37,526 | | | $ | 522,595 | |
| Hotel | 32,312 | | | 35,041 | | | 94,618 | | | 203,151 | | | 218,129 | | | 379,094 | | | 962,345 | |
| Industrial | 180,229 | | | 265,167 | | | 135,810 | | | 99,716 | | | 38,170 | | | 193,553 | | | 912,645 | |
| Office | 4,812 | | | 24,919 | | | 62,260 | | | 162,412 | | | 314,931 | | | 778,050 | | | 1,347,384 | |
| Parking | 31,618 | | | 28,651 | | | 13,783 | | | 26,676 | | | 8,446 | | | 283,136 | | | 392,310 | |
| Retail | 115,290 | | | 69,329 | | | 38,761 | | | 74,464 | | | 74,198 | | | 470,993 | | | 843,035 | |
| Storage | 23,184 | | | 28,936 | | | 48,401 | | | 37,156 | | | 17,095 | | | 8,913 | | | 163,685 | |
| Other | 54,114 | | | — | | | 21,662 | | | 29,884 | | | 1,650 | | | 45,104 | | | 152,414 | |
| Total | $ | 492,306 | | | $ | 531,716 | | | $ | 625,306 | | | $ | 655,625 | | | $ | 795,091 | | | $ | 2,196,369 | | | $ | 5,296,413 | |
| Allowance for credit losses | | | | | | | | | | | | | (97,079) | |
| Total, net of allowance | | | | | | | | | | | | | $ | 5,199,334 | |
Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. It is the Company's policy to not accrue interest on loans that are 90 days delinquent and where amounts are determined to be uncollectible. At December 31, 2021, no commercial loans were past due over 90 days and in non-accrual status.
Off-Balance Sheet Credit Exposures
The Company has off-balance sheet credit exposures related to non-cancellable unfunded commitment amounts on commercial mortgage loans. We estimate the allowance for these exposures by applying the allowance rate we computed for each property type to the related outstanding commitment amounts. As of December 31, 2021, we have included a $7.7 million liability in other liabilities on the consolidated statements of financial position based on unfunded loan commitments of $1.0 billion.
Note 6 – Real Estate and Other Investments
The carrying amount of real estate and real estate partnerships, net of accumulated depreciation, by property-type and geographic distribution are as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Amount | | Percentage | | Amount | | Percentage |
| Hotel | $ | 56,198 | | | 6.1 | % | | $ | 67,857 | | | 7.1 | % |
| Industrial | 119,698 | | | 12.9 | | | 132,757 | | | 13.8 | |
| Land | 39,760 | | | 4.3 | | | 51,220 | | | 5.3 | |
| Office | 277,034 | | | 29.8 | | | 299,500 | | | 31.2 | |
| Retail | 269,941 | | | 29.1 | | | 268,588 | | | 28.0 | |
| Apartments | 153,871 | | | 16.6 | | | 120,847 | | | 12.6 | |
| Other | 11,910 | | | 1.2 | | | 19,803 | | | 2.0 | |
| Total | $ | 928,412 | | | 100.0 | % | | $ | 960,572 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Amount | | Percentage | | Amount | | Percentage |
| East North Central | $ | 122,148 | | | 13.2 | % | | $ | 81,310 | | | 8.5 | % |
| East South Central | 59,122 | | | 6.4 | | | 65,302 | | | 6.8 | |
| Mountain | 127,542 | | | 13.7 | | | 133,233 | | | 13.9 | |
| Pacific | 112,714 | | | 12.1 | | | 127,421 | | | 13.3 | |
| South Atlantic | 67,573 | | | 7.3 | | | 97,801 | | | 10.1 | |
| West South Central | 428,272 | | | 46.1 | | | 434,722 | | | 45.3 | |
| Other | 11,041 | | | 1.2 | | | 20,783 | | | 2.1 | |
| Total | $ | 928,412 | | | 100.0 | % | | $ | 960,572 | | | 100.0 | % |
As of December 31, 2021, no real estate partnerships met the criteria as held-for-sale.
American National regularly invests in real estate partnerships and frequently participates in the design with the sponsor, but in most cases, its involvement is limited to financing. Through analysis performed by American National, some of these partnerships have been determined to be variable interest entities (“VIEs”). In certain instances, in addition to an economic interest in the entity, American National holds the power to direct the most significant activities of the entity and is deemed the primary beneficiary. The assets of the consolidated VIEs are restricted and must first be used to settle their liabilities. Creditors or beneficial interest holders of these VIEs have no recourse to the general credit of American National, as American National’s obligation is limited to the amount of its committed investment. American National has not provided financial or other support to the VIEs in the form of liquidity arrangements, guarantees, or other commitments to third-parties that may affect the fair value or risk of its variable interest in the VIEs in 2021 or 2020.
The assets and liabilities relating to the VIEs included in the consolidated financial statements are as follows (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| Real estate and real estate partnerships | | $ | 126,708 | | | $ | 131,405 | |
| Investment funds | | 100,374 | | | — | |
| Short-term investments | | 500 | | | 500 | |
| Cash and cash equivalents | | 10,341 | | | 8,070 | |
| Premiums due and other receivables | | 3,201 | | | 3,484 | |
| Other assets | | 12,992 | | | 13,796 | |
| Total assets of consolidated VIEs | | $ | 254,116 | | | $ | 157,255 | |
| Notes payable | | $ | 149,248 | | | $ | 153,703 | |
| Other liabilities | | 8,250 | | | 8,490 | |
| Total liabilities of consolidated VIEs | | $ | 157,498 | | | $ | 162,193 | |
The notes payable in the consolidated statements of financial position pertain to the borrowings of the consolidated VIEs. The liability of American National relating to notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $3.0 million at December 31, 2021 and 2020.
Note 6 – Real Estate and Other Investments — (Continued)
The total long-term notes payable of the consolidated VIE’s consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| Interest rate | | Maturity | | 2021 | | 2020 |
| LIBOR | | 2023 | | $ | 10,819 | | | $ | 10,819 | |
| 4% fixed | | 2022 | | 75,293 | | | 78,565 | |
| 4.18% fixed | | 2024 | | 63,136 | | | 64,319 | |
| Total | | | | $ | 149,248 | | | $ | 153,703 | |
For other real estate partnership VIEs, American National is not the primary beneficiary as major decisions impacting the economic activities of the VIE require consent from both partners. The carrying amount and maximum exposure to loss relating to these unconsolidated VIEs follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| | | Carrying Amount | | Maximum Exposure to Loss | | Carrying Amount | | Maximum Exposure to Loss |
| Real estate and real estate partnerships | | $ | 332,351 | | | $ | 332,351 | | | $ | 368,588 | | | $ | 368,588 | |
| Mortgage loans on real estate | | 690,779 | | | 690,779 | | | 722,917 | | | 722,917 | |
| Accrued investment income | | 2,878 | | | 2,878 | | | 4,980 | | | 4,980 | |
American National’s net investment income of real estate partnerships is the Company’s share of operating earnings and realized gains from investments in real estate joint ventures and other limited partnership interests ("joint ventures") using the equity method of accounting. In 2021 and 2020 certain joint ventures took advantage of market opportunities to generate realized gains on the sale of real estate held or developed by the ventures.
The Company’s income from and investment in each joint venture did not exceed 20% and therefore no separate financial disclosure is required. The Company’s income from, assets held, and investment in each joint venture did not exceed 10% of operating income before tax. Additionally, American National’s investment in joint ventures is less than 3% of the Company’s total assets, and investments in individual joint ventures is not considered to be material to the Company in relation to its financial position or ongoing results of operations. Therefore, summarized financial information of equity method investees has not been included.
The Company’s total investment in investment funds, real estate partnerships, and other partnerships, of which substantially all are limited liability companies ("LLCs") or limited partnerships, consists of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Investment funds | $ | 947,856 | | | $ | 458,776 | |
| Real estate partnerships | 439,341 | | | 443,279 | |
| Other | 13,907 | | | 18,359 | |
| Total investments in partnerships | $ | 1,401,104 | | | $ | 920,414 | |
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income from operations | $ | 103,826 | | | $ | 14,958 | | | $ | 7,407 | |
| Net gain on sales | 84,851 | | | 27,509 | | | 96,094 | |
| Net investment income from partnerships | $ | 188,677 | | | $ | 42,467 | | | $ | 103,501 | |
Note 7 – Derivative Instruments
American National purchases over-the-counter equity-indexed options as economic hedges against fluctuations in the equity markets to which equity-indexed products are exposed. These options are not designated as hedging instruments for accounting purposes under GAAP. Equity-indexed contracts include a fixed host universal-life insurance or annuity contract and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands, except number of instruments): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| Derivatives Not Designated as Hedging Instruments | | Location in the Consolidated Statements of Financial Position | | 2021 | | 2020 |
| Number of Instruments | | Notional Amounts | | Estimated Fair Value | | Number of Instruments | | Notional Amounts | | Estimated Fair Value |
| Equity-indexed options | | Other invested assets | | 473 | | | $ | 3,523,000 | | | $ | 259,383 | | | 455 | | | $ | 2,867,600 | | | $ | 242,201 | |
| Equity-indexed embedded derivative | | Policyholders’ account balances | | 125,523 | | | 3,419,992 | | | 832,579 | | | 112,103 | | | 2,748,540 | | | 705,013 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Gains (Losses) Recognized in Income on Derivatives |
| Derivatives Not Designated as Hedging Instruments | | Location in the Consolidated Statements of Operations | | Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| Equity-indexed options | | Net investment income | | $ | 127,681 | | | $ | 51,931 | | | $ | 144,980 | |
| Equity-indexed embedded derivative | | Interest credited to policyholders’ account balances | | (107,162) | | | (22,977) | | | (162,011) | |
The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by the counterparties. The Company has a policy of only dealing with counterparties it believes are creditworthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The Company holds collateral in cash and notes secured by U.S. government backed assets. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less the fair value of collateral held. The Company maintains master netting agreements with its current active trading partners. As such, a right of offset has been applied to collateral that supports credit risk and has been recorded in the consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.
Information regarding the Company’s exposure to credit loss on the options it holds is presented below (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2021 |
| Counterparty | | Moody/S&P Rating | | Options Fair Value | | Collateral Held in Cash | | Collateral Held in Invested Assets | | Total Collateral Held | | Collateral Amounts used to Offset Exposure | | Excess Collateral | | Exposure Net of Collateral |
| Bank of America | | A2/A- | | $ | 6,289 | | | $ | 5,950 | | | $ | — | | | $ | 5,950 | | | $ | 5,950 | | | $ | — | | | $ | 339 | |
| Barclays | | Baa2/BBB | | 45,410 | | | 28,173 | | | 18,100 | | | 46,273 | | | 45,410 | | | 863 | | | — | |
| Credit Suisse | | Baa1/BBB+ | | 34,411 | | | 35,300 | | | — | | | 35,300 | | | 34,411 | | | 889 | | | — | |
| ING | | Baa1/A- | | 13,280 | | | 3,030 | | | 10,300 | | | 13,330 | | | 13,280 | | | 50 | | | — | |
| Morgan Stanley | | A1/BBB+ | | 61,817 | | | 57,716 | | | 5,700 | | | 63,416 | | | 61,817 | | | 1,599 | | | — | |
| NATIXIS* | | A1/A | | 26,490 | | | 26,660 | | | — | | | 26,660 | | | 26,490 | | | 170 | | | — | |
| Truist | | A3/A- | | 39,589 | | | 30,010 | | | 11,000 | | | 41,010 | | | 39,530 | | | 1,480 | | | 59 | |
| Wells Fargo | | A1/BBB+ | | 32,097 | | | 22,320 | | | 9,900 | | | 32,220 | | | 32,065 | | | 155 | | | 32 | |
| Total | | | | $ | 259,383 | | | $ | 209,159 | | | $ | 55,000 | | | $ | 264,159 | | | $ | 258,953 | | | $ | 5,206 | | | $ | 430 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2020 |
| Counterparty | | Moody/S&P Rating | | Options Fair Value | | Collateral Held in Cash | | Collateral Held in Invested Assets | | Total Collateral Held | | Collateral Amounts used to Offset Exposure | | Excess Collateral | | Exposure Net of Collateral |
| Barclays | | Baa2/BBB | | $ | 51,489 | | | $ | 31,513 | | | $ | 18,100 | | | $ | 49,613 | | | $ | 49,613 | | | $ | — | | | $ | 1,876 | |
| Credit Suisse | | Baa1/BBB+ | | 9,447 | | | 8,680 | | | — | | | 8,680 | | | 8,680 | | | — | | | 767 | |
| Goldman-Sachs | | A3/BBB+ | | 1,227 | | | 1,170 | | | — | | | 1,170 | | | 1,170 | | | — | | | 57 | |
| ING | | Baa1/A- | | 20,606 | | | 10,450 | | | 10,300 | | | 20,750 | | | 20,606 | | | 144 | | | — | |
| Morgan Stanley | | A2/BBB+ | | 37,406 | | | 30,616 | | | 5,700 | | | 36,316 | | | 36,316 | | | — | | | 1,090 | |
| NATIXIS* | | A1/A+ | | 30,567 | | | 30,720 | | | — | | | 30,720 | | | 30,567 | | | 153 | | | — | |
| Truist | | A3/A- | | 52,127 | | | 43,960 | | | 11,000 | | | 54,960 | | | 52,127 | | | 2,833 | | | — | |
| Wells Fargo | | A2/BBB+ | | 39,332 | | | 29,370 | | | 9,900 | | | 39,270 | | | 39,270 | | | — | | | 62 | |
| Total | | | | $ | 242,201 | | | $ | 186,479 | | | $ | 55,000 | | | $ | 241,479 | | | $ | 238,349 | | | $ | 3,130 | | | $ | 3,852 | |
*Collateral is prohibited from being held in invested assets.
Note 8 – Net Investment Income and Net Realized Investment Gains (Losses)
Net investment income is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Bonds | | $ | 523,422 | | | $ | 560,811 | | | $ | 602,054 | |
| Equity securities | | 28,102 | | | 31,325 | | | 33,502 | |
| Mortgage loans | | 260,721 | | | 251,414 | | | 254,720 | |
| Real estate and real estate partnerships | | 99,483 | | | 28,810 | | | 106,446 | |
| Investment funds | | 99,007 | | | 19,454 | | | 5,904 | |
| Equity-indexed options | | 127,681 | | | 51,931 | | | 144,980 | |
| Other invested assets | | 33,238 | | | 32,407 | | | 33,301 | |
| Total | | $ | 1,171,654 | | | $ | 976,152 | | | $ | 1,180,907 | |
Net investment income from equity method investments, comprised of real estate partnerships and investment funds, was $188.7 million, $42.5 million, and $103.5 million for the twelve months ended December 31, 2021, 2020, and 2019 respectively.
Net realized investment gains (losses) are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Bonds | | $ | 54,941 | | | $ | 23,318 | | | $ | 16,361 | |
| Mortgage loans | | (768) | | | — | | | (2,412) | |
| Real estate and real estate partnerships | | 10,240 | | | 12,401 | | | 25,555 | |
| Other invested assets | | 215 | | | (59) | | | (1,785) | |
| Total | | $ | 64,628 | | | $ | 35,660 | | | $ | 37,719 | |
Net realized investment gains (losses) by transaction type are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Sales | | $ | 16,045 | | | $ | 10,249 | | | $ | 27,161 | |
| Calls and maturities | | 55,526 | | | 26,948 | | | 17,372 | |
| Paydowns | | 385 | | | (108) | | | (156) | |
| Impairments | | (5,913) | | | (1,276) | | | (6,505) | |
| Loss allowance | | — | | | — | | | 21 | |
| Other | | (1,415) | | | (153) | | | (174) | |
| Total | | $ | 64,628 | | | $ | 35,660 | | | $ | 37,719 | |
Other-than-temporary impairment losses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Bonds* | | $ | — | | | $ | — | | | $ | (6,968) | |
| | | | | | |
| | | | | | |
*Effective January 1, 2020, the Company adopted ASU No. 2016-13. Adoption of this guidance resulted in an allowance for credit losses primarily on our commercial mortgage loans and related off-balance sheet unfunded loan commitments, held-to-maturity bonds and reinsurance recoverables. The results for 2019 have not been restated to conform to the current presentation.
Note 9 – Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Financial assets | | |
| Fixed maturity, bonds held-to-maturity | | $ | 7,088,981 | | | $ | 7,458,789 | | | $ | 7,354,970 | | | $ | 7,983,181 | |
| Fixed maturity, bonds available-for-sale | | 8,380,248 | | | 8,380,248 | | | 7,597,180 | | | 7,597,180 | |
| Equity securities | | 135,433 | | | 135,433 | | | 2,070,766 | | | 2,070,766 | |
| Equity-indexed options | | 259,383 | | | 259,383 | | | 242,201 | | | 242,201 | |
| Mortgage loans on real estate, net of allowance | | 5,199,334 | | | 5,271,950 | | | 5,242,531 | | | 5,451,152 | |
| Policy loans | | 365,208 | | | 365,208 | | | 373,014 | | | 373,014 | |
| Short-term investments | | 1,840,732 | | | 1,840,732 | | | 1,028,379 | | | 1,028,379 | |
| Separate account assets ($1,278,380 and $1,153,702 included in fair value hierarchy) | | 1,320,703 | | | 1,320,703 | | | 1,185,467 | | | 1,185,467 | |
| Separately managed accounts | | 99,884 | | | 99,884 | | | 64,424 | | | 64,424 | |
| Total financial assets | | $ | 24,689,906 | | | $ | 25,132,330 | | | $ | 25,158,932 | | | $ | 25,995,764 | |
| Financial liabilities | | | | | | | | |
| Investment contracts | | $ | 10,947,958 | | | $ | 10,947,958 | | | $ | 10,101,764 | | | $ | 10,101,764 | |
| Embedded derivative liability for equity-indexed contracts | | 832,579 | | | 832,579 | | | 705,013 | | | 705,013 | |
| Notes payable | | 149,248 | | | 149,248 | | | 153,703 | | | 153,703 | |
| Federal Home Loan Bank advance | | — | | | — | | | 250,000 | | | 250,227 | |
| Separate account liabilities ($1,278,380 and $1,153,702 included in fair value hierarchy) | | 1,320,703 | | | 1,320,703 | | | 1,185,467 | | | 1,185,467 | |
| Total financial liabilities | | $ | 13,250,488 | | | $ | 13,250,488 | | | $ | 12,395,947 | | | $ | 12,396,174 | |
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. American National has evaluated the types of securities in its investment portfolio to determine an appropriate hierarchy level based upon trading activity and the observability of market inputs. The classification of assets or liabilities 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. |
| |
Level 2 | | Quoted prices in markets that are not active or inputs that are observable 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 National’s 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. |
Note 9 – Fair Value of Financial Instruments — (Continued)
Valuation Techniques for Financial Instruments Recorded at FairValue
Fixed Maturity Securities and Equity Options—American National utilizes a pricing service to estimate fair value measurements. The fair value for fixed maturity securities that are disclosed as Level 1 measurements are based on unadjusted quoted market prices for identical assets that are readily available in an active market. The estimates of fair value for most fixed maturity securities, including municipal bonds, provided by the pricing service are disclosed as Level 2 measurements as the estimates are based on observable market information rather than market quotes. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturity securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, an option adjusted spread model is used to develop prepayment and interest rate scenarios.
The pricing service evaluates each asset class based on relevant market information, credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, pricing source quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
American National has reviewed the inputs and methodology used and the techniques applied by the pricing service to produce quotes that represent the fair value of a specific security. The review confirms that the pricing service is utilizing information from observable transactions or a technique that represents a market participant’s assumptions. American National does not adjust quotes received from the pricing service. The pricing service utilized by American National has indicated that they will only produce an estimate of fair value if there is objectively verifiable information available.
American National holds a small amount of private placement debt and fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these securities, a quote from an independent pricing source (typically a market maker) is obtained. Due to the disclaimers on the quotes that indicate the price is indicative only, American National includes these fair value estimates in Level 3.
For securities priced using a quote from an independent pricing source, such as the equity-indexed options and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is performed quarterly.
Equity Securities—For publicly-traded equity securities, prices are received from a nationally recognized pricing service that are based on observable market transactions, and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, an estimated fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. If applicable, these estimates would be disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services annually.
Short-Term Investments—Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor's and Moody's, respectively. Commercial paper is carried at amortized cost which approximates fair value. These investments are classified as Level 2 measurements.
Note 9 – Fair Value of Financial Instruments — (Continued)
Separate Account Assets and Liabilities—Separate account assets and liabilities are funds that are held separate from the general assets and liabilities of American National. Separate account assets include funds representing the investments of variable insurance product contract holders, who bear the investment risk of such funds. Investment income and investment gains and losses from these separate funds accrue to the benefit of the contract holders. American National reports separately, as assets and liabilities, investments held in such 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 National’s 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. In addition, American National's qualified pension plan assets are included in separate accounts. 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 statements of operations. Separate accounts are established in conformity with insurance laws and are not chargeable with liabilities that arise from any other business of American National.
The separate account assets included on the quantitative disclosures fair value hierarchy table are comprised of short-term investments, equity securities, and fixed maturity bonds available-for-sale. Equity securities are classified as Level 1 measurements. Short-term investments and fixed maturity securities are classified as Level 2 measurements. These classifications for separate account assets reflect the same fair value level methodologies as listed above as they are derived from the same vendors and follow the same process.
The separate account assets also include cash and cash equivalents, investment funds, accrued investment income, and receivables for securities. These are not financial instruments and are not included in the quantitative disclosures of fair value hierarchy table.
No gains or losses were recognized on assets transferred to separate accounts for the years ended December 31, 2021, 2020, and 2019.
