Exhibit 99.2
AMERICAN NATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(In thousands, except share data)
March 31, 2022 | December 31, 2021 | |||||||
ASSETS | ||||||||
Fixed maturity, bonds held-to-maturity, at amortized cost, net of allowance for credit losses of $13,388 in 2022 and $13,129 in 2021 (Fair value $6,828,253 in 2022 and $7,458,789 in 2021) | $ | 6,896,485 | $ | 7,088,981 | ||||
Fixed maturity, bonds available-for-sale, at fair value (Allowance for credit losses of $28,420 in 2022 and $10,310 in 2021) (Amortized cost $9,824,697 in 2022 and $8,107,794 in 2021) | 9,473,058 | 8,380,248 | ||||||
Equity securities, at fair value (Cost $95,317 in 2022 and $94,732 in 2021) | 84,974 | 135,433 | ||||||
Mortgage loans on real estate, net of allowance for credit losses of $92,824 in 2022 and $97,079 in 2021 | 5,155,716 | 5,199,334 | ||||||
Policy loans | 365,117 | 365,208 | ||||||
Real estate and real estate partnerships, net of accumulated depreciation of $286,999 in 2022 and $287,387 in 2021 | 925,459 | 928,412 | ||||||
Investment funds | 981,802 | 961,763 | ||||||
Short-term investments | 1,217,041 | 1,840,732 | ||||||
Other invested assets | 131,998 | 125,795 | ||||||
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Total investments | 25,231,650 | 25,025,906 | ||||||
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Cash and cash equivalents | 1,195,757 | 1,930,882 | ||||||
Accrued investment income | 211,632 | 192,913 | ||||||
Reinsurance recoverables, net of allowance for credit losses of $14,725 in 2022 and $14,553 in 2021 | 457,300 | 459,621 | ||||||
Prepaid reinsurance premiums | 45,429 | 47,789 | ||||||
Premiums due and other receivables | 398,950 | 382,562 | ||||||
Deferred policy acquisition costs | 1,634,335 | 1,498,124 | ||||||
Property and equipment, net of accumulated depreciation of $307,897 in 2022 and $302,936 in 2021 | 143,038 | 137,466 | ||||||
Prepaid pension | 169,662 | 167,587 | ||||||
Other assets | 147,130 | 156,768 | ||||||
Separate account assets | 1,237,906 | 1,320,703 | ||||||
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Total assets | $ | 30,872,789 | $ | 31,320,321 | ||||
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LIABILITIES | ||||||||
Future policy benefits | ||||||||
Life | $ | 3,221,339 | $ | 3,216,626 | ||||
Annuity | 1,578,424 | 1,598,365 | ||||||
Health | 44,794 | 45,715 | ||||||
Policyholders’ account balances | 13,880,262 | 13,879,198 | ||||||
Policy and contract claims | 1,694,665 | 1,692,295 | ||||||
Unearned premium reserve | 1,039,776 | 1,013,830 | ||||||
Other policyholder funds | 372,143 | 379,545 | ||||||
Liability for retirement benefits | 78,076 | 79,089 | ||||||
Notes payable | 158,348 | 149,248 | ||||||
Deferred tax liabilities, net | 92,873 | 200,510 | ||||||
Current tax payable | 356,579 | 321,926 | ||||||
Other liabilities | 399,043 | 421,212 | ||||||
Separate account liabilities | 1,237,906 | 1,320,703 | ||||||
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Total liabilities | 24,154,228 | 24,318,262 | ||||||
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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 2022 and 2021 | 269 | 269 | ||||||
Additional paid-in capital | 47,782 | 47,762 | ||||||
Accumulated other comprehensive income (loss) | (224,811 | ) | 147,054 | |||||
Retained earnings | 6,886,004 | 6,799,283 | ||||||
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Total American National stockholders’ equity | 6,709,244 | 6,994,368 | ||||||
Noncontrolling interest | 9,317 | 7,691 | ||||||
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Total stockholders’ equity | 6,718,561 | 7,002,059 | ||||||
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Total liabilities and stockholders’ equity | $ | 30,872,789 | $ | 31,320,321 | ||||
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See accompanying notes to the unaudited condensed consolidated financial statements.
1
AMERICAN NATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
PREMIUMS AND OTHER REVENUES | ||||||||
Premiums | ||||||||
Life | $ | 106,216 | $ | 100,779 | ||||
Annuity | 7,343 | 24,241 | ||||||
Health | 32,465 | 38,228 | ||||||
Property and Casualty | 436,087 | 399,405 | ||||||
Other policy revenues | 94,764 | 86,539 | ||||||
Net investment income | 269,365 | 269,981 | ||||||
Net realized investment gains | 10,277 | 19,239 | ||||||
Increase in investment credit loss | (11,636 | ) | (5,486 | ) | ||||
Net gains (losses) on equity securities | (9,482 | ) | 95,940 | |||||
Other income | 10,735 | 9,752 | ||||||
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Total premiums and other revenues | 946,134 | 1,038,618 | ||||||
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BENEFITS, LOSSES AND EXPENSES | ||||||||
Policyholder benefits | ||||||||
Life | 164,276 | 146,160 | ||||||
Annuity | 21,294 | 44,717 | ||||||
Claims incurred | ||||||||
Health | 20,636 | 24,251 | ||||||
Property and Casualty | 270,605 | 244,135 | ||||||
Interest credited to policyholders’ account balances | 48,299 | 107,787 | ||||||
Commissions for acquiring and servicing policies | 157,343 | 153,685 | ||||||
Other operating expenses | 138,962 | 133,502 | ||||||
Change in deferred policy acquisition costs | (14,116 | ) | (28,119 | ) | ||||
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Total benefits, losses and expenses | 807,299 | 826,118 | ||||||
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Income before federal income tax and other items | 138,835 | 212,500 | ||||||
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Less: Provision (benefit) for federal income taxes | ||||||||
Current | 35,765 | 16,130 | ||||||
Deferred | (8,479 | ) | 27,041 | |||||
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Total provision for federal income taxes | 27,286 | 43,171 | ||||||
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Income after federal income tax | 111,549 | 169,329 | ||||||
Other components of net periodic pension benefit (costs), net of tax | (1,368 | ) | 944 | |||||
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Net income | 110,181 | 170,273 | ||||||
Less: Net income attributable to noncontrolling interest, net of tax | 1,412 | 100 | ||||||
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Net income attributable to American National | $ | 108,769 | $ | 170,173 | ||||
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Amounts available to American National common stockholders | ||||||||
Earnings per share | ||||||||
Basic | $ | 4.05 | $ | 6.33 | ||||
Diluted | 4.05 | 6.33 | ||||||
Weighted average common shares outstanding | 26,877,200 | 26,877,200 | ||||||
Weighted average common shares outstanding and dilutive potential common shares | 26,884,741 | 26,884,899 |
See accompanying notes to the unaudited condensed consolidated financial statements.
