We own and occupy our corporate headquarters in Galveston, Texas. We also own and occupy the following properties that are materially important to our operations:
Results for the year ended December 31, 2017 include the impact of the U. S. Tax Cut and Jobs Act ("Tax Reform") of $206.4 million, primarily due to the remeasurement of our deferred tax balances to the new 21% corporate income tax rate. Excluding the impact of Tax Reform, the Company’s net income for the year ended December 31, 2017 would have been $287.3 million and net earnings per basic and diluted share of $10.68 and $10.65, respectively.
Certain statements made in this report include forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are indicated by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning, and include, without limitation, statements regarding the outlook of our business and expected financial performance. These forward-looking statements are subject to changes and uncertainties which are, in many instances, beyond our control and have been made based upon our assumptions, expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. It is not a matter of corporate policy for us to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. Additionally, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable events. Forward-looking statements are not guarantees of future performance and involve various risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including without limitation risks, uncertainties and other factors discussed in Item 1A, Risk Factors and elsewhere in this report. Management’s discussion and analysis (“MD&A”) of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data.
Our business, financial condition and results of operations are materially affected by economic and financial market conditions. The U.S. and global economies, as well as the capital markets, continue to show mixed signals, and uncertainties continue to be significant factors in the markets in which we operate. Factors such as consumer spending, business investment, the volatility of the capital markets, the level of interest rates, unemployment, the level of participation in the workforce and the risk of inflation or deflation will affect the business and economic environment and, in turn, impact the demand for the type of financial and insurance products we offer. Adverse changes in the economy could have a material adverse effect on us. However, we believe those risks are somewhat mitigated by our financial strength, active enterprise risk management and disciplined underwriting for our products. Our diverse product mix and distribution channels across insurance segments is a strength that we expect will help us adapt to the volatile economic environment and give us the ability to serve the changing needs of our customers. Additionally, through our long-term business approach, we believe we are financially strong, and we are committed to providing a steady and reliable source of financial protection for policyholders.
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 make sure that they remain appropriate considering the current interest rate environment.
Increased Challenges of Talent Attraction and Retention: Attracting qualified individuals and retaining existing employees is a challenge for all employers. Businesses have become extremely competitive in the talent marketplace, and with such low unemployment today, it has become a candidate’s job market. Combined with the increasing impact of social media it is easier than ever for companies to find individuals with needed job skills and lure them away from their current positions. As a result, the ability to distinguish American National as the employer of choice grows increasingly challenging.
The annuity market is also highly competitive. In addition to aggressive interest crediting rates and new product features on annuities, there is competition from other financial service firms. Insurers continue to evaluate their distribution channels and the way they deliver products to consumers.
Most of the major provisions of the Patient Protection and Affordable Care Act, and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (collectively, “the Healthcare Acts”), phased in effective January 1, 2014. The Healthcare Acts mandated broad changes in the delivery of health care benefits that have impacted our business model including our relationships with current and future customers, producers, and health care providers, as well as our products, services and processes. As a result, the Healthcare Acts generated new opportunities 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 feel that recent 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.
We expect our Managing General Underwriter (“MGU”) business to remain stable during 2019. We generally retain only 10% of the MGU premium and risk. The majority of the revenue generated from this business is fee income included in “Other income” of the Health segment’s operating results.
To acquire and retain profitable business, we use sophisticated pricing models and risk segmentation, along with a focused distribution force. We believe this approach allows us to make product enhancements and offer programs that are tailored to our target markets while charging an appropriate premium for the risk.
Premium Deficiency Reserve-Deficiency reserves are recorded when the expected claims payments and policy maintenance costs for a product line exceed the expected premiums for that product line. The estimation of a deficiency reserve considers the current profitability of a product line using anticipated claims, CAE, and policy maintenance costs. The assumptions and methods used to determine the need for deficiency reserves are reviewed periodically for reasonableness. There were no reserves of this type at December 31, 2018 and December 31, 2017, respectively.
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 analysis of our credit insurance lines of business quantifies the estimated impact on gross loss reserves of a reasonably likely scenario of varying the ratio applied to the earned premium to determine the IBNR reserves at December 31, 2018. IBNR reserving methodology for this line of business focuses primarily on the use of a ratio applied to the unearned premium for each credit insurance product. The selected ratios are based on historical loss and claim data. In our analysis, we varied this ratio by +/- 5% across all credit insurance products combined. The results of our analysis show an increase or decrease in gross reserves across all accident years combined of approximately $10.1 million.
We believe the estimates used in our DAC calculations provide an example of 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-tail business at December 31, 2018 (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 not require a specified minimum rating. 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.
