| Fair Value of Financial Instruments | Fair Value of Financial Instruments The carrying amount and fair value of financial instruments are shown below (in thousands): September 30, 2021 December 31, 2020 Carrying Amount Fair Value Carrying Amount Fair Value Financial assets Fixed maturity, bonds held-to-maturity $ 7,277,801 $ 7,747,031 $ 7,354,970 $ 7,983,181 Fixed maturity, bonds available-for-sale 8,573,081 8,573,081 7,597,180 7,597,180 Equity securities 2,383,478 2,383,478 2,070,766 2,070,766 Equity-indexed options, included in other invested assets 229,690 229,690 242,201 242,201 Mortgage loans on real estate, net of allowance 5,002,978 5,241,982 5,242,531 5,451,152 Policy loans 364,960 364,960 373,014 373,014 Short-term investments 536,621 536,621 1,028,379 1,028,379 Separate account assets ($1,223,525 and $1,153,702 included in fair value hierarchy) 1,260,427 1,260,427 1,185,467 1,185,467 Separately managed accounts, included in other invested assets 97,157 97,157 64,424 64,424 Total financial assets $ 25,726,193 $ 26,434,427 $ 25,158,932 $ 25,995,764 Financial liabilities Investment contracts $ 10,794,070 $ 10,794,070 $ 10,101,764 $ 10,101,764 Embedded derivative liability for equity-indexed contracts 767,920 767,920 705,013 705,013 Notes payable 150,378 150,378 153,703 153,703 Federal Home Loan Bank advance — — 250,000 250,227 Separate account liabilities ($1,223,525 and $1,153,702 included in fair value hierarchy) 1,260,427 1,260,427 1,185,467 1,185,467 Total financial liabilities $ 12,972,795 $ 12,972,795 $ 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. 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 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. 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 condensed 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 nine months ended September 30, 2021 and 2020, respectively. 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 September 30, 2021 and December 31, 2020, the one year implied volatility used to estimate embedded derivative value was 20.9% 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 September 30, 2021 December 31, 2020 Unobservable Input September 30, 2021 December 31, 2020 Security type Embedded derivative Indexed Annuities $ 741.5 $ 670.8 Lapse Rate 1-50% 1-50% Mortality Multiplier 100% 100% Equity Volatility 14-67% 16-69% Indexed Life 26.4 34.2 Equity Volatility 14-67% 16-69% 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 September 30, 2021 Total Fair Value Level 1 Level 2 Level 3 Financial assets Fixed maturity, bonds available-for-sale U.S. treasury and government $ 26,004 $ 26,004 $ — $ — U.S. states and political subdivisions 1,080,488 — 1,080,488 — Foreign governments 5,980 — 5,980 — Corporate debt securities 7,219,095 — 7,050,921 168,174 Residential mortgage-backed securities 32,582 — 32,582 — Collateralized debt securities 208,932 — 208,932 — Total bonds available-for-sale 8,573,081 26,004 8,378,903 168,174 Equity securities Common stock 2,337,313 2,335,668 — 1,645 Preferred stock 46,165 13,136 — 33,029 Total equity securities 2,383,478 2,348,804 — 34,674 Options 229,690 — — 229,690 Short-term investments 536,621 — 536,621 — Separate account assets 1,223,525 351,433 872,092 — Separately managed accounts 97,157 — — 97,157 Total financial assets $ 13,043,552 $ 2,726,241 $ 9,787,616 $ 529,695 Financial liabilities Embedded derivative for equity-indexed contracts $ 767,920 $ — $ — $ 767,920 Notes payable 150,378 — — 150,378 Separate account liabilities 1,223,525 351,433 872,092 — Total financial liabilities $ 2,141,823 $ 351,433 $ 872,092 $ 918,298 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 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 September 30, 2021 Nine months ended September 30, 2021 Assets Liability Assets Liability Investment Securities Equity-Indexed Options Separately Managed Accounts Embedded Derivative Investment Securities Equity-Indexed Options Separately Managed Accounts Embedded Derivative Beginning balance $ 137,790 $ 260,053 $ 77,904 $ 776,430 $ 111,505 $ 242,201 $ 64,424 $ 705,013 Net gain for derivatives included in net investment income — 1,365 — — — 70,434 — — Net change included in interest credited — — — (9,607) — — — 45,542 Net fair value change