•Three buildings in League City, Texas, which are used primarily by our Life, Health, and Corporate and Other segments.
•We are communicating with our board of directors, senior management and employees regarding the ongoing developments of the COVID-19 pandemic. We are communicating through email, company intranet, videos, posters and other signage, an HR email hotline, teleconferences, and online MS Teams meetings.
•We have implemented multiple communication avenues to keep our customers, vendors and producers informed, including:
•Engage in ongoing communications with critical vendors related to their business continuity plans; and
•Provide an overview of our response to COVID-19 on our corporate website.
•We have assessed our facilities, systems, policies and procedures and have implemented plans to continue critical operations and services while many employees are working off-site. The implementation of these plans across all locations was addressed simultaneously in accordance with standards and procedures for remote access that existed prior to the current challenges COVID-19 has introduced. We also have plans for increasing capacity in critical operations should employees in any of our locations become unavailable to work due to COVID-19 health issues. We are continuing to evaluate our cybersecurity program for the next challenges that COVID-19 might cause.
•We have provided our managers resources on leading virtually, virtual meeting tips and transitioning back to the office.
•We developed return-to-office programs as we transition through the different reopening situations at our locations. During the fourth quarter of 2020, viral infections in the general population had begun to increase again resulting in resumption of restrictions in certain areas in which we operate. As a result, we have temporarily paused further return-to-office plans at our locations until May 2021.
•We have taken numerous steps to promote the safety of our employees in keeping current with the local and state mandates and health expert recommendations including:
•Enhanced cleaning protocols by increasing the cleaning rounds per day and focusing on high touch areas, including door handles, elevator knobs, etc.
•Posted social distancing markers and additional signage throughout the buildings as reminders to remain six feet apart.
•Procured and maintained sufficient supply of hand sanitizer and sanitizing wipes for use at entry points and common areas.
•Installed transparent shields in work areas where social distancing cannot be practiced.
•Adjusted air fan/filtration systems, where possible, to help enhance air flow by letting more fresh air into the buildings, while maintaining adequate comfort levels.
No assurance can be given that these actions will be successful, nor can we predict the level of disruption that will occur should the COVID-19 pandemic and its related macroeconomic risks continue for an extended period of time. Given this uncertainty, we are unable to quantify with reasonable confidence the expected impact of the COVID-19 pandemic on our future operations, financial condition, liquidity and results of operations. The wide-ranging social, economic and financial consequences of the COVID-19 pandemic and the possible effects of ongoing and future governmental action in response to COVID-19 compound this uncertainty. Additional information regarding risks and uncertainties related to the COVID-19 pandemic are set forth in Part I, Item 1A, Risk Factors.
This MD&A should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 8, Financial Statements and Supplementary Data.
Our business has been and will continue to be influenced by several industry-wide, segment or product-specific trends and conditions. In our discussion below, we first outline the broad macro-economic or industry trends (General Trends) that we expect to impact our overall business. Second, we discuss certain segment-specific trends we believe may impact individual segments or specific products within these segments.
Our insurance segments do not directly own assets. Rather, assets are allocated to support the liabilities and capital allocated to each segment. The mix of assets allocated to each of the insurance segments is intended to support the characteristics of the insurance liabilities within each segment including expected cash flows and pricing assumptions, and is intended to be sufficient to support each segment’s business activities. We have utilized this methodology consistently over all periods presented.
The interest rate environment affects estimated future profit projections, which could impact the amortization of our DAC assets and the estimates of policyholder liabilities. Significantly lower future estimated profits may cause us to accelerate the amortization of DAC or require us to establish additional policyholder liabilities, thereby reducing earnings. We periodically review assumptions with respect to future earnings to ensure they remain appropriate considering the current interest rate environment.
Importance of Operating Efficiencies: The volatile economic environment and costs associated with greater regulation create a further need for operating efficiencies. We manage our cost base while maintaining our commitment to provide superior customer service to policyholders and agents. Investments in technology are coordinated through a disciplined project management process. We anticipate continuous improvement in our use of technology to enhance our policyholders’ and agents’ experience and increase our overall operating effectiveness.
Continued Challenges of Talent Attraction and Retention: Attracting qualified individuals and retaining existing employees continues to be a challenge for employers. Businesses have become extremely competitive in the ever-changing landscape of the talent marketplace. As a result, it is an increasing challenge to distinguish us as an employer of choice.
To address these challenges, we continue to seek out new and expanded uses for technology and social media that enhance our employer brand and educate candidates on the many benefits of working for us. Our planning and outreach efforts to develop a more diverse and inclusive workplace continue and help to strengthen the engagement of current employees as well as attract future employees. We continue to amplify the voice of our employees with regular surveys which help us grow and innovate. We actively value the perspectives that each employee brings and encourage broader employee influence on how decisions are made. As a result, we continue to experience increase in overall employee engagement. Providing robust career development conversations and career paths, personal growth opportunities and effective succession planning are also important elements of our retention and employee development efforts.
Life insurance and annuity are mainstay segments, as they have been during our long history.
Effective management of invested assets and associated liabilities using crediting rates and, where applicable, financial hedging instruments (which we use as economic hedges of equity-indexed life and annuity products), is important to the success of our Life and Annuity segments. Asset “disintermediation,” the risk of large outflows of cash at times when it is disadvantageous to us to dispose of invested assets, is a risk associated with these segments as are rates of mortality and surrenders that exceed our assumptions.
We believe we are well positioned to address the increasing need for savings tools and income protection. We believe our overall financial strength and broad distribution channels position us to respond with a variety of products for individuals approaching retirement age, who seek information to plan for and manage their retirement needs. We believe our products that offer guaranteed income flows are well suited to serve this market.
