The carrying amount and fair value of financial instruments are shown below (in thousands):



	December 31,
	2018				2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity	$	8,211,449	$	8,130,084	$	7,552,959	$	7,774,353
Fixed maturity securities, bonds available-for-sale	6,215,563		6,215,563		6,145,308		6,145,308
Equity securities	1,530,228		1,530,228		1,784,226		1,784,226
Equity-indexed options	148,006		148,006		220,190		220,190
Mortgage loans on real estate, net of allowance	5,124,707		5,049,468		4,749,999		4,811,006
Policy loans	376,254		376,254		377,103		377,103
Short-term investments	206,760		206,760		658,765		658,765
Separate account assets ($905,824 and $965,575 included in fair value hierarchy)	918,369		918,369		969,764		969,764
Separately managed accounts	16,532		16,532		851		851
Total financial assets	$	22,747,868	$	22,591,264	$	22,459,165	$	22,741,566
Financial liabilities
Investment contracts	$	10,003,990	$	10,003,990	$	8,990,771	$	8,990,771
Embedded derivative liability for equity-indexed contracts	596,075		596,075		512,526		512,526
Notes payable	137,963		137,963		137,458		137,458
Separate account liabilities ($905,824 and $965,575 included in fair value hierarchy)	918,369		918,369		969,764		969,764
Total financial liabilities	$	11,656,397	$	11,656,397	$	10,610,519	$	10,610,519

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.

Fixed Maturity Securities and Equity Options—American National utilizes a pricing service to estimate fair value measurements. The estimates of fair value for most fixed maturity securities, including municipal bonds, provided by the pricing service are disclosed as Level 2 measurements as the estimates are based on observable market information rather than market quotes.

The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturity securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, an option adjusted spread model is used to develop prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant market information, credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

American National has reviewed the inputs and methodology used and the techniques applied by the pricing service to produce quotes that represent the fair value of a specific security. The review confirms that the pricing service is utilizing information from observable transactions or a technique that represents a market participant’s assumptions. American National does not adjust quotes received from the pricing service. The pricing service utilized by American National has indicated that they will only produce an estimate of fair value if there is objectively verifiable information available.

American National holds a small amount of private placement debt and fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these securities, a quote from an independent broker (typically a market maker) is obtained. Due to the disclaimers on the quotes that indicate that the price is indicative only, American National includes these fair value estimates in Level 3.

For securities priced using a quote from an independent broker, such as the equity-indexed options (which are priced monthly by the broker and quarterly by pricing service, SS&C Technologies Holdings, Inc.) 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 estimate of 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.

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. These estimates would be disclosed as Level 2 measurements.

Short-term investments— Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor's and Moody's, respectively. Commercial paper is carried at amortized cost which approximates fair value. These investments are classified as Level 2 measurements.

Separate account assets and liabilities— Separate account assets and liabilities are funds that are held separate from the general assets and liabilities of American National and that represent the investments of variable insurance product contract holders, who bear the investment risk of such funds. Investment income and investment gains and losses from these separate funds accrue to the benefit of the contract holders. Separate accounts are established in conformity with insurance laws and are not chargeable with liabilities that arise from any other business of American National. American National reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are legally insulated from American National’s general account liabilities; (iii) investments are directed by the contract holder; and (iv) all investment performance, net of contract fees and assessments, is passed through to the contract holder. The assets of these accounts are carried at fair value. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses in the consolidated financial statements.

The separate account assets included on the quantitative disclosures fair value hierarchy table is made up of short-term investments, equity securities, and fixed maturity securities of available-for-sale bonds. 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 account also includes cash and cash equivalents, investments in unconsolidated affiliates, accrued investment income, and receivables for securities. These are not financial instruments and are not included in the quantitative disclosures of fair value hierarchy table.

Embedded Derivative—The amounts reported within policyholder contract deposits include equity linked interest crediting rates based on the S&P 500 index within 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 will have the inverse effect of decreasing the fair value.


•	Mortality rate assumptions vary by age and by gender based on company and industry experience. Decreases to the assumed mortality rates increase the fair value of the liabilities as more policyholders earn crediting interest. Increases to the assumed mortality rates decrease the fair value as higher decrements reduce the potential for future interest credits.


