| Fair Value of Financial Instruments | The carrying amount and fair value of financial instruments are shown below (in thousands): June 30, 2020 December 31, 2019 Carrying Fair Value Carrying Fair Value Financial assets Fixed maturity, bonds held-to-maturity $ 8,238,405 $ 8,713,716 $ 8,631,261 $ 8,968,690 Fixed maturity, bonds available-for-sale 7,170,471 7,170,471 6,725,085 6,725,085 Equity securities 1,714,264 1,714,264 1,700,960 1,700,960 Equity-indexed options 191,486 191,486 256,005 256,005 Mortgage loans on real estate, net of allowance 5,176,511 5,438,373 5,097,017 5,309,005 Policy loans 377,826 377,826 379,657 379,657 Short-term investments 501,087 501,087 425,321 425,321 Separate account assets ($1,005,889 and $1,049,938 included in fair value hierarchy) 1,032,956 1,032,956 1,073,891 1,073,891 Separately managed accounts 51,537 51,537 50,503 50,503 Total financial assets $ 24,454,543 $ 25,191,716 $ 24,339,700 $ 24,889,117 Financial liabilities Investment contracts $ 10,185,122 $ 10,185,122 $ 10,254,959 $ 10,254,959 Embedded derivative liability for equity-indexed contracts 675,970 675,970 731,552 731,552 Notes payable 155,871 155,871 157,997 157,997 Federal Home Loan Bank advance 500,000 500,000 — — Separate account liabilities ($1,005,889 and $1,049,938 included in fair value hierarchy) 1,032,956 1,032,956 1,073,891 1,073,891 Total financial liabilities $ 12,549,919 $ 12,549,919 $ 12,218,399 $ 12,218,399 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. Valuation Techniques for Financial Instruments Recorded at Fair Value Fixed Maturity Securities and Equity Options— American National utilizes a pricing service to estimate fair value measurements. 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, broker/dealer 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 broker (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 broker, 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. 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 and that represent 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. Separate accounts are established in conformity with insurance laws and are not chargeable with liabilities that arise from any other business of American National. American National reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are legally insulated from American 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. 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 condensed consolidated statements of operations. 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, investments in unconsolidated affiliates, 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. Embedded Derivative— The amounts reported within policyholder contract deposits include equity linked interest crediting rates based on the S&P 500 index within index 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 June 30, 2020 and December 31, 2019, the one year implied volatility used to estimate embedded derivative value was 24.4% and 11.3%, 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 June 30, 2020 December 31, 2019 Unobservable Input June 30, 2020 December 31, 2019 Indexed Annuities $ 659.2 $ 706.5 Lapse Rate 1-70% 1-70% Mortality Multiplier 90-100% 90-100% Equity Volatility 16-65% 11-46% Indexed Life 16.7 25.1 Equity Volatility 16-65% 11-46% 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 as of June 30, 2020 Total Level 1 Level 2 Level 3 Financial assets Fixed maturity, bonds available-for-sale U.S. treasury and government $ 29,808 $ — $ 29,808 $ — U.S. states and political subdivisions 1,092,371 — 1,092,371 — Foreign governments 16,770 — 16,770 — Corporate debt securities 5,973,257 — 5,869,579 103,678 Residential mortgage-backed securities 30,457 — 30,457 — Collateralized debt securities 27,808 — 27,808 — Total bonds available-for-sale 7,170,471 — 7,066,793 103,678 Equity securities Common stock 1,696,311 1,696,159 — 152 Preferred stock 17,953 17,492 — 461 Total equity securities 1,714,264 1,713,651 — 613 Options 191,486 — — 191,486 Short-term investments 501,087 — 501,087 — Separate account assets 1,005,889 154,144 851,745 — Separately managed accounts 51,537 — — 51,537 Total financial assets $ 10,634,734 $ 1,867,795 $ 8,419,625 $ 347,314 Financial liabilities Embedded derivative for equity-indexed contracts $ 675,970 $ — $ — $ 675,970 Separate account liabilities 1,005,889 154,144 851,745 — Total financial liabilities $ 1,681,859 $ 154,144 $ 851,745 $ 675,970 Assets and Liabilities Carried at Fair Value by Hierarchy Level as of December 31, 2019 Total Level 1 Level 2 Level 3 Financial assets Fixed maturity, bonds available-for-sale U.S. treasury and government $ 29,941 $ — $ 29,941 $ — U.S. states and political subdivisions 1,078,165 — 1,078,165 — Foreign governments 6,287 — 6,287 — Corporate debt securities 5,576,620 — 5,531,776 44,844 Residential mortgage-backed securities 23,943 — 23,943 — Collateralized debt securities 10,129 — 10,129 — Total bonds available-for-sale 6,725,085 — 6,680,241 44,844 Equity securities Common stock 