As a result of the Healthcare Acts of 2010 new opportunities were created in the limited benefit and supplemental product markets. In recent years, we built a portfolio of such products to be sold in the worksite market as well as to individuals. We believe that changes to the Healthcare Acts that removed the tax consequences for not having health coverage and the removal of limitations on Short Term Medical products could significantly increase our production. We also continue to expand our presence in the worksite market to generate new opportunities in the broker market, as well as developing and implementing a captive sales force.
•Future lapse rates will remain reasonably consistent with our current expectations;
•Mortality rates will remain reasonably consistent within standard industry mortality table ranges; and
•Future interest spreads will remain reasonably consistent with our current expectations.
Health liabilities for unpaid claims are established using the following methods:
The property and casualty liabilities for unpaid claims are established to recognize future development on reported losses for each line of business. The estimation of these amounts is subject to significant uncertainty due to the volatile nature of property and casualty insurance liabilities. The estimation process is based significantly on the assumption that past developments are an appropriate predictor of future events and involves a variety of actuarial techniques that analyze experience, trends and other relevant factors. See the following paragraphs as well as Note 12, Liability for Unpaid Claims and Claim Adjustment Expenses, of the Notes to the Consolidated Financial Statements for additional information.
The evaluation process to determine liability for unpaid claims involves the collaboration of underwriting, claims and actuarial departments. The process also includes consultation with independent actuarial firms as part of our process of gaining reassurance that claims and CAE liability estimate sufficiently, all obligations arising from all losses incurred as of year-end.
•No significant prospective changes in laws that would significantly affect future payouts.
Management believes our reserves at December 31, 2020 are adequate. New information, regulation, events or circumstances unknown at the original valuation date, however, may result in future development resulting in ultimate losses being significantly greater or less than the recorded reserves at December 31, 2020.
We believe the estimates used in our DAC calculations provide insight into how variations in assumptions and estimates would affect our business. The following table displays the sensitivity of reasonably likely changes in assumptions in the DAC amortization for our long-duration business at December 31, 2020 (in thousands):
We manage our insurance underwriting risk exposures by purchasing reinsurance. We manage counterparty risk by entering into agreements with reinsurers we consider creditworthy, generally measured by the individual entity or entities’ financial strength rating. However, we do require a specified minimum rating by a NRSRO. We monitor the concentrations of the reinsurers and reduce the participation percentage of lower-rated and unrated companies when appropriate in our judgment. While we believe we currently have no significant credit risk related to reinsurance counterparties, we continue to monitor their financial condition.
On January 1, 2020, we adopted ASC 326, Financial Instruments-Credit Losses, accounting guidance related to the allowance for credit losses. Refer to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Consolidated Financial Statements in Item 8. The new standard significantly changes how entities measure credit losses for most financial assets and reinsurance recoverables that are not measured at fair value through net income. The guidance replaces the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. Refer to Note 4, Investment in Securities, and Note 5, Mortgage Loans, of the Notes to the Consolidated Financial Statements in Item 8 for further discussion of the accounting policies and methodologies for establishing the allowance for credit losses.
The accounting estimates relating to the allowance for credit losses over financial assets held at amortized cost have been evaluated and monitored since adoption and management has deemed these estimates to be critical for the following reasons:
•Changes in the provision for credit losses can be material to the financial position and results of operations for the Company;
•Estimates relating to the allowance for credit losses require us to project future cash flows, delinquencies, collateral values, occupancy rates, prepayments based on a reasonable and supportable forecast in order to estimate probability of default and the loss given default;
•The allowance for credit losses is also affected by factors outside of our control including, but not limited to, market volatility, deterioration in the credit or prospects of companies and governmental entities, political uncertainty, industry trends, pandemics, and trends in interest rates; and
•Management judgment is required to determine which models, methodologies, and scenario conditions are used to calculate the allowance for credit losses to produce a reasonable estimate that encompasses the expected lifetime credit losses.
The Company has frozen each of its defined benefit pension plans. Our pension and postretirement benefit obligations and related costs covering our employees are estimated using actuarial concepts in accordance with the relevant accounting guidance. The discount rate and the expected return on plan assets are important elements of expense and/or liability measurements. Each year, these key assumptions are reevaluated to determine whether they reflect the best estimates for the current period. Changes in the methodology used to determine the best estimates are made when facts or circumstances change. Other assumptions involve demographic factors such as retirement age, mortality and turnover. The expected long-term rate of return on plan assets is determined by a modeling method utilizing several factors which is described further in Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 2, Summary of Significant Accounting Policies and Practices, Pension and Postretirement Benefit Plans. See Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 18, Pension and Postretirement Benefits for additional details.
•A decrease in net gains on equity securities resulting from less favorable market conditions
Earnings for our Life segment decreased primarily due to the following:
•An overall increase in mortality primarily from deaths we believe are directly and indirectly attributable to COVID-19
Life insurance sales are based on the total yearly premium that insurance companies would expect to receive if all recurring premium policies would remain in-force, plus 10% of single and excess premiums. Life insurance sales measure activity associated with gaining new insurance business in the current period, and includes deposits received related to interest sensitive life and universal life-type products. Whereas GAAP premium revenues are associated with policies sold in current and prior periods, and deposits received related to interest sensitive life and universal life-type products are recorded in a policyholder account which is reflected as a liability. Therefore, a reconciliation of premium revenues and insurance sales is not meaningful.
The reduction in DAC amortization relates to lower actual gross profits on the universal block due to an increase in claims and better persistency on the traditional life block.
