XML 102 R16.htm IDEA: XBRL DOCUMENT

Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

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



	December 31,
	2019				2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity	$	8,631,261	$	8,968,690	$	8,211,449	$	8,130,084
Fixed maturity securities, bonds available-for-sale	6,725,085		6,725,085		6,215,563		6,215,563
Equity securities	1,700,960		1,700,960		1,530,228		1,530,228
Equity-indexed options	256,005		256,005		148,006		148,006
Mortgage loans on real estate, net of allowance	5,097,017		5,309,005		5,124,707		5,049,468
Policy loans	379,657		379,657		376,254		376,254
Short-term investments	425,321		425,321		206,760		206,760
Separate account assets ($1,049,938 and $905,824 included in fair value hierarchy)	1,073,891		1,073,891		918,369		918,369
Separately managed accounts	50,503		50,503		16,532		16,532
Total financial assets	$	24,339,700	$	24,889,117	$	22,747,868	$	22,591,264
Financial liabilities
Investment contracts	$	10,254,959	$	10,254,959	$	10,003,990	$	10,003,990
Embedded derivative liability for equity-indexed contracts	731,552		731,552		596,075		596,075
Notes payable	157,997		157,997		137,963		137,963
Separate account liabilities ($1,049,938 and $905,824 included in fair value hierarchy)	1,073,891		1,073,891		918,369		918,369
Total financial liabilities	$	12,218,399	$	12,218,399	$	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.

Valuation Techniques for Financial Instruments Recorded at Fair Value

Fixed Maturity Securities and Equity Options—American National utilizes SS&C Technologies, Inc. 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 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 and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is performed quarterly.

Equity Securities—For publicly-traded equity securities, prices are received from a nationally recognized pricing service that are based on observable market transactions, and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, an estimated fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. If applicable, these estimates would be disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services annually.

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

Separate account assets and liabilities—Separate account assets and liabilities are funds that are held separate from the general assets and liabilities of American National 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 statements of operations.

The separate account assets included on the quantitative disclosures fair value hierarchy table is comprised of short-term investments, equity securities, and fixed maturity 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 also include 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 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, 2019 and 2018, the one-year implied volatility used to estimate embedded derivative value was 11.3% 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
	December 31,					December 31,
	2019		2018		Unobservable Input	2019	2018
Indexed Annuities	$	706.5	$	592.8	Lapse Rate	1-70%	1-70%
					Mortality Multiplier	90-100%	90-100%
					Equity Volatility	11-46%	19-26%
Indexed Life	25.1		3.3		Equity Volatility	11-46%	19-26%

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 December 31, 2019
	Total Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds available-for-sale
U.S. treasury and government	$	29,941	$	—	$	29,941	$	—
U.S. states and political subdivisions	1,078,165		—		1,078,165		—
Foreign governments	6,287		—		6,287		—
Corporate debt securities	5,576,620		—		5,531,776		44,844
Residential mortgage-backed securities	23,943		—		23,943		—
Collateralized debt securities	10,129		—		10,129		—
Total bonds available-for-sale	6,725,085		—		6,680,241		44,844
Equity securities
Common stock	1,682,149		1,681,686		—		463
Preferred stock	18,811		18,811		—		—
Total equity securities	1,700,960		1,700,497		—		463
Options	256,005		—		—		256,005
Short-term investments	425,321		—		425,321		—
Separate account assets	1,049,938		271,575		778,363		—
Separately managed accounts	50,503		—		—		50,503
Total financial assets	$	10,207,812	$	1,972,072	$	7,883,925	$	351,815
Financial liabilities
Embedded derivative for equity-indexed contracts	$	731,552	$	—	$	—	$	731,552
Separate account liabilities	1,049,938		271,575		778,363		—
Total financial liabilities	$	1,781,490	$	271,575	$	778,363	$	731,552



	Assets and Liabilities Carried at Fair Value by Hierarchy Level at December 31, 2018
	Total Fair Value		Level 1		Level 2		Level 3
Financial assets
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
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	$	9,022,913	$	1,757,563	$	7,096,466	$	168,884
Financial liabilities
Embedded derivative for equity-indexed contracts	$	596,075	$	—	$	—	$	596,075
Separate account liabilities	905,824		227,448		678,376		—
Total financial liabilities	$	1,501,899	$	227,448	$	678,376	$	596,075

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			Separately Managed Accounts		Embedded Derivative
Balance at December 31, 2016	$	14,264		$	156,479		$	—	$	314,330
Total realized and unrealized investment losses included in other comprehensive income	(4,465		)	—			—		—
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			16,532		—
Sales	—			(18		)	—		—
Settlements or maturities	—			(89,106		)	—		—
Premiums less benefits	—			—			—		101,411
Balance at December 31, 2018	$	4,346		$	148,006		$	16,532	$	596,075
Net gain for derivatives included in net investment income	—			144,980			—		—
Net change included in interest credited	—			—			—		162,011
Net fair value change included in other comprehensive income	—			—			60		—
Purchases, sales and settlements or maturities
Purchases	45,307			75,163			33,911		—
Sales	(113		)	(13,396		)	—		—
Settlements or maturities	—			(98,748		)	—		—
Premiums less benefits	—			—			—		(26,534		)
Gross transfers out of Level 3	(4,233		)	—			—		—
Balance at December 31, 2019	$	45,307		$	256,005		$	50,503	$	731,552

Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $113,282,000, unrealized losses of $94,883,000, and unrealized gains of $50,805,000 relating to assets still held at December 31, 2019, 2018, and 2017, 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 year ended December 31, 2017 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 indicates 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, 2019. The transfers out of Level 3 during the years ended December 31, 2019, and 2017, were the result of 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.

Fair Value Information About Financial Instruments Not Recorded at Fair Value

Information about fair value estimates for financial instruments not measured at fair values is discussed below:

Fixed Maturity Securities—The fair value of held-to-maturity securities is determined 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, 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.

The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis are shown below (in thousands):



	December 31, 2019
	FV Hierarchy Level	Carrying Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	Level 2	$	165,109	$	170,114
Foreign governments	Level 2	3,907		4,349
Corporate debt securities	Level 2	8,099,098		8,424,969
Residential mortgage-backed securities	Level 2	237,516		242,828
Collateralized debt securities	Level 2	125,631		126,430
Total fixed maturity securities, bonds held-to-maturity		8,631,261		8,968,690
Mortgage loans on real estate, net of allowance	Level 3	5,097,017		5,309,005
Policy loans	Level 3	379,657		379,657
Total financial assets		$	14,107,935	$	14,657,352
Financial liabilities
Investment contracts	Level 3	$	10,254,959	$	10,254,959
Notes payable	Level 3	157,997		157,997
Total financial liabilities		$	10,412,956	$	10,412,956



	December 31, 2018
	FV Hierarchy Level	Carrying Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	Level 2	$	245,360	$	250,899
Foreign governments	Level 2	3,961		4,430
Corporate debt securities	Level 2	7,640,891		7,548,829
Residential mortgage-backed securities	Level 2	315,306		319,910
Collateralized debt securities	Level 2	5,214		5,285
Other debt securities	Level 2	717		731
Total fixed maturity securities, bonds held-to-maturity		8,211,449		8,130,084
Mortgage loans on real estate, net of allowance	Level 3	5,124,707		5,049,468
Policy loans	Level 3	376,254		376,254
Total financial assets		$	13,712,410	$	13,555,806
Financial liabilities
Investment contracts	Level 3	$	10,003,990	$	10,003,990
Notes payable	Level 3	137,963		137,963
Total financial liabilities		$	10,141,953	$	10,141,953

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details