•	Equity volatility assumptions begin with current market volatilities and grow to long-term values. Increases to the assumed volatility will increase the fair value of liabilities, as future projections will produce higher increases in the linked index. At December 31, 2018 and 2017, the one-year implied volatility used to estimate embedded derivative value was 23.2% and 13.7%, respectively

Fair values of indexed life and annuity liabilities are calculated using the discounted cash flow technique. Shown below are the significant unobservable inputs used to calculate the Level 3 fair value of the embedded derivatives within policyholder contract deposits (in millions, except range percentages):



	Fair Value					Range
	December 31,					December 31,
	2018		2017		Unobservable Input	2018	2017
Indexed Annuities	$	592.8	$	498.3	Lapse Rate	1-70%	1-66%
					Mortality Multiplier	90-100%	90-100%
					Equity Volatility	19-26%	7-30%
Indexed Life	3.3		14.2		Equity Volatility	19-26%	7-30%

Other Financial Instruments—Other financial instruments classified as Level 3 measurements, as there is little or no market activity, are as follows:

Policy loans—The carrying value of policy loans is the outstanding balance plus any accrued interest. Due to the collateralized nature of policy loans such that they cannot be separated from the policy contracts, the unpredictable timing of repayments and the fact that settlement is at outstanding value, American National believes the carrying value of policy loans approximates fair value.

Separately managed accounts—The amounts reported in separately managed accounts consist primarily of notes and private equity. These investments are private placements and do not have a readily determinable fair value. The carrying value of the separately managed accounts is cost or market value if available from the separately managed account manager. Market value is provided by the separately managed account manager in subsequent quarters. American National believes that cost approximates fair value at initial recognition during the quarter of investment.

Investment contracts—The carrying value of investment contracts is equivalent to the accrued account balance. The accrued account balance consists of deposits, net of withdrawals, plus or minus interest credited, fees and charges assessed and other adjustments. American National believes that the carrying value of investment contracts approximates fair value because the majority of these contracts’ interest rates reset at anniversary.

Notes payable—Notes payable are carried at outstanding principal balance. The carrying value of the notes payable approximates fair value because the underlying interest rates approximate market rates at the balance sheet date.

Quantitative Disclosures

The fair value hierarchy measurements of the financial instruments are shown below (in thousands):



	Fair Value Measurement as of December 31, 2018
	Total Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	250,899	$	—	$	250,899	$	—
Foreign governments	4,430		—		4,430		—
Corporate debt securities	7,548,829		—		7,548,829		—
Residential mortgage-backed securities	319,910		—		319,910		—
Collateralized debt securities	5,285		—		5,285		—
Other debt securities	731		—		731		—
Total bonds held-to-maturity	8,130,084		—		8,130,084		—
Fixed maturity securities, bonds available-for-sale
U.S. treasury and government	28,399		—		28,399		—
U.S. states and political subdivisions	862,030		—		862,030		—
Foreign governments	6,210		—		6,210		—
Corporate debt securities	5,283,818		—		5,279,585		4,233
Residential mortgage-backed securities	31,662		—		31,662		—
Collateralized debt securities	3,444		—		3,444		—
Total bonds available-for-sale	6,215,563		—		6,211,330		4,233
Equity securities
Common stock	1,509,186		1,509,073		—		113
Preferred stock	21,042		21,042		—		—
Total equity securities	1,530,228		1,530,115		—		113
Options	148,006		—		—		148,006
Mortgage loans on real estate	5,049,468		—		5,049,468		—
Policy loans	376,254		—		—		376,254
Short-term investments	206,760		—		206,760		—
Separate account assets	905,824		227,448		678,376		—
Separately managed accounts	16,532		—		—		16,532
Total financial assets	$	22,578,719	$	1,757,563	$	20,276,018	$	545,138
Financial liabilities
Investment contracts	$	10,003,990	$	—	$	—	$	10,003,990
Embedded derivative liability for equity-indexed contracts	596,075		—		—		596,075
Notes payable	137,963		—		—		137,963
Separate account liabilities	905,824		227,448		678,376		—
Total financial liabilities	$	11,643,852	$	227,448	$	678,376	$	10,738,028