For 2020, the companies to whom we have ceded reinsurance for the Life segment are shown below (in thousands, except percentages):
Earnings for our Annuity segment increased primarily due to the following:
•Due to a change in estimate in the fourth quarter of 2020 related to our equity indexed annuity products, policyholder benefits increased by $47.1 million and deferred policy acquisition costs increased by $26.3 million. Offsetting these increases, interest credited to policyholders' account balances was reduced by $96.4 million. The net impact of this change in estimate was an increase of $23.0 million to earnings from our annuity segment in 2020
Annuity premiums and deposits decreased primarily for fixed deferred products during the year ended December 31, 2020 compared to 2019. The low interest rate environment and choices we made on setting crediting rates, coupled with the economic impact attributable to COVID-19 resulted in lower sales of fixed deferred annuities during the year ended December 31, 2020.
The change in amortization was primarily due to a change in estimates related to our equity indexed annuities. As mentioned above, the change in estimate related to our equity indexed annuities resulted in a $26.3 million increase in the amortization of DAC. The change in acquisition costs capitalized strongly correlated with the change in commissions, which declined due to lower sales.
Equity indexed annuity change in estimates during the fourth quarter of 2020 resulted in a reduction of interest credited to policyholder's by $96.4 million partially offset by a $47.1 million increase in policyholder benefits, combining for a net increase of $49.3 million in interest and mortality margin. The following table summarizes the interest margin due to the impact of the investment performance, net of interest credited to policyholder’s and the net cost of mortality related reserves (in thousands):
Earnings for our Health segment remained consistent; however, there were offsetting variances as follows:
•An increase in Worksite premium driven by the addition of a large group
•A reduction in other operating expenses primarily attributable to a reduction in travel and related marketing costs
Competitive premium rates were the primary driver behind the increase in sales for Medicare Supplement in late 2019. Similarly, Worksite premium increased due to the addition of a large group. The decline in MGU premium is driven by the completion of prior treaties for a large MGU program that is inactive for 2020.
We cede or retrocede the majority of the premium and risk associated with our stop-loss and other MGU programs. We maintain reinsurance on a quota share basis for our long-term care and long-term disability income business.
Earnings for our Property and Casualty segment increased primarily due to the following:
•Significantly higher catastrophe losses, which had the greatest impact on our homeowners loss ratio
•Net premiums written and earned for the year were reduced by COVID-19 relief policy credits for auto policyholders totaling $17.7 million; $16.8 million for personal auto policies and $0.9 million for commercial auto policies. The policy credits were based on 10%-15% of monthly premiums
•The increase in commissions expense for the year was primarily due to the increase in premiums written and an increase in contingent commissions due to the improvement in the loss ratios for the Specialty Markets Group products
Homeowners: Net premiums written and earned increased primarily due to rate increases. The loss and loss adjustment expense and combined ratios increased due to increased net catastrophe losses caused by multiple wind and hailstorms. Catastrophe losses, net of reinsurance, increased by $32.2 million, to $91.2 million in 2020 compared to $59.0 million in 2019.
Commercial Products results for the periods indicated were as follows (in thousands, except percentages):
Agricultural Business: Our agricultural business product allows policyholders to customize and cover their agriculture exposure using a package policy, which includes coverage for residences and household contents, farm and ranch buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased primarily due to rate increases and an increase in policies in-force. The loss and loss adjustment expense and combined ratios improved primarily due to fewer non-catastrophe claims as well as favorable prior year claim severity development.
Specialty Markets products provide protection to borrowers and the creditors that extend credit to them. Products offer coverage against unpaid indebtedness as a result of death, disability, involuntary unemployment or untimely loss to the collateral securing a personal or mortgage loan. Specialty Markets products also include renters, mortgage security, aviation, and private flood insurance.
Net written and earned premiums increased primarily due to the addition of new accounts related to mortgage security and collateral protection products. The loss and loss adjustment expense and combined ratios decreased primarily due to the improvement of loss ratios on products that provide collateral protection related to automobiles, also known as auto GAP business, and mortgage security products.
During 2020, we retained the first $1.0 million for workers’ compensation risks and the first $1.5 million of loss per risk for non-workers’ compensation risks. Our catastrophe reinsurance retention covering property and casualty companies in total is $17.5 million.
We purchase a Catastrophe Aggregate reinsurance coverage that provides for $30 million of limit excess of $104 million of aggregated catastrophe losses. Qualifying losses include amounts of retained losses net of other reinsurance below $25 million on Property Claims Services (“PCS”) declared catastrophe events and internally declared catastrophe events exceeding $5 million. The Catastrophe Aggregate reinsurance coverage has been placed at 100% for 2020 and does not include a reinstatement.
A Second and Third Event Property Catastrophe Excess cover was placed in 2020. This cover provides $15 million of protection excess of a $10 million retention per catastrophe. The reinsurance protection follows satisfaction of a $13.5 million Annual Aggregate Deductible ("AAD"). This cover acts to reduce the retention on large second and third catastrophe events to $10 million following a first large catastrophe and includes one automatic reinstatement at 100%.
(1)A.M. Best rating as of the most current information available February 10, 2021.
Reinsurance is used to reduce risks associated with our credit related specialty market products primarily to provide producers of these products the opportunity to participate in the underwriting risk through various entities, such as producer-owned captive reinsurance companies or other insurance companies. A majority of the treaties entered into by our Specialty Markets Group are written on a 100% coinsurance basis without benefit limits. We also place a corporate catastrophe reinsurance program which covers P&C business written by the Specialty Markets Group as well as personal and commercial business written by our Multiple Line agents.