Embedded Derivative—The amounts reported within policyholder contract deposits include equity linked interest crediting rates based on the S&P 500 within indexed annuities and indexed life. The following unobservable inputs are used for measuring the fair value of the embedded derivatives associated with the policyholder contract liabilities:
•Lapse rate assumptions are determined by company experience. Lapse rates are generally assumed to be lower during a contract’s surrender charge period and then higher once the surrender charge period has ended. Decreases to the assumed lapse rates generally increase the fair value of the liability as more policyholders persist to collect the crediting interest pertaining to the indexed product. Increases to the lapse rate assumption decrease the fair value.
•Mortality rate assumptions vary by age and gender based on company and industry experience. Decreases to the assumed mortality rates increase the fair value of the liabilities as more policyholders earn crediting interest. Increases to the assumed mortality rates decrease the fair value as higher decrements reduce the potential for future interest credits.
•Equity volatility assumptions begin with current market volatilities and grow to long-term values. Increases to the assumed volatility will increase the fair value of liabilities, as future projections will produce higher increases in the linked index. At December 31, 2021 and 2020, the one-year implied volatility used to estimate embedded derivative value was 19.6% and 17.6%, respectively.
Fair values of indexed life and annuity liabilities are calculated using the discounted cash flow technique. Shown below are the significant unobservable inputs used to calculate the Level 3 fair value of the embedded derivatives within policyholder contract deposits (in millions, except range percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | | | Range |
| | | December 31, | | | | December 31, |
| | | 2021 | | 2020 | | Unobservable Input | | 2021 | | 2020 |
| Security type | | | | | | | | | | |
| Embedded derivative | | | | | | | | | | |
| Indexed Annuities | | $ | 799.3 | | | $ | 670.8 | | | Lapse Rate | | 1-50% | | 1-50% |
| | | | | | Mortality Multiplier | | 100% | | 100% |
| | | | | | Equity Volatility | | 12-64% | | 16-69% |
| Indexed Life | | 33.3 | | | 34.2 | | | Equity Volatility | | 12-64% | | 16-69% |
Note 9 – Fair Value of Financial Instruments — (Continued)
Quantitative Disclosures
The fair value hierarchy measurements of the financial instruments are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Assets and Liabilities Carried at Fair Value by Hierarchy Level at December 31, 2021 |
| | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | |
| Fixed maturity, bonds available-for-sale | | | | | | | | |
| U.S. treasury and government | | $ | 26,753 | | | $ | 26,753 | | | $ | — | | | $ | — | |
| U.S. states and political subdivisions | | 1,077,129 | | | — | | | 1,077,129 | | | — | |
| Foreign governments | | 5,841 | | | — | | | 5,841 | | | — | |
| Corporate debt securities | | 7,036,148 | | | — | | | 6,789,991 | | | 246,157 | |
| Residential mortgage-backed securities | | 31,967 | | | — | | | 31,967 | | | — | |
| Collateralized debt securities | | 202,410 | | | — | | | 202,410 | | | — | |
| Total bonds available-for-sale | | 8,380,248 | | | 26,753 | | | 8,107,338 | | | 246,157 | |
| Equity securities | | | | | | | | |
| Common stock | | 94,895 | | | 93,315 | | | — | | | 1,580 | |
| Preferred stock | | 40,538 | | | 7,570 | | | — | | | 32,968 | |
| Total equity securities | | 135,433 | | | 100,885 | | | — | | | 34,548 | |
| Options | | 259,383 | | | — | | | — | | | 259,383 | |
| Short-term investments | | 1,840,732 | | | — | | | 1,840,732 | | | — | |
| Separate account assets | | 1,278,380 | | | 381,414 | | | 896,966 | | | — | |
| Separately managed accounts | | 99,884 | | | — | | | — | | | 99,884 | |
| Total financial assets | | $ | 11,994,060 | | | $ | 509,052 | | | $ | 10,845,036 | | | $ | 639,972 | |
| Financial liabilities | | | | | | | | |
| Embedded derivative for equity-indexed contracts | | $ | 832,579 | | | $ | — | | | $ | — | | | $ | 832,579 | |
| Notes payable | | 149,248 | | | — | | | — | | | 149,248 | |
| Separate account liabilities | | 1,278,380 | | | 381,414 | | | 896,966 | | | — | |
| Total financial liabilities | | $ | 2,260,207 | | | $ | 381,414 | | | $ | 896,966 | | | $ | 981,827 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Assets and Liabilities Carried at Fair Value by Hierarchy Level at December 31, 2020 |
| | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | |
| Fixed maturity, bonds available-for-sale | | | | | | | | |
| U.S. treasury and government | | $ | 29,183 | | | $ | — | | | $ | 29,183 | | | $ | — | |
| U.S. states and political subdivisions | | 1,140,458 | | | — | | | 1,140,458 | | | — | |
| Foreign governments | | 16,388 | | | — | | | 16,388 | | | — | |
| Corporate debt securities | | 6,334,479 | | | — | | | 6,224,042 | | | 110,437 | |
| Residential mortgage-backed securities | | 21,291 | | | — | | | 21,291 | | | — | |
| Collateralized debt securities | | 55,381 | | | — | | | 55,381 | | | — | |
| Total bonds available-for-sale | | 7,597,180 | | | — | | | 7,486,743 | | | 110,437 | |
| Equity securities | | | | | | | | |
| Common stock | | 2,055,229 | | | 2,054,789 | | | — | | | 440 | |
| Preferred stock | | 15,537 | | | 14,909 | | | — | | | 628 | |
| Total equity securities | | 2,070,766 | | | 2,069,698 | | | — | | | 1,068 | |
| Options | | 242,201 | | | — | | | — | | | 242,201 | |
| Short-term investments | | 1,028,379 | | | — | | | 1,028,379 | | | — | |
| Separate account assets | | 1,153,702 | | | 309,425 | | | 844,277 | | | — | |
| Separately managed accounts | | 64,424 | | | — | | | — | | | 64,424 | |
| Total financial assets | | $ | 12,156,652 | | | $ | 2,379,123 | | | $ | 9,359,399 | | | $ | 418,130 | |
| Financial liabilities | | | | | | | | |
| Embedded derivative for equity-indexed contracts | | $ | 705,013 | | | $ | — | | | $ | — | | | $ | 705,013 | |
| Notes payable | | 153,703 | | | — | | | — | | | 153,703 | |
| Separate account liabilities | | 1,153,702 | | | 309,425 | | | 844,277 | | | — | |
| Total financial liabilities | | $ | 2,012,418 | | | $ | 309,425 | | | $ | 844,277 | | | $ | 858,716 | |
Note 9 – Fair Value of Financial Instruments — (Continued)
For financial instruments measured at fair value on a recurring basis using Level 3 inputs during the period, a reconciliation of the beginning and ending balances is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Level 3 |
| | | Assets | | Liability |
| | Investment Securities | | Equity-Indexed Options | | Separately Managed Accounts | | Embedded Derivative |
| Balance at December 31, 2018 | | $ | 4,346 | | | $ | 148,006 | | | $ | 16,532 | | | $ | 596,075 | |
| | | | | | | | |
| Net gain for derivatives included in net investment income | | — | | | 144,980 | | | — | | | — | |
| Net change included in interest credited | | — | | | — | | | — | | | 162,011 | |
| Net fair value change included in other comprehensive income | | — | | | — | | | 60 | | | — | |
| Purchases, sales and settlements or maturities | | | | | | | | |
| Purchases | | 45,307 | | | 75,163 | | | 33,911 | | | — | |
| Sales | | (113) | | | (13,396) | | | — | | | — | |
| Settlements or maturities | | — | | | (98,748) | | | — | | | — | |
| Premiums less benefits | | — | | | — | | | — | | | (26,534) | |
| | | | | | | | |
| | | | | | | | |
| Gross transfers out of Level 3 | | (4,233) | | | — | | | — | | | — | |
| Balance at December 31, 2019 | | 45,307 | | | 256,005 | | | 50,503 | | | 731,552 | |
| | | | | | | | |
| Net gain for derivatives included in net investment income | | — | | | 51,931 | | | — | | | — | |
| Net change included in interest credited | | — | | | — | | | — | | | 22,977 | |
| | | | | | | | |
| Net fair value change included in other comprehensive income | | 80 | | | — | | | (312) | | | — | |
| Purchases, sales and settlements or maturities | | | | | | | | |
| Purchases | | 191,960 | | | 80,705 | | | 25,343 | | | — | |
| Sales | | (70,842) | | | (8,063) | | | (11,110) | | | — | |
| Settlements or maturities | | — | | | (138,377) | | | — | | | — | |
| Premiums less benefits | | — | | | — | | | — | | | (49,516) | |
| | | | | | | | |
| | | | | | | | |
| Gross transfers out of Level 3 | | (55,000) | | | — | | | — | | | — | |
| Balance at December 31, 2020 | | 111,505 | | | 242,201 | | | 64,424 | | | 705,013 | |
| Net gain for derivatives included in net investment income | | — | | | 127,681 | | | — | | | — | |
| Net change included in interest credited | | — | | | — | | | — | | | 107,162 | |
| | | | | | | | |
| Net fair value change included in other comprehensive income | | 3,269 | | | — | | | 1,444 | | | — | |
| Purchases, sales and settlements or maturities | | | | | | | | |
| Purchases | | 225,063 | | | 97,712 | | | 56,712 | | | — | |
| Sales | | (58,593) | | | — | | | (22,696) | | | — | |
| Settlements or maturities | | — | | | (208,211) | | | — | | | — | |
| Premiums less benefits | | — | | | — | | | — | | | 20,404 | |
| Gross transfers into Level 3 | | 1,479 | | | — | | | — | | | — | |
| Gross transfers out of Level 3 | | (2,018) | | | — | | | — | | | — | |
| Balance at December 31, 2021 | | $ | 280,705 | | | $ | 259,383 | | | $ | 99,884 | | | $ | 832,579 | |
Within the net gain for derivatives included in net investment income were unrealized gains of $4.4 million, unrealized losses of $11.2 million, and unrealized gains of $113.3 million relating to assets still held at December 31, 2021, 2020, and 2019, respectively.
The associated embedded derivative decrease during 2020 is largely driven by classification changes to declared funds within indexed products and by changes to the embedded derivative discount rate.
There was $26.8 million transferred between Level 1 and Level 2 fair value hierarchies during the periods presented for U.S. treasury and government bonds available-for-sale. It was determined these securities will be disclosed as Level 1 since valuations are based on quoted prices readily available in an active market. American National’s valuation of financial instruments categorized as Level 3 in the fair value hierarchy are based on valuation techniques that use significant inputs that are unobservable or had a decline in market activity that obscured observability. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources. The transfers into Level 3 during 2021 were the result of securities not being priced by the third-party service at the end of the period.
Note 9 – Fair Value of Financial Instruments — (Continued)
Equity-Index Options—Certain over the counter equity options are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility and forward price/dividend assumptions. Other primary inputs include interest rate assumptions (risk-free rate assumptions), and underlying equity quoted index prices for identical or similar assets in markets that exhibit less liquidity relative to those markets.
The following summarizes the fair value (in thousands), valuation techniques and unobservable inputs of the Level 3 fair value measurements:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2021 | | Valuation Technique | | Unobservable Input | | Range/Weighted Average |
Security type | | | | | | | |
Investment securities | | | | | | | |
Common stock | $ | 1,580 | | | Guideline public company method (1)
| | Recurring Revenue Multiple (2)
| | 8x |
| | | Option pricing method | | LTM EBITDA Multiple (3)
| | 7.6x |
| | | CVM | | NCY EBITDA Multiple (5)
| | 4.8x |
Preferred stock | 32,968 | | | Guideline public company method (1)
| | LTM Revenue Multiple (4)
| | 6.3x |
| | | Priced at cost | | LTM EBITDA Multiple (3)
| | 4.2x |
| | | | | NCY EBITDA Multiple (5)
| | 4.8x |
| | | | | Term (Years) | | 1.80 |
| | | | | Volatility | | 60.00% |
Bonds | 246,157 | | | Priced at cost | | Coupon rate | | 2.63-8.00% |
Separately managed accounts | 99,884 | | | Discounted cash flows (yield analysis) | | Discount rate | | 4.80-16.40% |
| | | CVM | | NCY EBITDA Multiple (5)
| | 4.8x |
| | | Market transaction | | N/A | | N/A |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2020 | | Valuation Technique | | Unobservable Input | | Range/Weighted Average |
| Security type | | | | | | | |
| Investment securities | | | | | | | |
| Common stock | $ | 440 | | | Option pricing method | | Term (years) | | 2.83 |
| | | | | Volatility | | 45.00% |
| | | Market transaction | | N/A | | N/A |
| Preferred stock | 628 | | | Option pricing method | | Term (years) | | 2.83 |
| | | | | Volatility | | 45.00% |
| | | Market transaction | | N/A | | N/A |
| Bonds | 110,437 | | | Priced at cost | | Coupon rate | | 2.72-8.00% |
| Separately managed accounts | 64,424 | | | Discounted cash flows (yield analysis) | | Discount rate | | 7.25-14.71% |
| | | Market transaction | | N/A | | N/A |
(1)Guideline public company method uses price multiples from data on comparable public companies. Multiples are then adjusted to account for differences between what is being valued and comparable firms.
(2)Recurring Revenue Multiple for the most relevant period of time, measures the value of the equity or a business relative to the revenues it generates.
(3)Last Twelve Months (“LTM”) EBITDA Multiple valuation metric shows earnings before interest, taxes, depreciation and amortization adjustments for the past 12 month period.
(4)LTM Revenue Multiple valuation metric shows revenue for the past 12 month period.
(5)Next Calendar Year (“NCY”) EBITDA Multiple is the forecasted EBITDA expected to be achieved over the next calendar year.
Investment Securities—These bonds use cost as the best estimate of fair value. They are valued at cost because the value would not change unless there is a fundamental deterioration in the portfolio. There is no observable market valuation price or third-party sources that provide market values for these securities since they are not publicly traded. The common and preferred stock are valued at market transaction, option pricing method, or guideline public company method based on the best available information.
Separately Managed Accounts—The separately managed account manager uses the mid-point of a range from a third-party to price these securities. Discounted cash flows (yield analysis) and market transactions approach are used in the valuation. They use discount rate which is considered an unobservable input.
Note 9 – Fair Value of Financial Instruments — (Continued)
Fair Value Information About Financial Instruments Not Recorded at Fair Value
Information about fair value estimates for financial instruments not measured at fair values is discussed below:
Fixed Maturity Securities—The fair value of bonds held-to-maturity is determined to be consistent with the disclosure under Valuation Techniques for the Financial Instrument Recorded at Fair Value section.
Mortgage Loans—The fair value of mortgage loans is estimated using discounted cash flow analyses on a loan by loan basis by applying a discount rate to expected cash flows from future installment and balloon payments. The discount rate takes into account general market trends and specific credit risk trends for the individual loan. Factors used to arrive at the discount rate include inputs from spreads based on U.S. Treasury notes and the loan’s credit quality, region, property-type, lien priority, payment type and current status.
Policy Loans—The carrying value of policy loans is the outstanding balance plus any accrued interest. Due to the collateralized nature of policy loans such that they cannot be separated from the policy contracts, the unpredictable timing of repayments and the fact that settlement is at outstanding value, American National believes the carrying value of policy loans approximates fair value.
Separately Managed Accounts—The amounts reported in separately managed accounts consist primarily of notes and private equity. These investments are private placements and do not have a readily determinable fair value. The carrying value of the separately managed accounts is cost or market value, if available from the separately managed account manager. Market value is provided by the separately managed account manager in subsequent quarters. American National believes that cost approximates fair value at initial recognition during the quarter of investment.
Investment Contracts—The carrying value of investment contracts is equivalent to the accrued account balance. The accrued account balance consists of deposits, net of withdrawals, net of interest credited, fees and charges assessed and other adjustments. American National believes that the carrying value of investment contracts approximates fair value because the majority of these contracts’ interest rates reset at anniversary.
Notes Payable—Notes payable are carried at outstanding principal balance. The carrying value of the notes payable approximates fair value because the underlying interest rates approximate market rates at the balance sheet date.
Federal Home Loan Bank Advance—The Federal Home Loan Bank advance was carried at outstanding principal balance. The fair value of the advance was obtained from the Federal Home Loan Bank of Dallas. The Company does not have outstanding loans from FHLB as of December 31, 2021.
Note 9 – Fair Value of Financial Instruments — (Continued)
The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis are shown below (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| FV Hierarchy Level | | Carrying Amount | | Fair Value |
| Financial assets | | | | | |
| Fixed maturity, bonds held-to-maturity | | | | | |
| U.S. treasury and government | Level 1 | | $ | 12,284 | | | $ | 11,997 | |
| U.S. states and political subdivisions | Level 2 | | 104,039 | | | 103,809 | |
| Foreign governments | Level 2 | | 14,369 | | | 14,347 | |
| Corporate debt securities | Level 2 | | 6,799,051 | | | 7,166,564 | |
| | | | | |
| Residential mortgage-backed securities | Level 2 | | 47,975 | | | 50,178 | |
| Collateralized debt securities | Level 2 | | 111,263 | | | 111,894 | |
| Total fixed maturity, bonds held-to-maturity | | | 7,088,981 | | | 7,458,789 | |
| Mortgage loans on real estate, net of allowance | Level 3 | | 5,199,334 | | | 5,271,950 | |
| Policy loans | Level 3 | | 365,208 | | | 365,208 | |
| | | | | |
| Total financial assets | | | $ | 12,653,523 | | | $ | 13,095,947 | |
| Financial liabilities | | | | | |
| Investment contracts | Level 3 | | $ | 10,947,958 | | | $ | 10,947,958 | |
| Notes payable | Level 3 | | 149,248 | | | 149,248 | |
| | | | | |
| Total financial liabilities | | | $ | 11,097,206 | | | $ | 11,097,206 | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| FV Hierarchy Level | | Carrying Amount | | Fair Value |
| Financial assets | | | | | |
| Fixed maturity, bonds held-to-maturity | | | | | |
| U.S. treasury and government | Level 2 | | $ | 7,732 | | | $ | 7,744 | |
| U.S. states and political subdivisions | Level 2 | | 109,445 | | | 113,535 | |
| Foreign governments | Level 2 | | 3,851 | | | 4,225 | |
| Corporate debt securities | Level 2 | | 6,981,597 | | | 7,595,712 | |
| Corporate debt securities | Level 3 | | 3,024 | | | 3,024 | |
| Residential mortgage-backed securities | Level 2 | | 114,127 | | | 117,728 | |
| Collateralized debt securities | Level 2 | | 135,194 | | | 141,213 | |
| Total fixed maturity, bonds held-to-maturity | | | 7,354,970 | | | 7,983,181 | |
| Mortgage loans on real estate, net of allowance | Level 3 | | 5,242,531 | | | 5,451,152 | |
| Policy loans | Level 3 | | 373,014 | | | 373,014 | |
| | | | | |
| Total financial assets | | | $ | 12,970,515 | | | $ | 13,807,347 | |
| Financial liabilities | | | | | |
| Investment contracts | Level 3 | | $ | 10,101,764 | | | $ | 10,101,764 | |
| Notes payable | Level 3 | | 153,703 | | | 153,703 | |
| Federal Home Loan Bank advance | Level 2 | | 250,000 | | | 250,227 | |
| Total financial liabilities | | | $ | 10,505,467 | | | $ | 10,505,694 | |
Note 10 – Deferred Policy Acquisition Costs
Deferred policy acquisition costs are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Life | | Annuity | | Health | | Property & Casualty | | Total |
| Balance at December 31, 2018 | | $ | 839,133 | | | $ | 499,588 | | | $ | 33,960 | | | $ | 124,580 | | | $ | 1,497,261 | |
| Additions | | 139,336 | | | 70,272 | | | 19,940 | | | 313,710 | | | 543,258 | |
| Amortization | | (113,300) | | | (79,746) | | | (21,322) | | | (316,141) | | | (530,509) | |
| Effect of change in unrealized gains on available-for-sale debt securities | | (12,269) | | | (74,734) | | | — | | | — | | | (87,003) | |
| Net change | | 13,767 | | | (84,208) | | | (1,382) | | | (2,431) | | | (74,254) | |
| Balance at December 31, 2019 | | 852,900 | | | 415,380 | | | 32,578 | | | 122,149 | | | 1,423,007 | |
| Additions | | 148,142 | | | 55,411 | | | 15,926 | | | 335,744 | | | 555,223 | |
| Amortization | | (94,386) | | | (103,709) | | | (15,619) | | | (335,831) | | | (549,545) | |
| Effect of change in unrealized gains on available-for-sale debt securities | | (10,448) | | | (58,026) | | | — | | | — | | | (68,474) | |
| Net change | | 43,308 | | | (106,324) | | | 307 | | | (87) | | | (62,796) | |
| Balance at December 31, 2020 | | 896,208 | | | 309,056 | | | 32,885 | | | 122,062 | | | 1,360,211 | |
| Additions | | 161,898 | | | 99,971 | | | 14,369 | | | 366,167 | | | 642,405 | |
| Amortization | | (111,764) | | | (77,133) | | | (17,906) | | | (355,970) | | | (562,773) | |
| Effect of change in unrealized gains on available-for-sale debt securities | | 9,703 | | | 48,578 | | | — | | | — | | | 58,281 | |
| Net change | | 59,837 | | | 71,416 | | | (3,537) | | | 10,197 | | | 137,913 | |
| Balance at December 31, 2021 | | $ | 956,045 | | | $ | 380,472 | | | $ | 29,348 | | | $ | 132,259 | | | $ | 1,498,124 | |
Commissions comprise the majority of the additions to deferred policy acquisition costs.
Note 11 – Liability for Future Policy Benefits and Policyholder Account Balances
American National estimates liabilities for amounts payable under insurance and annuity policies. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of expected benefit payments reduced by the present value of expected premiums. Such liabilities are established on a block of business 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 termination, investment return, inflation, expenses, and other contingent events as appropriate to the respective product type.