2
AMERICAN NATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED
(In thousands)
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Net income | $ | 110,181 | $ | 170,273 | ||||
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Other comprehensive income (loss), net of tax | ||||||||
Change in net unrealized losses on securities | (375,020 | ) | (106,264 | ) | ||||
Foreign currency transaction and translation adjustments | 312 | 244 | ||||||
Defined benefit pension plan adjustment | 2,843 | 3,809 | ||||||
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Total other comprehensive loss, net of tax | (371,865 | ) | (102,211 | ) | ||||
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Total comprehensive income (loss) | (261,684 | ) | 68,062 | |||||
Less: Comprehensive income attributable to noncontrolling interest | 1,412 | 100 | ||||||
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Total comprehensive income (loss) attributable to American National | $ | (263,096 | ) | $ | 67,962 | |||
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
AMERICAN NATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In thousands, except per share data)
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interest | Total Equity | |||||||||||||||||||
Balance at January 1, 2022 | $ | 269 | $ | 47,762 | $ | 147,054 | $ | 6,799,283 | $ | 7,691 | $ | 7,002,059 | ||||||||||||
Amortization of restricted stock | — | 20 | — | — | — | 20 | ||||||||||||||||||
Other comprehensive loss | — | — | (371,865 | ) | — | — | (371,865 | ) | ||||||||||||||||
Net income attributable to American National | — | — | — | 108,769 | — | 108,769 | ||||||||||||||||||
Cash dividends to common stockholders (declared per share of $0.82) | — | — | — | (22,048 | ) | — | (22,048 | ) | ||||||||||||||||
Contributions | — | — | — | — | 858 | 858 | ||||||||||||||||||
Distributions | — | — | — | — | (644 | ) | (644 | ) | ||||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | — | 1,412 | 1,412 | ||||||||||||||||||
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Balance at March 31, 2022 | $ | 269 | $ | 47,782 | $ | (224,811 | ) | $ | 6,886,004 | $ | 9,317 | $ | 6,718,561 | |||||||||||
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Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interest | Total Equity | |||||||||||||||||||
Balance at January 1, 2021 | $ | 269 | $ | 47,683 | $ | 222,170 | $ | 6,188,148 | $ | 7,297 | $ | 6,465,567 | ||||||||||||
Amortization of restricted stock | — | 19 | — | — | — | 19 | ||||||||||||||||||
Other comprehensive loss | — | — | (102,211 | ) | — | — | (102,211 | ) | ||||||||||||||||
Net income attributable to American National | — | — | — | 170,173 | — | 170,173 | ||||||||||||||||||
Cash dividends to common stockholders (declared per share of $0.82) | — | — | — | (22,048 | ) | — | (22,048 | ) | ||||||||||||||||
Contributions | — | — | — | — | 259 | 259 | ||||||||||||||||||
Distributions | — | — | — | — | (380 | ) | (380 | ) | ||||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | — | 100 | 100 | ||||||||||||||||||
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Balance at March 31, 2021 | $ | 269 | $ | 47,702 | $ | 119,959 | $ | 6,336,273 | $ | 7,276 | $ | 6,511,479 | ||||||||||||
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
AMERICAN NATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 110,181 | $ | 170,273 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Net realized investment gains | (10,277 | ) | (19,239 | ) | ||||
Increase in investment credit loss | 11,636 | 5,486 | ||||||
Accretion of premiums, discounts and loan origination fees | 6,598 | 2,991 | ||||||
Net capitalized interest on policy loans and mortgage loans | (8,072 | ) | (8,969 | ) | ||||
Depreciation | 12,171 | 12,688 | ||||||
Interest credited to policyholders’ account balances | 48,299 | 107,787 | ||||||
Charges to policyholders’ account balances | (94,764 | ) | (86,539 | ) | ||||
Deferred federal income tax expense (benefit) | (8,479 | ) | 27,041 | |||||
Income from equity method investments | (67,096 | ) | (23,161 | ) | ||||
Distributions from unconsolidated affiliates | 68,663 | 17,605 | ||||||
Changes in: | ||||||||
Policyholder liabilities | 14,777 | 130,675 | ||||||
Deferred policy acquisition costs | (14,116 | ) | (28,119 | ) | ||||
Reinsurance payables | 2,321 | (29,927 | ) | |||||
Premiums due and other receivables | (16,388 | ) | (21,164 | ) | ||||
Prepaid reinsurance premiums | 2,360 | 1,997 | ||||||
Accrued investment income | (18,719 | ) | 2,629 | |||||
Current tax payable | 34,653 | 14,127 | ||||||
Liability for retirement benefits | 511 | (3,291 | ) | |||||
Fair value of option securities | 35,183 | (28,827 | ) | |||||
Fair value of equity securities | 9,482 | (95,940 | ) | |||||
Other, net | (11,134 | ) | 1,313 | |||||
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Net cash provided by operating activities | 107,790 | 149,436 | ||||||
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INVESTING ACTIVITIES | ||||||||
Proceeds from sale/maturity/prepayment of: | ||||||||
Held-to-maturity securities | 185,127 | 446,616 | ||||||
Available-for-sale securities | 249,551 | 249,726 | ||||||
Equity securities | 67,291 | 35,383 | ||||||
Real estate and real estate partnerships | 8,275 | 11,119 | ||||||
Mortgage loans | 308,883 | 267,290 | ||||||
Policy loans | 11,238 | 15,106 | ||||||
Other invested assets | 50,951 | 38,231 | ||||||
Disposals of property and equipment | — | 11 | ||||||
Distributions from real estate and real estate partnerships | 33,519 | 40,846 | ||||||
Distributions from investment funds | 25,407 | 30,557 | ||||||
Payment for the purchase/origination of: | ||||||||
Held-to-maturity securities | — | (560,406 | ) | |||||
Available-for-sale securities | (1,965,103 | ) | (210,290 | ) | ||||
Equity securities | (26,307 | ) | (32,845 | ) | ||||
Real estate and real estate partnerships | (14,545 | ) | (2,910 | ) | ||||
Mortgage loans | (253,967 | ) | (157,027 | ) | ||||
Policy loans | (5,869 | ) | (5,090 | ) | ||||
Other invested assets | (39,017 | ) | (22,441 | ) | ||||
Additions to property and equipment | (10,533 | ) | (9,914 | ) | ||||
Contributions to real estate and real estate partnerships | (25,435 | ) | (28,092 | ) | ||||
Contributions to investment funds | (51,755 | ) | (66,589 | ) | ||||
Change in short-term investments | 623,691 | (183,963 | ) | |||||
Change in collateral held for derivatives | (53,718 | ) | 13,136 | |||||
Other, net | 5,464 | (2,356 | ) | |||||
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Net cash used in investing activities | (876,852 | ) | (133,902 | ) | ||||
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5
AMERICAN NATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
FINANCING ACTIVITIES | ||||||||
Policyholders’ account deposits | $ | 343,049 | $ | 450,984 | ||||
Policyholders’ account withdrawals | (295,520 | ) | (323,854 | ) | ||||
Change in notes payable | 9,100 | (1,096 | ) | |||||
Dividends to stockholders | (22,048 | ) | (22,048 | ) | ||||
Payments to noncontrolling interest | (644 | ) | (380 | ) | ||||
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Net cash provided by financing activities | 33,937 | 103,606 | ||||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (735,125 | ) | 119,140 | |||||
Cash and cash equivalents at beginning of the period | 1,930,882 | 339,947 | ||||||
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Cash and cash equivalents at end of the period | $ | 1,195,757 | $ | 459,087 | ||||
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Supplemental cash flow information: | ||||||||
Interest paid | $ | — | $ | 218 | ||||
Income taxes paid, net | — | 18 |
See accompanying notes to the unaudited condensed consolidated financial statements.
6
NOTES TO THE UNAUDITED CONDENSED 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 Company received the requisite stockholder approval required under Delaware law for the adoption of the Merger Agreement. 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 condensed consolidated financial statements and notes thereto have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“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.
The interim condensed consolidated financial statements and notes should be read in conjunction with the annual consolidated financial statements and notes thereto included in American National’s Annual Report on Form 10-K as of and for the year ended December 31, 2021. The condensed consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
The preparation of the condensed 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.
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Note 3 – Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards—There were no recently adopted accounting standards for the three months ended March 31, 2022 that had a material impact to the Company’s Condensed Consolidated Financial Statements or Notes to the Condensed Consolidated Financial Statements.