While we believe that our claims reserves at December 31, 2020 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in ultimate losses in amounts significantly greater or less than the reserves currently recorded. The actual final cost of settling both claims outstanding at December 31, 2020 and claims expected to arise from unexpired periods of risk is uncertain. There are many other possible changes that would cause losses to increase or decrease, which include but are not limited to claim severity; the expected level of reported claims; judicial action changing the scope or liability of coverage; the regulatory, social and economic environment; and unexpected changes in loss inflation. For additional information regarding prior year development of our claims and CAE reserves, refer to Note 12, Liability for Unpaid Claims and Claim Adjustment Expenses, of the Notes to the Consolidated Financial Statements.
•An increase in the S&P 500 of 16.3% for the twelve months ended December 31, 2020 compared to a 28.9% increase for the same period in 2019 resulting in lower net gains on equity securities
•A decrease in net investment income earned and allocated to this segment
The following summarizes the carrying values of our invested assets (other than investments in unconsolidated affiliates) by asset class (in thousands, except percentages):
Equity Securities-We invest in the equity securities of companies traded on national U.S. stock exchanges. See Note 4, Investments in Securities, of the Notes to the Consolidated Financial Statements for the unrealized and realized gains and losses of equity securities.
Mortgage Loans-We invest in commercial mortgage loans that are diversified by property-type and geography. Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. Mortgage loans are generally carried at outstanding principal balances, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of allowances. The weighted average coupon yield on the principal funded for mortgage loans was 4.8% at December 31, 2020 and 2019. For additional information regarding mortgage loans refer to Note 5, Mortgage Loans, of the Notes to the Consolidated Financial Statements.
Investment Real Estate-We invest in commercial real estate where positive cash flows and/or appreciation in value is expected. Real estate may be owned directly by our insurance companies or non-insurance affiliates or indirectly in joint ventures with real estate developers or investors we determine share our perspective regarding risk and return relationships. The carrying value of real estate is stated at cost, less accumulated depreciation and impairments, if any. Depreciation is provided over the estimated useful lives of the properties.
Net investment income decreased $143.7 million during 2020 compared to 2019 primarily due to lower gains on options from a decline in the S&P 500.
Net realized investment gains decreased $2.1 million during 2020 compared to 2019 primarily attributable to decreased sales of real estate. Net realized investment gains (losses) are shown below (in thousands):
The net change in the unrealized gains on fixed maturity securities between December 31, 2020 and December 31, 2019 is primarily attributable to the decrease in benchmark ten-year interest rates which were 0.9% and 1.9% 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.
We are monitoring our liquidity needs closely. In April 2020, the Company borrowed $500 million from the Federal Home Loan Bank of Dallas' COVID-19 Relief Advance Program. As of December 31, 2020, one advance totaling $250 million was outstanding and expected to be repaid on its maturity date of April 28, 2021. The available liquidity at February 22, 2021 was approximately $775.2 million.
The primary use of cash has been and is expected to continue to be payment of policyholder benefits and claims incurred. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management currently considers our current liquidity position to be sufficient to meet anticipated demands over the next twelve months. Our contractual obligations are not expected to have a significant negative impact to cash flows from operations.
We are currently evaluating the renovation and modernization of our home office facilities. This could result in aggregate capital expenditures of approximately $100 million over a three-year period beginning in 2021. However, current uncertainties relating to the COVID-19 pandemic could cause us to lower or delay anticipated spending on capital investment projects. There are no other unusually large capital expenditures expected in the next 12-24 months.
A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flows from operations.
Statutory capital and surplus is the capital of our insurance companies reported in accordance with accounting practices prescribed or permitted by the applicable state insurance departments. 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 of at least 200% of the authorized control level RBC are required to take certain actions. At December 31, 2020 and December 31, 2019, ANICO’s statutory capital and surplus was $3.6 billion and $3.5 billion, respectively. ANICO and each of our insurance subsidiaries had statutory capital and surplus at December 31, 2020 and December 31, 2019, above 200% of the authorized control level, except for ANPAC Louisiana Insurance Company ("ANPLA") at December 31, 2020.
At December 31, 2020 and December 31, 2019, ANPLA's statutory capital and surplus was $68.5 million and $77.0 million, which resulted in an RBC level of 194% and 280% of the authorized control level, respectively. This decrease in RBC of ANPLA is primarily driven by an increase in homeowners catastrophe losses during 2020. We are actively managing our homeowners exposure of ANPLA, will continue to monitor the surplus levels and will be addressing rate adequacy through future planned rate and underwriting actions.
(2)Includes undiscounted case reserves for reported claims and reserves for IBNR with the timing of future payments based on our historical payment patterns. The timing of these payments may vary significantly from the pattern shown in the preceding table. The ultimate losses may vary materially from the recorded amounts, which are our best estimates.
(4)Estimated payments through continuing operations for benefit obligations of the non-qualified defined benefit pension plan. A liability has been established for the full amount of benefits accrued.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
We have audited the accompanying consolidated statement of financial position of American National Group, Inc. and subsidiaries (the "Company") as of December 31, 2020, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for the year ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Policyholders’ Account Balances - Valuation of embedded derivative liabilities for equity-indexed contracts - Refer to Notes 7 and 9 to the financial statements
Our principal audit procedures related to the lapse rate and equity volatility assumptions selected by management for the valuation of embedded derivative liabilities included the following, among others:
•With the assistance of our fair value specialists, we tested the completeness and accuracy of the underlying data used to determine the equity volatility assumptions.
•With the assistance of our actuarial specialists, we evaluated the appropriateness of the assumptions, evaluated the consistency of the selected assumptions used in the Company’s valuation model, and tested the mathematical accuracy of the valuation model.