Future policy benefits for non-participating traditional life insurance are equal to the aggregate of the present value of expected benefit payments and related expenses less the present value of expected net premiums. Assumptions as to mortality and persistency are based upon American National’s experience when the basis of the liability is established. Interest rates for the aggregate future policy benefit liabilities range from 3.0% to 8.0%.
Future policy benefit liabilities for participating traditional life insurance 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 5.5%) and mortality rates guaranteed in calculating the cash surrender values described in such contracts; and (ii) the liability for terminal dividends.
Future policy benefit liabilities for individual fixed deferred annuities after annuitization and single premium immediate annuities are equal to the present value of expected future payments. The interest rate used in establishing such liabilities range from 3.0% to 6.0% for all policies in-force.
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. The interest rate used in establishing such liabilities range from 3.5% to 8.0%.
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. The interest rates used in establishing such liabilities range from 3.0% to 6.0%.
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 Standard & Poor’s 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 result in losses. The effects of changes in such estimated liabilities are included in the consolidated statements 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 1.0% to 8.0% (some annuities have enhanced first year crediting rates ranging from 1.0% to 7.0%), less expenses, mortality charges, and withdrawals; and (iii) fair value adjustment.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses
The liability for unpaid claims and claim adjustment expenses (“claims”) for health and property and casualty insurance is included in “Policy and contract claims” in the consolidated statements of financial position and is the amount estimated for incurred but not reported (“IBNR”) claims and claims that have been reported but not settled. The liability for unpaid claims is estimated based upon American National’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, less anticipated salvage and subrogation. The effects of the changes are included in the consolidated results of operations in the period in which the changes occur. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. There have been no significant changes in methodologies or assumptions used to calculate the liability for unpaid claims and claim adjustment expenses.
Information regarding the liability for unpaid claims is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Unpaid claims balance, beginning | | $ | 1,354,213 | | | $ | 1,322,837 | | | $ | 1,305,225 | |
| Less: Reinsurance recoverables | | 243,084 | | | 246,447 | | | 254,466 | |
| Net beginning balance | | 1,111,129 | | | 1,076,390 | | | 1,050,759 | |
| Incurred related to | | | | | | |
| Current | | 1,277,798 | | | 1,177,634 | | | 1,207,796 | |
| Prior years | | (93,357) | | | (61,659) | | | (57,979) | |
| Total incurred claims | | 1,184,441 | | | 1,115,975 | | | 1,149,817 | |
| Paid claims related to | | | | | | |
| Current | | 735,968 | | | 681,960 | | | 688,544 | |
| Prior years | | 392,881 | | | 399,276 | | | 435,642 | |
| Total paid claims | | 1,128,849 | | | 1,081,236 | | | 1,124,186 | |
| Net balance | | 1,166,721 | | | 1,111,129 | | | 1,076,390 | |
| Plus: Reinsurance recoverables | | 288,358 | | | 243,084 | | | 246,447 | |
| Unpaid claims balance, ending | | $ | 1,455,079 | | | $ | 1,354,213 | | | $ | 1,322,837 | |
The net and gross reserve calculations have shown favorable development as a result of favorable loss emergence compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred claims attributable to insured events of prior years decreased by approximately $93.4 million, $61.7 million, $58.0 million in 2021, 2020, and 2019, respectively. The favorable development in 2021 was a reflection of lower-than-anticipated settlement costs of losses arising from commercial automobile, agribusiness, private passenger automobile, guaranteed asset protection waiver, and collateral protection insurance lines of business. The favorable development in 2020 was a reflection of lower rates of claim severity emergence than previously expected in the worker's compensation line of business, and lower liability claim settlement costs emerging from agribusiness and private passenger automobile lines of business.
For short-duration health insurance claims, the total of IBNR plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses at December 31, 2021 and December 31, 2020 was $18.9 million and $20.5 million respectively.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows (in thousands):
| | | | | |
| |
| December 31, 2021 |
Net outstanding liabilities | |
Auto Liability | $ | 458,517 | |
Non-Auto Liability | 303,662 | |
Commercial Multi-Peril | 150,783 | |
Homeowners | 84,625 | |
Short Tail Property | 38,998 | |
Credit Property and Casualty | 16,004 | |
Credit Life | 1,435 | |
Health | 23,329 | |
Credit Health | 4,557 | |
Other | 897 | |
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance | 1,082,807 | |
Reinsurance recoverable on unpaid claims | |
Auto Liability | 11,554 | |
Non-Auto Liability | 40,650 | |
Commercial Multi-Peril | 8,419 | |
Homeowners | 13,746 | |
Short Tail Property | 12,818 | |
Credit Property and Casualty | 11,782 | |
Credit Life | 673 | |
Health | 193,065 | |
Credit Health | 1,657 | |
Other | 7,020 | |
Total reinsurance recoverable on unpaid claims | 301,384 | |
Insurance lines other than short-duration | 244,418 | |
Unallocated claim adjustment expenses | 63,686 | |
| 308,104 | |
Total gross liability for unpaid claims and claim adjustment expense | $ | 1,692,295 | |
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Property and Casualty Reserving Methodology—The following methods are utilized:
•Initial Expected Loss Ratio—This method calculates an estimate of ultimate losses by applying an estimated loss ratio to actual earned premium for each calendar/accident year. This method is appropriate for classes of business where the actual paid or reported loss experience is not yet mature enough to influence initial expectations of the ultimate loss ratios.
•Pegged Frequency and Severity—This method uses actual claims count data and emergence patterns of older accident periods to project the ultimate number of reported claims for a given accident year. A similar process projects the ultimate average severity per claim so that the product of the two projections results in a projection of ultimate loss for a given accident year.
•Bornhuetter-Ferguson—This method uses, as a starting point, either an assumed Initial Expected Loss Ratio Method or Pegged Frequency and Severity method and blends in the loss ratio or frequency and severity implied by the claims experience to date by using loss development patterns based on our historical experience. This method is generally appropriate where there are few reported claims and an unstable pattern of reported losses.
•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 total. This method is appropriate when there is a relatively stable pattern of loss and expense emergence and a relatively large number of reported claims.
•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 total. 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.
•Calendar Year Paid Adjusting and Other Expense to Paid Loss—This method uses a selected prior calendar years’ paid expense to paid loss ratio to project ultimate loss adjustment expenses for adjusting and other expense. 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 that a percentage of the expense is incurred when a claim is opened and the remaining percentage is paid throughout the claim’s life.
For most credit property and casualty products, IBNR liability is calculated as a percentage of pro rata unearned premium, with the specific percentage for a given product line informed by a traditional completion factor claim reserve analysis.
The expected development on reported claims is the sum of a pay-to-current reserve and a future reserve. The pay-to-current reserve is calculated for each open claim having a monthly indemnity and contains the amount required to pay the open claim from the last payment date to the current valuation date. The future reserve is calculated by assigning to each open claim a fixed reserve amount based on the historical average severity. For debt cancellation products and involuntary unemployment insurance, this reserve is calculated using published valuation tables.
Cumulative claim frequency information is calculated on a per claim basis. Claims that do not result in a liability are not considered in the determination of unpaid liabilities.
For any given line of business, none of these methods are relied on exclusively. With minor exceptions, multiple methods may be used for a line of business as a check for reasonableness of our reselected reserve value.
The following contains information about incurred and paid claims development as of December 31, 2021, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2012 to 2020 is presented as supplementary information.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Auto Liability—Consists of personal and commercial auto. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | | | | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 | |
| 2012 | | $ | 251,593 | | | $ | 242,255 | | | $ | 231,312 | | | $ | 228,013 | | | $ | 229,426 | | | $ | 228,559 | | | $ | 228,864 | | | $ | 228,486 | | | $ | 228,236 | | | $ | 228,181 | | | $ | 58 | | | 44,691 | |
| 2013 | | | | 242,364 | | | 236,432 | | | 233,068 | | | 231,301 | | | 228,285 | | | 226,608 | | | 227,234 | | | 227,102 | | | 226,943 | | | 134 | | | 38,817 | |
| 2014 | | | | | | 232,146 | | | 223,386 | | | 217,819 | | | 215,419 | | | 214,870 | | | 214,557 | | | 214,326 | | | 214,253 | | | 203 | | | 36,011 | |
| 2015 | | | | | | | | 237,578 | | | 240,697 | | | 239,421 | | | 245,775 | | | 244,798 | | | 244,621 | | | 243,304 | | | 374 | | | 36,097 | |
| 2016 | | | | | | | | | | 259,177 | | | 256,080 | | | 261,400 | | | 259,128 | | | 257,633 | | | 256,294 | | | 1,434 | | | 37,114 | |
| 2017 | | | | | | | | | | | | 269,803 | | | 280,012 | | | 275,850 | | | 273,551 | | | 270,464 | | | 4,607 | | | 38,591 | |
| 2018 | | | | | | | | | | | | | | 314,467 | | | 299,512 | | | 288,806 | | | 282,805 | | | 12,541 | | | 37,826 | |
| 2019 | | | | | | | | | | | | | | | | 330,988 | | | 313,636 | | | 305,312 | | | 26,749 | | | 36,267 | |
| 2020 | | | | | | | | | | | | | | | | | | 277,597 | | | 254,808 | | | 46,637 | | | 26,166 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 299,746 | | | 89,756 | | | 26,556 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 2,582,110 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | | Years ended December 31, |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 |
| 2012 | | $ | 82,531 | | | $ | 150,323 | | | $ | 183,448 | | | $ | 204,980 | | | $ | 214,467 | | | $ | 219,170 | | | $ | 222,117 | | | $ | 222,865 | | | $ | 224,585 | | | $ | 224,799 | |
| 2013 | | | | 79,358 | | | 143,709 | | | 181,535 | | | 204,480 | | | 215,280 | | | 219,303 | | | 223,739 | | | 224,675 | | | 226,211 | |
| 2014 | | | | | | 72,838 | | | 134,376 | | | 166,947 | | | 187,375 | | | 204,057 | | | 209,401 | | | 210,994 | | | 212,522 | |
| 2015 | | | | | | | | 78,861 | | | 149,366 | | | 186,281 | | | 211,908 | | | 231,530 | | | 237,792 | | | 239,986 | |
| 2016 | | | | | | | | | | 86,492 | | | 153,911 | | | 198,326 | | | 225,869 | | | 237,592 | | | 247,640 | |
| 2017 | | | | | | | | | | | | 88,357 | | | 175,175 | | | 218,435 | | | 241,823 | | | 255,530 | |
| 2018 | | | | | | | | | | | | | | 95,777 | | | 185,317 | | | 227,312 | | | 248,183 | |
| 2019 | | | | | | | | | | | | | | | | 98,545 | | | 193,389 | | | 231,892 | |
| 2020 | | | | | | | | | | | | | | | | | | 78,699 | | | 151,722 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 85,916 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 2,124,401 | |
| | | | | | | | All outstanding liabilities before 2012, net of reinsurance* | | 808 | |
| | | | | | Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 458,517 | |
*Unaudited supplementary information.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Non-Auto Liability—Consists of workers’ compensation and other liability occurrence. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 | |
| 2012 | | $ | 83,146 | | | $ | 80,470 | | | $ | 78,644 | | | $ | 75,226 | | | $ | 68,017 | | | $ | 63,630 | | | $ | 64,118 | | | $ | 63,336 | | | $ | 63,552 | | | $ | 63,304 | | | $ | 1,623 | | | 4,877 | |
| 2013 | | | | 74,183 | | | 75,815 | | | 70,772 | | | 67,841 | | | 65,096 | | | 64,564 | | | 63,284 | | | 62,926 | | | 62,159 | | | 1,738 | | | 4,556 | |
| 2014 | | | | | | 83,084 | | | 75,550 | | | 72,624 | | | 67,339 | | | 67,865 | | | 67,267 | | | 67,268 | | | 66,250 | | | 3,168 | | | 6,111 | |
| 2015 | | | | | | | | 83,897 | | | 78,968 | | | 76,724 | | | 67,548 | | | 64,189 | | | 63,326 | | | 63,523 | | | 3,593 | | | 5,563 | |
| 2016 | | | | | | | | | | 86,935 | | | 83,179 | | | 73,764 | | | 73,195 | | | 68,178 | | | 67,347 | | | 4,153 | | | 4,501 | |
| 2017 | | | | | | | | | | | | 102,616 | | | 88,902 | | | 81,240 | | | 77,322 | | | 76,540 | | | 6,397 | | | 8,176 | |
| 2018 | | | | | | | | | | | | | | 88,986 | | | 85,910 | | | 79,493 | | | 75,207 | | | 16,115 | | | 13,684 | |
| 2019 | | | | | | | | | | | | | | | | 96,064 | | | 95,340 | | | 92,544 | | | 26,473 | | | 11,875 | |
| 2020 | | | | | | | | | | | | | | | | | | 90,197 | | | 83,339 | | | 37,431 | | | 10,028 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 102,869 | | | 65,428 | | | 8,512 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 753,082 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | | Years ended December 31, |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 |
| 2012 | | $ | 13,862 | | | $ | 27,574 | | | $ | 38,826 | | | $ | 49,585 | | | $ | 55,194 | | | $ | 57,863 | | | $ | 59,528 | | | $ | 60,900 | | | $ | 61,450 | | | $ | 61,858 | |
| 2013 | | | | 12,794 | | | 22,743 | | | 32,474 | | | 42,504 | | | 47,987 | | | 51,672 | | | 54,323 | | | 55,426 | | | 56,916 | |
| 2014 | | | | | | 11,201 | | | 26,587 | | | 36,220 | | | 45,206 | | | 51,853 | | | 55,307 | | | 57,497 | | | 58,559 | |
| 2015 | | | | | | | | 11,979 | | | 23,488 | | | 37,059 | | | 46,285 | | | 51,303 | | | 53,478 | | | 55,434 | |
| 2016 | | | | | | | | | | 12,733 | | | 24,633 | | | 35,502 | | | 45,820 | | | 50,596 | | | 55,205 | |
| 2017 | | | | | | | | | | | | 14,865 | | | 37,139 | | | 48,654 | | | 53,996 | | | 59,582 | |
| 2018 | | | | | | | | | | | | | | 13,156 | | | 26,115 | | | 37,574 | | | 45,316 | |
| 2019 | | | | | | | | | | | | | | | | 12,204 | | | 30,199 | | | 40,729 | |
| 2020 | | | | | | | | | | | | | | | | | | 9,596 | | | 23,838 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 12,389 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 469,826 | |
| | | | All outstanding liabilities before 2012, net of reinsurance* | | 20,406 | |
| | | | | | Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 303,662 | |
*Unaudited supplementary information.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Commercial Multi-Peril—Consists of business owners insurance and mortgage fire business. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 | |
| 2012 | | $ | 35,169 | | | $ | 28,548 | | | $ | 26,805 | | | $ | 23,258 | | | $ | 23,385 | | | $ | 23,090 | | | $ | 22,481 | | | $ | 22,045 | | | $ | 22,033 | | | $ | 22,381 | | | $ | 151 | | | 2,717 | |
| 2013 | | | | 33,979 | | | 27,592 | | | 27,867 | | | 26,970 | | | 25,948 | | | 26,028 | | | 24,790 | | | 24,681 | | | 24,733 | | | 231 | | | 2,228 | |
| 2014 | | | | | | 36,852 | | | 31,220 | | | 34,911 | | | 33,962 | | | 36,132 | | | 34,279 | | | 34,004 | | | 33,836 | | | 292 | | | 2,311 | |
| 2015 | | | | | | | | 33,997 | | | 31,488 | | | 29,023 | | | 32,282 | | | 31,285 | | | 33,059 | | | 34,282 | | | 821 | | | 2,240 | |
| 2016 | | | | | | | | | | 38,115 | | | 33,475 | | | 33,080 | | | 31,615 | | | 33,628 | | | 32,705 | | | 875 | | | 4,798 | |
| 2017 | | | | | | | | | | | | 42,411 | | | 37,079 | | | 40,611 | | | 43,367 | | | 47,660 | | | 3,631 | | | 6,815 | |
| 2018 | | | | | | | | | | | | | | 50,784 | | | 50,182 | | | 51,519 | | | 51,035 | | | 4,595 | | | 5,678 | |
| 2019 | | | | | | | | | | | | | | | | 56,062 | | | 59,789 | | | 58,262 | | | 11,129 | | | 3,587 | |
| 2020 | | | | | | | | | | | | | | | | | | 68,226 | | | 63,281 | | | 16,924 | | | 4,012 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 95,708 | | | 39,566 | | | 4,999 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 463,883 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | | Years ended December 31, |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 |
| 2012 | | $ | 11,525 | | | $ | 14,454 | | | $ | 16,263 | | | $ | 18,670 | | | $ | 20,716 | | | $ | 21,026 | | | $ | 21,352 | | | $ | 21,415 | | | $ | 21,453 | | | $ | 21,499 | |
| 2013 | | | | 9,374 | | | 12,723 | | | 15,426 | | | 18,406 | | | 20,816 | | | 21,718 | | | 23,210 | | | 23,348 | | | 23,513 | |
| 2014 | | | | | | 12,001 | | | 16,484 | | | 20,199 | | | 24,602 | | | 27,339 | | | 31,448 | | | 32,702 | | | 32,934 | |
| 2015 | | | | | | | | 9,820 | | | 12,956 | | | 16,402 | | | 21,680 | | | 25,188 | | | 27,201 | | | 28,566 | |
| 2016 | | | | | | | | | | 11,327 | | | 17,193 | | | 19,085 | | | 22,339 | | | 25,686 | | | 26,690 | |
| 2017 | | | | | | | | | | | | 12,458 | | | 20,828 | | | 23,294 | | | 26,202 | | | 28,420 | |
| 2018 | | | | | | | | | | | | | | 18,027 | | | 30,078 | | | 32,490 | | | 35,781 | |
| 2019 | | | | | | | | | | | | | | | | 22,098 | | | 32,295 | | | 37,408 | |
| 2020 | | | | | | | | | | | | | | | | | | 25,492 | | | 38,415 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 41,452 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 314,678 | |
| | | | | | All outstanding liabilities before 2012, net of reinsurance* | | 1,578 | |
| | | | | | Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 150,783 | |
*Unaudited supplementary information.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Homeowners—Consists of homeowners and renters business. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | | | | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 | |
| 2012 | | $ | 181,284 | | | $ | 177,664 | | | $ | 175,523 | | | $ | 175,509 | | | $ | 175,178 | | | $ | 175,032 | | | $ | 174,611 | | | $ | 174,276 | | | $ | 174,239 | | | $ | 174,238 | | | $ | — | | | 30,999 | |
| 2013 | | | | 152,208 | | | 149,080 | | | 149,272 | | | 148,231 | | | 147,927 | | | 147,444 | | | 147,359 | | | 147,234 | | | 147,246 | | | — | | | 20,041 | |
| 2014 | | | | | | 132,651 | | | 131,634 | | | 130,287 | | | 131,546 | | | 130,895 | | | 130,747 | | | 130,799 | | | 130,713 | | | — | | | 18,183 | |
| 2015 | | | | | | | | 125,430 | | | 124,199 | | | 123,619 | | | 123,824 | | | 123,731 | | | 123,357 | | | 123,312 | | | 2 | | | 17,758 | |
| 2016 | | | | | | | | | | 147,264 | | | 145,373 | | | 144,376 | | | 145,019 | | | 144,828 | | | 144,766 | | | 17 | | | 21,559 | |
| 2017 | | | | | | | | | | | | 164,284 | | | 172,274 | | | 172,491 | | | 169,524 | | | 169,430 | | | 45 | | | 23,589 | |
| 2018 | | | | | | | | | | | | | | 174,495 | | | 179,561 | | | 176,317 | | | 176,681 | | | 61 | | | 22,576 | |
| 2019 | | | | | | | | | | | | | | | | 177,854 | | | 176,005 | | | 173,763 | | | 1,181 | | | 20,260 | |
| 2020 | | | | | | | | | | | | | | | | | | 227,298 | | | 228,441 | | | 2,876 | | | 24,788 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 240,732 | | | 31,342 | | | 19,762 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 1,709,322 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | | Years ended December 31, |
| Accident Year | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 |
| 2012 | | $ | 143,797 | | | $ | 169,415 | | | $ | 171,842 | | | $ | 173,170 | | | $ | 173,676 | | | $ | 174,139 | | | $ | 174,247 | | | $ | 174,256 | | | $ | 174,239 | | | $ | 174,238 | |
| 2013 | | | | 115,605 | | | 140,309 | | | 145,152 | | | 146,650 | | | 146,920 | | | 147,145 | | | 147,233 | | | 147,232 | | | 147,245 | |
| 2014 | | | | | | 96,300 | | | 122,601 | | | 126,245 | | | 129,467 | | | 130,059 | | | 130,305 | | | 130,542 | | | 130,577 | |
| 2015 | | | | | | | | 86,617 | | | 114,696 | | | 119,331 | | | 122,585 | | | 122,955 | | | 123,065 | | | 123,161 | |
| 2016 | | | | | | | | | | 105,415 | | | 136,796 | | | 140,972 | | | 144,000 | | | 144,596 | | | 144,635 | |
| 2017 | | | | | | | | | | | | 116,075 | | | 159,107 | | | 166,009 | | | 167,638 | | | 168,241 | |
| 2018 | | | | | | | | | | | | | | 121,631 | | | 165,203 | | | 170,850 | | | 174,077 | |
| 2019 | | | | | | | | | | | | | | | | 122,530 | | | 163,400 | | | 170,229 | |
| 2020 | | | | | | | | | | | | | | | | | | 166,352 | | | 217,224 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 175,265 | |
| | | | | | | | | | | | | | | | | | Total | | $ | 1,624,892 | |
| | | | | | | | All outstanding liabilities before 2012, net of reinsurance* | | 195 | |
| | | | | | Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 84,625 | |
*Unaudited supplementary information.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Short Tail Property—Consists of auto physical damage, fire, rental owners, standard fire policy, country estates, inland marine and watercraft. This line of business has substantially all claims settled and paid in less than two years. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2020* | | 2021 | |
| 2020 | | $ | 237,332 | | | $ | 229,857 | | | $ | 282 | | | 53,008 | |
| 2021 | | | | 269,065 | | | (3,599) | | | 53,068 | |
| | Total | | $ | 498,922 | | | | | |
| | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | | Years ended December 31, |
| Accident Year | | 2020* | | 2021 |
| 2020 | | $ | 203,827 | | | $ | 227,495 | |
| 2021 | | | | 235,425 | |
| | Total | | $ | 462,920 | |
| All outstanding liabilities before 2020, net of reinsurance* | | 2,996 | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 38,998 | |
*Unaudited supplementary information
Credit Property and Casualty—Consists of credit property insurance, vendor’s or lender’s single interest insurance, GAP insurance, GAP waiver, debt cancellation products, involuntary unemployment insurance and collateral protection insurance. This line of business has substantially all claims settled and paid in less than two years. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2020* | | 2021 | |
| 2020 | | $ | 65,260 | | | $ | 65,269 | | | $ | — | | | 22,385 | |
| 2021 | | | | 51,002 | | | 12,188 | | | 14,443 | |
| | Total | | $ | 116,271 | | | | | |
| | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | | Years ended December 31, |
| Accident Year | | 2020* | | 2021 |
| 2020 | | $ | 46,417 | | | $ | 65,269 | |
| 2021 | | | | 34,998 | |
| | Total | | $ | 100,267 | |
| All outstanding liabilities before 2020, net of reinsurance* | | — | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 16,004 | |
*Unaudited supplementary information.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Credit Life—For credit life products, IBNR is calculated as a percentage of life insurance in-force. This line of business has substantially all claims settled and paid in less than two years. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2020* | | 2021 | |
| 2020 | | $ | 7,265 | | | $ | 8,397 | | | $ | 35 | | | 48 | |
| 2021 | | | | 10,291 | | | 1,300 | | | 50 | |
| | Total | | $ | 18,688 | | | | | |
| | | | | | | | | | | | | | |
| | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | Years ended December 31, |
| Accident Year | | 2020* | | 2021 |
| 2020 | | $ | 6,201 | | | $ | 8,359 | |
| 2021 | | | | 8,894 | |
| | Total | | $ | 17,253 | |
| All outstanding liabilities before 2020, net of reinsurance* | | — | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 1,435 | |
*Unaudited supplementary information.