A decline in the fair value of fixed maturity investment securities below their cost basis is evaluated on an ongoing basis to determine if the decline is other-than-temporary. A number of assumptions and estimates inherent in evaluating impairments are used to determine if they are other-than-temporary, which include 1) our ability and intent to hold the investment securities for a period of time sufficient to allow for an anticipated recovery in value; 2) the expected recoverability of principal and interest; 3) the length of time and extent to which the fair value has been less than cost basis; 4) 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; and 5) the specific reasons that a security is in a significant unrealized loss position, including market conditions, which could affect liquidity.
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 using the building-block method 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. In 2017, the Company commenced a one-time window offering to terminated, vested participants of our qualified defined benefit pension plans. The offer allowed participants to take a lump sum or annuity payout which was funded from pension plan assets. See Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 18, Pension and Postretirement Benefits for additional details.
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 valuation allowances recorded during the years ended December 31, 2018 and 2017. Although realization is not assured, management believes it is more-likely-than-not that our remaining deferred tax assets will be realized and that no additional valuation allowance is necessary as of December 31, 2018.
On December 22, 2017, the federal government enacted the Tax Cuts and Jobs Act (“Tax Reform”). Tax Reform made broad and complex changes to federal corporate tax law and resulted in changes to our overall tax obligations. Most notably, Tax Reform reduced the corporate income tax rate from 35% to 21%. Other provisions affecting corporations include, but are not limited to, changes to the deductibility of interest expense, limitations on certain deductions for executive compensation and the repeal of the corporate Alternative Minimum Tax. In addition, there were several changes that are specific to insurance companies, namely changes to the proration formula used to determine the amount of dividends eligible for the dividends-received deduction, and changes to the calculation of tax reserves associated with policyholder liabilities.
The unlocking of best estimate assumptions on the interest sensitive block impacted other policy revenues, policyholder benefits, and change in deferred policy acquisition costs. The Company unlocked assumptions in 2017 and 2018 with favorable operating income impacts of $5 million and $6 million, respectively.
Earnings increased during the year ended December 31, 2018 compared to 2017 due to higher premiums and other policy revenues. Earnings increased during 2017 compared to 2016 primarily due to a decrease in policyholder benefits.
Policyholder benefits increased during the year ended December 31, 2018 compared to 2017 attributable to an increase in the severity of claims. Policyholder benefits decreased during 2017 compared to 2016 primarily due to the change in estimates.
The amortization of DAC increased during the year ended December 31, 2018 due to release of reserves due to an increase in the severity of claims. The increase in DAC during 2017 compared to 2016 was primarily due to the change in estimates.
For 2018, the companies to whom we have ceded reinsurance for the Life segment are shown below (in thousands, except percentages)
Earnings decreased during the year ended December 31, 2018 compared to 2017 primarily due to a reduced interest margin on equity-indexed products, driven by mark-to-market option volatility resulting from a decrease in the S&P 500 index. Earnings increased during 2017 compared to 2016 primarily due to a decrease in operating expenses as well as the conversion of SPIA reserve valuation discussed in "Items affecting the comparability of annuity results" section immediately above.
Sales declined during the year ended December 31, 2018 driven by a decrease in fixed deferred products. Deferred products are deposit type contracts and do not contribute to earned premiums. Sales strengthened during 2017 compared to 2016 led by the equity-indexed and fixed deferred products. Earned premiums consist of single premium immediate annuity sales which increased during the year ended December 31, 2018 compared to 2017. These variances are reflective of our management of our annuity block in a very competitive environment for annuities.
We monitor account values and changes in those values as a key indicator of performance in our Annuity segment. Shown below are the changes in account values (in thousands):
Policyholder benefits consist of annuity payments and reserve increases for SPIA contracts. Reserve increases are highly correlated to the sales volume of SPIA contracts, which explains the change in benefits over the past three years.
Other operating expenses remained relatively flat during the year ended December 31, 2018 compared to 2017. Other operating expenses decreased during 2017 compared to 2016 primarily due to a non-recurring premium tax payment in 2016.
In 2018, DAC assumptions were unlocked, resulting in a favorable reduction in amortization.
Health segment financial results for the periods indicated were as follows (in thousands):
Earnings increased for the year ended December 31, 2018 compared to 2017, primarily due to an increase in other income driven by Managing General Underwriting (MGU) fee income resulting from growth of MGU business, partially offset by an increase in operating expenses. Earnings increased during 2017 compared to 2016, primarily due to a change in estimate which decreased the amount of ceded MGU claim reserves during 2016. Earnings also increased due to the absence of a group health plan that was not renewed and an improvement in results for the closed medical expense block.
Earned premiums increased during the year ended December 31, 2018 compared to 2017 primarily due to an increase in MGU retention and Medicare Supplement sales. Earned premiums decreased during 2017 compared to 2016 primarily due to the non-renewal of a group health plan, partially offset by an increase in MGU and credit health premiums.