The Company establishes a liability for unpaid claims and claim adjustment expenses to provide for the estimated costs of paying claims under property and casualty insurance policies written by the Company. The property and casualty liability for unpaid claims is included within Policy and Contract Claims in the statements of financial position, which had a balance of $1.6 billion as of December 31, 2020. This liability, which includes estimates for both claims that have been reported and claims that have been incurred but not reported, represents the estimate of all claim and claim adjustment expenses associated with processing and settling the claims. The liability for unpaid claims is estimated using actuarial assumptions for loss development patterns that are based upon the Company’s historical experience and consider the effects of current developments, anticipated trends and risk management programs.
Given the subjectivity of estimating the ultimate cost to settle the liability for property and casualty insurance reported and incurred but not reported claims, the related audit effort in evaluating the assumptions for loss development patterns required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial specialists.
Our principal audit procedures related to the assumptions for loss development patterns selected by management to estimate the property and casualty liability for unpaid claims and claim adjustment expenses included the following, among others:
•We tested the effectiveness of management’s controls over the property and casualty liability for unpaid claims and claim adjustment expenses, including those over the development, selection, and implementation of the assumptions for loss development patterns used in the actuarial estimates.
•With the assistance of our actuarial specialists, we tested the completeness and accuracy of the underlying data, including historical claims, used to determine the assumptions for loss development patterns, evaluated the appropriateness of the assumptions, evaluated the consistency of the selected assumptions used in the Company’s valuation model, and tested the mathematical accuracy of the valuation model.
Mortgage Loans on Real Estate - Allowance for Credit Losses - Refer to Notes 2, 3, and 5 to the financial statements
Given the subjectivity of estimating the qualitative allowance factors applied in developing the allowance for credit losses, performing audit procedures to evaluate whether the allowance for credit losses on mortgage loans was appropriately valued required a high degree of auditor judgment and an increased extent of effort, including involvement of our credit specialists.
•We tested the effectiveness of management’s controls over the allowance for credit losses on mortgage loans, including those over the development, selection, and implementation of the assumptions related to the qualitative allowance factors.
The preparation of the 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.
Mortgage loans on real estate are stated at unpaid principal balance, adjusted for any unamortized discount, deferred expenses, and allowances. Accretion of discounts is recorded using the effective yield method. Interest income, prepayment fees, and accretion of discounts and origination fees are reported in “Net investment income” in the consolidated statements of operations. Interest income earned is accrued on the principal amount of the loan based on contractual interest rate. However, interest ceases to accrue for loans on which interest is more than 90 days past due, when the collection of interest is not probable, or when a loan is in foreclosure. Income on past due loans is reported on a cash basis. When a loan becomes current, it is placed back into accrual status. Cash receipts on impaired loans are recorded as a reduction of principal, interest income, expense reimbursement, or other manner in accordance with the loan agreement. In the consolidated statements of operations, gains and losses from the sale of loans are reported in “Net realized investment gains,” and changes in allowances are reported in "Change in investment credit loss."
Mortgage loans are presented net of the Company's recorded allowance for expected credit loss, which represents the portion of amortized cost basis on mortgage loans that the Company does not expect to collect. In determining the Company’s allowance for credit losses, management: (i) pools and evaluates mortgage loans with similar risk characteristics, (ii) considers expected lifetime credit losses adjusted for prepayments and extensions, and (iii) considers past events, current economic conditions and forecasts of future economic conditions. The allowance is calculated quarterly for each property type based on inputs unique to each loan property type.
Investment real estate including related improvements are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the asset (typically 15 to 50 years). Rental income is recognized on a straight-line basis over the term of the respective lease. American National classifies a property as held-for-sale if it commits to a plan to sell a property within one year and actively markets the property in its current condition for a price that is reasonable in comparison to its estimated fair value. Real estate held-for-sale is stated at the lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated while it is classified as held-for-sale. American National periodically reviews its investment real estate for impairment and tests properties for recoverability whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable and the carrying value of the property exceeds its estimated fair value. Properties whose carrying values are greater than their undiscounted cash flows are written down to their estimated fair value, with the impairment loss included as an adjustment to “Net realized investment gains” in the consolidated statements of operations. Impairment losses are based upon the estimated fair value of real estate, which is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks as well as other appraisal methods. Real estate acquired upon foreclosure is recorded at the lower of its cost or its estimated fair value at the date of foreclosure.
Credit losses on fixed maturity securities, held-to-maturity, receive a lifetime expected credit loss allowance upon initial recognition of the security representing the net amount expected to be collected. Expected credit losses are measured on a collective (pool) basis by major security type with the credit loss allowance determined based on the difference between the net present value of the expected cash flows from those pooled securities with the amortized cost basis. The expected cash flows are discounted at the effective interest rate of the security and consider historical credit loss information that is adjusted for current market conditions and reasonable and supportable economic forecasts based upon a third-party valuation model. The valuation model calculates expected cash flows based on scenario conditioned probability of default and loss given default. Probability of default measures the likelihood of default over a specified time period, and the loss given default measures the amount that the Company could lose in the event of a counterparty default.
Derivative instruments are purchased to hedge against future interest rate increases in liabilities indexed to market rates and are recorded in the consolidated statements of financial position at fair value net of collateral provided by counterparties. The change in fair value of derivative assets and liabilities is reported in the consolidated statements of operations as “Net investment income” and “Interest credited to policyholders’ account balances,” respectively. American National does not apply hedge accounting treatment to its derivative instruments. The Company uses derivative instruments to hedge its business risk and holds collateral to offset exposure from its counterparties. Collateral that supports credit risk is reported in the consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.