Health Reserving Methodology—The following methods are utilized:
•Completion Factor Approach—This method assumes that the historical claim patterns will be an accurate representation of unpaid claim liabilities. An estimate of the unpaid claims is calculated by subtracting period-to-date paid claims from an estimate of the ultimate “complete” payment for all incurred claims in the period. Completion factors are calculated which “complete” the current period-to-date payment totals for each incurred month to estimate the ultimate expected payout.
•Tabular Claims Reserves—This method is used to calculate the reserves for long-term care and disability income blocks of business. These reserves rely on published valuation continuance tables created using industry experience regarding assumptions of continued morbidity and subsequent recovery. Reserves are calculated by applying these continuance tables, along with appropriate company experience adjustments, to the stream of contractual benefit payments. These expected benefit payments are discounted at the required interest rate.
•Future Policy Benefits—Reserves 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.
•Premium Deficiency Reserves—Deficiency reserves are established when the expected future claim payments and expenses for a classification of policies 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, future net investment income, and the expected benefit utilization patterns. We have established premium deficiency reserves for portions of the major medical business and the long-term care business that are in run-off. The assumptions and methods used to determine the deficiency reserves are reviewed periodically for reasonableness, and the reserve amount is monitored against emerging losses.
There is no expected development on reported claims in the health blocks. Claim frequency is determined by totaling the number of unique claim numbers during the period as each unique claim number represents a claim event for an individual claimant.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
Health—Consists of stop-loss and other supplemental health products. This line of business has substantially all claims settled and paid in less than five years. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 | |
| 2017 | | $ | 41,544 | | | $ | 39,930 | | | $ | 35,466 | | | $ | 35,447 | | | $ | 35,451 | | | $ | — | | | 29,216 | |
| 2018 | | | | 64,686 | | | 63,729 | | | 57,676 | | | 57,682 | | | — | | | 30,004 | |
| 2019 | | | | | | 48,175 | | | 52,508 | | | 47,294 | | | 1 | | | 30,614 | |
| 2020 | | | | | | | | 38,461 | | | 37,871 | | | 3,816 | | | 24,946 | |
| 2021 | | | | | | | | | | 43,153 | | | 14,174 | | | 20,877 | |
| | | | | | | | Total | | $ | 221,451 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | Years ended December 31, |
| Accident Year | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 |
| 2017 | | $ | 25,358 | | | $ | 35,392 | | | $ | 35,420 | | | $ | 35,420 | | | $ | 35,420 | |
| 2018 | | | | 34,894 | | | 57,759 | | | 57,616 | | | 57,617 | |
| 2019 | | | | | | 33,353 | | | 47,270 | | | 47,245 | |
| 2020 | | | | | | | | 23,398 | | | 34,118 | |
| 2021 | | | | | | | | | | 27,889 | |
| | | | | | | | Total | | $ | 202,289 | |
| All outstanding liabilities before 2017, net of reinsurance* | | 4,167 | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 23,329 | |
*Unaudited supplementary information.
Credit Health Reserving Methodology—The following methods are utilized:
Tabular Claims Reserves—These reserves rely on published valuation continuance tables. The insured's age at disablement, the duration of the claim and the remaining term of the policy are used to provide a factor which is applied to the remaining exposure to calculate the present value of future benefits for insureds on claim.
The claim liability consists of IBNR and Due/Unpaid. The IBNR utilizes an inventory type method based on historical patterns of claim payments incurred but not reported within the last six months of the valuation date.
The Due/Unpaid reserves are the amount needed to pay an open claim from the last date of payment to the reserve valuation date.
Credit Health—The claim liability consists of credit disability. This line of business has substantially all claims settled and paid in less than five years. Claims and claim adjustment expenses are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | As of December 31, 2021 |
| | Years ended December 31, | | IBNR Plus Expected Development | | Cumulative Number of Reported Claims |
| Accident Year | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 | |
| 2017 | | $ | 4,555 | | | $ | 4,852 | | | $ | 4,773 | | | $ | 4,820 | | | $ | 4,873 | | | $ | 46 | | | 3,803 | |
| 2018 | | | | 4,631 | | | 4,163 | | | 4,155 | | | 4,303 | | | 76 | | | 3,572 | |
| 2019 | | | | | | 3,902 | | | 3,705 | | | 3,631 | | | 97 | | | 2,999 | |
| 2020 | | | | | | | | 3,736 | | | 3,741 | | | 222 | | | 2,605 | |
| 2021 | | | | | | | | | | 3,415 | | | 457 | | | 1,533 | |
| | | | | | | | Total | | $ | 19,963 | | | | | |
*Unaudited supplementary information.
Note 12 – Liability for Unpaid Claims and Claim Adjustment Expenses — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | Years ended December 31, |
| Accident Year | | 2017* | | 2018* | | 2019* | | 2020* | | 2021 |
| 2017 | | $ | 1,389 | | | $ | 3,328 | | | $ | 4,058 | | | $ | 4,438 | | | $ | 4,639 | |
| 2018 | | | | 1,473 | | | 2,930 | | | 3,598 | | | 3,918 | |
| 2019 | | | | | | 1,208 | | | 2,618 | | | 3,138 | |
| 2020 | | | | | | | | 1,179 | | | 2,613 | |
| 2021 | | | | | | | | | | 1,098 | |
| | | | | | | | Total | | $ | 15,406 | |
| All outstanding liabilities before 2017, net of reinsurance* | | — | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 4,557 | |
*Unaudited supplementary information.
The following table is supplementary information. A 10-year average annual percentage payout of incurred claims is shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
| | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Year 6 | | Year 7 | | Year 8 | | Year 9 | | Year 10 |
| Auto Liability | | 33.0 | % | | 29.5 | % | | 15.3 | % | | 9.5 | % | | 5.7 | % | | 2.6 | % | | 1.2 | % | | 0.5 | % | | 0.7 | % | | 2.0 | % |
| Non-Auto Liability | | 17.1 | % | | 19.9 | % | | 15.9 | % | | 13.4 | % | | 8.3 | % | | 5.1 | % | | 3.3 | % | | 1.9 | % | | 1.6 | % | | 13.5 | % |
| Commercial Multi-Peril | | 37.1 | % | | 16.2 | % | | 8.1 | % | | 10.5 | % | | 8.7 | % | | 5.2 | % | | 3.8 | % | | 0.5 | % | | 0.5 | % | | 9.4 | % |
| Homeowners | | 73.1 | % | | 21.3 | % | | 3.3 | % | | 1.7 | % | | 0.3 | % | | 0.1 | % | | 0.1 | % | | — | % | | — | % | | 0.1 | % |
| Short Tail Property | | 88.1 | % | | 11.9 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
| Credit Property and Casualty | | 69.9 | % | | 30.1 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
| Credit Life | | 80.1 | % | | 19.9 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
Note 13 – Reinsurance
American National reinsures portions of certain life insurance policies to provide a greater diversification of risk and manage exposure on larger risks. The maximum amounts that would be retained by one life insurance company (ANICO) by issue ages are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 0-75 Years | | 76-80 Years | | 81 and Over |
| Individual life | | $ | 5,000 | | | $ | 2,000 | | | $ | 1,000 | |
| Individual accidental death | | 250 | | | 250 | | | 250 | |
| Credit life | | 100 | | | 100 | | | 100 | |
| Group life | | 100 | | | 100 | | | 100 | |
| Total | | $ | 5,450 | | | $ | 2,450 | | | $ | 1,450 | |
For the Property and Casualty segment, American National retains the first $2.0 million of loss per risk. Reinsurance covers up to $6.0 million of property and liability losses per risk. Additional excess property per risk coverage is purchased to cover risks up to $20.0 million, and excess casualty clash coverage is purchased to cover losses up to $60.0 million. Excess casualty clash covers losses incurred as a result of one casualty event involving multiple policies, excess policy limits and extra contractual obligations. Facultative reinsurance is purchased for individual risks attaching at $20.0 million as needed. Corporate catastrophe coverage is in place for losses up to $470.0 million ($500.0 million if the top layer of the Property Catastrophe Top and Drop contract is included). American National retains the first $35.0 million of each catastrophe. Catastrophe aggregate reinsurance coverage is also purchased and is provided by 2 contracts.
The first contract is the Property Catastrophe Top and Drop cover that consists of $30.0 million of annual limit available either wholly or in part across 2 layers of coverage. The first layer is 100% of $30.0 million excess of $470.0 million on an occurrence basis. The second layer provides aggregate protection where subject loss is $15.0 million excess of $20.0 million of each catastrophe, and recoveries follow satisfaction of a $15.0 million annual aggregate deductible. The second layer acts to reduce the retention on large second and third catastrophe events to $20.0 million following a first large catastrophe. This cover was placed at 100% for 2021 and does not include a reinstatement. The second aggregate contract provides for $30.0 million of coverage after $160.0 million of annual aggregated catastrophe losses has been reached. Qualifying losses include amounts of retained losses net of other reinsurance below $35.0 million on Property Claims Services (“PCS”) declared catastrophe events and internally declared catastrophe events exceeding $5.0 million. This cover was placed at 55% for 2021 and does not include a reinstatement.
American National remains primarily liable with respect to any reinsurance ceded and would bear the entire loss if the reinsurer does not meet their obligations under any reinsurance treaties. American National had the following recoverables from reinsurance, net of allowance for credit losses (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Reinsurance recoverables | | $ | 459,621 | | | $ | 414,359 | |
None of the amount outstanding at December 31, 2021 is the subject of litigation or is in dispute with the reinsurers involved. Management believes the unfavorable resolution of any dispute that may arise would not have a material impact on American National’s consolidated financial statements.
Note 13 – Reinsurance — (Continued)
The amounts in the consolidated financial statements include the impact of reinsurance. Premiums written and earned are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
| WRITTEN | | | | | | |
| Direct | | $ | 2,650,696 | | | $ | 2,533,278 | | | $ | 2,500,176 | |
| Reinsurance assumed | | 644,858 | | | 591,457 | | | 578,656 | |
| Reinsurance ceded | | (944,194) | | | (883,187) | | | (865,369) | |
| Net | | $ | 2,351,360 | | | $ | 2,241,548 | | | $ | 2,213,463 | |
| | | | | | |
| EARNED | | | | | | |
| Direct | | $ | 2,716,632 | | | $ | 2,629,403 | | | $ | 2,464,870 | |
| Reinsurance assumed | | 317,081 | | | 291,945 | | | 236,504 | |
| Reinsurance ceded | | (732,660) | | | (703,274) | | | (518,580) | |
| Net | | $ | 2,301,053 | | | $ | 2,218,074 | | | $ | 2,182,794 | |
Life insurance in-force and related reinsurance amounts are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 | | 2019 |
| Direct life insurance in-force | | $ | 136,710,529 | | | $ | 128,075,765 | | | $ | 117,886,265 | |
| Reinsurance risks assumed from other companies | | 221,023 | | | 171,433 | | | 218,020 | |
| Reinsurance risks ceded to other companies | | (22,835,954) | | | (24,006,683) | | | (24,913,905) | |
| Net life insurance in-force | | $ | 114,095,598 | | | $ | 104,240,515 | | | $ | 93,190,380 | |
Note 14 – Federal Income Taxes
A reconciliation of the effective tax rate to the statutory federal tax rate is shown below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| Total expected income tax expense at the statutory rate | | $ | 181,229 | | | 21.0 | % | | $ | 121,939 | | | 21.0 | % | | $ | 167,554 | | | 21.0 | % |
| Tax-exempt investment income | | (3,929) | | | (0.5) | | | (4,262) | | | (0.7) | | | (3,969) | | | (0.5) | |
| Deferred tax change | | (8,375) | | | (1.0) | | | 2,816 | | | 0.5 | | | (519) | | | (0.1) | |
| Dividend exclusion | | (3,459) | | | (0.4) | | | (3,097) | | | (0.5) | | | (3,628) | | | (0.5) | |
| Tax credits, net | | (4,988) | | | (0.6) | | | (7,484) | | | (1.3) | | | (7,090) | | | (0.9) | |
| Low income housing tax credit expense | | 4,744 | | | 0.5 | | | 4,923 | | | 0.8 | | | 6,394 | | | 0.8 | |
| | | | | | | | | | | | |
| Change in valuation allowance | | (138) | | | — | | | (625) | | | (0.1) | | | 383 | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other items, net | | 1,501 | | | 0.3 | | | 2,397 | | | 0.4 | | | 6,292 | | | 0.7 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total | | $ | 166,585 | | | 19.3 | % | | $ | 116,607 | | | 20.1 | % | | $ | 165,417 | | | 20.5 | % |
As of December 31, 2021, American National had no material net operating loss or tax credit carryforwards.
American National’s federal income tax returns for tax years 2018 to 2020 are subject to examination by the Internal Revenue Service. In the opinion of management, all prior year taxes have been paid or adequate provisions have been made for any tax deficiencies that may be assessed.
As of December 31, 2021, American National had no provision for uncertain tax positions and no provision for penalties or interest. In addition, management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would impact American National’s effective tax rate.
Note 14 – Federal Income Taxes — (Continued)
The tax effects of temporary differences that gave rise to the deferred tax assets and liabilities are shown below (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| DEFERRED TAX ASSETS | | | | |
| Mortgage loans on real estate | | $ | 27,784 | | | $ | 34,341 | |
| Future policy benefits, policyholders' account balances and claims | | 43,538 | | | 57,572 | |
| Unearned premium reserve | | 25,142 | | | 23,225 | |
| Participating policyholders’ liability | | 67,367 | | | 41,593 | |
| Deferred compensation | | 11,427 | | | 9,057 | |
| | | | |
| Tax carryforwards | | 1,748 | | | 1,643 | |
| Gross deferred tax assets before valuation allowance | | 177,006 | | | 167,431 | |
| Valuation allowance | | (2,552) | | | (2,458) | |
| Gross deferred tax assets after valuation allowance | | 174,454 | | | 164,973 | |
| | | | |
| DEFERRED TAX LIABILITIES | | | | |
| Bonds | | 69,089 | | | 122,326 | |
| Equity securities | | 8,386 | | | 262,017 | |
| Real estate, real estate partnerships and investment funds | | 16,319 | | | 12,499 | |
| Other invested assets | | 30,452 | | | 29,664 | |
| Deferred acquisition costs | | 218,252 | | | 199,152 | |
| Property and equipment | | 6,272 | | | 7,689 | |
| Pension and liability for retirement benefits | | 20,640 | | | 1,549 | |
| Other liabilities | | 5,554 | | | 8,424 | |
| Gross deferred tax liabilities | | 374,964 | | | 643,320 | |
| Total net deferred tax liability | | $ | 200,510 | | | $ | 478,347 | |
In 2021, our deferred tax liabilities decreased from $478.3 million at December 31, 2020 to $200.5 million at December 31, 2021. The decrease was primarily due to the sale of equity securities. Upon sale, deferred tax liabilities on unrealized gains became realized for tax purposes resulting in a decrease in deferred tax liabilities and an increase in current tax liability.
GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance, if necessary, to reduce our deferred tax assets to an amount that is more-likely-than-not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. There were no material changes to our valuation allowance recorded during the years ended December 31, 2021 and 2020. Although realization is not assured, management believes it is more-likely-than-not that our remaining deferred tax assets will be realized and that as of December 31, 2021, no additional valuation allowance is required.
Note 15 – Accumulated Other Comprehensive Income (Loss)
The components of and changes in the accumulated other comprehensive income (“AOCI”), and the related tax effects, are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Securities | | Defined Benefit Pension Plan Adjustments | | Foreign Currency Adjustments | | Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2018 | | $ | (42,469) | | | $ | (54,236) | | | $ | (3,033) | | | $ | (99,738) | |
| Amounts reclassified from AOCI (net of tax benefit $213 and expense $1,491) | | (800) | | | 5,607 | | | — | | | 4,807 | |
| Unrealized holding gains arising during the period (net of tax expense $70,808) | | 266,373 | | | — | | | — | | | 266,373 | |
| Unrealized adjustment to DAC (net of tax benefit $18,270) | | (68,733) | | | — | | | — | | | (68,733) | |
| Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $3,372) | | (12,684) | | | — | | | — | | | (12,684) | |
| Actuarial gain arising during the period (net of tax expense of $2,629) | | — | | | 9,888 | | | — | | | 9,888 | |
| Foreign currency adjustment (net of tax expense $104) | | — | | | — | | | 390 | | | 390 | |
| Cumulative effect of changes in accounting | | 16,164 | | | (16,491) | | | (458) | | | (785) | |
| Balance at December 31, 2019 | | 157,851 | | | (55,232) | | | (3,101) | | | 99,518 | |
| Amounts reclassified from AOCI (net of tax benefit $2,092 and expense $1,018) | | (7,870) | | | 3,831 | | | — | | | (4,039) | |
| Unrealized holding gains arising during the period (net of tax expense $52,808) | | 198,657 | | | — | | | — | | | 198,657 | |
| Unrealized adjustment to DAC (net of tax benefit $14,380) | | (54,094) | | | — | | | — | | | (54,094) | |
| Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $632) | | (2,378) | | | — | | | — | | | (2,378) | |
| Actuarial loss arising during the period (net of tax benefit $4,181) | | — | | | (15,729) | | | — | | | (15,729) | |
| Foreign currency adjustment (net of tax expense $62) | | — | | | — | | | 235 | | | 235 | |
| | | | | | | | |
| Balance at December 31, 2020 | | 292,166 | | | (67,130) | | | (2,866) | | | 222,170 | |
| Amounts reclassified from AOCI (net of tax benefit $8,608 and expense $2,016) | | (32,382) | | | 7,584 | | | — | | | (24,798) | |
| Unrealized holding losses arising during the period (net of tax benefit $43,343) | | (163,051) | | | — | | | — | | | (163,051) | |
| Unrealized adjustment to DAC (net of tax expense $12,239) | | 46,042 | | | — | | | — | | | 46,042 | |
| Unrealized losses on investments attributable to participating policyholders’ interest (net of tax expense $1,738) | | 6,537 | | | — | | | — | | | 6,537 | |
| Actuarial gain arising during the period (net of tax expense $15,974) | | — | | | 60,092 | | | — | | | 60,092 | |
| Foreign currency adjustment (net of tax expense $65) | | — | | | — | | | 62 | | | 62 | |
| | | | | | | | |
| Balance at December 31, 2021 | | $ | 149,312 | | | $ | 546 | | | $ | (2,804) | | | $ | 147,054 | |
Note 16 – Stockholders’ Equity and Noncontrolling Interests
ANAT has one class of common stock with a par value of $0.01 per share and 50,000,000 authorized shares. Each issued and outstanding share of the Company's common stock will be converted into the right to receive $190.00 in cash without interest pursuant to the Merger Agreement with Brookfield Reinsurance. Refer to Note 1, Nature of Operations, for more information. The number of shares outstanding at the dates indicated are shown below:
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Common stock | | | | | | |
| Shares issued | | 26,887,200 | | | 26,887,200 | | | 30,832,449 | |
| Treasury shares | | — | | | — | | | (3,945,249) | |
| Outstanding shares | | 26,887,200 | | | 26,887,200 | | | 26,887,200 | |
| Restricted shares | | (10,000) | | | (10,000) | | | (10,000) | |
| Unrestricted outstanding shares | | 26,877,200 | | | 26,877,200 | | | 26,877,200 | |
Stock-based Compensation
American National has made grants of Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, and Restricted Stock Units (“RSU”), pursuant to a stock-based compensation plan. The term for granting additional awards under such plan expired in 2019. Pursuant to the plan, grants were made to certain officers meeting established performance objectives, and grants were made to directors as compensation and to align their interests with those of other shareholders. In addition, American National has made grants to directors and advisory directors of RSUs that are cash-settled only, with no provision for conversion to stock. During 2021, 10,197 of such cash-settled RSUs were granted and remain outstanding at December 31, 2021 as shown in the table below.