Future Adoption of New Accounting Standards—The Financial Accounting Standards Board issued the following accounting guidance relevant to American National:
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, although we expect the impact to be material to the Consolidated Financial Statements and Notes to 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. | |||
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. Certain 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 Condensed Consolidated Financial Statements or Notes to the Condensed Consolidated Financial Statements. | |||
ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures | The amendments in this Update eliminate the accounting guidance for troubled debt restructurings by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The update also requires an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses— Measured at Amortized Cost. | The amendments in this guidance are effective for the Company for all annual and interim reporting periods beginning January 1, 2023. The guidance requires that the amendments be adopted prospectively, with early adoption permitted. | This impact of this amendment is currently under evaluation by the Company. |
8
Note 4 – Investment in Securities
The cost or amortized cost and fair value of investments in securities are shown below (in thousands):
March 31, 2022 | ||||||||||||||||||||
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 | $ | 12,248 | $ | — | $ | (818 | ) | $ | — | $ | 11,430 | |||||||||
U.S. states and political subdivisions | 89,666 | 764 | (7,076 | ) | — | 83,354 | ||||||||||||||
Foreign governments | 14,335 | 71 | (908 | ) | — | 13,498 | ||||||||||||||
Corporate debt securities | 6,639,092 | 91,538 | (148,807 | ) | (11,915 | ) | 6,569,908 | |||||||||||||
Residential mortgage-backed securities | 43,501 | 1,535 | (1,002 | ) | (476 | ) | 43,558 | |||||||||||||
Collateralized debt securities | 111,031 | 997 | (4,526 | ) | (997 | ) | 106,505 | |||||||||||||
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Total bonds held-to-maturity | 6,909,873 | 94,905 | (163,137 | ) | (13,388 | ) | 6,828,253 | |||||||||||||
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Fixed maturity, bonds available-for-sale | ||||||||||||||||||||
U.S. treasury and government | 25,804 | 60 | (1,021 | ) | — | 24,843 | ||||||||||||||
U.S. states and political subdivisions | 1,003,911 | 12,591 | (15,378 | ) | (46 | ) | 1,001,078 | |||||||||||||
Foreign governments | 5,000 | 583 | — | — | 5,583 | |||||||||||||||
Corporate debt securities | 8,518,765 | 59,243 | (365,074 | ) | (23,741 | ) | 8,189,193 | |||||||||||||
Residential mortgage-backed securities | 32,063 | 4 | (1,470 | ) | (284 | ) | 30,313 | |||||||||||||
Collateralized debt securities | 239,154 | 272 | (13,029 | ) | (4,349 | ) | 222,048 | |||||||||||||
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Total bonds available-for-sale | 9,824,697 | 72,753 | (395,972 | ) | (28,420 | ) | 9,473,058 | |||||||||||||
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Total investments in fixed maturity | $ | 16,734,570 | $ | 167,658 | $ | (559,109 | ) | $ | (41,808 | ) | $ | 16,301,311 | ||||||||
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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 | |||||||||||||
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| �� |
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| |||||||||||
Total bonds held-to-maturity | 7,102,110 | 394,900 | (25,092 | ) | (13,129 | ) | 7,458,789 | |||||||||||||
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| |||||||||||
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 | |||||||||||||
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| |||||||||||
Total bonds available-for-sale | 8,107,794 | 321,861 | (39,097 | ) | (10,310 | ) | 8,380,248 | |||||||||||||
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| |||||||||||
Total investments in fixed maturity | $ | 15,209,904 | $ | 716,761 | $ | (64,189 | ) | $ | (23,439 | ) | $ | 15,839,037 | ||||||||
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9
Note 4 – Investment in Securities – (Continued)
The amortized cost and fair value, by contractual maturity, of fixed maturity securities are shown below (in thousands):
March 31, 2022 | ||||||||||||||||
Bonds Held-to-Maturity | Bonds Available-for-Sale | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Due in one year or less | $ | 1,009,078 | $ | 1,015,539 | $ | 679,738 | $ | 683,242 | ||||||||
Due after one year through five years | 2,073,827 | 2,097,134 | 2,878,586 | 2,878,658 | ||||||||||||
Due after five years through ten years | 2,861,063 | 2,804,615 | 2,957,938 | 2,871,074 | ||||||||||||
Due after ten years | 965,905 | 910,965 | 3,308,435 | 3,040,084 | ||||||||||||
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| |||||||||
Total | $ | 6,909,873 | $ | 6,828,253 | $ | 9,824,697 | $ | 9,473,058 | ||||||||
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Actual maturities may 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):
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Proceeds from sales of fixed maturity, bonds available-for-sale | $ | 20,247 | $ | 11,650 | ||||
Gross realized gains | — | — | ||||||
Gross realized losses | — | — |
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 the three months ended March 31,2022.
In accordance with various regulations, American National has bonds on deposit with regulating authorities with a carrying value of $52.7 million and $53.5 million at March 31, 2022 and December 31, 2021, respectively. In addition, American National has pledged bonds in connection with certain agreements and transactions, such as financing and reinsurance agreements. The carrying value of bonds pledged was $62.2 million and $67.1 million at March 31, 2022 and December 31, 2021, respectively.
The components of the change in net unrealized gains (losses) on debt securities are shown below (in thousands):
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Bonds available-for-sale: change in unrealized losses | $ | (605,983 | ) | $ | (171,952 | ) | ||
Adjustments for | ||||||||
Deferred policy acquisition costs | 122,095 | 33,570 | ||||||
Participating policyholders’ interest | 9,744 | 4,322 | ||||||
Deferred federal income tax benefit | 99,124 | 27,796 | ||||||
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| |||||
Change in net unrealized losses on debt securities, net of tax | $ | (375,020 | ) | $ | (106,264 | ) | ||
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The components of the change in net gains (losses) on equity securities are shown below (in thousands):
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Unrealized gains (losses) on equity securities | $ | (1,270 | ) | $ | 96,766 | |||
Net losses on equity securities sold | (8,212 | ) | (826 | ) | ||||
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| |||||
Net gains (losses) on equity securities | $ | (9,482 | ) | $ | 95,940 | |||
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10
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):
March 31, 2022 | ||||||||||||||||||||||||||||||||||||
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 | 9 | $ | (881 | ) | $ | 15,413 | 2 | $ | (140 | ) | $ | 5,052 | 11 | $ | (1,021 | ) | $ | 20,465 | ||||||||||||||||||
U.S. states and political subdivisions | 84 | (9,879 | ) | 224,058 | 5 | (5,499 | ) | 30,791 | 89 | (15,378 | ) | 254,849 | ||||||||||||||||||||||||
Corporate debt securities | 526 | (333,952 | ) | 4,537,251 | 46 | (31,122 | ) | 197,510 | 572 | (365,074 | ) | 4,734,761 | ||||||||||||||||||||||||
Residential mortgage- backed securities | 5 | (1,456 | ) | 29,805 | 2 | (14 | ) | 462 | 7 | (1,470 | ) | 30,267 | ||||||||||||||||||||||||
Collateralized debt securities | 29 | (12,729 | ) | 214,998 | 4 | (300 | ) | 5,683 | 33 | (13,029 | ) | 220,681 | ||||||||||||||||||||||||
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| |||||||||||||||||||
Total | 653 | $ | (358,897 | ) | $ | 5,021,525 | 59 | $ | (37,075 | ) | $ | 239,498 | 712 | $ | (395,972 | ) | $ | 5,261,023 | ||||||||||||||||||
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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 | ||||||||||||||||||||||||
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| |||||||||||||||||||
Total | 235 | $ | (29,407 | ) | $ | 1,869,749 | 42 | $ | (9,690 | ) | $ | 188,028 | 277 | $ | (39,097 | ) | $ | 2,057,777 | ||||||||||||||||||
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Several assumptions and underlying estimates are made in the evaluation of allowance for credit loss. Examples include 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 transportation sector.
Equity securities by market sector distribution are shown below, based on fair value:
March 31, 2022 | December 31, 2021 | |||||||
Consumer goods | — | % | 9.6 | % | ||||
Energy and utilities | 34.1 | 6.4 | ||||||
Finance | 38.4 | 35.6 | ||||||
Healthcare | — | 9.0 | ||||||
Industrials | — | 3.5 | ||||||
Information technology | — | 15.1 | ||||||
Other | 27.5 | 20.8 | ||||||
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| |||||
Total | 100.0 | % | 100.0 | % | ||||
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11
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 condensed consolidated statement of operations as “(Increase) decrease in investment credit loss.”
No accrued interest receivables were written off as of March 31, 2022.