Cash and cash equivalents have durations that do not exceed 90 days at the date of acquisition, include cash on-hand and in banks, as well as amounts invested in money market funds, and are reported as “Cash and cash equivalents” in the consolidated statements of financial position.
DAC on universal life and investment-type contracts is amortized as a level percentage of the present value of anticipated gross profits from investment yields, mortality, and surrender charges. The effect of the realization of unrealized gains (losses) on DAC is recognized within AOCI in the consolidated statements of financial position as of the reporting date. A change in interest rates could have a significant impact on DAC calculated for these contracts.
DAC associated with property and casualty business is amortized over the coverage period of the related policies, in relation to premiums earned.
Liabilities for future policy benefits for traditional products have been provided on a net level premium method based on estimated investment yields, withdrawals, mortality, and other assumptions that were appropriate at the time the policies were issued. Estimates are based on historical experience adjusted for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience. When it is determined that future expected experience differs significantly from existing assumptions, the estimates are revised for current and future issues.
Reinsurance recoverables are estimated amounts due to American National from reinsurers related to paid and unpaid ceded claims and CAE and are presented net of a reserve for collectability. Recoveries of gross ultimate losses under our non-catastrophe reinsurance are estimated by a review of individual large claims and the ceded portion of IBNR using assumed distribution of loss by percentage retained. Recoveries of gross ultimate losses under our catastrophe reinsurance are estimated by applying reinsurance treaty terms to estimates of gross ultimate losses. The most significant assumption is the average size of the individual losses for those claims that have occurred but have not yet been reported and our estimate of gross ultimate losses. The ultimate amount of the reinsurance ceded recoverable is unknown until all losses settle.
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 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.
Traditional ordinary life and health premiums are recognized as revenue when due. Benefits and expenses are associated with earned premiums to result in recognition of profits over the term of the insurance contracts.
Universal life and single premium whole life revenues represent amounts assessed to policyholders including mortality charges, surrender charges actually paid, and earned policy service fees. Amounts included in expenses are benefits in excess of account balances returned to policyholders.
Property and casualty premiums are recognized as revenue over the period of the contract in proportion to the amount of insurance protection, which is generally evenly over the contract period, net of reinsurance ceded. Claims incurred consist of claims and CAE paid and the change in reserves, net of reinsurance received and recoverable.
For the majority of this participating business, profits earned are reserved for the payment of dividends to policyholders, except for the stockholders’ share of profits on participating policies, which is limited to the greater of 10% of the profit on participating business, or 50 cents per thousand dollars of the face amount of participating life insurance in-force. Participating policyholders’ interest includes the accumulated net income from participating policies reserved for payment to such policyholders in the form of dividends (less net income allocated to stockholders as indicated above) as well as a pro rata portion of unrealized investment gains (losses) net of tax. Dividends to participating policyholders were $7.0 million, $8.4 million, and $7.6 million for the years ended 2020, 2019, and 2018, respectively. Additional income of $5.8 million, $34.0 million, and $4.2 million was allocated to participating policyholders for the years ended 2020, 2019, and 2018, respectively.
American National uses a discount rate to determine the present value of future benefits on the measurement date. The guideline for setting this rate is a high-quality long-term corporate bond rate. For this purpose, a hypothetical bond portfolio to match the expected monthly benefit payments under the pension plan was constructed with the resulting yield of the portfolio used as a discount rate.
In developing the investment return assumption, we relied on a model that utilizes the following factors:
•Forecasts of inflation, GDP growth, and total return for each asset class
•Standard deviations and correlations related to historical and expected future returns of each asset class and inflation
Using this approach, the calculated return will fluctuate from year to year; however, it is American National’s policy to hold this long-term assumption relatively constant.
Future Adoption of New Accounting Standards - The FASB issued the following accounting guidance relevant to American National:
Actual maturities 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):
Gains and losses are determined using specific identification of the securities sold. During 2020 and 2019, bonds below investment grade with a carrying value of $142.7 million and $157.9 million, respectively, were transferred from held-to-maturity to available-for-sale after a deterioration in the issuers’ creditworthiness.
In accordance with various regulations, American National has bonds on deposit with regulating authorities with a carrying value of $47.7 million and $48.0 million at December 31, 2020 and 2019, respectively. In addition, American National has pledged bonds in connection with agreements and transactions, such as financing and reinsurance agreements. The carrying value of bonds pledged was $111.0 million and $162.2 million at December 31, 2020 and 2019, respectively.
Unrealized losses on bonds available-for-sale where an allowance for credit loss was not recorded are due to noncredit related factors caused by market liquidity events related to COVID-19 and the related economic downturn. A number of assumptions and estimates are inherent in evaluating whether an allowance for credit loss is necessary, which include the 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.
Equity securities by market sector distribution are shown below, based on fair value:
Available-for-Sale Securities-For bonds available-for-sale 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 is 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.
No accrued interest receivables were written off as of December 31, 2020.
The rollforward of the allowance for credit losses for bonds held-to-maturity is shown below (in thousands):
The allowance fluctuated from quarter to quarter in 2020 reflecting market volatility during the year. The impact of COVID-19, the oil price shocks, and the elevated unemployment rate were variables that increased default risk for borrowers in North America and globally. During 2020, energy, retail, construction and transportation sectors were most impacted by the market conditions leading to increased loss allowances; however, in the last quarter of 2020, the default risk forecast had shown that government policies and vaccine development succeeded in mitigating the credit risk to a certain extent. As a result, the expected loss on U.S. corporate debt securities classified as held-to-maturity decreased with the recovery in the market by the end of the year. The outcome drove held-to-maturity allowances to become more in line with available-for-sale results.