SAR, RS and RSU information for the periods indicated are shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | SAR | | RS Shares | | RSUs |
| | | Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value | | Units | | Weighted-Average Grant Date Fair Value |
| Outstanding at December 31, 2018 | | 335 | | | $ | 84.41 | | | 10,000 | | | $ | 80.05 | | | 18,316 | | | $ | 111.12 | |
| Granted | | — | | | — | | | — | | | — | | | 8,250 | | | 113.19 | |
| Exercised | | — | | | — | | | — | | | — | | | (18,316) | | | 111.12 | |
| Forfeited | | — | | | — | | | — | | | — | | | — | | | — | |
| Expired | | (269) | | | 77.90 | | | — | | | — | | | — | | | — | |
| Outstanding at December 31, 2019 | | 66 | | | 110.83 | | | 10,000 | | | 80.05 | | | 8,250 | | | 113.19 | |
| Granted | | — | | | — | | | — | | | — | | | 8,250 | | | 75.35 | |
| Exercised | | — | | | — | | | — | | | — | | | (8,250) | | | 113.19 | |
| Forfeited | | — | | | — | | | — | | | — | | | — | | | — | |
| Expired | | (66) | | | 110.83 | | | — | | | — | | | — | | | — | |
| Outstanding at December 31, 2020 | | — | | | — | | | 10,000 | | | 80.05 | | | 8,250 | | | 75.35 | |
| Granted | | — | | | — | | | — | | | — | | | 10,197 | | | 113.35 | |
| Exercised | | — | | | — | | | — | | | — | | | (8,250) | | | 75.35 | |
| Forfeited | | — | | | — | | | — | | | — | | | — | | | — | |
| Expired | | — | | | — | | | — | | | — | | | — | | | — | |
| Outstanding at December 31, 2021 | | — | | | $ | — | | | 10,000 | | | $ | 80.05 | | | 10,197 | | | $ | 113.35 | |
Note 16 – Stockholders' Equity and Noncontrolling Interests — (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | SAR | | RS Shares | | RSUs |
| Weighted-average contractual remaining life (in years) | | 0.0 | | 1.16 | | 0.33 |
| Exercisable shares | | — | | | N/A | | N/A |
| Weighted-average exercise price | | $ | — | | | $ | 80.05 | | | $ | 113.35 | |
| Weighted-average exercise price exercisable shares | | — | | | N/A | | N/A |
| Compensation expense (credit) | | | | | | |
| Year ended December 31, 2021 | | $ | — | | | $ | 80,000 | | | $ | 1,989,000 | |
| Year ended December 31, 2020 | | (1,000) | | | 80,000 | | | 449,000 | |
| Year ended December 31, 2019 | | 15,000 | | | 80,000 | | | 1,168,000 | |
| Fair value of liability award | | | | | | |
| December 31, 2021 | | $ | — | | | N/A | | $ | 1,926,000 | |
| December 31, 2020 | | — | | | N/A | | 793,000 | |
The SARs gave the holder the right to cash compensation based on the difference between the stock price on the grant date and the stock price on the exercise date. The SARs vest at a rate of 20% per year for five years and expired five years after vesting. All remaining SARs expired on May 1, 2020.
RS awards entitle the participant to full dividend and voting rights. Each RS share awarded has the value of one share of restricted stock and vests 10 years from the grant date. 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, death or disability of an award holder or change in control. Restricted stock awards for 350,334 shares have been granted at an exercise price of zero, of which 10,000 shares are unvested.
RSU awards to our directors and advisory directors are settled in cash based upon the market price of our common stock after one-year or earlier upon death, disability or retirement from service after age 65 or change in control. During the twelve months ended December 31, 2021, 8,250 RSUs were granted and vested on May 1, 2021 and were settled in cash. A new grant of 10,197 RSUs was awarded to directors and advisory directors on May 1, 2021 with one-year cliff vesting which will be settled in cash.
Pursuant to the Merger Agreement with Brookfield Reinsurance, each outstanding and unvested restricted share award and restricted stock unit award will vest and be converted into the right to receive cash payment equal to $190.00 multiplied by the total number of shares of common stock subject to such award prior to the effective date of the merger with Brookfield Reinsurance. Refer to Note 1, Nature of Operations, for more information.
Earnings per Share
Basic earnings per share were calculated using a weighted average number of shares outstanding. Diluted earnings per share include RS awards and RSU award shares issued in 2019. RSUs issued in 2021 and 2020 may only be settled in cash.
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Weighted average shares outstanding | | 26,877,200 | | | 26,878,679 | | | 26,882,691 | |
| Incremental shares from RS awards and RSUs | | 7,479 | | | 8,446 | | | 8,552 | |
| Total shares for diluted calculations | | 26,884,679 | | | 26,887,125 | | | 26,891,243 | |
| Net income attributable to American National (in thousands) | | $ | 699,325 | | | $ | 467,505 | | | $ | 620,363 | |
| Basic earnings per share | | $ | 26.02 | | | $ | 17.39 | | | $ | 23.08 | |
| Diluted earnings per share | | $ | 26.01 | | | $ | 17.38 | | | $ | 23.07 | |
Note 16 – Stockholders' Equity and Noncontrolling Interests — (Continued)
Statutory Capital and Surplus
Risk Based Capital (“RBC”) is a measure insurance regulators use to evaluate the capital adequacy of American National's insurance subsidiaries. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level at least 100% of the company action level RBC are required to take certain actions. At December 31, 2021 and 2020, ANICO’s statutory capital and surplus was $4.0 billion and $3.6 billion, respectively, which resulted in an RBC level above 200% of the company action level. All of our other insurance subsidiaries had statutory capital and surplus at December 31, 2021 and 2020 above 200% of the company action level except ANPAC Louisiana Insurance Company ("ANPLA"), which had an RBC level of 194% at December 31, 2020, which increased to 242% at December 31, 2021.
American National's insurance subsidiaries prepare financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of each subsidiary's state of domicile, which include certain components of the National Association of Insurance Commissioners’ Codification of Statutory Accounting Principles (“NAIC Codification”). NAIC Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting practices continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the statutory capital and surplus of our insurance subsidiaries.
Statutory accounting differs from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, and valuing securities on a different basis. In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus.
One of American National’s insurance subsidiaries has been granted a permitted practice from the Missouri Department of Insurance, to record as the valuation of its investment in a wholly-owned subsidiary that is the attorney-in-fact for a Texas domiciled insurer, the statutory capital and surplus of the Texas domiciled insurer. This permitted practice increases the statutory capital and surplus of both ANICO and American National Lloyds Insurance Company by $68.1 million and $75.3 million at December 31, 2021 and 2020, respectively. The statutory capital and surplus of both ANICO and American National Lloyds Insurance Company would have remained above the authorized control level RBC had it not used the permitted practice.
The statutory capital and surplus and net income (loss) of our life and property and casualty insurance entities in accordance with statutory accounting practices are shown below (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| Statutory capital and surplus | | | | |
| Life insurance entities | | $ | 2,425,759 | | | $ | 2,188,808 | |
| Property and casualty insurance entities | | 1,570,501 | | | 1,463,179 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Statutory net income (loss) | | | | | | |
| Life insurance entities | | $ | 956,053 | | | $ | (25,178) | | | $ | 47,133 | |
| Property and casualty insurance entities | | 383,962 | | | 127,207 | | | 96,269 | |
Statutory net income for our life insurance entities increased as a result of a $1.0 billion dividend payment to ANICO from ANH Investments, LLC, as a result of proceeds received from the sale of the majority of the equity securities portfolio. Statutory net income for our property and casualty entities increased driven by an increase in net realized gains as a result of the sale of the majority of the companies’ equity securities portfolios.
Note 16 – Stockholders' Equity and Noncontrolling Interests — (Continued)
Dividends
Dividends are paid on a quarterly basis. We paid a quarterly dividend of $0.82 per share for each quarter for the years ended December 31, 2021 and 2020, and we expect to continue to pay regular quarterly cash dividends, not to exceed $0.82 per share, prior to the completion of the merger with Brookfield Reinsurance, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial conditions. Refer to Note 1, Nature of Operations, for more information regarding the Merger Agreement with Brookfield Reinsurance.
The amount of dividends paid by our insurance company subsidiaries is restricted by insurance law. These restrictions are based, in part, on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior regulatory approval. Dividends in larger amounts, or extraordinary dividends, are subject to approval by the insurance commissioner of the relevant state of domicile. For example, restrictions applicable to Texas-domiciled life insurance companies like ANICO limit the payment of dividends to the greater of the prior year’s statutory net gain from operations before realized capital gains, or 10% of prior year statutory surplus, in each case determined in accordance with statutory accounting principles. ANICO is permitted, without prior approval of the Texas Department of Insurance, to pay total dividends of $792.4 million during 2022, subject to the terms and conditions of the Merger Agreement with Brookfield Reinsurance.Noncontrolling Interests
American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company owned by its policyholders. ANICO 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 $6.8 million at December 31, 2021 and 2020, respectively.
American National Group, Inc. and its subsidiaries exercise control or ownership of various joint ventures, resulting in their consolidation into American National’s consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as a noncontrolling interest of $0.9 million and a noncontrolling deficit of $0.9 million at December 31, 2021 and 2020, respectively.
Note 17 – Segment Information
Management organizes the business into 5 operating segments:
•Life—consists of whole, term, universal, indexed and variable life insurance. Products are primarily sold through career, multiple-line, and independent agents as well as direct marketing channels.
•Annuity—consists of fixed, indexed, and variable annuity products. Products are primarily sold through independent agents, brokers, and financial institutions, along with multiple-line and career agents.
•Health—consists of Medicare Supplement, stop-loss, other supplemental health products and credit disability insurance. Products are typically distributed through independent agents and managing general underwriters.
•Property and Casualty—consists of personal, agricultural and targeted commercial coverages and credit-related property insurance. Products are primarily sold through multiple-line and independent agents or managing general agents.
•Corporate and Other—consists of net investment income from investments and certain expenses not allocated to the insurance segments and revenues and related expenses from non-insurance operations.
The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Consolidated Financial Statements. All revenues and expenses specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Revenues and expenses not specifically attributable to policy transactions are allocated to each segment as follows:
•Recurring income from bonds and mortgage loans is allocated based on the assets allocated to each segment at the average yield available from these assets.
•Net investment income from all other assets is allocated to the insurance segments in accordance with the amount of capital allocated to each segment, with the remainder recorded in the Corporate and Other segment.
•Expenses are charged to segments through direct identification and allocations based upon various factors.
The following summarizes total assets by operating segments (in thousands):
| | | | | | | | | | | | | | | | |
| | Years ended December 31, | | |
| | 2021 | | 2020 | | |
| Total assets | | | | | | |
| Life | | $ | 7,491,012 | | | $ | 7,111,991 | | | |
| Annuity | | 14,803,297 | | | 13,642,357 | | | |
| Health | | 532,809 | | | 515,841 | | | |
| Property and Casualty | | 2,888,696 | | | 2,716,896 | | | |
| Corporate and Other | | 5,604,507 | | | 5,480,730 | | | |
| Total | | $ | 31,320,321 | | | $ | 29,467,815 | | | |
Note 17 – Segment Information — (Continued)
The results of operations measured as the income before federal income taxes and other items by operating segments are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2021 |
| | | | | | | | | | | | |
| | | Life | | Annuity | | Health | | Property & Casualty | | Corporate & Other | | Total |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | | | |
| Premiums | | $ | 412,769 | | | $ | 74,925 | | | $ | 143,484 | | | $ | 1,669,875 | | | $ | — | | | $ | 2,301,053 | |
| Other policy revenues | | 336,136 | | | 23,571 | | | — | | | — | | | — | | | 359,707 | |
| Net investment income | | 277,962 | | | 629,417 | | | 8,153 | | | 62,140 | | | 193,982 | | | 1,171,654 | |
| Net realized investment gains | | — | | | — | | | — | | | — | | | 64,628 | | | 64,628 | |
| Decrease in investment credit loss | | — | | | — | | | — | | | — | | | 28,778 | | | 28,778 | |
| Net gains on equity securities | | — | | | — | | | — | | | — | | | 420,283 | | | 420,283 | |
| Other income | | 1,577 | | | 3,282 | | | 21,743 | | | 15,807 | | | 3,279 | | | 45,688 | |
| Total premiums and other revenues | | 1,028,444 | | | 731,195 | | | 173,380 | | | 1,747,822 | | | 710,950 | | | 4,391,791 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | | | |
| Policyholder benefits | | 605,724 | | | 149,931 | | | — | | | — | | | — | | | 755,655 | |
| Claims incurred | | — | | | — | | | 98,029 | | | 1,094,126 | | | — | | | 1,192,155 | |
| Interest credited to policyholders' account balances | | 84,005 | | | 364,649 | | | — | | | — | | | — | | | 448,654 | |
| Commissions for acquiring and servicing policies | | 186,470 | | | 98,842 | | | 24,231 | | | 330,554 | | | — | | | 640,097 | |
| Other operating expenses | | 195,127 | | | 53,379 | | | 42,284 | | | 213,486 | | | 67,593 | | | 571,869 | |
| Change in deferred policy acquisition costs | | (50,134) | | | (22,838) | | | 3,537 | | | (10,197) | | | — | | | (79,632) | |
| Total benefits, losses and expenses | | 1,021,192 | | | 643,963 | | | 168,081 | | | 1,627,969 | | | 67,593 | | | 3,528,798 | |
| Income before federal income tax and other items | | $ | 7,252 | | | $ | 87,232 | | | $ | 5,299 | | | $ | 119,853 | | | $ | 643,357 | | | $ | 862,993 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2020 |
| | | | | | | | | | | | |
| | | Life | | Annuity | | Health | | Property & Casualty | | Corporate & Other | | Total |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | | | |
| Premiums | | $ | 396,099 | | | $ | 92,866 | | | $ | 168,805 | | | $ | 1,560,304 | | | $ | — | | | $ | 2,218,074 | |
| Other policy revenues | | 295,263 | | | 15,483 | | | — | | | — | | | — | | | 310,746 | |
| Net investment income | | 261,389 | | | 570,003 | | | 8,637 | | | 63,949 | | | 72,174 | | | 976,152 | |
| Net realized investment gains | | — | | | — | | | — | | | — | | | 35,660 | | | 35,660 | |
| Increase in investment credit loss | | — | | | — | | | — | | | — | | | (102,603) | | | (102,603) | |
| Net gains on equity securities | | — | | | — | | | — | | | — | | | 356,281 | | | 356,281 | |
| Other income | | 2,084 | | | 2,716 | | | 19,598 | | | 12,779 | | | 3,379 | | | 40,556 | |
| Total premiums and other revenues | | 954,835 | | | 681,068 | | | 197,040 | | | 1,637,032 | | | 364,891 | | | 3,834,866 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | | | |
| Policyholder benefits | | 533,925 | | | 214,158 | | | — | | | — | | | — | | | 748,083 | |
| Claims incurred | | — | | | — | | | 116,122 | | | 1,005,620 | | | — | | | 1,121,742 | |
| Interest credited to policyholders' account balances | | 75,943 | | | 245,099 | | | — | | | — | | | — | | | 321,042 | |
| Commissions for acquiring and servicing policies | | 167,548 | | | 55,910 | | | 30,182 | | | 299,960 | | | — | | | 553,600 | |
| Other operating expenses | | 182,395 | | | 48,359 | | | 39,265 | | | 202,503 | | | 42,891 | | | 515,413 | |
| Change in deferred policy acquisition costs | | (53,756) | | | 48,298 | | | (307) | | | 87 | | | — | | | (5,678) | |
| Total benefits, losses and expenses | | 906,055 | | | 611,824 | | | 185,262 | | | 1,508,170 | | | 42,891 | | | 3,254,202 | |
| Income before federal income tax and other items | | $ | 48,780 | | | $ | 69,244 | | | $ | 11,778 | | | $ | 128,862 | | | $ | 322,000 | | | $ | 580,664 | |
Note 17 – Segment Information — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2019 |
| | | | | | | | | | | | |
| | | Life | | Annuity | | Health | | Property & Casualty | | Corporate & Other | | Total |
| PREMIUMS AND OTHER REVENUES | | | | | | | | | | | | |
| Premiums | | $ | 359,419 | | | $ | 147,139 | | | $ | 165,035 | | | $ | 1,511,201 | | | $ | — | | | $ | 2,182,794 | |
| Other policy revenues | | 288,061 | | | 17,195 | | | — | | | — | | | — | | | 305,256 | |
| Net investment income | | 263,788 | | | 663,895 | | | 9,467 | | | 64,263 | | | 179,494 | | | 1,180,907 | |
| Net realized investment gains | | — | | | — | | | — | | | — | | | 30,751 | | | 30,751 | |
| | | | | | | | | | | | |
| Net gains on equity securities | | — | | | — | | | — | | | — | | | 422,535 | | | 422,535 | |
| Other income | | 1,967 | | | 2,727 | | | 20,762 | | | 11,897 | | | 14,048 | | | 51,401 | |
| Total premiums and other revenues | | 913,235 | | | 830,956 | | | 195,264 | | | 1,587,361 | | | 646,828 | | | 4,173,644 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | | | | | | | |
| Policyholder benefits | | 449,252 | | | 218,576 | | | — | | | — | | | — | | | 667,828 | |
| Claims incurred | | — | | | — | | | 109,013 | | | 1,042,153 | | | — | | | 1,151,166 | |
| Interest credited to policyholders' account balances | | 80,950 | | | 431,049 | | | — | | | — | | | — | | | 511,999 | |
| Commissions for acquiring and servicing policies | | 162,203 | | | 71,350 | | | 31,624 | | | 267,457 | | | — | | | 532,634 | |
| Other operating expenses | | 190,104 | | | 50,507 | | | 41,475 | | | 201,580 | | | 41,222 | | | 524,888 | |
| Change in deferred policy acquisition costs | | (26,036) | | | 9,474 | | | 1,382 | | | 2,431 | | | — | | | (12,749) | |
| Total benefits, losses and expenses | | 856,473 | | | 780,956 | | | 183,494 | | | 1,513,621 | | | 41,222 | | | 3,375,766 | |
| Income before federal income tax and other items | | $ | 56,762 | | | $ | 50,000 | | | $ | 11,770 | | | $ | 73,740 | | | $ | 605,606 | | | $ | 797,878 | |
Note 18 – Pension and Postretirement Benefits
Savings Plans
American National sponsors a qualified defined contribution (401(k) plan) for all employees, and non-qualified defined contribution plans for certain employees whose otherwise eligible earnings exceed the statutory limits under the qualified plans. The total expense associated with matching contributions to these plans was $10.8 million, $9.9 million, and $9.5 million for 2021, 2020, and 2019, respectively.
Pension Benefits
American National sponsors qualified and non-qualified defined benefitThe following table describes the estimated benefits that would have been due to our NEOs under our existing pension plans allin the event of whicha termination of employment as of December 31, 2021 as a result of various triggering events. Mr. Merrill is not a participant under our existing pension plans and has been omitted from the table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Plan | | Potential Payout on Retirement or Voluntary Termination 12/31/21 (a) | | Potential Payout if Terminated Upon Disability 12/31/21 (b) | | Potential Payout if Terminated Upon Death 12/31/21 (c) | | Potential Payout if Terminated Involuntarily 12/31/21 (d) |
| James E. Pozzi | | Qualified Plan | | $ | 3,471,463 | | | $ | 3,471,463 | | | $ | 3,201,145 | | | $ | 3,471,463 |
| | Nonqualified Plan | | $ | 9,240,961 | | | $ | 9,240,961 | | | $ | 8,939,853 | | | $ | 9,240,961 | |
| Timothy A. Walsh | | Farm Family Plan | | $ | 71,633 | | | $ | 71,633 | | | $ | 48,615 | | | $ | 71,633 | |
| David A. Behrens | | Qualified Plan | | $ | 682,022 | | | $ | 682,022 | | $ | 825,766 | | | $ | 682,022 | |
| | Nonqualified Plan | | $ | 1,836,457 | | | $ | 1,836,457 | | $ | 2,471,829 | | | $ | 1,836,457 | |
| J.D. Johnson | | Qualified Plan | | $ | 536,219 | | | $ | 536,219 | | $ | 529,872 | | | $ | 536,219 | |
| | Nonqualified Plan | | $ | 174,640 | | | $ | 174,640 | | $ | 183,700 | | | $ | 174,640 | |
| Hoyt J. Strickland | | Qualified Plan | | $ | 639,559 | | | $ | 639,559 | | $ | 551,495 | | | $ | 639,559 | |
| | Nonqualified Plan | | $ | 117,077 | | | $ | 117,077 | | $ | 107,004 | | | $ | 117,077 | |
Column (a) - Potential Payout on Retirement or Voluntary Termination. The “potential payout” refers to the actuarial present value of the benefit payable. As explained in connection with the Pension Benefits Table above, Mr. Pozzi and Mr. Johnson are eligible for normal retirement under both the Qualified Plan and the Nonqualified Plan. Each would have been frozen. As such,eligible to receive his accumulated benefit shown in this column upon retirement or voluntary termination on December 31, 2021. The other three NEOs shown are eligible for early retirement benefits under the plans in which they participate. Mr. Walsh is eligible for early retirement under the Farm Family Plan, and Mr. Behrens and Mr. Strickland are eligible for early retirement under the Qualified Plan and the Nonqualified Plan. Messrs. Walsh, Behrens and Strickland would have been eligible to receive the amounts shown in this column as an early retirement benefit on December 31, 2021. The early retirement benefit is an actuarially reduced value of accumulated benefits, which for Messrs. Walsh, Behrens and Strickland was 61.1%, 65.3%, and 99.4%, respectively, of their deferred benefits at December 31, 2021.