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, 2022 | $ | (11,467 | ) | $ | (1,146 | ) | $ | (516 | ) | $ | (13,129 | ) | ||||
Disposition | 125 | — | 2 | 127 | ||||||||||||
Provision | (573 | ) | 149 | 38 | (386 | ) | ||||||||||
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| |||||||||
Balance at March 31, 2022 | $ | (11,915 | ) | $ | (997 | ) | $ | (476 | ) | $ | (13,388 | ) | ||||
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Corporate Debt Securities | Collateralized Debt Securities | Residential Mortgage Backed Securities | Total | |||||||||||||
Balance at January 1, 2021 | $ | (7,475 | ) | $ | (4,515 | ) | $ | (452 | ) | $ | (12,442 | ) | ||||
Purchases | (228 | ) | — | — | (228 | ) | ||||||||||
Disposition | 125 | — | — | 125 | ||||||||||||
Provision | (4,215 | ) | (2,004 | ) | (90 | ) | (6,309 | ) | ||||||||
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| |||||||||
Balance at March 31, 2021 | $ | (11,793 | ) | $ | (6,519 | ) | $ | (542 | ) | $ | (18,854 | ) | ||||
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12
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. State and Political Subdivisions | Corporate Debt Securities | Collateralized Debt Securities | Residential Mortgage Backed Securities | Total | ||||||||||||||||
Balance at January 1, 2022 | $ | (14 | ) | $ | (7,141 | ) | $ | (2,887 | ) | $ | (268 | ) | $ | (10,310 | ) | |||||
Increase in allowance related to purchases | — | (10,286 | ) | (59 | ) | — | (10,345 | ) | ||||||||||||
Reduction in allowance related to disposition | — | 180 | — | — | 180 | |||||||||||||||
Allowance on securities that had an allowance recorded in a previous period | — | 949 | (1,384 | ) | (16 | ) | (451 | ) | ||||||||||||
Allowance on securities where credit losses were not previously recorded | (32 | ) | (7,443 | ) | (19 | ) | — | (7,494 | ) | |||||||||||
Balance at March 31, 2022 | $ | (46 | ) | $ | (23,741 | ) | $ | (4,349 | ) | $ | (284 | ) | $ | (28,420 | ) | |||||
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U.S. Treasury and Government | Corporate Debt Securities | Collateralized Debt Securities | Residential Mortgage Backed Securities | Total | ||||||||||||||||
Balance at January 1, 2021 | $ | — | $ | (7,275 | ) | $ | (19 | ) | $ | (188 | ) | $ | (7,482 | ) | ||||||
Allowance on securities that had an allowance recorded in a previous period | — | (733 | ) | (488 | ) | (10 | ) | (1,231 | ) | |||||||||||
Allowance on securities where credit losses were not previously recorded | (3 | ) | — | — | — | (3 | ) | |||||||||||||
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Balance at March 31, 2021 | $ | (3 | ) | $ | (8,008 | ) | $ | (507 | ) | $ | (198 | ) | $ | (8,716 | ) | |||||
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Credit Quality Indicators
The Company monitors the credit quality of bonds held-to-maturity through the use of credit ratings provided by third party rating agencies, 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):
March 31, 2022 | ||||||||||||||||||||||||
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 | $ | — | $ | 12,248 | $ | — | $ | — | $ | — | $ | 12,248 | ||||||||||||
U.S. state and political subdivisions | 7,364 | 46,306 | 4,934 | 25,672 | 5,390 | 89,666 | ||||||||||||||||||
Foreign governments | — | 13,325 | 1,010 | — | — | 14,335 | ||||||||||||||||||
Corporate debt securities | 31,091 | 386,909 | 3,105,228 | 3,015,546 | 100,318 | 6,639,092 | ||||||||||||||||||
Collateralized debt securities | — | — | 71,148 | 39,883 | — | 111,031 | ||||||||||||||||||
Residential mortgage backed securities | — | 42,433 | — | — | 1,068 | 43,501 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 38,455 | $ | 501,221 | $ | 3,182,320 | $ | 3,081,101 | $ | 106,776 | $ | 6,909,873 | ||||||||||||
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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 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 45,540 | $ | 522,936 | $ | 3,289,605 | $ | 3,128,223 | $ | 115,806 | $ | 7,102,110 | ||||||||||||
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13
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):
March 31, 2022 | December 31, 2021 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
East North Central | $ | 763,641 | 14.8 | % | $ | 747,661 | 14.4 | % | ||||||||
East South Central | 97,225 | 1.9 | 117,574 | 2.3 | ||||||||||||
Mountain | 1,280,431 | 24.8 | 1,250,562 | 24.0 | ||||||||||||
Pacific | 869,480 | 16.9 | 878,820 | 16.9 | ||||||||||||
South Atlantic | 598,798 | 11.6 | 627,295 | 12.0 | ||||||||||||
West South Central | 1,242,336 | 24.1 | 1,261,659 | 24.3 | ||||||||||||
Other | 303,805 | 5.9 | 315,763 | 6.1 | ||||||||||||
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| |||||||||
Total | $ | 5,155,716 | 100.0 | % | $ | 5,199,334 | 100.0 | % | ||||||||
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|
As of March 31, 2022 and December 31, 2021, loans in foreclosure and loans foreclosed are as follows (in thousands, except number of loans):
March 31, 2022 | December 31, 2021 | |||||||||||||||
Foreclosure and foreclosed | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | ||||||||||||
In foreclosure | 1 | $ | 4,874 | — | $ | — | ||||||||||
Filed for bankruptcy | — | — | — | — | ||||||||||||
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| |||||||||
Total in foreclosure | 1 | $ | 4,874 | — | $ | — | ||||||||||
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| |||||||||
Foreclosed | — | $ | — | 1 | $ | 5,168 | ||||||||||
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The age analysis of past due loans is shown below (in thousands, except percentages):
March 31, 2022 | 30-59 Days Past Due | 60-89 Days Past Due | More Than 90 Days Past Due | Total | Current | Total | ||||||||||||||||||||||
Amount | Percentage | |||||||||||||||||||||||||||
Apartment | $ | 30,539 | $ | — | $ | — | $ | 30,539 | $ | 537,149 | $ | 567,688 | 10.8 | % | ||||||||||||||
Hotel | — | — | — | — | 975,076 | 975,076 | 18.6 | |||||||||||||||||||||
Industrial | — | — | — | — | 880,514 | 880,514 | 16.8 | |||||||||||||||||||||
Office | — | 57,083 | — | 57,083 | 1,304,290 | 1,361,373 | 25.9 | |||||||||||||||||||||
Parking | — | — | — | — | 390,745 | 390,745 | 7.4 | |||||||||||||||||||||
Retail | — | — | 4,874 | 4,874 | 753,525 | 758,399 | 14.5 | |||||||||||||||||||||
Storage | — | — | — | — | 169,721 | 169,721 | 3.2 | |||||||||||||||||||||
Other | 4,363 | — | — | 4,363 | 140,661 | 145,024 | 2.8 | |||||||||||||||||||||
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| |||||||||||||||||||||||||
Total | $ | 34,902 | $ | 57,083 | $ | 4,874 | $ | 96,859 | $ | 5,151,681 | $ | 5,248,540 | 100.0 | % | ||||||||||||||
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| |||||||||||||||||
Allowance for credit losses | (92,824 | ) | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Total, net of allowance | $ | 5,155,716 | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||
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 | |||||||||||||||||||||
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| |||||||||||||||||||||||||
Total | $ | 4,872 | $ | — | $ | — | $ | 4,872 | $ | 5,291,541 | $ | 5,296,413 | 100.0 | % | ||||||||||||||
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|
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|
| |||||||||||||||
Allowance for credit losses | (97,079 | ) | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Total, net of allowance | $ | 5,199,334 | ||||||||||||||||||||||||||
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14
Note 5 – Mortgage Loans – (Continued)
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 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 in 2021. However, gradual easing of pandemic restrictions has generated a more favorable economic environment and no additional modifications were made during the first quarter of 2022. The additional modifications from prior years 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 $5.2 million as of March 31, 2022.