1,682,149 1,681,686 — 463 Preferred stock 18,811 18,811 — — Total equity securities 1,700,960 1,700,497 — 463 Options 256,005 — — 256,005 Short-term investments 425,321 — 425,321 — Separate account assets 1,049,938 271,575 778,363 — Separately managed accounts 50,503 — — 50,503 Total financial assets $ 10,207,812 $ 1,972,072 $ 7,883,925 $ 351,815 Financial liabilities Embedded derivative for equity-indexed contracts $ 731,552 $ — $ — $ 731,552 Separate account liabilities 1,049,938 271,575 778,363 — Total financial liabilities $ 1,781,490 $ 271,575 $ 778,363 $ 731,552 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 Three months ended June 30, 2020 Six months ended June 30, 2020 Assets Liability Assets Liability Investment Equity-Indexed Separately Managed Accounts Embedded Investment Equity-Indexed Separately Managed Accounts Embedded Beginning balance $ 53,853 $ 125,988 $ 50,489 $ 630,952 $ 45,307 $ 256,005 $ 50,503 $ 731,552 Net gain (loss) for derivatives included in net investment income — 67,157 — — — (40,938) — — Net change included in interest credited — — — 62,491 — — — (27,090) Net fair value change included in other comprehensive income — — (4,046) — — — (4,060) — Purchases, sales and settlements or maturities Purchases 86,467 24,273 9,042 — 109,169 38,438 9,042 — Sales (36,642) — (3,948) — (50,798) — (3,948) — Settlements or maturities — (25,932) — — — (62,019) — — Premiums less benefits — — — (17,473) — — — (28,492) Ending balance at June 30, 2020 $ 103,678 $ 191,486 $ 51,537 $ 675,970 $ 103,678 $ 191,486 $ 51,537 $ 675,970 Level 3 Three months ended June 30, 2019 Six months ended June 30, 2019 Assets Liability Assets Liability Investment Equity-Indexed Separately Managed Accounts* Embedded Investment Equity-Indexed Separately Managed Accounts* Embedded Beginning balance $ 4,346 $ 216,156 $ 23,254 $ 668,485 $ 4,346 $ 148,006 $ 16,532 $ 596,075 Net gain for derivatives included in net investment income — 23,125 — — — 89,610 — — Net change included in interest credited — — — 36,255 — — — 94,411 Net fair value change included in other comprehensive income — — (11) — — — (2) — Purchases, sales and settlements or maturities Purchases — 21,412 7,412 — — 38,768 14,125 — Settlements or maturities — (29,649) — — — (45,340) — — Premiums less benefits — — — (9,064) — — — 5,190 Ending balance at June 30, 2019 $ 4,346 $ 231,044 $ 30,655 $ 695,676 $ 4,346 $ 231,044 $ 30,655 $ 695,676 * Subsequent to the issuance of the Company's interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2019, the Company's management determined Separately Managed Accounts were omitted from this disclosure. The amounts included in the disclosure tables above now include disclosures for Separately Managed Accounts for all periods presented. Within the net gain for derivatives included in net investment income were unrealized gains of $59,948,000 and $84,756,000, relating to assets still held at June 30, 2020 and 2019, respectively. 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 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, plus or minus 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 is carried at outstanding principal balance. The carrying value of the advance approximates fair value because the underlying interest rates approximate market rates at the balance sheet date. The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis are shown below (in thousands): June 30, 2020 FV Hierarchy Level Carrying Fair Value Financial assets Fixed maturity, bonds held-to-maturity U.S. states and political subdivisions Level 2 $ 127,592 $ 131,799 Foreign governments Level 2 3,880 4,361 Corporate debt securities Level 2 7,734,990 8,199,640 Residential mortgage-backed securities Level 2 207,039 170,326 Collateralized debt securities Level 2 164,904 207,590 Total fixed maturity, bonds held-to-maturity 8,238,405 8,713,716 Mortgage loans on real estate, net of allowance Level 3 5,176,511 5,438,373 Policy loans Level 3 377,826 377,826 Total financial assets $ 13,792,742 $ 14,529,915 Financial liabilities Investment contracts Level 3 $ 10,185,122 $ 10,185,122 Notes payable Level 3 155,871 155,871 Federal Home Loan Bank advance Level 3 500,000 500,000 Total financial liabilities $ 10,840,993 $ 10,840,993 December 31, 2019 FV Hierarchy Level Carrying Fair Value Financial assets Fixed maturity, bonds held-to-maturity U.S. states and political subdivisions Level 2 $ 165,109 $ 170,114 Foreign governments Level 2 3,907 4,349 Corporate debt securities Level 2 8,099,098 8,424,969 Residential mortgage-backed securities Level 2 237,516 242,828 Collateralized debt securities Level 2 125,631 126,430 Total fixed maturity, bonds held-to-maturity 8,631,261 8,968,690 Mortgage loans on real estate, net allowance Level 3 5,097,017 5,309,005 Policy loans Level 3 379,657 379,657 Total financial assets $ 14,107,935 $ 14,657,352 Financial liabilities Investment contracts Level 3 $ 10,254,959 $ 10,254,959 Notes payable Level 3 157,997 157,997 Total financial liabilities $ 10,412,956 $ 10,412,956 |