Column (b) - Potential Payout if Terminated Upon Disability. 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 arebecome immediately payable, unless the individual is entitled to retirement at the time of disability. Total disability must be validated by approval for Social Security disability. Had the employment of Mr. Pozzi or Mr. Johnson been terminated by disability on December 31, 2021, each would be entitled to his accumulated benefit. In the case of the disability of Messrs. Walsh, Behrens or Strickland on December 31, 2021, each would have been entitled to his early retirement benefit.
Column (c) - Potential Payout if Terminated Upon Death. The “potential payout” refers to the actuarial present value of the benefit payable. This amount represents the value of a surviving spouse’s benefit as determined based upon a percentage of the accrued through theseor 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 surviving spouse’s benefit would be according to the form of payment elected at retirement. In the event of death prior to retirement, a pension is available for additionalthe surviving spouse for the life of the spouse that generally would be at most 75% of the NEO’s projected monthly pension at age 65, although the percentage may be higher for an NEO who has reached age 65 and has continued to defer commencement of benefits. 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 credit or future salary increase credit, and no new participants are addedequal to the plans. Benefits earned by eligible employees prior to the plans being frozen have not been affected.at least 55.
Column (d) - Potential Payout if Terminated Involuntarily. No special benefits are triggered by involuntary termination. Please see the explanation provided above in connection with Column A - Potential Payout on Retirement or Voluntary Termination. The qualified pension plans are noncontributory. The plans provide benefits for salaried and management employees and corporate clerical employees subject“potential payout” refers to a collective bargaining agreement based on yearsthe actuarial present value of service and employee compensation. The non-qualified pension plans cover key employees and restore benefits that would otherwise be curtailed by statutory limits on qualified plan benefits.the benefit payable.
Note 18 – Pension and Postretirement BenefitsITEM 11. EXECUTIVE COMPENSATION — (Continued)
Amounts recognizedMedical Benefits
As the Company’s President and CEO, Mr. Pozzi is eligible for lifetime participation in our Merit Plan and core medical insurance plan upon his retirement. Such coverage also is available to his spouse 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 consolidated statementscore medical insurance plan and the Merit Plan, the value of financial position consistlifetime coverage is approximately $848,048 for Mr. Pozzi. Such calculation was made using assumptions in accordance with GAAP as follows: (a) 1994 Group Annuity Reserving table, (b) a health care cost trend rate of (in thousands):5.6%, and (c) an interest rate of 3.04%. The other NEOs are not eligible for such benefits.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified | | Non-qualified |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Reconciliation of benefit obligation | | | | | | | | |
| Obligation at beginning of year | | $ | 427,745 | | | $ | 387,273 | | | $ | 65,791 | | | $ | 65,733 | |
| Service cost | | 589 | | | 543 | | | — | | | — | |
| Interest cost on projected benefit obligation | | 10,290 | | | 13,079 | | | 917 | | | 1,789 | |
| Actuarial (gain) loss | | (11,640) | | | 50,620 | | | 2,496 | | | 6,775 | |
| Benefits paid | | (27,604) | | | (23,770) | | | (8,510) | | | (8,506) | |
| Obligation at end of year | | 399,380 | | | 427,745 | | | 60,694 | | | 65,791 | |
| Reconciliation of fair value of plan assets | | | | | | | | |
| Fair value of plan assets at beginning of year | | 511,989 | | | 470,101 | | | — | | | — | |
| Actual return on plan assets | | 90,822 | | | 65,700 | | | — | | | — | |
| Employer contributions | | — | | | — | | | 8,510 | | | 8,506 | |
| Benefits paid | | (27,597) | | | (23,812) | | | (8,510) | | | (8,506) | |
| Fair value of plan assets at end of year | | 575,214 | | | 511,989 | | | — | | | — | |
| Funded status at end of year | | $ | 175,834 | | | $ | 84,244 | | | $ | (60,694) | | | $ | (65,791) | |
CEO PAY RATIO
As required by the Dodd-Frank Act and rules of the Securities and Exchange Commission (the “SEC”), we are providing the following information about the relationship of the total annual compensation of our median employee and the total annual compensation of our CEO. Under such SEC rules, we are required to identify our median employee only once every three years, unless there is a change in our employee population or compensation arrangements such that we reasonably believe a significant change in our pay ratio disclosure would result. Because we do not believe that there have been changes in our employee population or compensation arrangements that would significantly impact our pay ratio disclosure, we believe it is reasonable to use the median employee previously identified and reported for 2020 for purposes of calculating our pay ratio disclosure for 2021.
The componentstotal annual compensation for 2021 of net periodic benefit costthe employee identified as our median employee (not including our CEO) was $67,828. The total annual compensation for 2021 of our CEO, James E. Pozzi, was $8,981,150. Based on this information, the defined benefit pension plans are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Service cost | | $ | 589 | | | $ | 543 | | | $ | 523 | |
| Interest cost | | 11,207 | | | 14,868 | | | 17,421 | |
| Expected return on plan assets | | (25,921) | | | (26,109) | | | (24,248) | |
| Amortization of net actuarial loss | | 7,628 | | | 4,848 | | | 7,070 | |
| Settlement recognition | | 1,973 | | | — | | | — | |
| Net periodic cost (benefit) | | $ | (4,524) | | | $ | (5,850) | | | $ | 766 | |
Amounts related toTo identify our median employee for purposes of our pay ratio disclosure for 2020, we first identified all of our employees as of December 31, 2020. We then ranked the defined benefit pension plans recognized2020 annual compensation of this employee population (not including our CEO) based on IRS Form W-2, Box 1 wages, without annualizing the compensation of individuals who were employed for less than the full year. After identifying the median employee from this ranking, we calculated the annual total compensation for such employee using the same methodology we use for our NEOs as a component of AOCI are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Actuarial gain (loss) | | $ | 85,666 | | | $ | (15,061) | | | $ | 19,615 | |
| Deferred tax benefit (expense) | | (17,990) | | | 3,163 | | | (4,120) | |
| Cumulative effect of change in accounting | | — | | | — | | | (16,491) | |
| Other comprehensive income (loss), net of tax | | $ | 67,676 | | | $ | (11,898) | | | $ | (996) | |
Amounts recognizedThis pay ratio is a reasonable good faith estimate calculated in a manner consistent with SEC rules based on our payroll and employment records and the methodology described above. The SEC rules for identifying the median compensated employee and calculating the pay ratio based on his or her annual total compensation allow companies to use a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices. As such, the pay ratios reported by other companies may not be comparable to the pay ratio we report above, as a component of AOCI thatother companies may have not been recognized as a component of the combined net periodic benefit cost of the defined benefit pension plans, are shown below (in thousands):different employment and compensation practices and may use different methodologies, exclusions, estimates and assumptions to calculate their own pay ratios.
| | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 |
| Net actuarial gain (loss) | | $ | 690 | | | $ | (84,976) | |
| Deferred tax benefit (expense) | | (144) | | | 17,846 | |
| Amounts included in AOCI | | $ | 546 | | | $ | (67,130) | |
Note 18 – Pension and Postretirement BenefitsITEM 11. EXECUTIVE COMPENSATION — (Continued)
The weighted average assumptions used are shown below:
| | | | | | | | | | | | | | |
| | Used for Net Benefit Cost for year ended December 31, 2021 | | Used for Benefit Obligations as of December 31, 2021 |
| Discount rate | | 2.52 | % | | 2.86 | % |
| Long-term rate of return | | 5.25 | | | — | |
American National’s funding policy for the qualified pension plans is to make annual contributions to meet the minimum funding standards of the Pension Protection Act of 2006. American National and its affiliates did not contribute to its qualified plans in 2021, 2020 and 2019 due to the substantial contribution over minimum funding standards of $60 million made in 2018. The benefits paid from the non-qualified plans were $8.5 million, $8.5 million and $8.7 million in 2021, 2020 and 2019, respectively. Future payments from the non-qualified pension benefit plans will be funded out of general corporate assets.DIRECTOR COMPENSATION TABLE
The following table shows pension benefit payments expected to be paid (in thousands):has information about the compensation of our directors and advisory directors for 2021, other than Mr. Pozzi.
| | | | | | | | |
| 2022 | | $ | 49,048 | |
| 2023 | | 33,243 | |
| 2024 | | 32,891 | |
| 2025 | | 30,522 | |
| 2026 | | 29,648 | |
| 2027-2031 | | 135,164 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash (a) | | Stock Awards (b) | | All Other Compensation (c) | | Total |
| Directors | | | | | | | | |
| William C. Ansell | | $ | 197,500 | | $ | 108,366 | | | $ | 33,018 | | $ | 338,884 |
| Arthur O. Dummer | | $ | 143,500 | | $ | 108,366 | | | $ | 26,559 | | $ | 278,425 |
| Irwin M. Herz, Jr. | | $ | 92,000 | | $ | 108,366 | | | $ | 28,261 | | $ | 228,627 |
| E. Douglas McLeod | | $ | 83,000 | | $ | 108,366 | | | $ | 23,251 | | $ | 214,617 |
| Frances A. Moody-Dahlberg | | $ | 83,000 | | $ | 108,366 | | | $ | 100,000 | | $ | 291,366 |
| Ross R. Moody | | $ | 94,750 | | $ | 108,366 | | | $ | — | | $ | 203,116 |
| James P. Payne | | $ | 206,500 | | $ | 108,366 | | | $ | 45,912 | | $ | 360,778 |
| E. J. Pederson | | $ | 298,250 | | $ | 108,366 | | | $ | 23,272 | | $ | 429,888 |
| James D. Yarbrough | | $ | 144,250 | | $ | 108,366 | | | $ | 76,629 | | $ | 329,245 |
| Advisory Directors | | | | | | | | |
| R. Eugene Lucas | | $ | 83,000 | | $ | 108,366 | | | $ | — | | $ | 191,366 |
| Russell S. Moody | | $ | 83,000 | | $ | 108,366 | | | $ | 49,749 | | $ | 241,115 |
American National utilizes third-party pricing servicesColumn (a) - Fees Earned or Paid in Cash. We pay compensation for service as a director or advisory director only to estimate fair value measurements of its pension plan assets. Refer to Note 9, Fair Value of Financial Instruments for further information concerningthose individuals who are not also officers. Beginning with the valuation methodologies and related inputs utilized by the third-party pricing services. The fair values (hierarchy measurements)annual meeting of the pension plan assetsBoard in April 2021, we revised our director compensation structure to one based primarily on annual retainers, after considering recommendations provided by asset categoryFW Cook. Previously, our directors and advisory directors received a combination of annual retainers and per-meeting fees for Board and committee service. For 2021, under the revised compensation structure, directors and advisory directors each received a $75,000 annual retainer. Members of the Nominating Committee, including its Chairman, each received a $4,000 annual retainer. The Chairman of the Compensation Committee received a $16,000 annual retainer, and other members of the Compensation Committee each received a $12,000 annual retainer. The Chairman of the Audit Committee received a $35,000 annual retainer, and the other members of the Audit Committee each received a $24,000 annual retainer. Members of the Executive Committee who are shown below (in thousands):not also officers each received $1,500 per meeting 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. In February 2021, the Board established a special committee comprised of Mr. Pederson, Mr. Ansell and Mr. Payne to consider a strategic transaction. In April 2021, the Board voted to provide cash compensation to each of these three directors for their service on the special committee as follows: $100,000 to Mr. Pederson as Chair of the Committee, and $70,000 to each of Mr. Ansell and Mr. Payne. Such amounts are included in Column (a). In addition, Mr. Pederson was paid $50,000 during 2021for his service as lead independent director. Such amount included an annual fee of $37,500 for the period of May 1, 2021 through April 30, 2022, and a pro-rated amount of $12,500 for the period from January 2021 through April 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | Total | | Level 1 | | Level 2 | | Level 3 |
| Asset Category | | | | | | | | |
| Corporate debt securities | | $ | 144,770 | | | $ | — | | | $ | 144,770 | | | $ | — | |
| Residential mortgage-backed securities | | 61 | | | — | | | 61 | | | — | |
| | | | | | | | |
| Equity securities by sector | | | | | | | | |
| Consumer goods | | 63,296 | | | 63,296 | | | — | | | — | |
| Energy and utilities | | 27,078 | | | 27,078 | | | — | | | — | |
| Finance | | 48,401 | | | 48,401 | | | — | | | — | |
| Healthcare | | 60,972 | | | 60,972 | | | — | | | — | |
| Industrials | | 29,375 | | | 29,375 | | | — | | | — | |
| Information technology | | 103,379 | | | 103,379 | | | — | | | — | |
| Other | | 86,256 | | | 86,256 | | | — | | | — | |
| Commercial paper | | 3,104 | | | — | | | 3,104 | | | — | |
| Unallocated group annuity contract | | 498 | | | — | | | 498 | | | — | |
| Other | | 8,024 | | | 8,024 | | | — | | | — | |
| Total | | $ | 575,214 | | | $ | 426,781 | | | $ | 148,433 | | | $ | — | |
Note 18 – Pension and Postretirement BenefitsITEM 11. EXECUTIVE COMPENSATION — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| | | Total | | Level 1 | | Level 2 | | Level 3 |
| Asset Category | | | | | | | | |
| Corporate debt securities | | $ | 157,933 | | | $ | — | | | $ | 157,243 | | | $ | 690 | |
| Residential mortgage-backed securities | | 3,521 | | | — | | | 3,521 | | | — | |
| | | | | | | | |
| Equity securities by sector | | | | | | | | |
| Consumer goods | | 57,684 | | | 57,684 | | | — | | | — | |
| Energy and utilities | | 22,007 | | | 22,007 | | | — | | | — | |
| Finance | | 40,161 | | | 40,161 | | | — | | | — | |
| Healthcare | | 51,641 | | | 51,641 | | | — | | | — | |
| Industrials | | 25,827 | | | 25,827 | | | — | | | — | |
| Information technology | | 78,720 | | | 78,720 | | | — | | | — | |
| Other | | 70,230 | | | 70,230 | | | — | | | — | |
| Commercial paper | | 872 | | | — | | | 872 | | | — | |
| Unallocated group annuity contract | | 1,940 | | | — | | | 1,940 | | | — | |
| Other | | 1,453 | | | 1,453 | | | — | | | — | |
| Total | | $ | 511,989 | | | $ | 347,723 | | | $ | 163,576 | | | $ | 690 | |
Column (c) - All Other Compensation. These amounts include the following:
All Other Compensation Table – Directors and Advisory Directors
| | | | | | | | | | | | | | | | | | | | |
| Name | | Perquisites* | | Subsidiary Director Fees | | Total |
| Directors | | | | | | |
| William C. Ansell | | $ | 33,018 | | | $ | — | | | $ | 33,018 | |
| Arthur O. Dummer | | $ | 26,559 | | | $ | — | | | $ | 26,559 | |
| Irwin M. Herz, Jr. | | $ | 16,261 | | | $ | 12,000 | | | $ | 28,261 | |
| E. Douglas McLeod | | $ | 18,501 | | | $ | 4,750 | | | $ | 23,251 | |
| Frances A. Moody-Dahlberg | | $ | 100,000 | | | $ | — | | | $ | 100,000 | |
| Ross R. Moody | | $ | — | | | $ | — | | | $ | — | |
| James P. Payne | | $ | 35,412 | | | $ | 10,500 | | | $ | 45,912 | |
| E. J. Pederson | | $ | 8,272 | | | $ | 15,000 | | | $ | 23,272 | |
| James D. Yarbrough | | $ | 61,629 | | | $ | 15,000 | | | $ | 76,629 | |
| Advisory Directors | | | | | | |
| R. Eugene Lucas | | $ | — | | | $ | — | | | $ | — | |
| Russell S. Moody | | $ | 49,749 | | | $ | — | | | $ | 49,749 | |
*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 and advisory directors who are not current or former common law employees, (2) retired directors who have at least 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, and (4) the spouses and any dependents of the foregoing.
Compensation Committee Interlocks and Insider Participation
The investment policy for the retirement plan assets is designed to provide the highest return commensurate with sound and prudent underwriting practices. The investment diversification goals are to have investments in cash and cash equivalents as necessary for liquidity, debt securities up to 100% and equity securities up to 75%current members of the total invested plan assets. The amount invested in any particular investment is limited based on credit quality,Board Compensation Committee are E. J. Pederson, Chairman, William C. Ansell, Arthur O. Dummer, James P. Payne, and no single investment may at the time of purchase be more than 5%James D. Yarbrough. No member of the Board Compensation Committee is or has been an officer or employee of the Company or any of its subsidiaries or had a relationship with us requiring disclosure under the SEC’s Regulation S-K Item 404, except that Mr. Yarbrough’s son-in-law, Dustin J. Dusek, is employed by us as a Vice President and Life and Annuity Actuary. In such capacity, Mr. Dusek received total invested assets.
The corporate debt securities category are investment grade bondscompensation during 2021, including under our Merit Plan for officers, in excess of U.S. and foreign issuers denominated and payable in U.S. dollars from diverse industries, with$250,000, but less than $300,000. During 2021, no executive officer of the Company served as a maturitymember of 1 to 30 years. Foreign bondsthe board of directors or compensation committee (or other board committee performing similar functions or, in the aggregate shall not exceed 20%absence of any such committee, the entire board of directors) of another corporation, one of whose executive officers served on our Board Compensation Committee. During 2021, no executive officer of the bond portfolio. Residential mortgage-backed securities represent asset-backed securities withCompany served as a maturity date 1 to 30 years with a Level 1member of the compensation committee (or other board committee performing similar functions or, 2 rating.
Equity portfolio managers have discretion to choose the degree of concentration in various issues and industry sectors for the equity securities. Permitted securities are those for which there is an active market providing liquidity for the specific security. Commercial paper investments generally have a credit rating of A2 by Moody’s or P2 by Standard & Poor’s with at least BBB rating on the issuer’s outstanding debt, or selected issuers with no outstanding debt.
Postretirement Life and Health Benefits
Under American National’s 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.
The accrued postretirement benefit obligation, included in the liability for retirement benefits, was $12.2 million and $5.3 million at December 31, 2021 and 2020, respectively. These amounts were approximately equal toabsence of any such committee, the unfunded accumulated postretirement benefit obligation.
Note 19 – Commitments and Contingencies
Commitments
American National and its subsidiaries lease insurance sales office space, technological equipment, and automobiles. The remaining long-term lease commitments at December 31, 2021 were approximately $12.7 million.
American National had aggregate commitments at December 31, 2021 to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $1.5 billion of which $786.2 million is expected to be funded in 2022 with the remainder funded in 2023 and beyond.
American National had outstanding letters of credit in the amount of $3.5 million as of December 31, 2021 and 2020.
The Merger Agreement contains certain termination rights for both the Company and Brookfield Reinsurance. If the Merger has not closed by May 6, 2022 (“Outside Date”), either the Company or Brookfield Reinsurance may terminate the Merger Agreement. However, if the closing has not occurred because the required insurance regulatory approvals have not been obtained, and all other conditions to closing have been satisfied (other than those conditions that by their terms are to be satisfied at the closing, each of which is capable of being satisfied at the closing) or waived, the Outside Date will be August 6, 2022. The Merger Agreement requires the Company to pay Brookfield Reinsurance a $178.5 million termination fee under certain circumstances. Those circumstances are relatively limited, since the Company has already received the required stockholder approval for the Merger. Specifically, a termination fee would be payable by the Company if (i) Brookfield Reinsurance terminates the merger agreement due to the occurrence of a terminable breach by the Company, (ii) a competing acquisition proposal from a third party was announced prior to the termination that was not withdrawn and (iii) within 12 months after the termination, the Company enters into a definitive agreement with respect to, or otherwise consummates, the competing acquisition proposal (or does not oppose it, in the case of a tender or exchange offer).
Federal Home Loan Bank (FHLB) Agreements
In May 2018, the Company became a member of the Federal Home Loan Bank of Dallas to augment its liquidity resources. The Company initially purchased $7.0 million of stock to meet the FHLB’s membership requirement. The FHLB member stock is recorded in other invested assets on the Company’s consolidated statements of financial position. Through its membership, the Company has access to the FHLB’s financial services including advances that provide an attractive funding source for short-term borrowing and for access to other funding agreements. As of December 31, 2021, certain collateralized mortgage obligations with a fair value of approximately $28.0 million and commercial mortgage loans of approximately $1.5 billion were on deposit with the FHLB as collateral for borrowing. As of December 31, 2021, the collateral provided borrowing capacity of approximately $902.7 million. The deposited securities and commercial mortgage loans are included in the Company’s consolidated statements of financial position within fixed maturity securities and mortgage loans on real estate, net of allowance, respectively.
Guarantees
ANICO 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 ANICO. The loans are secured by the cash values of the life insurance policies. If the customer were to default on a bank loan, ANICO would be obligated to pay off the loan. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of December 31, 2021, was approximately $121.4 million, while the total cash value of the related life insurance policies was approximately $143.1 million.
Restrictions of the Merger Agreement limit the Company's ability, without Brookfield Reinsurance's consent, to incur guarantee or assume any indebtedness, subject to certain limited exceptions, including investment portfolio transactions in the ordinary course of business consistent with past practice and other incurrences of indebtedness not to exceed $10,000,000 in the aggregate.