Total in-force policies increased during the year ended December 31, 2018 compared to 2017 primarily due to an increase in MGU business. Total in-force policies decreased during 2017 compared to 2016 in all blocks of business except for Medicare Supplement and MGU. Although credit health premiums increased from 2016 to 2017, policy counts decreased due to a decrease in the traditional single premium business. Although supplemental insurance sales increased during 2017 compared to 2016, the termination of two large groups produced a net decrease in supplemental insurance policy counts.
Claims incurred increased during the year end December 31, 2018 compared to 2017 consistent with growth in the MGU line of business. Claims incurred decreased during 2017 compared to 2016 due to the non-renewal of a group health plan.
Net premiums written and earned increased for all major lines of business during the year ended December 31, 2018 compared to 2017 and the year ended December 31, 2017 compared to 2016. The largest increases were in the personal auto, homeowners, and other commercial lines of business.
Commissions increased during the year ended December 31, 2018 compared to 2017 and the year ended December 31, 2017 compared to 2016, primarily as a result of the premium growth as well as the mix of products.
Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 58.9% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 31.3% of net premiums written; and (iii) Credit-related property insurance products, marketed to and through financial institutions and retailers, representing 9.8% of net premiums written.
We retain the first $500,000 for workers’ compensation risks and the first $1.5 million of loss per risk for non-workers’ compensation risks. Workers’ compensation reinsurance coverage for losses between $500,000 and $1 million follows satisfaction of a $2 million annual aggregate deductible. Our catastrophe reinsurance retention covering property and casualty companies in total is $17.5 million for non-earthquake losses and $10 million for earthquake losses.
We use multiple reinsurers with each reinsurer absorbing part of the overall risk ceded. The primary reinsurers in the 2018 programs and the coverage each provides are shown in the following table:
Earnings decreased during the year ended December 31, 2018 compared to 2017 primarily due to net losses on equity securities due to unfavorable market conditions reflected in the S&P 500 index and a reduction in realized investment gains in 2018 compared to 2017. Earnings for the year ended December 31, 2018 included net losses on equity securities as a result of our adoption of new accounting guidance which was effective January 1, 2018. Earnings increased during 2017 compared to 2016 primarily due to an increase in realized investment gains. The increase in realized investment gains is primarily attributable to an increase in the sale of equity securities and certain real estate holdings. These increases were partially offset during 2017 by an increase in other operating expenses which included a pension cost of $12.5 million relating to the completion of the one-time pension payment window that occurred in 2017.
We manage our investment portfolio to optimize the rate of return commensurate with sound and prudent asset selection and to maintain a well-diversified portfolio. Our investment operations are regulated primarily by the state insurance departments where our insurance companies are domiciled. Investment activities, including setting investment policies and defining acceptable risk levels, are subject to oversight by our Board of Directors, which is assisted by our Finance Committee and Management Risk Committee.
We invest in commercial mortgage loans when the yield and credit risk compare favorably with fixed maturity securities. Individual residential mortgage loans including sub-prime or Alt-A mortgage loans have not been and are not expected to be part of our investment portfolio. We purchase real estate and equity investments based on a risk and reward analysis where we believe there are opportunities for enhanced returns.
The increase in our total investments at December 31, 2018 compared to 2017 was primarily a result of an increase in bonds held-to-maturity and mortgage loans, somewhat offset by a reduction in short-term investments and a decline in the fair value of equity securities.
Bonds-We allocate most of our fixed maturity securities to support our insurance business. At December 31, 2018, our fixed maturity securities had an estimated fair value of $14.3 billion, which was $0.1 billion, or 0.9%, below amortized cost. At December 31, 2017, our fixed maturity securities had an estimated fair value of $13.9 billion, which was $0.4 billion, or 3.0%, above amortized cost. The estimated fair value for securities due in one year or less was $0.5 billion as of December 31, 2018 and December 31, 2017. For additional information regarding total bonds by credit quality rating refer to Note 4, Investments in Securities, of the Notes to the Consolidated Financial Statements.
Policy Loans-For certain life insurance products, policyholders may borrow funds using the policy’s cash value as collateral. The maximum amount of the policy loan depends upon the policy’s surrender value. As of December 31, 2018, we had $376.3 million in policy loans with a loan to surrender value of approximately 60%, and at December 31, 2017, we had $377.1 million in policy loans with a loan to surrender value of approximately 63%. Interest rates on policy loans primarily range from 3.0% to 12.0% per annum. Policy loans may be repaid at any time by the policyholder and have priority to any claims on the policy. If the policyholder fails to repay the policy loan, funds are withdrawn from the policy’s benefits.
Net realized gains decreased $86.4 million during the year ended December 31, 2018 compared to 2017. The decrease in net realized gains in 2018 was primarily attributable to new accounting guidance affecting how income from the sale of equity securities is recognized. Other-than-temporary impairment on investment securities decreased $12.1 million during 2018 compared to 2017.