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 restructured 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 restructures during the periods presented are as follows (in thousands, except number of loans):
Three months ended March 31, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
Number of Loans | Recorded Investment Pre- Modification | Recorded Investment Post- Modification | Number of Loans | Recorded Investment Pre- Modification | Recorded Investment Post- Modification | |||||||||||||||||||
Office | — | $ | — | $ | — | 2 | $ | 14,660 | $ | 14,660 | ||||||||||||||
Retail | — | — | — | 2 | 28,234 | 28,234 | ||||||||||||||||||
Parking | — | — | — | 1 | 9,730 | 9,730 | ||||||||||||||||||
Storage | — | — | — | 1 | 8,937 | 8,937 | ||||||||||||||||||
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| |||||||||||||
Total | — | $ | — | $ | — | 6 | $ | 61,561 | $ | 61,561 | ||||||||||||||
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During the first quarter of 2022, 4 of the 72 troubled debt restructured loans were paid in full, leaving a total of 68 loans with a recorded investment of $1.2 billion reduced from $1.3 billion at year end 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 in the three months ended March 31, 2022 is primarily attributable to improved economic conditions after lifting of COVID-19 related restrictions.
15
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, 2022 | $ | (97,079 | ) | |
Provision | 4,255 | |||
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| |||
Balance at March 31, 2022 | $ | (92,824 | ) | |
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| |||
Commercial Mortgage Loans | ||||
Balance at January 1, 2021 | $ | (125,703 | ) | |
Provision | (885 | ) | ||
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| |||
Balance at March 31, 2021 | $ | (126,588 | ) | |
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The change in allowance for the three months ended March 31, 2022 was primarily driven by higher overall occupancy in upper- tier hotels and a decreased allowance rate in the office sector as more businesses return to pre-pandemic behavior.
The asset and allowance balances for credit losses for mortgage loans by property-type are shown below (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||||
Asset Balance | Allowance | Asset Balance | Allowance | |||||||||||||
Apartment | $ | 567,688 | $ | (1,540 | ) | $ | 522,595 | $ | (1,366 | ) | ||||||
Hotel | 975,076 | (38,076 | ) | 962,345 | (39,272 | ) | ||||||||||
Industrial | 880,514 | (4,047 | ) | 912,645 | (4,051 | ) | ||||||||||
Office | 1,361,373 | (24,296 | ) | 1,347,384 | (26,988 | ) | ||||||||||
Parking | 390,745 | (15,278 | ) | 392,310 | (16,037 | ) | ||||||||||
Retail | 758,399 | (6,878 | ) | 843,035 | (6,685 | ) | ||||||||||
Storage | 169,721 | (637 | ) | 163,685 | (459 | ) | ||||||||||
Other | 145,024 | (2,072 | ) | 152,414 | (2,221 | ) | ||||||||||
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Total | $ | 5,248,540 | $ | (92,824 | ) | $ | 5,296,413 | $ | (97,079 | ) | ||||||
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16
Note 5 – Mortgage Loans – (Continued)
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 | ||||||||||||||||||||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||
Apartment | $ | 12,444 | $ | 61,832 | $ | 89,955 | $ | 221,719 | $ | 22,166 | $ | 159,572 | $ | 567,688 | ||||||||||||||
Hotel | 24,652 | 32,318 | 39,119 | 106,715 | 202,220 | 570,052 | 975,076 | |||||||||||||||||||||
Industrial | 48,553 | 177,881 | 236,315 | 135,240 | 65,100 | 217,425 | 880,514 | |||||||||||||||||||||
Office | 37,314 | 5,612 | 24,811 | 47,451 | 161,630 | 1,084,555 | 1,361,373 | |||||||||||||||||||||
Parking | — | 31,504 | 28,644 | 13,673 | 26,588 | 290,336 | 390,745 | |||||||||||||||||||||
Retail | 29,925 | 119,858 | 69,851 | 38,603 | 59,491 | 440,671 | 758,399 | |||||||||||||||||||||
Storage | — | 27,998 | 30,532 | 38,595 | 46,586 | 26,010 | 169,721 | |||||||||||||||||||||
Other | — | 50,642 | — | 27,117 | 20,089 | 47,176 | 145,024 | |||||||||||||||||||||
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Total | $ | 152,888 | $ | 507,645 | $ | 519,227 | $ | 629,113 | $ | 603,870 | $ | 2,835,797 | $ | 5,248,540 | ||||||||||||||
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Allowance for credit losses | (92,824 | ) | ||||||||||||||||||||||||||
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Total, net of allowance | $ | 5,155,716 | ||||||||||||||||||||||||||
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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 March 31, 2022, one commercial loan was past due over 90 days or 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 March 31, 2022, we have included a $5.3 million liability in other liabilities on the condensed consolidated statements of financial position based on unfunded loan commitments of $900.9 million.
Note 6 - Real Estate and Other Investments
The carrying amount of investment real estate, net of accumulated depreciation, and real estate partnerships by property-type and geographic distribution are as follows (in thousands, except percentages):
March 31, 2022 | December 31, 2021 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Hotel | $ | 63,822 | 6.9 | % | $ | 56,198 | 6.1 | % | ||||||||
Industrial | 99,758 | 10.8 | 119,698 | 12.9 | ||||||||||||
Land | 42,508 | 4.6 | 39,760 | 4.3 | ||||||||||||
Office | 273,847 | 29.6 | 277,034 | 29.8 | ||||||||||||
Retail | 273,171 | 29.5 | 269,941 | 29.1 | ||||||||||||
Apartments | 161,141 | 17.4 | 153,871 | 16.6 | ||||||||||||
Other | 11,212 | 1.2 | 11,910 | 1.2 | ||||||||||||
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| |||||||||
Total | $ | 925,459 | 100.0 | % | $ | 928,412 | 100.0 | % | ||||||||
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17
Note 6 – Real Estate and Other Investments – (Continued)
March 31, 2022 | December 31, 2021 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
East North Central | $ | 125,250 | 13.5 | % | $ | 122,148 | 13.2 | % | ||||||||
East South Central | 57,608 | 6.2 | 59,122 | 6.4 | ||||||||||||
Mountain | 136,973 | 14.8 | 127,542 | 13.7 | ||||||||||||
Pacific | 115,548 | 12.5 | 112,714 | 12.1 | ||||||||||||
South Atlantic | 67,152 | 7.3 | 67,573 | 7.3 | ||||||||||||
West South Central | 418,032 | 45.2 | 428,272 | 46.1 | ||||||||||||
Other | 4,896 | 0.5 | 11,041 | 1.2 | ||||||||||||
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| |||||||||
Total | $ | 925,459 | 100.0 | % | $ | 928,412 | 100.0 | % | ||||||||
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As of March 31, 2022, no real estate investments 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. 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 2022 or 2021.
The assets and liabilities relating to the VIEs included in the condensed consolidated financial statements are as follows (in thousands):
March 31, 2022 | December 31, 2021 | |||||||
Real estate and real estate partnerships | $ | 121,480 | $ | 126,708 | ||||
Investment funds | 100,045 | 100,374 | ||||||
Short-term investments | 500 | 500 | ||||||
Cash and cash equivalents | 9,537 | 10,341 | ||||||
Premiums due and other receivables | 3,415 | 3,201 | ||||||
Other assets | 13,856 | 12,992 | ||||||
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| |||||
Total assets of consolidated VIEs | $ | 248,833 | $ | 254,116 | ||||
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| |||||
Notes payable | $ | 158,348 | $ | 149,248 | ||||
Other liabilities | 8,985 | 8,250 | ||||||
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| |||||
Total liabilities of consolidated VIEs | $ | 167,333 | $ | 157,498 | ||||
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The notes payable in the condensed 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 $12.1 million and $3.0 million at March 31, 2022 and December 31, 2021, respectively.