Note 19 – Commitments and Contingencies — (Continued)
Litigation
American National and certain subsidiaries are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information presently available, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position, liquidity or results of operations; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future.
Such speculation warrants caution, as the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given lawsuit. These lawsuits are in various stages of development, and future facts and circumstances could result in management changing its conclusions. 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 our consolidated financial position, liquidity, or results of operations. With respect to the existing litigation, management currently believes that the possibility of a material judgment adverse to American National is remote. Accruals for losses are established whenever they are probable and reasonably estimable. If no one estimate within the range of possible losses is more probable than any other, an accrual is recorded based on the lowest amount of the range.
Note 20 – Related Party Transactions
American National has entered into recurring transactions and agreements with certain related parties. These include mortgage loans, management contracts, agency commission contracts, marketing agreements, health insurance contracts, and legal services. The impact on the consolidated financial statements of significant related party transactions is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Dollar Amount of Transactions | | Amount due from American National |
| | | | | Years ended December 31, | | December 31, |
| Related Party | | Financial Statement Line Impacted | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Gal-Tex Hotel Corporation | | Mortgage loan on real estate | | $ | — | | | $ | — | | | $ | 576 | | | $ | — | | | $ | — | |
| Gal-Tex Hotel Corporation | | Net investment income | | — | | | — | | | 9 | | | — | | | — | |
| Greer, Herz & Adams, LLP | | Other operating expenses | | 13,203 | | | 13,451 | | | 12,088 | | | (310) | | | (441) | |
Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National held a first mortgage loan which originated in 1999, with an interest rate of 7.25% and final maturity date of April 1, 2019 issued to a subsidiary of Gal-Tex, which was collateralized by a hotel property in San Antonio, Texas. This loan has been paid in full. The Moody Foundation owns 34.0% of Gal-Tex and 22.75% of American National, and the Libbie Shearn Moody Trust owns 50.2% of Gal-Tex and 37.0% of American National.
Transactions with Greer, Herz & Adams, LLP: Irwin M. Herz, Jr. is a member of the Board of Directors of American National Group, Inc. and certain of its subsidiaries, and a Partner with Greer, Herz & Adams, LLP, which serves as American National’s General Counsel.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2021. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluations of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including the Chief Executive Officer and Chief Financial Officer, has conducted an assessment, including testing, of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — An Integrated Framework (2013). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of the company’s internal control over financial reporting as of December 31, 2021, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report.
Changes in Internal Control Over Financial Reporting
Management has monitored the internal controls over financial reporting, including any material changes to the internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from our definitive proxy statement for our Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from our definitive proxy statement for our Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of March 16, 2022, except as otherwise noted, concerning each person or group known to own more than five percent of the outstanding shares of our Common Stock.
| | | | | | | | | | | | | | |
| Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
THE MOODY FOUNDATION(1) 2302 Postoffice Street, Suite 704 Galveston, Texas 77550 | | 6,116,316 | | 22.75% |
|
MOODY NATIONAL BANK(2) (as trustee or agent of the Libbie Shearn Moody Trust and other accounts) 2302 Postoffice Street Galveston, Texas 77550
LIBBIE SHEARN MOODY TRUST(3) OTHER ACCOUNTS(4)
Total | | 9,949,585 2,839,993
12,789,578 | | 37.005% 10.563%
47.57% |
(1)The Moody Foundation is a charitable trust classified as a private foundation established in 1942 by W. L. Moody, Jr., and his wife, Libbie Shearn Moody, for charitable and educational purposes. Its Trustees are Frances A. Moody-Dahlberg and Ross R. Moody, two of our directors, and Elizabeth L. Moody. Frances A. Moody-Dahlberg and Ross R. Moody are children of Robert L. Moody, Sr., the Chairman Emeritus of ANICO, who served as our Chairman and Chief Executive Officer for many years. Elizabeth L. Moody is the daughter of Ross R. Moody. The beneficial ownership information shown for The Moody Foundation is based on information provided by it to us.
(2)Management has been advised that Moody Bank Holding Company, Inc. (“MBHC”), which is wholly-owned by Moody Bancshares, Inc. (“Bancshares”), owns approximately 98.5% of the common stock of Moody National Bank. Management has further been advised that the Three R Trusts, trusts created by Robert L. Moody, Sr. for the benefit of his children, own 100% of Bancshares' Class B Stock (which elects a majority of Bancshares' directors) and approximately 50.3% of Bancshares' Class A Stock. Accordingly, the Three R Trusts, through ownership of Bancshares, control Moody National Bank. The Trustee of the Three R Trusts is Irwin M. Herz, Jr., one of our directors, and a partner in Greer, Herz & Adams, LLP, One Moody Plaza, 18th Floor, Galveston, Texas, General Counsel to us and counsel to Moody National Bank, Bancshares and MBHC. The beneficial ownership information shown for Moody National Bank is based on information contained in an amended Schedule 13G filed jointly on January 19, 2022 by the Moody National Bank Trust Division, Bancshares, MBHC, Three R Trusts, and Irwin M. Herz, Jr. (the “Amended 13G”). The percentage of ownership shown in the table is based on the number of shares of our Common Stock outstanding at the close of business on March 16, 2022. According to the Amended 13G, as of December 31, 2021, Moody National Bank, Bancshares and MBHC have shared voting power with respect to 12,789,578 shares of our Common Stock and shared dispositive power with respect to 695,079 shares of our Common Stock; the Three R Trusts and Irwin M. Herz, Jr. have shared voting power with respect to 12,799,128 shares of our Common Stock and shared dispositive power with respect to 704,629 shares of our Common Stock; and Irwin M. Herz, Jr. has sole voting power with respect to 19,325 shares of our Common Stock and sole dispositive power with respect to 19,325 shares of our Common Stock. According to the Amended 13G, Bancshares, MBHC, Three R Trusts and Irwin M. Herz, Jr. disclaim beneficial ownership with respect to the shares of our Common Stock beneficially owned by Moody National Bank. In addition, Irwin M. Herz, Jr. disclaims beneficial ownership with respect to the 9,550 shares of our Common Stock beneficially owned by the Three R Trusts. The principal address of Bancshares and MBHC is 2302 Postoffice, Galveston, Texas 77550. The principal address of the Three R Trusts is 2302 Postoffice, Suite 702, Galveston, Texas 77550, and the principal address of Irwin M. Herz, Jr. is One Moody Plaza, 18th Floor, Galveston, Texas 77550.
(3)The Libbie Shearn Moody Trust is a split-interest trust with both charitable and non-charitable beneficiaries. It 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 voting power with respect to the shares of our Common Stock owned by the trust. Robert L. Moody, Sr. is the remaining life income beneficiary of the Libbie Shearn Moody Trust. Robert L. Moody, Sr. has advised management that he has assigned all of his life income interest in such trust to a subsidiary of National Western Life Insurance Company, a Colorado insurance company controlled by him through the Robert L. Moody Revocable Trust. Management has also been advised that the Libbie Shearn Moody Trust will terminate following the death of Robert L. Moody, Sr., and that upon such termination approximately 79% of our Common Stock then held in the trust, if any, is to be distributed to The Moody Foundation and/or its assignee(s), and the remaining portion is to be distributed to Moody Memorial First United Methodist Church in Galveston, Texas.
(4)According to the Amended 13G, Moody National Bank acts as (i) trustee for and votes the 1,155,000 shares of our Common Stock owned by the W. L. Moody, Jr. Trust for Grandchildren (“Trust 19”) (see Footnote 4 under “Security Ownership of Directors and Executive Officers” below for additional information regarding Trust 19); (ii) agent for and votes 896,678 shares of our Common Stock held pursuant to an Agency and Investment Services Agreement for the benefit of The Moody Endowment, a non-profit corporation; and (iii) trustee or agent for and votes the 788,315 shares of our Common Stock owned by other trust, agency and custodian accounts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS— (Continued)
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The information requiredcontained in the following table is given with respect to the ownership of our Common Stock as of the close of business on March 16, 2022 by this item is incorporated by reference fromeach of our definitive proxy statementdirectors, each of the executive officers named in the Summary Compensation Table in the “Compensation Tables” section below, and for our Annual Meetingdirectors and executive officers as a group:
| | | | | | | | | | | | | | | | | |
| Name of Beneficial Owner | | Amount and Nature of Beneficial Ownership(1) | | Percent of Class |
| | | | | |
| William C. Ansell | | 2,250 77,275 | Direct Indirect(2) | | * * |
| Arthur O. Dummer | | 5,880 | Direct | | * |
Irwin M. Herz, Jr.(3) | | 17,325 | Direct | | * |
| E. Douglas McLeod | | 28,000 | Direct | | * |
Frances A. Moody-Dahlberg(4) | | 3,187 | Direct | | * |
| 6,116,316 10,725 | Indirect(5) Indirect(6) | | 22.75% * |
Ross R. Moody(4) | | 2,790 | Direct | | * |
| 6,116,316 77,892 | Indirect(5) Indirect(7) | | 22.75% * |
| James P. Payne | | 1,337 | Direct | | * |
| E. J. Pederson | | 2,702 | Direct | | * |
| James E. Pozzi | | 21,797 | Direct(8) | | * |
| James D. Yarbrough | | 13,250 | Direct | | * |
| Timothy A. Walsh | | 6,964 | Direct | | * |
| David A. Behrens | | 1,792 | Direct | | * |
| J. D. Johnson | | 3,613 | Direct | | * |
| Brody J. Merrill | | — | | | — |
| Hoyt J. Strickland | | 4,104 | Direct | | * |
All Directors(9) and Executive Officers as a Group | | 125,731 | Direct | | 0.468% |
| | 6,325,846 | Indirect | | 23.527% |
| | 6,451,577 | | | 23.995% |
*Less than 1%.
(1)All of Stockholders, which willthe named beneficial owners have sole voting power and sole investment power as to all the shares shown to be fileddirectly beneficially owned by them, with the Securitiesexception of shares that may be owned jointly with their spouses.
(2)Shares owned by spouse.
(3)Mr. Herz may be deemed to have beneficial ownership of the shares of our Common Stock beneficially owned by Moody National Bank and Exchange Commission within 120 days after December 31, 2021.the Three R Trusts; however, Mr. Herz disclaims beneficial ownership of such shares. Accordingly, such shares are not included in this table. (See Footnote 2 under “Security Ownership of Certain Beneficial Owners” above for information regarding the Amended 13G).
(4)Robert L. Moody, Sr. is the remaining life income beneficiary of Trust 19. Directors Frances A. Moody-Dahlberg and Ross R. Moody, as children of Robert L. Moody, Sr., have a contingent residuary interest in his beneficial interest in Trust 19. The numbers in the table above and in the table immediately below under “Security Ownership of Advisory Directors” do not include shares held in Trust 19. (See Footnote 4 under “Security Ownership of Certain Beneficial Owners” above for additional information about Trust 19).
(5)Shares owned by The Moody Foundation, of which Frances A. Moody-Dahlberg and Ross R. Moody are among three Trustees. (See “Security Ownership of Certain Beneficial Owners” above).
(6)Shares owned by Moody FAMD Interests Ltd. Frances A. Moody-Dahlberg is the sole manager and member of the general partner of Moody FAMD Interests Ltd., Moody FAMD Management Company LLC, and is the trustee and beneficiary of certain trusts owning limited partnership interests in Moody FAMD Interests Ltd.
(7)Shares owned by Moody RRM Interests Ltd. Ross R. Moody is the sole manager and member of the general partner of Moody RRM Interests Ltd., Moody RRM Management Company LLC, and is the trustee and a beneficiary of certain trusts owning limited partnership interests in Moody RRM Interests Ltd.
(8)Includes 10,000 shares of our restricted stock.
(9)Includes our Advisory Directors, whose security ownership is described in the next section below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS— (Continued)
SECURITY OWNERSHIP OF ADVISORY DIRECTORS
The information contained in the following table is given with respect to the ownership of our Common Stock as of the close of business on March 16, 2022 by each of our advisory directors.
| | | | | | | | | | | | | | | | | |
| Name of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
| | | | |
| R. Eugene Lucas | | 8,752 | Indirect (1) | | * |
Russell S. Moody(2) | | 6,562 34,886 | Direct (3) Indirect (4) | | * * |
*Less than 1%.
(1)Shares owned by family trust.
(2)Robert L. Moody, Sr. is the remaining life income beneficiary of Trust 19. Russell S. Moody, as a son of Robert L. Moody, Sr., has a contingent residuary interest in his father’s beneficial interest in Trust 19. The numbers in the tables above and immediately below do not include shares held in Trust 19. (See Footnote 4 under “Security Ownership of Certain Beneficial Owners” above for additional information about Trust 19).
(3)Russell S. Moody shares voting and investment power with respect to these shares with Moody National Bank, who is Mr. Moody’s attorney-in-fact pursuant to a power of attorney executed by Mr. Moody.
(4)Shares owned by Moody RSM Interests Ltd. Russell S. Moody is the co-manager and sole member of the general partner of Moody RSM Interests Ltd., Moody RSM Management Company LLC, and is a beneficiary of certain trusts owning limited partnership interests in Moody RSM Interests Ltd.
Unless otherwise noted, the information shown in the previous three tables was obtained from ownership disclosures furnished to us by each of the persons or entities listed or from other communications with such persons or entities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this itemfollowing is incorporated by reference from our definitive proxy statement for our Annual Meetinga description of Stockholders, which will be filed withcertain transactions and relationships existing since the Securitiesbeginning of 2021 between us and Exchange Commission within 120 days after December 31, 2021.certain related parties.
Management Contracts with 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”). We have entered into management contracts with a subsidiary of Gal-Tex for the management of a hotel and adjacent fitness center owned by us. During the year ended December 31, 2021, we paid Gal-Tex $174,454 and $103,184, respectively, for services rendered under these contracts. Both 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 brother of two of our directors, including our Chairman of the Board, 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 2021, total commissions paid under such agency contracts, primarily from the marketing of health insurance products, were $340,098. We also entered into a National Marketing Director’s Contract with MIG 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 2021, MIG received $858,032 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.
Transactions with Moody National Bank: We and some of our subsidiaries have entered into various depository, custodian and safekeeping arrangements with Moody National Bank in the ordinary course of our business. In addition, American National Registered Investment Advisor, Inc. (“ANRIA”), a registered investment advisor subsidiary of ours, provided investment management services to certain accounts maintained by others at the Trust Department of Moody National Bank. For such services, Moody National Bank compensated ANRIA from the fees the bank received for its services as custodian, trustee or other agent of such accounts. During 2021, Moody National Bank paid ANRIA $411,334 in fees for such services.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE— (Continued)
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 – NEOs.” Ross R. Moody, our Chairman of the Board, is the Chairman, President and Chief Executive Officer of National Western’s parent company, National Western Life Group, Inc. (“NWLGI”), and Robert L. Moody, Sr. is the Class B controlling stockholder, through the Robert L. Moody Revocable Trust, and Chairman Emeritus of NWLGI. E. Douglas McLeod, E. J. Pederson and Frances A. Moody-Dahlberg are directors, and Russell S. Moody is an advisory director, of NWLGI. In addition, according to schedules 13D files with the SEC by Ross R. Moody and Frances A. Moody-Dahlberg on April 9, 2020 and by Russell S. Moody on April 7, 2020, each of them may have beneficial ownership of approximately 8.42% of the Class A shares of NWLGI through certain limited partnerships. During 2021, we paid National Western $2,972,197 in premium and fees with respect to the Merit Plan. In addition, we insure substantially similar plans offered by National Western, and The Moody Foundation to certain of their officers. During 2021, National Western, and The Moody Foundation paid us premium and fees with respect to such plans in the amounts of $642,099 and $92,143, respectively. Lastly, we act as insurer under a Group Retirement Policy Deposit Administration Contract issued to Gal-Tex as policyholder, pursuant to which Gal-Tex made contributions totaling $1,729,040 during 2021 and paid premiums of $1,602,180during 2021 for annuities issued under such contract.
Transactions with Greer, Herz & Adams, L.L.P.: Irwin M. Herz, Jr. is a director of ours and a Partner with Greer, Herz & Adams, L.L.P. which serves as our General Counsel. In the year ended December 31, 2021, Greer, Herz & Adams, L.L.P. received approximately $13,203,000 in legal fees and reimbursements of expenses in connection with its services as our General Counsel. We also furnished offices, telephones and the use of certain office decorations to the law firm.
Other Family Relationships: Robert L. Moody, Sr., our Chairman Emeritus of ANICO, is the father of directors Frances A. Moody-Dahlberg and Ross R. Moody and advisory director Russell S. Moody. As Chairman Emeritus of ANICO, Robert L. Moody, Sr. received approximately $178,608 in compensation during 2021. E. Vince Matthews III, a half-brother of director Frances A. Moody-Dahlberg, is a director of a mutual insurer managed by us and an advisory director of one of our subsidiaries. Mr. Matthews is also employed as one of our officers, for which he received total compensation during 2021, including under our Merit Plan for officers, in excess of $300,000, but less than $350,000. Please also see the section “Compensation Committee Interlocks and Insider Participation” above.
Procedure for Review, Approval or Ratification of Related Persons Transactions
The Audit Committee reviews and approves or ratifies any related party transactions in which we have 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 NASDAQ, the requirements of Item 404(a) of Regulation S-K promulgated by the SEC, and other SEC interpretive guidance on related party transactions.
Director Independence
The Board has determined, after considering all of the relevant facts and circumstances, that William C. Ansell, Arthur O. Dummer, E. Douglas McLeod, James P. Payne, E. J. Pederson and James D. Yarbrough are “independent” from management in accordance with the NASDAQ listing standards. To be considered independent, the Board must determine that a director does not have any direct or indirect material relationship that would interfere with his or her exercise of independent judgment in carrying out the responsibilities of a director. In making this determination, the Board considered that (1) E. J. Pederson serves as an independent director of National Western Life Group, Inc. and National Western Life Insurance Company, (2) James P. Payne is a retired officer of National Western Life Insurance Company and receives certain retirement benefits from such company, and (3) E. Douglas McLeod has family relationships with certain other members of the Board, as described in the “Relationships Among Directors, Advisory Directors and Certain Entities” section above. The Board determined that such relationships do not impair the independence of these directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our Audit Committee has selected Deloitte & Touche LLP (PCAOB ID:34) (Houston, Texas), a firm of independent public accountants (“Deloitte”), to serve as our independent registered public accounting firm (“independent auditor”) to examine our consolidated financial statements for the fiscal year ending December 31, 2022. Deloitte also served as our independent auditor for the fiscal years ended December 31, 2021 and December 31, 2020.
The informationtable below presents fees billed by Deloitte for audit and other services during 2021 and 2020. There were no fees billed by Deloitte during such years for tax compliance, tax advice or tax planning services.
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Audit Fees(1) | | $ | 3,958,000 | | $ | 4,324,000 |
Audit-Related Fees(2) | | $ | 493,000 | | $ | 510,100 |
All Other Fees(3) | | $ | 155,000 | | $ | 257,258 |
(1)Aggregate fees billed for the audit of our consolidated financial statements and insurance company statutory financial statements, review of our interim financial statements, and review of our systems of internal control over financial reporting.
(2)Aggregate fees billed for performing assurance or related services that were related to the performance of the audit or review of our financial statements but were beyond the normal audit scope and not reportable as Audit Fees.
(3)Aggregate fees billed for services not reportable as Audit Fees or Audit-Related Fees. The amounts shown represent fees related to accounting research and consulting services.
Pre-Approval of Audit, Audit-Related, Tax and Non-Audit Services
The Audit Committee pre-approves all audit services and non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor, as required by this item is incorporatedapplicable law or listing standards and the Charter of the Audit Committee. The Committee may delegate authority to one or more of its members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of any such member to grant pre-approvals are presented to the full Committee at its next regular meeting. The Audit Committee has determined the rendering of non-audit services by reference from our definitive proxy statement for our Annual Meeting of Stockholders, which will be filedDeloitte was compatible with the Securities and Exchange Commission within 120 days after December 31, 2021.maintaining Deloitte’s independence.