	Fair Value Measurement as of December 31, 2017
	Total Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	279,395	$	—	$	276,450	$	2,945
Foreign governments	4,593		—		4,593		—
Corporate debt securities	7,232,327		—		7,232,327		—
Residential mortgage-backed securities	255,243		—		255,243		—
Collateralized debt securities	954		—		954		—
Other debt securities	1,841		—		1,841		—
Total bonds held-to-maturity	7,774,353		—		7,771,408		2,945
Fixed maturity securities, bonds available-for-sale
U.S. treasury and government	27,898		—		27,898		—
U.S. states and political subdivisions	897,047		—		897,047		—
Foreign governments	6,460		—		6,460		—
Corporate debt securities	5,192,927		—		5,192,927		—
Residential mortgage-backed securities	14,717		—		14,717		—
Collateralized debt securities	3,818		—		3,818		—
Other debt securities	2,441		—		2,441		—
Total bonds available-for-sale	6,145,308		—		6,145,308		—
Equity securities
Common stock	1,760,627		1,760,499		—		128
Preferred stock	23,599		23,599		—		—
Total equity securities	1,784,226		1,784,098		—		128
Options	220,190		—		—		220,190
Mortgage loans on real estate	4,811,006		—		4,811,006		—
Policy loans	377,103		—		—		377,103
Short-term investments	658,765		—		658,765		—
Separate account assets	965,575		257,209		708,366		—
Separately managed accounts	851		—		—		851
Total financial assets	$	22,737,377	$	2,041,307	$	20,094,853	$	601,217
Financial liabilities
Investment contracts	$	8,990,771	$	—	$	—	$	8,990,771
Embedded derivative liability for equity-indexed contracts	512,526		—		—		512,526
Notes payable	137,458		—		—		137,458
Separate account liabilities	965,575		257,209		708,366		—
Total financial liabilities	$	10,606,330	$	257,209	$	708,366	$	9,640,755

For financial instruments measured at fair value on a recurring basis using Level 3 inputs during the period, a reconciliation of the beginning and ending balances is shown below (in thousands):



	Level 3
	Assets						Liability
	Investment Securities			Equity-Indexed Options			Embedded Derivative
Balance at December 31, 2015	$	20,130		$	123,007		$	242,412
Total realized and unrealized investment gains included in other comprehensive income	481			—			—
Net fair value change included in realized gains (losses)	—			—			—
Net gain for derivatives included in net investment income	—			28,400			—
Net change included in interest credited	—			—			25,239
Purchases, sales and settlements or maturities
Purchases	—			27,961			—
Sales	—			—			—
Settlements or maturities	(425		)	(22,889		)	—
Premiums less benefits	—			—			46,679
Gross transfers into Level 3	908			—			—
Gross transfers out of Level 3	(6,830		)	—			—
Balance at December 31, 2016	$	14,264		$	156,479		$	314,330
Total realized and unrealized investment gains included in other comprehensive income	(4,465		)	—			—
Net fair value change included in realized gains (losses)	—			—			—
Net gain for derivatives included in net investment income	—			90,433			—
Net change included in interest credited	—			—			98,351
Purchases, sales and settlements or maturities
Purchases	—			47,134			—
Sales	(12,436		)	(12,837		)	—
Settlements or maturities	(7,020		)	(61,019		)	—
Premiums less benefits	—			—			99,845
Carry value transfers in	15,000			—			—
Gross transfers into Level 3	382			—			—
Gross transfers out of Level 3	(5,725		)	—			—
Balance at December 31, 2017	$	—		$	220,190		$	512,526
Net loss for derivatives included in net investment income	—			(55,093		)	—
Net change included in interest credited	—			—			(17,862		)
Purchases, sales and settlements or maturities
Purchases	4,346			72,033			—
Sales	—			(18		)	—
Settlements or maturities	—			(89,106		)	—
Premiums less benefits	—			—			101,411
Balance at December 31, 2018	$	4,346		$	148,006		$	596,075

Within the net gain (loss) for derivatives included in net investment income were unrealized losses of $94,883,000, and unrealized gains of $50,805,000, and $44,615,000 relating to assets still held at December 31, 2018, 2017, and 2016, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies during the periods presented. The transfers into Level 3 during the years ended December 31, 2017, and 2016 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. Unless information is obtained from the brokers that indicate observable inputs were used in their pricing, there are not enough observable inputs to enable American National to classify the securities priced by the brokers as other than Level 3. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The inputs used by the brokers include recent transactions in the security, similar bonds with same name, ratings, maturity and structure, external dealer quotes in the security, Bloomberg evaluated pricing and prior months pricing. None of them are observable to American National as of December 31, 2018. The transfers out of Level 3 during the years end December 31, 2017, and 2016, were securities being priced by the third-party service at the end of the period, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2.