The total long-term notes payable of the consolidated VIEs consists of the following (in thousands):
Interest rate | Maturity | March 31, 2022 | December 31, 2021 | |||||||||
4% fixed | 2022 | $ | 74,454 | $ | 75,293 | |||||||
LIBOR or Equivalent | 2023 | 10,776 | 10,819 | |||||||||
4.18% fixed | 2024 | 62,834 | 63,136 | |||||||||
3.25% | 2024 | 6,749 | — | |||||||||
Prime Rate, min. 3.25%, currently 3.50% | 2024 | 3,535 | �� | |||||||||
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| |||||||||
Total | $ | 158,348 | $ | 149,248 | ||||||||
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18
Note 6 – Real Estate and Other Investments – (Continued)
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):
March 31, 2022 | December 31, 2021 | |||||||||||||||
Carrying Amount | Maximum Exposure to Loss | Carrying Amount | Maximum Exposure to Loss | |||||||||||||
Real estate and real estate partnerships | $ | 314,635 | $ | 314,635 | $ | 332,351 | $ | 332,351 | ||||||||
Mortgage loans on real estate | 710,505 | 710,505 | 690,779 | 690,779 | ||||||||||||
Accrued investment income | 3,017 | 3,017 | 2,878 | 2,878 |
American National’s equity in earnings 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.
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 are 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, was comprised of $1.4 billion at March 31, 2022 and December 31, 2021.
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):
Derivatives Not Designated as | Location in the Condensed Consolidated Statements of Financial Position | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
Number of Instruments | Notional Amounts | Estimated Fair Value | Number of Instruments | Notional Amounts | Estimated Fair Value | |||||||||||||||||||||
Equity-indexed options | Other invested assets | 484 | $ | 3,622,900 | $ | 205,296 | 473 | $ | 3,523,000 | $ | 259,383 | |||||||||||||||
Equity-indexed embedded derivative | Policyholders’ account balances | 127,634 | 3,554,390 | 794,636 | 125,523 | 3,419,992 | 832,579 |
Gains (Losses) Recognized in Income on Derivatives | ||||||||||
Derivatives Not Designated as Hedging Instruments | Three months ended March 31, | |||||||||
Location in the Condensed Consolidated Statements of Operations | 2022 | 2021 | ||||||||
Equity-indexed options | Net investment income | $ | (35,183 | ) | $ | 28,827 | ||||
Equity-indexed embedded derivative | Interest credited to policyholders’ account balances | 39,508 | (26,689 | ) |
The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by 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 fair value of open contracts less fair value of collateral held. The Company maintains master netting agreements with its current active trading partners. A right of offset has been applied to collateral that supports credit risk and has been recorded in the condensed consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.
19
Note 7 – Derivative Instruments – (Continued)
Information regarding the Company’s exposure to credit loss on the options it holds is presented below (in thousands):
March 31, 2022 | ||||||||||||||||||||||||||||||||
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- | $ | 5,444 | $ | 5,950 | $ | — | $ | 5,950 | $ | 5,444 | $ | 506 | $ | — | |||||||||||||||||
Barclays | Baa2/BBB | 36,007 | 19,733 | 18,100 | 37,833 | 36,007 | 1,826 | — | ||||||||||||||||||||||||
Credit Suisse | Baa1/BBB+ | 18,600 | 20,230 | — | 20,230 | 18,600 | 1,630 | — | ||||||||||||||||||||||||
ING | Baa1/A- | 12,529 | 2,510 | 10,300 | 12,810 | 12,529 | 281 | — | ||||||||||||||||||||||||
Morgan Stanley | A1/BBB+ | 41,013 | 37,606 | 5,700 | 43,306 | 41,013 | 2,293 | — | ||||||||||||||||||||||||
NATIXIS* | A1/A | 25,550 | 25,490 | — | 25,490 | 25,490 | — | 60 | ||||||||||||||||||||||||
Truist | A3/A- | 41,147 | 31,920 | 11,000 | 42,920 | 41,147 | 1,773 | — | ||||||||||||||||||||||||
Wells Fargo | A1/BBB+ | 25,006 | 16,540 | 9,900 | 26,440 | 25,006 | 1,434 | — | ||||||||||||||||||||||||
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Total | $ | 205,296 | $ | 159,979 | $ | 55,000 | $ | 214,979 | $ | 205,236 | $ | 9,743 | $ | 60 | ||||||||||||||||||
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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 | |||||||||||||||||||||
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| |||||||||||||||||
Total | $ | 259,383 | $ | 209,159 | $ | 55,000 | $ | 264,159 | $ | 258,953 | $ | 5,206 | $ | 430 | ||||||||||||||||
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* | Collateral is prohibited from being held in invested assets. |
20
Note 8 – Net Investment Income and Realized Investment Gains (Losses)
Net investment income is shown below (in thousands):
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Bonds | $ | 138,603 | $ | 130,497 | ||||
Equity securities | 547 | 7,493 | ||||||
Mortgage loans | 83,716 | 70,866 | ||||||
Real estate and real estate partnerships | 54,851 | 3,485 | ||||||
Investment funds | 18,145 | 21,356 | ||||||
Equity-indexed options | (35,183 | ) | 28,827 | |||||
Other invested assets | 8,686 | 7,457 | ||||||
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| |||||
Total | $ | 269,365 | $ | 269,981 | ||||
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Net investment income from equity method investments, comprised of real estate partnerships and investment funds was $70.1 million and $23.2 million for the three months ended March 31, 2022 and 2021, respectively. Net realized investment gains (losses) are shown below (in thousands):
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Bonds | $ | 7,405 | $ | 7,699 | ||||
Real estate and real estate partnerships | 2,896 | 11,193 | ||||||
Other invested assets | (24 | ) | 347 | |||||
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| |||||
Total | $ | 10,277 | $ | 19,239 | ||||
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Net realized investment gains (losses) by transaction type are shown below (in thousands):
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Sales | $ | 3,846 | $ | 12,898 | ||||
Calls and maturities | 6,509 | 7,260 | ||||||
Paydowns | 1 | 439 | ||||||
Impairments | — | (1,265 | ) | |||||
Other | (79 | ) | (93 | ) | ||||
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Total | $ | 10,277 | $ | 19,239 | ||||
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21
Note 9 – 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 | ||||||||||||
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| |||||||||
Total financial assets | $ | 24,740,806 | $ | 24,728,891 | $ | 24,689,906 | $ | 25,132,330 | ||||||||
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| |||||||||
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 | ||||||||||||
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| |||||||||
Total financial liabilities | $ | 11,429,093 | $ | 11,429,093 | $ | 13,250,488 | $ | 13,250,488 | ||||||||
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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. |
22
Note 9 – Fair Value of Financial Instruments — (Continued)
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.
23
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 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 | % |
24
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 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 | ||||||||
|
|
|
|
|
|
|
|
25
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 | ||||||||||||||||
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.
26
Note 9 – Fair Value of Financial Instruments – (Continued)
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.
27
Note 9 – Fair Value of Financial Instruments – (Continued)
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.
28
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):
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 | ||||||||
|
|
|
|
29
Note 10 – Deferred Policy Acquisition Costs
Deferred policy acquisition costs (“DAC”) are shown below (in thousands):
Life | Annuity | Health | Property & Casualty | Total | ||||||||||||||||
Beginning balance at January 1, 2022 | $ | 956,045 | $ | 380,472 | $ | 29,348 | $ | 132,259 | $ | 1,498,124 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Additions | 40,364 | 16,272 | 3,265 | 92,050 | 151,951 | |||||||||||||||
Amortization | (33,165 | ) | (12,724 | ) | (4,182 | ) | (87,764 | ) | (137,835 | ) | ||||||||||
Effect of change in unrealized gains on available-for-sale debt securities | 9,400 | 112,695 | — | — | 122,095 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net change | 16,599 | 116,243 | (917 | ) | 4,286 | 136,211 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Ending balance at March 31, 2022 | $ | 972,644 | $ | 496,715 | $ | 28,431 | $ | 136,545 | $ | 1,634,335 | ||||||||||
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|
|
|
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|
|
Commissions comprise the majority of additions to deferred policy acquisition costs.
