| Fair Value of Financial Instruments | Fair Value of Financial Instruments The carrying amount and fair value of financial instruments are shown below (in thousands): March 31, 2022 December 31, 2021 Carrying Amount Fair Value Carrying Amount Fair Value Financial assets Fixed maturity, bonds held-to-maturity $ 6,896,485 $ 6,828,253 $ 7,088,981 $ 7,458,789 Fixed maturity, bonds available-for-sale 9,473,058 9,473,058 8,380,248 8,380,248 Equity securities 84,974 84,974 135,433 135,433 Equity-indexed options, included in other invested assets 205,296 205,296 259,383 259,383 Mortgage loans on real estate, net of allowance 5,155,716 5,212,033 5,199,334 5,271,950 Policy loans 365,117 365,117 365,208 365,208 Short-term investments 1,217,041 1,217,041 1,840,732 1,840,732 Separate account assets ($1,197,883 and $1,278,380 included in fair value hierarchy) 1,237,906 1,237,906 1,320,703 1,320,703 Separately managed accounts, included in other invested assets 105,213 105,213 99,884 99,884 Total financial assets $ 24,740,806 $ 24,728,891 $ 24,689,906 $ 25,132,330 Financial liabilities Investment contracts $ 9,238,203 $ 9,238,203 $ 10,947,958 $ 10,947,958 Embedded derivative liability for equity-indexed contracts 794,636 794,636 832,579 832,579 Notes payable 158,348 158,348 149,248 149,248 Separate account liabilities ($1,197,883 and $1,278,380 included in fair value hierarchy) 1,237,906 1,237,906 1,320,703 1,320,703 Total financial liabilities $ 11,429,093 $ 11,429,093 $ 13,250,488 $ 13,250,488 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 three months ended March 31, 2022 and 2021, respectively. Embedded Derivatives —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 March 31, 2022 and December 31, 2021, the one year implied volatility used to estimate embedded derivative value was 18.2% and 19.6%, 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 March 31, 2022 December 31, 2021 Unobservable Input March 31, 2022 December 31, 2021 Security type Embedded derivative Indexed Annuities $ 771.0 $ 799.3 Lapse Rate 1-50% 1-50% Mortality Multiplier 100% 100% Equity Volatility 14-68% 12-64% Indexed Life 23.6 33.3 Equity Volatility 14-68% 12-64% 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 March 31, 2022 Total Fair Value Level 1 Level 2 Level 3 Financial assets Fixed maturity, bonds available-for-sale U.S. treasury and government $ 24,843 $ 24,843 $ — $ — U.S. states and political subdivisions 1,001,078 — 1,001,078 — Foreign governments 5,583 — 5,583 — Corporate debt securities 8,189,193 — 7,933,212 255,981 Residential mortgage-backed securities 30,313 — 30,313 — Collateralized debt securities 222,048 — 222,048 — Total bonds available-for-sale 9,473,058 24,843 9,192,234 255,981 Equity securities Common stock 21,923 20,200 — 1,723 Preferred stock 63,051 29,732 — 33,319 Total equity securities 84,974 49,932 — 35,042 Options 205,296 — — 205,296 Short-term investments 1,217,041 — 1,217,041 — Separate account assets 1,197,883 364,726 833,157 — Separately managed accounts 105,213 — — 105,213 Total financial assets $ 12,283,465 $ 439,501 $ 11,242,432 $ 601,532 Financial liabilities Embedded derivative for equity-indexed contracts $ 794,636 $ — $ — $ 794,636 Notes payable 158,348 — — 158,348 Separate account liabilities 1,197,883 364,726 833,157 — Total financial liabilities $ 2,150,867 $ 364,726 $ 833,157 $ 952,984 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 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 March 31, 2022 Assets Liability Investment Securities Equity-Indexed Options Separately Managed Accounts Embedded Derivative Beginning balance $ 280,705 $ 259,383 $ 99,884 $ 832,579 Net loss for derivatives included in net investment income — (35,183) — — Net change included in interest credited — — — (39,508) Net fair value change included in other comprehensive income 296 — 5 — Purchases, sales and settlements or maturities Purchases 30,269 22,960 12,765 — Sales (20,247) — (7,441) — Settlements or maturities — (41,864) — — Premiums less benefits — — — 1,565 Ending balance at March 31, 2022 $ 291,023 $ 205,296 $ 105,213 $ 794,636 Level 3 Three months ended March 31, 2021 Assets Liability Investment Securities Equity-Indexed Options Separately Managed Accounts Embedded Derivative Beginning balance $ 111,505 $ 242,201 $ 64,424 $ 705,013 Net gain for derivatives included in net investment income — 28,827 — — Net change included in interest credited — — — 26,689 Net fair value change included in other comprehensive income 1,178 — 594 — Purchases, sales and settlements or maturities Purchases 27,453 20,147 10,072 — Sales (11,650) — (8,109) — Settlements or maturities — (37,812) — — Premiums less benefits — — — 8,812 Ending balance at March 31, 2021 $ 128,486 $ 253,363 $ 66,981 $ 740,514 Within the net gain (loss) for derivatives included in net investment income were unrealized losses of $56.2 million and unrealized gains of $7.9 million, relating to assets still held at March 31, 2022 and 2021, 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 March 31, 2022 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 March 31, 2022 Valuation Technique Unobservable Input Range/Weighted Average Security type Investment securities Common stock $ 1,723 Guideline public company method (1) LTM Revenue Multiple 3.7x CVM NCY Revenue Multiple (6) 3.25x NCY +1 Revenue Multiple (7) 0.7x NCY +1 EBITDA Multiple 4.75x Preferred stock 33,319 Guideline public company method LTM Revenue Multiple (4) 5.42x CVM LTM EBITDA Multiple 6.75x NCY Revenue Multiple 3.25x NCY +1 Revenue Multiple 0.7x NCY +1 EBITDA Multiple (8) 4.75x Bonds 255,981 Priced at cost Coupon rate 2.72-8.00% Separately managed accounts 105,213 Discounted cash flows (yield analysis) Discount rate 5.50-18.70% CVM NCY +1 EBITDA 4.87x Market transaction N/A 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 (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. (6) NCY Revenue forecast revenue over the next calendar year. (7) NCY +1 Revenue forecast revenue over the calendar year that is two years from measurement. (8) NCY +1 EBITDA forecast EBITDA over the calendar year that is two years from measurement. 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 Company does not have outstanding loans from FHLB as of March 31, 2022. The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis are shown below (in thousands): March 31, 2022 FV Hierarchy Level Carrying Amount Fair Value Financial assets Fixed maturity, bonds held-to-maturity U.S. treasury and government Level 1 $ 12,248 $ 11,430 U.S. states and political subdivisions Level 2 89,666 83,354 Foreign governments Level 2 14,335 13,498 Corporate debt securities Level 2 6,627,177 6,569,908 Residential mortgage-backed securities Level 2 43,025 43,558 Collateralized debt securities Level 2 110,034 106,505 Total fixed maturity, bonds held-to-maturity 6,896,485 6,828,253 Mortgage loans on real estate, net of allowance Level 3 5,155,716 5,212,033 Policy loans Level 3 365,117 365,117 Total financial assets $ 12,417,318 $ 12,405,403 Financial liabilities Investment contracts Level 3 $ 9,238,203 $ 9,238,203 Notes payable Level 3 158,348 158,348 Total financial liabilities $ 9,396,551 $ 9,396,551 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 |