The age analysis of past due loans is shown below (in thousands, except percentages):
There were no unamortized purchase discounts as of December 31, 2020 and 2019. Total mortgage loans were net of unamortized origination fees of $26.1 million and $29.3 million at December 31, 2020 and 2019, respectively. No unearned income is included in these amounts.
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 after the allowance, before and after modification in a troubled debt restructuring, may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment. 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.
There were 67 loans determined to be a troubled debt restructuring for the year ended December 31, 2020. There are $3.9 million of commitments to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring during the periods presented. The increase in loans determined to be a troubled debt restructuring in 2020 is attributable to COVID-19 related loan modifications where the concessions granted were in excess of six-months in duration.
Mortgage loans on real estate are stated at unpaid principal balance, adjusted for any unamortized discount, deferred expenses and allowances. The allowance for current expected losses per ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326"), at the effective date, January 1, 2020, was based upon the current expected credit loss model. Refer to Note 3, Recently Issued Accounting Pronouncements. 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 change in allowance for December 31, 2020 was driven by the economic disruption caused by COVID-19.
The asset and allowance balances for credit losses for mortgage loans by property-type are shown below (in thousands):
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 December 31, 2020, commercial loans of $40.2 million were past due over 90 days and are in non-accrual status.
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 December 31, 2020, we have included an $11.8 million liability in other liabilities on the consolidated statements of financial position based on unfunded loan commitments of $686.5 million.
As of December 31, 2020, one real estate investment with a carrying value of $3.4 million met the criteria as held-for-sale.
The Company’s equity in earnings of unconsolidated affiliates is the Company’s share of operating earnings and realized gains from fixed income and equity funds and investments in real estate joint ventures (“joint ventures”) using the equity method of accounting. In 2020 and 2019 certain joint ventures took advantage of market opportunities to generate realized gains on the sale of real estate held or developed by the ventures.
Fixed income and equity funds are primarily comprised of senior secured and second lien private loans that are secured by assets, revenues, or credit/balance sheet lending.
The Company’s total investment in and equity in earnings of unconsolidated affiliates, of which substantially all are limited liability companies ("LLCs") or limited partnerships, were comprised of the following (in thousands):
Net realized investment gains (losses) by transaction type are shown below (in thousands):
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 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.
No gains or losses were recognized on assets transferred to separate accounts for the years ended December 31, 2020, 2019, and 2018.
•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.
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):
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):
The associated embedded derivative decrease is largely driven by classification changes to declared funds within indexed products and by changes to the embedded derivative discount rate.
Fair Value Information About Financial Instruments Not Recorded at Fair Value
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 $61.7 million, $58.0 million, $19.9 million in 2020, 2019, and 2018, respectively. The favorable development in 2020 was a reflection of lower rates of claim severity emergence than previously expected in the worker's compensation line of business , and lower liability claim settlement costs emerging from agribusiness and private passenger automobile lines of business. The favorable development in 2019 reflected lower rates of claim severity emergence than previously expected in the workers compensation line of business , and lower liability claim settlement costs emerging from private passenger automobile line of business.
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows (in thousands):
•Pegged Frequency and Severity-This method uses actual claims count data and emergence patterns of older accident periods to project the ultimate number of reported claims for a given accident year. A similar process projects the ultimate average severity per claim so that the product of the two projections results in a projection of ultimate loss for a given accident year.
•Bornhuetter-Ferguson-This method uses, as a starting point, either an assumed Initial Expected Loss Ratio Method or Pegged Frequency and Severity method and blends in the loss ratio or frequency and severity implied by the claims experience to date by using loss development patterns based on our historical experience. This method is generally appropriate where there are few reported claims and an unstable pattern of reported losses.
•Calendar Year Paid Adjusting and Other Expense to Paid Loss-This method uses a selected prior calendar years’ paid expense to paid loss ratio to project ultimate loss adjustment expenses for adjusting and other expense. A percentage of the selected ratio is applied to the case reserves (depending on the line of insurance) and 100% to the indicated IBNR reserves. These ratios assume that a percentage of the expense is incurred when a claim is opened and the remaining percentage is paid throughout the claim’s life.
The following contains information about incurred and paid claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2011 to 2019 is presented as supplementary information.
Note 12 - Liability for Unpaid Claims and Claim Adjustment Expenses - (Continued)
Credit Property and Casualty-Consists of credit property insurance, vendor’s or lender’s single interest insurance, GAP insurance, GAP waiver, debt cancellation products, involuntary unemployment insurance and collateral protection insurance. This line of business has substantially all claims settled and paid in less than two years. Claims and claim adjustment expenses are shown below (in thousands):
•Completion Factor Approach-This method assumes that the historical claim patterns will be an accurate representation of unpaid claim liabilities. An estimate of the unpaid claims is calculated by subtracting period-to-date paid claims from an estimate of the ultimate “complete” payment for all incurred claims in the period. Completion factors are calculated which “complete” the current period-to-date payment totals for each incurred month to estimate the ultimate expected payout.
•Tabular Claims Reserves-This method is used to calculate the reserves for long-term care and disability income blocks of business. These reserves rely on published valuation continuance tables created using industry experience regarding assumptions of continued morbidity and subsequent recovery. Reserves are calculated by applying these continuance tables, along with appropriate company experience adjustments, to the stream of contractual benefit payments. These expected benefit payments are discounted at the required interest rate.