Note 11 – 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 condensed 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 condensed 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):
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Unpaid claims balance, beginning | $ | 1,455,079 | $ | 1,373,600 | ||||
Less: Reinsurance recoverables | 288,358 | 262,471 | ||||||
|
|
|
| |||||
Net beginning balance | 1,166,721 | 1,111,129 | ||||||
|
|
|
| |||||
Incurred related to | ||||||||
Current | 298,198 | 300,176 | ||||||
Prior years | (6,150 | ) | (31,127 | ) | ||||
|
|
|
| |||||
Total incurred claims | 292,048 | 269,049 | ||||||
|
|
|
| |||||
Paid claims related to | ||||||||
Current | 95,315 | 99,857 | ||||||
Prior years | 191,862 | 160,716 | ||||||
|
|
|
| |||||
Total paid claims | 287,177 | 260,573 | ||||||
|
|
|
| |||||
Net balance | 1,171,592 | 1,119,605 | ||||||
Plus: Reinsurance recoverables | 274,708 | 239,160 | ||||||
|
|
|
| |||||
Unpaid claims balance, ending | $ | 1,446,300 | $ | 1,358,765 | ||||
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|
|
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 $6.2 million during the first three months of 2022 and decreased by $31.1 million during the same period in 2021. The favorable development in 2022 was a reflection of lower-than-anticipated settlement of losses arising from guaranteed asset protection waiver line of business. The favorable development in 2021 was a reflection of lower liability claim settlement costs emerging from commercial automotive, 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 March 31, 2022 and December 31, 2021 was $17.6 million and $18.9 million, respectively.
30
Note 12 – Federal Income Taxes
A reconciliation of the effective tax rate to the statutory federal tax rate is shown below (in thousands, except percentages):
Three months ended March 31, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Total expected income tax expense at the statutory rate | $ | 29,155 | 21.0 | % | $ | 44,625 | 21.0 | % | ||||||||
Tax-exempt investment income | (1,119 | ) | (0.8 | ) | (1,172 | ) | (0.6 | ) | ||||||||
Dividend exclusion | (211 | ) | (0.2 | ) | (813 | ) | (0.4 | ) | ||||||||
Tax credits, net | (1,331 | ) | (1.0 | ) | (1,618 | ) | (0.8 | ) | ||||||||
Low income housing tax credit expense | 807 | 0.6 | 1,513 | 0.7 | ||||||||||||
Change in valuation allowance | 16 | — | 29 | — | ||||||||||||
Other items, net | (31 | ) | 0.1 | 607 | 0.4 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 27,286 | 19.7 | % | $ | 43,171 | 20.3 | % | ||||||||
|
|
|
|
|
|
|
|
As of March 31, 2022, 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 deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld.
As of March 31, 2022, 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 13 – 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) | |||||||||||||
Beginning balance at January 1, 2022 | $ | 149,312 | $ | 546 | $ | (2,804 | ) | $ | 147,054 | |||||||
Amounts reclassified from AOCI (net of tax benefit $1,436 and expense $756) | (5,400 | ) | 2,843 | — | (2,557 | ) | ||||||||||
Unrealized holding losses arising during the period (net of tax benefit $125,940) | (473,773 | ) | — | — | (473,773 | ) | ||||||||||
Unrealized adjustment to DAC (net of tax expense $25,640) | 96,455 | — | — | 96,455 | ||||||||||||
Unrealized losses on investments attributable to participating policyholders’ interest (net of tax expense $2,046) | 7,698 | — | — | 7,698 | ||||||||||||
Foreign currency adjustment (net of tax expense $83) | — | — | 312 | 312 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending balance at March 31, 2022 | $ | (225,708 | ) | $ | 3,389 | $ | (2,492 | ) | $ | (224,811 | ) | |||||
|
|
|
|
|
|
|
|
Net Unrealized Gains (Losses) on Securities | Defined Benefit Pension Plan Adjustments | Foreign Currency Adjustments | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
Beginning balance at January 1, 2021 | $ | 292,166 | $ | (67,130 | ) | $ | (2,866 | ) | $ | 222,170 | ||||||
Amounts reclassified from AOCI (net of tax benefit $944 and expense $1,013) | (3,553 | ) | 3,809 | — | 256 | |||||||||||
Unrealized holding losses arising during the period (net of tax benefit $35,260) | (132,644 | ) | — | — | (132,644 | ) | ||||||||||
Unrealized adjustment to DAC (net of tax expense $7,050) | 26,519 | — | — | 26,519 | ||||||||||||
Unrealized losses on investments attributable to participating policyholders’ interest (net of tax expense $908) | 3,414 | — | — | 3,414 | ||||||||||||
Foreign currency adjustment (net of tax expense $65) | — | — | 244 | 244 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Ending balance at March 31, 2021 | $ | 185,902 | $ | (63,321 | ) | $ | (2,622 | ) | $ | 119,959 | ||||||
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|
|
|
|
|
|
|
Unrealized holding losses increased during the period ended March 31, 2022 compared to December 31, 2021, as a result of an increase in benchmark ten-year interest rates, which were 2.3% and 1.5%, 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.
31
Note 14 – Stockholders’ Equity and Noncontrolling Interests
ANAT has one class of common stock with a par value $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 that was announced by the Company on August 9, 2021. Refer to Note 1, Nature of Operations, for more information. The number of shares outstanding at the dates indicated are shown below:
March 31, 2022 | December 31, 2021 | |||||||
Common stock | ||||||||
Shares issued | 26,887,200 | 26,887,200 | ||||||
Restricted shares | (10,000 | ) | (10,000 | ) | ||||
|
|
|
| |||||
Unrestricted outstanding shares | 26,877,200 | 26,877,200 | ||||||
|
|
|
|
Stock-based Compensation
American National has made grants of 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 March 31, 2022 as shown in the table below.
RS and RSU information for the periods indicated are shown below:
RS Shares | RSUs | |||||||||||||||
Shares | Weighted-Average Grant Date Fair Value | Units | Weighted-Average Grant Date Fair Value | |||||||||||||
Outstanding at December 31, 2021 | 10,000 | $ | 80.05 | 10,197 | $ | 113.35 | ||||||||||
Granted | — | — | — | — | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Forfeited | — | — | — | — | ||||||||||||
Expired | — | — | — | — | ||||||||||||
|
|
|
| |||||||||||||
Outstanding at March 31, 2022 | 10,000 | $ | 80.05 | 10,197 | $ | 113.35 | ||||||||||
|
|
|
|
RS Shares | RSUs | |||||||
Weighted-average contractual remaining life (in years) | 0.92 | 0.08 | ||||||
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 | ||||||||
Three months ended March 31, 2022 | $ | 20,000 | $ | 175,000 | ||||
Three months ended March 31, 2021 | 20,000 | 220,000 | ||||||
Fair value of liability award | ||||||||
March 31, 2022 | N/A | $ | 1,560,000 | |||||
December 31, 2021 | N/A | 1,926,000 |
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.
32
Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)
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. 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 in May 2022.
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. RSUs may only be settled in cash.
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Weighted average shares outstanding | 26,877,200 | 26,877,200 | ||||||
Incremental shares from RS awards | 7,541 | 7,699 | ||||||
|
|
|
| |||||
Total shares for diluted calculations | 26,884,741 | 26,884,899 | ||||||
|
|
|
| |||||
Net income attributable to American National (in thousands) | $ | 108,769 | $ | 170,173 | ||||
Basic earnings per share | $ | 4.05 | $ | 6.33 | ||||
Diluted earnings per share | $ | 4.05 | $ | 6.33 |
Statutory Capital and Surplus
Risk Based Capital (“RBC”) is a measure defined by the National Association of Insurance Commissioners (NAIC) and is used by insurance regulators 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 both March 31, 2022 and December 31, 2021, the statutory capital and surplus of American National Insurance Company (“ANICO”) was $4.0 billion, 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 March 31, 2022 and December 31, 2021, above 200% of the company action level.
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.
