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



	March 31, 2019				December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity	$	8,208,129	$	8,323,600	$	8,211,449	$	8,130,084
Fixed maturity securities, bonds available-for-sale	6,584,393		6,584,393		6,215,563		6,215,563
Equity securities	1,698,314		1,698,314		1,530,228		1,530,228
Equity-indexed options	216,156		216,156		148,006		148,006
Mortgage loans on real estate, net of allowance	4,960,650		4,926,154		5,124,707		5,049,468
Policy loans	375,990		375,990		376,254		376,254
Short-term investments	726,759		726,759		206,760		206,760
Separate account assets ($990,983 and $905,824 included in fair value hierarchy)	1,004,475		1,004,475		918,369		918,369
Separately managed accounts	23,254		23,254		16,532		16,532
Total financial assets	$	23,798,120	$	23,879,095	$	22,747,868	$	22,591,264
Financial liabilities
Investment contracts	$	10,364,141	$	10,364,141	$	10,003,990	$	10,003,990
Embedded derivative liability for equity-indexed contracts	668,485		668,485		596,075		596,075
Notes payable	137,490		137,490		137,963		137,963
Separate account liabilities ($990,983 and $905,824 included in fair value hierarchy)	1,004,475		1,004,475		918,369		918,369
Total financial liabilities	$	12,174,591	$	12,174,591	$	11,656,397	$	11,656,397

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.

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, 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 index annuities and indexed life. The following unobservable inputs are used for measuring the fair value of the embedded derivatives associated with the policyholder contract liabilities:

•

Lapse rate assumptions are determined by company experience. Lapse rates are generally assumed to be lower during a contract’s surrender charge period and then higher once the surrender charge period has ended. Decreases to the assumed lapse rates generally increase the fair value of the liability as more policyholders persist to collect the crediting interest pertaining to the indexed product. Increases to the lapse rate assumption will have the inverse effect 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 March 31, 2019 and December 31, 2018, the one year implied volatility used to estimate embedded derivative value was 11.9% and 23.2%, 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, 2019		December 31, 2018		Unobservable Input	March 31, 2019	December 31, 2018
Indexed Annuities	$	656.4	$	592.8	Lapse Rate	1-70%	1-70%
					Mortality Multiplier	90-100%	90-100%
					Equity Volatility	12-25%	19-26%
Indexed Life	12.1		3.3		Equity Volatility	12-25%	19-26%

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 March 31, 2019
	Total Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	228,402	$	—	$	228,402	$	—
Foreign governments	4,416		—		4,416		—
Corporate debt securities	7,759,690		—		7,759,690		—
Residential mortgage-backed securities	221,794		—		221,794		—
Collateralized debt securities	109,147		—		109,147		—
Other debt securities	151		—		151		—
Total bonds held-to-maturity	8,323,600		—		8,323,600		—
Fixed maturity securities, bonds available-for-sale
U.S. treasury and government	28,526		—		28,526		—
U.S. states and political subdivisions	950,033		—		950,033		—
Foreign governments	6,290		—		6,290		—
Corporate debt securities	5,564,541		—		5,560,308		4,233
Residential mortgage-backed securities	24,469		—		24,469		—
Collateralized debt securities	10,534		—		10,534		—
Total bonds available-for-sale	6,584,393		—		6,580,160		4,233
Equity securities
Common stock	1,677,074		1,676,961		—		113
Preferred stock	21,240		21,240		—		—
Total equity securities	1,698,314		1,698,201		—		113
Options	216,156		—		—		216,156
Mortgage loans on real estate	4,926,154		—		4,926,154		—
Policy loans	375,990		—		—		375,990
Short-term investments	726,759		—		726,759		—
Separate account assets	990,983		253,824		737,159		—
Separately managed accounts	23,254		—		—		23,254
Total financial assets	$	23,865,603	$	1,952,025	$	21,293,832	$	619,746
Financial liabilities
Investment contracts	$	10,364,141	$	—	$	—	$	10,364,141
Embedded derivative liability for equity-indexed contracts	668,485		—		—		668,485
Notes payable	137,490		—		—		137,490
Separate account liabilities	990,983		253,824		737,159		—
Total financial liabilities	$	12,161,099	$	253,824	$	737,159	$	11,170,116



	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

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
Beginning balance at January 1, 2019	$	4,346	$	148,006		$	596,075
Total realized and unrealized investment gains (losses) included in other comprehensive income	—		—			—
Net fair value change included in realized gains (losses)	—		—			—
Net gain for derivatives included in net investment income	—		66,485			—
Net change included in interest credited	—		—			58,156
Purchases, sales and settlements or maturities
Purchases	—		17,356			—
Sales	—		—			—
Settlements or maturities	—		(15,691		)	—
Premiums less benefits	—		—			14,254
Ending balance at March 31, 2019	$	4,346	$	216,156		$	668,485
Beginning balance at January 1, 2018	$	—	$	220,190		$	512,526
Total realized and unrealized investment gains (losses) included in other comprehensive income	—		—			—
Net fair value change included in realized gains (losses)	—		—			—
Net loss for derivatives included in net investment income	—		(14,145		)	—
Net change included in interest credited	—		—			(13,436		)
Purchases, sales and settlements or maturities
Purchases	—		16,928			—
Sales	—		—			—
Settlements or maturities	—		(18,665		)	—
Premiums less benefits	—		—			36,551
Gross transfers into Level 3	—		—			—
Gross transfers out of Level 3	—		—			—
Ending balance at March 31, 2018	$	—	$	204,308		$	535,641

Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $69,005,000 and unrealized losses of $24,627,000, relating to assets still held at March 31, 2019, and 2018, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies during the periods presented. 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 March 31, 2019.