•Premium Deficiency Reserves-Deficiency reserves are established when the expected future claim payments and expenses for a classification of policies are in excess of the expected premiums for these policies. The determination of a deficiency reserve takes into consideration the likelihood of premium rate increases, the timing of these increases, future net investment income, and the expected benefit utilization patterns. We have established premium deficiency reserves for portions of the major medical business and the long-term care business that are in run-off. The assumptions and methods used to determine the deficiency reserves are reviewed periodically for reasonableness, and the reserve amount is monitored against emerging losses.
The claim liability consists of IBNR and Due/Unpaid. The IBNR utilizes an inventory type method based on historical patterns of claim payments incurred but not reported within the last six months of the valuation date.
The Due/Unpaid reserves are the amount needed to pay an open claim from the last date of payment to the reserve valuation date.
For the Property and Casualty segment, American National retains the first $1 million of loss per workers’ compensation risk and $1.5 million of loss per non-workers’ compensation risk. Reinsurance covers up to $6 million of property and liability losses per risk. Additional excess property per risk coverage is purchased to cover risks up to $20 million, and excess casualty clash coverage is purchased to cover losses up to $60 million. Excess casualty clash covers losses incurred as a result of one casualty event involving multiple policies, excess policy limits and extra contractual obligations. Facultative reinsurance is purchased for individual risks attaching at $20 million as needed. Corporate catastrophe coverage is in place for losses up to $500 million. American National retains the first $17.5 million of each catastrophe. Catastrophe aggregate reinsurance coverage is also purchased and is provided by two contracts. The first contract provides for $30 million of coverage after $104 million of aggregated catastrophe losses has been reached. The first $25 million of each catastrophe loss net of other reinsurance contributes to the $104 million aggregation of losses. The second aggregate contract is the Second and Third Event Property Catastrophe Excess cover. This cover provides $15 million of protection excess of the $10 million retention per catastrophe. The reinsurance protection follows satisfaction of a $13.5 million AAD. This cover acts to reduce the retention on large second and third catastrophe events to $10 million following a first large catastrophe and includes one automatic reinstatement at 100%.
American National remains primarily liable with respect to any reinsurance ceded and would bear the entire loss if the reinsurer does not meet their obligations under any reinsurance treaties. American National had the following recoverables from reinsurance, net of allowance for credit losses (in thousands):
None of the amount outstanding at December 31, 2020 is the subject of litigation or is in dispute with the reinsurers involved. Management believes the unfavorable resolution of any dispute that may arise would not have a material impact on American National’s consolidated financial statements.
The amounts in the consolidated financial statements include the impact of reinsurance. Premiums written and earned are shown below (in thousands):
GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance, if necessary, to reduce our deferred tax assets to an amount that is more-likely-than-not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. There were no material changes to our valuation allowance recorded during the years ended December 31, 2020 and 2019. Although realization is not assured, management believes it is more-likely-than-not that our remaining deferred tax assets will be realized and that as of December 31, 2020, no additional valuation allowance is required.
American National has made grants of Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”), 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. 8,250 of such cash-settled RSUs were granted during the third quarter of 2020 and are currently outstanding as shown in the table below.
Basic earnings per share were calculated using a weighted average number of shares outstanding. Diluted earnings per share include RS and RSU award shares issued in 2019 and 2018. RSUs issued in 2020 may only be settled in cash.
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 consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6.8 million at December 31, 2020 and 2019.
American National Group, Inc. and its subsidiaries exercise control or ownership of various joint ventures, resulting in their consolidation into American National’s consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as a noncontrolling deficit of $0.9 million and $0.7 million at December 31, 2020 and 2019, respectively.
•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.
•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.
•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.
The results of operations measured as the income (loss) before federal income taxes and other items by operating segments are summarized below (in thousands):
American National sponsors qualified and non-qualified defined benefit pension plans, all of which have been frozen. As such, no additional benefits are accrued through these plans for additional years of service credit or future salary increase credit, and no new participants are added to the plans. Benefits earned by eligible employees prior to the plans being frozen have not been affected.
Amounts recognized as a component of AOCI that have not been recognized as a component of the combined net periodic benefit cost of the defined benefit pension plans, are shown below (in thousands):
American National’s funding policy for the qualified pension plans is to make annual contributions to meet the minimum funding standards of the Pension Protection Act of 2006. American National and its affiliates did not contribute to its qualified plans in 2020 and 2019 due to the substantial contribution over minimum funding standards of $60 million made in 2018. The benefits paid from the non-qualified plans were $8.5 million, $8.7 million and $8.9 million in 2020, 2019 and 2018, respectively. Future payments from the non-qualified pension benefit plans will be funded out of general corporate assets.
Under American National’s various group benefit plans for active employees, life insurance benefits are provided upon retirement for eligible participants who meet certain age and length of service requirements.
American National and its subsidiaries lease insurance sales office space, technological equipment, and automobiles. The remaining long-term lease commitments at December 31, 2020 were approximately $7.4 million.
American National had aggregate commitments at December 31, 2020 to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $1.2 billion of which $582.7 million is expected to be funded in 2021 with the remainder funded in 2022 and beyond.
FHLB outstanding advance as of December 31, 2020 is shown below (in thousands, except percentages):
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 December 31, 2020, was approximately $121.4 million, while the total cash value of the related life insurance policies was approximately $142.8 million.
Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National held a first mortgage loan which originated in 1999, with an interest rate of 7.25% and final maturity date of April 1, 2019 issued to a subsidiary of Gal-Tex, which was collateralized by a hotel property in San Antonio, Texas. This loan has been paid in full. The Moody Foundation owns 34.0% of Gal-Tex and 22.75% of American National, and the Libbie Shearn Moody Trust owns 50.2% of Gal-Tex and 37.0% of American National.
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.