33
Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)
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 $64.2 million and $68.1 million at March 31, 2022 and December 31, 2021, 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):
March 31, 2022 | December 31, 2021 | |||||||
Statutory capital and surplus | ||||||||
Life insurance entities | $ | 2,427,574 | $ | 2,425,759 | ||||
Property and casualty insurance entities | 1,602,817 | 1,570,501 | ||||||
Three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Statutory net income (loss) | ||||||||
Life insurance entities | $ | 52,558 | $ | (32,217 | ) | |||
Property and casualty insurance entities | 31,698 | 39,272 |
Dividends
Dividends are paid on a quarterly basis. We paid a quarterly dividend of $0.82 per share for each quarter during the three months ended March 31, 2022 and 2021, 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.
Under the terms of the Merger Agreement with Brookfield Reinsurance, American National is not permitted to pay cash dividends prior to the closing of the Merger, except for quarterly cash dividends of not more than $0.82 per share, with record and payment dates set forth on an agreed schedule that reflects American National’s historical dividend amounts, record dates and payment dates. Consistent with that schedule, American National has paid two quarterly cash dividends since the Merger Agreement was signed on August 6, 2021. The next permitted record date for dividends is June 7, 2022. If the Merger has not closed on or prior to that date, then we would expect our Board of Directors to declare a regular quarterly dividend payable June 17, 2022 to the holders of record on June 7, 2022.
The Merger Agreement requires American National and Brookfield Reinsurance to close the Merger on the fourth business day after all insurance regulatory approvals have been obtained. However, there can be no assurance as to whether the Merger will close prior to, on, or after June 7, 2022, and we are not able to accelerate our quarterly dividend schedule without Brookfield Reinsurance’s prior written consent. 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.
34
Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)
Noncontrolling Interest
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 condensed consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest $6.8 million at March 31, 2022 and December 31, 2021, respectively.
American National Group, Inc. and its subsidiaries exercise control or ownership of various joint ventures, resulting in their consolidation into American National’s condensed consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as a noncontrolling interest of $2.5 million and $0.9 million at March 31, 2022 and December 31, 2021, respectively.
Note 15 – Segment Information
Management organizes the business into five 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 (“MGU”). |
• | 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. |
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 line of business 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. |
35
Note 15 – Segment Information – (Continued)
The results of operations measured as the income (loss) before federal income tax and other items by operating segments are summarized below (in thousands):
Three months ended March 31, 2022 | ||||||||||||||||||||||||
Life | Annuity | Health | Property & Casualty | Corporate & Other | Total | |||||||||||||||||||
PREMIUMS AND OTHER REVENUES | ||||||||||||||||||||||||
Premiums | $ | 106,216 | $ | 7,343 | $ | 32,465 | $ | 436,087 | $ | — | $ | 582,111 | ||||||||||||
Other policy revenues | 89,072 | 5,692 | — | — | — | 94,764 | ||||||||||||||||||
Net investment income | 52,910 | 108,776 | 1,248 | 14,894 | 91,537 | 269,365 | ||||||||||||||||||
Net realized investment gains | — | — | — | — | 10,277 | 10,277 | ||||||||||||||||||
Increase in investment credit loss | — | — | — | — | (11,636 | ) | (11,636 | ) | ||||||||||||||||
Net losses on equity securities | — | — | — | — | (9,482 | ) | (9,482 | ) | ||||||||||||||||
Other income | 898 | 1,188 | 4,343 | 3,002 | 1,304 | 10,735 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total premiums and other revenues | 249,096 | 122,999 | 38,056 | 453,983 | 82,000 | 946,134 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
BENEFITS, LOSSES AND EXPENSES | ||||||||||||||||||||||||
Policyholder benefits | 164,276 | 21,294 | — | — | — | 185,570 | ||||||||||||||||||
Claims incurred | — | — | 20,636 | 270,605 | — | 291,241 | ||||||||||||||||||
Interest credited to policyholders’ account balances | 10,013 | 38,286 | — | — | — | 48,299 | ||||||||||||||||||
Commissions for acquiring and servicing policies | 45,441 | 15,229 | 5,321 | 91,352 | — | 157,343 | ||||||||||||||||||
Other operating expenses | 50,297 | 13,349 | 11,139 | 52,661 | 11,516 | 138,962 | ||||||||||||||||||
Change in deferred policy acquisition costs | (7,199 | ) | (3,548 | ) | 917 | (4,286 | ) | — | (14,116 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total benefits, losses and expenses | 262,828 | 84,610 | 38,013 | 410,332 | 11,516 | 807,299 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) before federal income tax and other items | $ | (13,732 | ) | $ | 38,389 | $ | 43 | $ | 43,651 | $ | 70,484 | $ | 138,835 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2021 | ||||||||||||||||||||||||
Life | Annuity | Health | Property & Casualty | Corporate & Other | Total | |||||||||||||||||||
PREMIUMS AND OTHER REVENUES | ||||||||||||||||||||||||
Premiums | $ | 100,779 | $ | 24,241 | $ | 38,228 | $ | 399,405 | $ | — | $ | 562,653 | ||||||||||||
Other policy revenues | 81,508 | 5,031 | — | — | — | 86,539 | ||||||||||||||||||
Net investment income | 67,797 | 153,864 | 2,083 | 15,513 | 30,724 | 269,981 | ||||||||||||||||||
Net realized investment gains | — | — | — | — | 19,239 | 19,239 | ||||||||||||||||||
Increase in investment credit loss | — | — | — | — | (5,486 | ) | (5,486 | ) | ||||||||||||||||
Net gains on equity securities | — | — | — | — | 95,940 | 95,940 | ||||||||||||||||||
Other income | 458 | 856 | 4,094 | 3,489 | 855 | 9,752 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total premiums and other revenues | 250,542 | 183,992 | 44,405 | 418,407 | 141,272 | 1,038,618 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
BENEFITS, LOSSES AND EXPENSES | ||||||||||||||||||||||||
Policyholder benefits | 146,160 | 44,717 | — | — | — | 190,877 | ||||||||||||||||||
Claims incurred | — | — | 24,251 | 244,135 | — | 268,386 | ||||||||||||||||||
Interest credited to policyholders’ account balances | 19,770 | 88,017 | — | — | — | 107,787 | ||||||||||||||||||
Commissions for acquiring and servicing policies | 45,420 | 23,042 | 5,986 | 79,237 | — | 153,685 | ||||||||||||||||||
Other operating expenses | 47,041 | 12,181 | 10,608 | 53,886 | 9,786 | 133,502 | ||||||||||||||||||
Change in deferred policy acquisition costs | (14,469 | ) | (11,071 | ) | 854 | (3,433 | ) | — | (28,119 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total benefits, losses and expenses | 243,922 | 156,886 | 41,699 | 373,825 | 9,786 | 826,118 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income before federal income tax and other items | $ | 6,620 | $ | 27,106 | $ | 2,706 | $ | 44,582 | $ | 131,486 | $ | 212,500 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
36
Note 16 – 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 March 31, 2022 were approximately $12.7 million.
American National had aggregate commitments at March 31, 2022 to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $1.8 billion of which $1.0 billion 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 March 31, 2022 and December 31, 2021.
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
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 March 31, 2022, certain municipal bonds and collateralized mortgage obligations with a fair value of approximately $24.3 million and commercial mortgage loans of approximately $1.4 billion were on deposit with the FHLB as collateral for borrowing. As of March 31, 2022, the collateral provided borrowing capacity of approximately $826.6 million. The deposited securities and commercial mortgage loans are included in the Company’s condensed 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 March 31, 2022, was approximately $121.4 million, while the total cash value of the related life insurance policies was approximately $143.9 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. Refer to Part I, Item 2, MD&A, Introductory Note Regarding Pending Merger for more information.
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Note 16 – 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 condensed 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 condensed 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 17 – 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 condensed consolidated financial statements of significant related party transactions is shown below (in thousands):
Dollar Amount of Transactions | ||||||||||||||||||
Three months ended March 31, | Amount due from American National | |||||||||||||||||
Related Party | Financial Statement Line Impacted | 2022 | 2021 | March 31, 2022 | December 31, 2021 | |||||||||||||
Greer, Herz & Adams, LLP | Other operating expenses | $ | 3,573 | $ | 3,713 | $ | (564 | ) | $ | (310 | ) |
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.
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