PART IV
| | | | | |
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this Amendment:
(a)(1) Financial Statements—(SeeThe Consolidated Financial Statements required by this Item are submitted in Part II, Item 8 Financial Statements and Supplementary Data)of the Original 10-K)
(a)(2) Supplementary Data and Financial Statement Schedules—(The following Supplementary Data and Financial Statement Schedules are attached hereto atsubmitted in Part II, Item 9 of the following pages
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
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| Exhibit Number | | Description |
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| 2.1 | | Agreement and Plan of Merger, dated February 11, 2020, among American National Insurance Company, a Texas insurance company ("ANICO"), American National Group, Inc., a Delaware corporation ("ANAT"), and AN MergerCo., Inc., a Texas corporation (incorporated by reference to Annex I to the Proxy Statement/Prospectus filed on March 25, 2020). |
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| 2.2 | | |
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| 3.1 | | |
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| 3.2 | | |
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| 3.3 | | |
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| 3.4 | | |
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| 4.1 | | |
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| 4.2 | | |
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| 10.1* | | |
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| 10.2* | | |
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| 10.3* | | |
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| 10.4* | | |
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| 10.5* | | |
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| 10.8* | | |
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| 10.9* | | |
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| 10.10* | | |
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| 10.11* | | |
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| 10.12* | | |
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| 21 | | |
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| 23.1 | | |
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| 23.2 | | |
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| 31.1 | | |
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| 31.2 | | |
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| 31.3 | | |
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| 31.4 | | |
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| 32.1 | | |
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101.INS
| | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.document (previously filed with this annual report on Form 10-K on February 25, 2022) |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document.Document (previously filed with this annual report on Form 10-K on February 25, 2022) |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document.Document (previously filed with this annual report on Form 10-K on February 25, 2022) |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document.Document (previously filed with this annual report on Form 10-K on February 25, 2022) |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document.Document (previously filed with this annual report on Form 10-K on February 25, 2022) |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document.Document (previously filed with this annual report on Form 10-K on February 25, 2022) |
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| 104 | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
*Management contract or compensatory plan or arrangement.
| | | | | |
ITEM 16. | ITEM 16. FORM 10-K SUMMARY |
Not applicableNone.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| AMERICAN NATIONAL GROUP, INC. |
| |
| By: | | /s/ James E. Pozzi |
| Name: | | James E. Pozzi |
| Title: | | President and Chief Executive Officer |
| | (Principal Executive Officer) |
Date: February 25,April 18, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | |
/s/ James E. Pozzi | | President and Chief Executive Officer, Director
(Principal Executive Officer)
| | February 25, 2022 |
James E. Pozzi | | |
| | |
/s/ Brody J. Merrill | | Senior Vice President, Chief Financial Officer and Treasurer (Principle Financial Officer)
| | February 25, 2022 |
Brody J. Merrill | | |
| | |
| | | | |
| | |
| | | | |
| | | | |
| | |
| | | |
/s/ Michelle A. Gage | | Vice President, and Controller | | February 25, 2022 |
Michelle A. Gage | | |
| | |
/s/ William C. Ansell | | Director | | February 25, 2022 |
William C. Ansell | | | | |
| | |
/s/ Arthur O. Dummer | | Director |
| | February 25, 2022 | | |
Arthur O. Dummer | | | | |
| | |
/s/ Irwin M. Herz, Jr. | | Director | | February 25, 2022 |
Irwin M. Herz, Jr. | | | | |
| | |
/s/ E. Douglas McLeod | | Director | | February 25, 2022 |
E. Douglas McLeod | | | | |
| | |
/s/ Frances A. Moody-Dahlberg | | Director | | February 25, 2022 |
Frances A. Moody-Dahlberg | | | | |
| | |
/s/ Ross R. Moody | | Director | | February 25, 2022 |
Ross R. Moody | | | | |
| | |
/s/ James P. Payne | | Director | | February 25, 2022 |
James P. Payne | | | | |
| | |
/s/ E.J. Pederson | | Director | | February 25, 2022 |
E.J. Pederson | | | | |
| | |
/s/ James D. Yarbrough | | Director | | February 25, 2022 |
James D. Yarbrough | | | |
| | |
| | | | |
| | |
AMERICAN NATIONAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | Cost or Amortized Cost (1) | | Estimated Fair Value | | Amount at Which Shown in the Balance Sheet |
| Type of investment | | | | | | |
| Fixed maturities | | | | | | |
| Bonds held-to-maturity | | | | | | |
| U.S. treasury and government | | $ | 12,284 | | | $ | 11,997 | | | $ | 12,284 | |
| U.S. states and political subdivisions | | 104,039 | | | 103,809 | | | 104,039 | |
| Foreign governments | | 14,369 | | | 14,347 | | | 14,369 | |
| Corporate debt securities | | 6,810,518 | | | 7,166,564 | | | 6,799,051 | |
| Residential mortgage-backed securities | | 48,491 | | | 50,178 | | | 47,975 | |
| Collateralized debt securities | | 112,409 | | | 111,894 | | | 111,263 | |
| | | | | | |
| Bonds available-for-sale | | | | | | |
| U.S. treasury and government | | 26,887 | | | 26,753 | | | 26,753 | |
| U.S. states and political subdivisions | | 1,028,331 | | | 1,077,129 | | | 1,077,129 | |
| Foreign governments | | 5,000 | | | 5,841 | | | 5,841 | |
| Corporate debt securities | | 6,809,610 | | | 7,036,148 | | | 7,036,148 | |
| Residential mortgage-backed securities | | 32,234 | | | 31,967 | | | 31,967 | |
| Collateralized debt securities | | 205,732 | | | 202,410 | | | 202,410 | |
| Equity securities | | | | | | |
| Common stocks | | | | | | |
| Consumer goods | | 3,980 | | | 13,031 | | | 13,031 | |
| Energy and utilities | | 21,138 | | | 8,647 | | | 8,647 | |
| Finance | | 2,810 | | | 7,502 | | | 7,502 | |
| Healthcare | | 3,442 | | | 12,136 | | | 12,136 | |
| Industrials | | 2,214 | | | 4,733 | | | 4,733 | |
| Information technology | | 5,193 | | | 20,436 | | | 20,436 | |
| | | | | | |
| Other | | 18,810 | | | 31,492 | | | 31,492 | |
| Preferred stocks | | 37,145 | | | 37,456 | | | 37,456 | |
| Other investments | | | | | | |
| Mortgage loans on real estate, net of allowance | | 5,199,334 | | | 5,271,950 | | | 5,199,334 | |
| Real estate and real estate partnerships, net of accumulated depreciation | | 890,105 | | | — | | | 890,105 | |
| Investment funds | | 961,763 | | | — | | | 961,763 | |
| Real estate acquired in satisfaction of debt | | 38,307 | | | — | | | 38,307 | |
| Policy loans | | 365,208 | | | 365,208 | | | 365,208 | |
Options (2) | | 113,632 | | | 259,383 | | | 430 | |
| Other long-term investments | | 125,365 | | | — | | | 125,365 | |
| Short-term investments | | 1,840,732 | | | 1,840,732 | | | 1,840,732 | |
| Total investments | | $ | 24,839,082 | | | $ | 23,711,743 | | | $ | 25,025,906 | |
(1)Original cost of equity securities and, as to fixed maturity securities, original cost reduced by repayments and valuation write-downs and adjusted for amortization of premiums or accrual of discounts.
(2)The amount shown in the Consolidated Statement of Financial Position represents options exposure net of collateral. See Part II, Item 8, Financial Statements and Supplementary Data — Note 7, Derivative Instruments, of the Notes to the Consolidated Financial Statements for more information.
See accompanying Report of Independent Registered Public Accounting Firm.
AMERICAN NATIONAL GROUP, INC. (Parent Company Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION
(In thousands)
| | | | | | | | | | | | | | |
| | | December 31, |
| | 2021 | | 2020 |
| ASSETS | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Investment in subsidiaries | | $ | 6,950,792 | | | $ | 6,453,754 | |
| | | | |
| | | | |
| Other assets | | 62,016 | | | 17,754 | |
| | | | |
| Total assets | | $ | 7,012,808 | | | $ | 6,471,508 | |
| LIABILITIES | | | | |
| | | | |
| | | | |
| Other liabilities | | $ | 18,440 | | | $ | 13,238 | |
| | | | |
| Total liabilities | | 18,440 | | | 13,238 | |
| EQUITY | | | | |
| Common stock | | 269 | | | 269 | |
| Additional paid-in capital | | 47,762 | | | 47,683 | |
| Accumulated other comprehensive income | | 147,054 | | | 222,170 | |
| Retained earnings | | 6,799,283 | | | 6,188,148 | |
| | | | |
| Total stockholders' equity | | 6,994,368 | | | 6,458,270 | |
| Total liabilities and stockholders' equity | | $ | 7,012,808 | | | $ | 6,471,508 | |
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes therein.
See accompanying Report of Independent Registered Public Accounting Firm.
AMERICAN NATIONAL GROUP, INC. (Parent Company Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
| PREMIUMS AND OTHER REVENUES | | | | | | |
| Premiums and other policy revenues | | $ | — | | | $ | — | | | $ | 873,076 | |
| Net investment income | | — | | | — | | | 866,837 | |
| Net realized investment gains | | — | | | — | | | 5,600 | |
| Other-than-temporary impairments | | — | | | — | | | (6,663) | |
| Net gains on equity securities | | — | | | — | | | 958 | |
| Other income | | — | | | — | | | 28,037 | |
| Total premiums and other revenues | | — | | | — | | | 1,767,845 | |
| BENEFITS, LOSSES AND EXPENSES | | | | | | |
| Policyholder benefits | | — | | | — | | | 651,162 | |
| Other operating expenses | | 25,802 | | | 1,148 | | | 965,338 | |
| Total benefits, losses and expenses | | 25,802 | | | 1,148 | | | 1,616,500 | |
| Income (loss) before federal income tax and other items | | (25,802) | | | (1,148) | | | 151,345 | |
| Provision (benefit) for federal income taxes | | (2,972) | | | (245) | | | 27,568 | |
| Income from subsidiaries, net of tax | | 722,155 | | | 468,408 | | | 492,888 | |
| Other components of net periodic pension benefit, net of tax | | — | | | — | | | 3,698 | |
| Net income | | $ | 699,325 | | | $ | 467,505 | | | $ | 620,363 | |
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes therein.
See accompanying Report of Independent Registered Public Accounting Firm.
AMERICAN NATIONAL GROUP, INC. (Parent Company Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Net income | | $ | 699,325 | | | $ | 467,505 | | | $ | 620,363 | |
| Other comprehensive income, net of tax | | | | | | |
| Change in net unrealized gains on securities | | — | | | — | | | 80,235 | |
| | | | | | |
| Defined benefit pension plan adjustment | | — | | | — | | | (42,139) | |
| Total other comprehensive income, net of tax | | — | | | — | | | 38,096 | |
| | | | | | |
| | | | | | |
| Total comprehensive income | | $ | 699,325 | | | $ | 467,505 | | | $ | 658,459 | |
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes therein.
See accompanying Report of Independent Registered Public Accounting Firm.
| | | | | | | | | | | | | | | | | | | | |
| AMERICAN NATIONAL GROUP, INC. (Parent Company Only) |
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT |
| STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | | | | | |
| | | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
| OPERATING ACTIVITIES | | | | | | |
| Net income | | $ | 699,325 | | | $ | 467,505 | | | $ | 620,363 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Net realized investment gains | | — | | | — | | | (5,600) | |
| Other-than-temporary impairments | | — | | | — | | | 6,663 | |
| Accretion of premiums, discounts and loan origination fees | | — | | | — | | | (9,654) | |
| Net capitalized interest on policy loans and mortgage loans | | — | | | — | | | (31,366) | |
| Depreciation | | — | | | — | | | 30,658 | |
| Interest credited to policyholders’ account balances | | — | | | — | | | 441,268 | |
| Charges to policyholders’ account balances | | — | | | — | | | (291,160) | |
| Deferred federal income tax expense (benefit) | | (1,439) | | | (245) | | | 40,936 | |
| Equity in earnings of subsidiaries | | (722,155) | | | (468,408) | | | (6,752) | |
| Net income of subsidiaries | | — | | | — | | | (486,136) | |
| Distributions from equity method investments | | — | | | — | | | 22,012 | |
| Dividends from subsidiaries | | 150,000 | | | — | | | — | |
| Changes in: | | | | | | |
| Policyholder liabilities | | — | | | — | | | 44,732 | |
| Deferred policy acquisition costs | | — | | | — | | | (4,791) | |
| Reinsurance recoverables | | — | | | — | | | 18,826 | |
| Premiums due and other receivables | | — | | | — | | | 4,333 | |
| Prepaid reinsurance premiums | | — | | | — | | | 5,277 | |
| Accrued investment income | | — | | | — | | | (3,535) | |
| Current tax receivable/payable | | 9,195 | | | 12,098 | | | (83,470) | |
| Liability for retirement benefits | | — | | | — | | | (5,482) | |
| Fair value of option securities | | — | | | — | | | (134,925) | |
| Fair value of equity securities | | — | | | — | | | (958) | |
| Other, net | | (3,913) | | | 1,264 | | | (6,193) | |
| Net cash provided by operating activities | | 131,013 | | | 12,214 | | | 165,046 | |
| INVESTING ACTIVITIES | | | | | | |
| Proceeds from sale/maturity/prepayment of: | | | | | | |
| Held-to-maturity securities | | — | | | — | | | 706,230 | |
| Available-for-sale securities | | — | | | — | | | 366,696 | |
| | | | | | |
| | | | | | |
| Mortgage loans | | — | | | — | | | 789,088 | |
| Policy loans | | — | | | — | | | 42,316 | |
| Other invested assets | | — | | | — | | | 112,340 | |
| Disposals of property and equipment | | — | | | — | | | 69 | |
| Distributions from affiliates and subsidiaries | | — | | | — | | | 27,891 | |
| Payment for the purchase/origination of: | | | | | | |
| Held-to-maturity securities | | — | | | — | | | (936,646) | |
| Available-for-sale securities | | — | | | — | | | (326,476) | |
| Equity securities | | — | | | — | | | (351) | |
| Investment real estate | | — | | | — | | | (13,639) | |
| Mortgage loans | | — | | | — | | | (668,563) | |
| Policy loans | | — | | | — | | | (25,408) | |
| Other invested assets | | — | | | — | | | (102,275) | |
| Additions to property and equipment | | — | | | — | | | (11,163) | |
| Contributions to unconsolidated affiliates | | — | | | — | | | (147,547) | |
| Change in short-term investments | | — | | | — | | | 138,021 | |
| Change in investment in subsidiaries | | — | | | — | | | 35,069 | |
| Change in collateral held for derivatives | | — | | | — | | | 97,852 | |
| Other, net | | — | | | — | | | (92) | |
| Net cash provided by investing activities | | — | | | — | | | 83,412 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| AMERICAN NATIONAL GROUP, INC. (Parent Company Only) |
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT |
| STATEMENTS OF CASH FLOWS (CONTINUED) |
| (In thousands) |
| | | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
| FINANCING ACTIVITIES | | | | | | |
| Policyholders’ account deposits | | — | | | — | | | 1,375,003 | |
| Policyholders’ account withdrawals | | — | | | — | | | (1,391,881) | |
| Dividends to stockholders | | (88,190) | | | (44,095) | | | (88,243) | |
| Dividends from subsidiaries | | — | | | 49,500 | | | — | |
| Net cash provided by (used in) financing activities | | (88,190) | | | 5,405 | | | (105,121) | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | 42,823 | | | 17,619 | | | 143,337 | |
| Beginning of the year | | 17,619 | | | — | | | 151,592 | |
| End of the year | | $ | 60,442 | | | $ | 17,619 | | | $ | 294,929 | |
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes therein.
See accompanying Report of Independent Registered Public Accounting Firm.
AMERICAN NATIONAL GROUP, INC. (Parent Company Only)
SCHEDULE II - NOTES TO THE CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Basis of presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes therein.
On July 1, 2020, American National Insurance Company (“ANICO”) completed its previously announced holding company reorganization, whereby ANICO became a wholly-owned subsidiary of American National Group, Inc. (“ANAT”) and ANAT replaced ANICO as the publicly held company.
In the parent company only condensed financial statements, ANAT’s investments in subsidiaries are accounted for using the equity method of accounting. Intercompany balances and transactions with subsidiaries have been eliminated.
AMERICAN NATIONAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Deferred Policy Acquisition Cost | | Future Policy Benefits, Policyholders’ Account Balances, Policy and Contract Claims and Other Policyholder Funds | | Unearned Premiums | | Premium Revenue | | Net Investment Income (1) | | Benefits, Claims, Losses and Settlement Expenses | | Amortization of Deferred Policy Acquisition Costs | | Other Operating Expenses (2) | | Premiums Written |
| December 31, 2021 | | | | | | | | | | | | | | | | | | |
| Life | | $ | 956,045 | | | $ | 5,662,057 | | | $ | 22,152 | | | $ | 412,769 | | | $ | 277,962 | | | $ | 605,724 | | | $ | 111,764 | | | $ | 195,127 | | | $ | — | |
| Annuity | | 380,472 | | | 13,643,790 | | | — | | | 74,925 | | | 629,417 | | | 149,931 | | | 77,133 | | | 53,379 | | | — | |
| Health | | 29,348 | | | 305,532 | | | 27,774 | | | 143,484 | | | 8,153 | | | 98,029 | | | 17,906 | | | 42,284 | | | — | |
| Property & Casualty | | 132,259 | | | 1,200,365 | | | 963,904 | | | 1,669,875 | | | 62,140 | | | 1,094,126 | | | 355,970 | | | 213,486 | | | 1,726,151 | |
| Corporate & Other | | — | | | — | | | — | | | — | | | 193,982 | | | — | | | — | | | 67,593 | | | — | |
| Total | | $ | 1,498,124 | | | $ | 20,811,744 | | | $ | 1,013,830 | | | $ | 2,301,053 | | | $ | 1,171,654 | | | $ | 1,947,810 | | | $ | 562,773 | | | $ | 571,869 | | | $ | 1,726,151 | |
| December 31, 2020 | | | | | | | | | | | | | | | | | | |
| Life | | $ | 896,208 | | | $ | 5,443,826 | | | $ | 23,867 | | | $ | 396,099 | | | $ | 261,389 | | | $ | 533,925 | | | $ | 84,443 | | | $ | 182,395 | | | $ | — | |
| Annuity | | 309,056 | | | 12,690,490 | | | — | | | 92,866 | | | 570,003 | | | 214,158 | | | 103,709 | | | 48,359 | | | — | |
| Health | | 32,885 | | | 286,875 | | | 30,629 | | | 168,805 | | | 8,637 | | | 116,122 | | | 15,619 | | | 39,265 | | | — | |
| Property & Casualty | | 122,062 | | | 1,141,352 | | | 901,847 | | | 1,560,304 | | | 63,949 | | | 1,005,620 | | | 335,831 | | | 202,503 | | | 1,590,740 | |
| Corporate & Other | | — | | | — | | | — | | | — | | | 72,174 | | | — | | | — | | | 42,891 | | | — | |
| Total | | $ | 1,360,211 | | | $ | 19,562,543 | | | $ | 956,343 | | | $ | 2,218,074 | | | $ | 976,152 | | | $ | 1,869,825 | | | $ | 539,602 | | | $ | 515,413 | | | $ | 1,590,740 | |
| December 31, 2019 | | | | | | | | | | | | | | | | | | |
| Life | | $ | 852,900 | | | $ | 5,293,970 | | | $ | 27,080 | | | $ | 359,419 | | | $ | 263,788 | | | $ | 449,252 | | | $ | 113,300 | | | $ | 190,104 | | | $ | — | |
| Annuity | | 415,380 | | | 12,856,209 | | | — | | | 147,139 | | | 663,895 | | | 218,576 | | | 79,746 | | | 50,507 | | | — | |
| Health | | 32,578 | | | 282,592 | | | 34,862 | | | 165,035 | | | 9,467 | | | 109,013 | | | 21,322 | | | 41,475 | | | — | |
| Property & Casualty | | 122,149 | | | 1,084,983 | | | 871,617 | | | 1,511,201 | | | 64,263 | | | 1,042,153 | | | 316,141 | | | 201,580 | | | 1,546,144 | |
| Corporate & Other | | — | | | — | | | — | | | — | | | 179,494 | | | — | | | — | | | 41,222 | | | — | |
| Total | | $ | 1,423,007 | | | $ | 19,517,754 | | | $ | 933,559 | | | $ | 2,182,794 | | | $ | 1,180,907 | | | $ | 1,818,994 | | | $ | 530,509 | | | $ | 524,888 | | | $ | 1,546,144 | |
(1)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 and surplus.
(2)Expenses are charged to segments through direct identification and allocations based on various factors.
See accompanying Report of Independent Registered Public Accounting Firm.
AMERICAN NATIONAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE INFORMATION
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Direct Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Percentage of
Amount
Assumed to Net |
| Year ended December 31, 2021 | | | | | | | | | | |
| Life insurance in-force | | $ | 136,710,529 | | | $ | 22,835,954 | | | $ | 221,023 | | | $ | 114,095,598 | | | 0.2 | % |
| Premiums earned | | | | | | | | | | |
| Life and Annuity | | $ | 570,875 | | | $ | 88,264 | | | $ | 5,083 | | | $ | 487,694 | | | 1.0 | % |
| Health | | 198,563 | | | 295,631 | | | 240,552 | | | 143,484 | | | 167.7 | |
| Property and Casualty | | 1,947,194 | | | 348,765 | | | 71,446 | | | 1,669,875 | | | 4.3 | |
| Total premiums | | $ | 2,716,632 | | | $ | 732,660 | | | $ | 317,081 | | | $ | 2,301,053 | | | 13.8 | % |
| | | | | | | | | | |
| Year ended December 31, 2020 | | | | | | | | | | |
| Life insurance in-force | | $ | 128,075,765 | | | $ | 24,006,683 | | | $ | 171,433 | | | $ | 104,240,515 | | | 0.2 | % |
| Premiums earned | | | | | | | | | | |
| Life and Annuity | | $ | 581,350 | | | $ | 96,675 | | | $ | 4,290 | | | $ | 488,965 | | | 0.9 | % |
| Health | | 215,430 | | | 263,078 | | | 216,453 | | | 168,805 | | | 128.2 | |
| Property and Casualty | | 1,832,623 | | | 343,521 | | | 71,202 | | | 1,560,304 | | | 4.6 | |
| Total premiums | | $ | 2,629,403 | | | $ | 703,274 | | | $ | 291,945 | | | $ | 2,218,074 | | | 13.2 | % |
| | | | | | | | | | |
| Year ended December 31, 2019 | | | | | | | | | | |
| Life insurance in-force | | $ | 117,886,265 | | | $ | 24,913,905 | | | $ | 218,020 | | | $ | 93,190,380 | | | 0.2 | % |
| Premiums earned | | | | | | | | | | |
| Life and Annuity | | $ | 605,796 | | | $ | 99,856 | | | $ | 618 | | | $ | 506,558 | | | 0.1 | % |
| Health | | 209,200 | | | 269,487 | | | 225,322 | | | 165,035 | | | 136.5 | |
| Property and Casualty | | 1,649,874 | | | 149,237 | | | 10,564 | | | 1,511,201 | | | 0.7 | |
| Total premiums | | $ | 2,464,870 | | | $ | 518,580 | | | $ | 236,504 | | | $ | 2,182,794 | | | 10.8 | % |
See accompanying Report of Independent Registered Public Accounting Firm.