included in other comprehensive income 541 — (195) — 2,422 — 427 — Purchases, sales and settlements or maturities Purchases 72,443 23,487 23,250 — 118,623 69,917 45,961 — Sales (5,907) — (3,802) — (29,162) — (13,655) — Settlements or maturities — (55,215) — — — (152,862) — — Premiums less benefits — — — 1,097 — — — 17,365 Gross transfers into Level 3 — — — — 1,479 — — — Gross transfers out of Level 3 (2,019) — — — (2,019) — — — Ending balance at September 30, 2021 $ 202,848 $ 229,690 $ 97,157 $ 767,920 $ 202,848 $ 229,690 $ 97,157 $ 767,920 Level 3 Three months ended September 30, 2020 Nine months ended September 30, 2020 Assets Liability Assets Liability Investment Securities Equity-Indexed Options Separately Managed Accounts Embedded Derivative Investment Securities Equity-Indexed Options Separately Managed Accounts Embedded Derivative Beginning balance $ 104,138 $ 191,486 $ 51,537 $ 675,970 $ 45,307 $ 256,005 $ 50,503 $ 731,552 Net gain (loss) for derivatives included in net investment income — 38,738 — — — (2,200) — — Net change included in interest credited — — — 44,792 — — — 17,702 Net fair value change included in other comprehensive income 6 — 3,663 — 4 — (397) — Purchases, sales and settlements or maturities Purchases 15,222 19,257 7,421 — 124,390 57,695 16,463 — Sales (380) — (569) — (50,715) — (4,517) — Settlements or maturities — (35,699) — — — (97,718) — — Premiums less benefits — — — (26,982) — — — (55,474) Ending balance at September 30, 2020 $ 118,986 $ 213,782 $ 62,052 $ 693,780 $ 118,986 $ 213,782 $ 62,052 $ 693,780 Within the net gain (loss) for derivatives included in net investment income were unrealized losses of $20.7 million and unrealized gains of $38.8 million, relating to assets still held at September 30, 2021 and 2020, respectively. There were no transfers between Level 1 and Level 2 fair value hierarchies during the periods presented. 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 the three months ended September 30, 2021 were the result of securities not being priced by the third-party service at the end of the period. 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 September 30, 2021 Valuation Technique Unobservable Input Range/Weighted Average Security type Investment securities Common stock $ 1,645 Guideline public company method (1) Recurring Revenue Multiple (2) 7.75x Option pricing method LTM EBITDA Multiple (3) 20x Preferred stock 33,029 Guideline public company method LTM Revenue Multiple (4) 5.50x Priced at cost LTM EBITDA Multiple 5.30x Term (years) 2.08 Volatility 55.00 % Bonds 168,174 Priced at cost Coupon rate 2.65-9.75% Separately managed accounts 97,157 Discounted cash flows (yield analysis) Discount rate 6.78-15.53% 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) LTM EBITDA multiple valuation metric shows earnings before interest, taxes, depreciation and amortization adjustments for the past 12 month period. (4) LTM EBITDA multiple valuation metric shows revenue for the past 12 month period. 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. Fair Value Information About Financial Instruments Not Recorded at Fair Value Information about fair value estimates for financial instruments not measured at fair value 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 carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis are shown below (in thousands): September 30, 2021 FV Hierarchy Level Carrying Amount Fair Value Financial assets Fixed maturity, bonds held-to-maturity U.S. Treasury and government Level 1 $ 12,320 $ 12,163 U.S. states and political subdivisions Level 2 108,155 108,322 Foreign governments Level 2 14,403 14,533 Corporate debt securities Level 2 6,984,017 7,448,762 Residential mortgage-backed securities Level 2 53,813 56,760 Collateralized debt securities Level 2 105,093 106,491 Total fixed maturity, bonds held-to-maturity 7,277,801 7,747,031 Mortgage loans on real estate, net of allowance Level 3 5,002,978 5,241,982 Policy loans Level 3 364,960 364,960 Total financial assets $ 12,645,739 $ 13,353,973 Financial liabilities Investment contracts Level 3 $ 10,794,070 $ 10,794,070 Notes payable Level 3 150,378 150,378 Total financial liabilities $ 10,944,448 $ 10,944,448 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 |