Increasing interest rates may lead to an increase in the volume of annuity contracts sold, which may be partially offset by increases in surrenders. Our defined benefit plans are frozen and currently adequately funded; however, low interest rates, increased longevity of participants, and rising Pension Benefit Guaranty Corporation (“PBGC”) premiums may cause us to increase our funding of the plans. An increase in funding provided an opportunity to realize tax savings on contributions made before September 15, 2018. Consequently, a $60 million contribution was made before the aforementioned deadline. This contribution did not significantly impact cash flow and resulted in an overfunded status on our qualified pension plan. No unusually large capital expenditures are expected in the next 12-24 months. We have paid dividends to stockholders for over 110 consecutive years and expect to continue this trend. There are no other known trends or uncertainties regarding product pricing, changes in product lines or rising costs that are expected to have a significant impact to cash flows from operations.
Our cash and cash equivalents and short-term investment position decreased from $1.0 billion at December 31, 2017 to $474.9 million at December 31, 2018. The decrease primarily relates to a decrease in commercial paper to fund additional investments.
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, 2018 and December 31, 2017, American National Insurance Company’s statutory capital and surplus was $3,162,808,000 and $3,293,474,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at December 31, 2018 and December 31, 2017, substantially above 200% of the authorized control level.
The following summarizes our contractual obligations as of December 31, 2018 (in thousands):
We have audited the accompanying consolidated balance sheets of American National Insurance Company and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2018, the related notes and financial statement schedules I to V (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these (consolidated) financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We have audited American National Insurance Company and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2018, the related notes and financial statement schedules I to V (collectively, the consolidated financial statements), and our report dated February 28, 2019 expressed an unqualified opinion on those consolidated financial statements.
Other invested assets comprised primarily of equity-indexed options are carried at fair value and may be collateralized by counterparties; such collateral is restricted to the Company’s use. Other invested assets also include tax credit partnerships, Certified Capital Companies (“CAPCO”) investments, mineral rights and limited liability company interests, are carried at cost, less allowance for depletion, where applicable. Separately managed accounts are also included in other invested assets. Separately managed accounts are carried at cost or market value if available from the account manager.
All fixed maturity securities with unrealized losses are assessed to determine if the creditworthiness of any of those securities has deteriorated to a point where its carrying value will not be realized at maturity. For fixed maturity securities at December 31, 2018, the unrealized losses on fixed maturity securities that were not other-than-temporarily impaired were the result of credit spread widening. There were no delinquent coupon payments attributed to these securities for the year ended December 31, 2018.
Cash and cash equivalents 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.
Property and equipment consist of buildings occupied by American National, data processing equipment, software, furniture and equipment, and automobiles which are carried at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the asset (typically 3 to 50 years).
DAC associated with property and casualty business is amortized over the coverage period of the related policies, in relation to premium earned.
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 contractholder; and (iv) all investment performance, net of contract fees and assessments, is passed through to the contract holder. American National's qualified and non-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 financial statements.
Participating business comprised approximately 4.9% of the life insurance in-force at December 31, 2018 and 16.6% of life premiums in 2018.
The effects of tax legislation are recognized in the period of enactment. On December 22, 2017, the U.S. Tax Cut and Jobs Act (“Tax Reform”) was enacted. The effects of Tax Reform were reflected in the 2017 financial statements as reasonably estimated provisional amounts based on available information subject to interpretation in accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 provides guidance on accounting for the effects of Tax Reform where our determinations were incomplete but we were able to determine a reasonable estimate. In 2017, we recorded a provisional tax benefit of $206.4 million in accordance with the guidance in SAB 118. There were no adjustments in 2018 to the provisional tax benefit we recorded in 2017. Interest and penalties assessed, if applicable, are classified as current federal income taxes in the consolidated statements of operations. See Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 14, Income Taxes for further discussion.
In October of 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, whereas, prior guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset was sold to an outside party. The Company adopted the standard on its required effective date of January 1, 2018 using a modified retrospective approach. Upon adoption, a liability was released and retained earnings increased by $59.9 million.
In February 2018, the FASB issued guidance that allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company plans to adopt the standard effective January 1, 2019. The guidance changes equity presentation only and will not have a material impact on the Company’s results of operations or financial position.
There were three loans determined to be a troubled debt restructuring for the year ended December 31, 2018. There are no commitments to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring during the periods presented.
As of December 31, 2018, no real estate investments were classified as held-for-sale.
Note 8 - Net Investment Income and Net Realized Investment Gains (Losses)
Equity Securities-For publicly-traded equity securities, prices are received from a nationally recognized pricing service that are based on observable market transactions, and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, an estimate of fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. If applicable, these estimates would be disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services annually.
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.
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.
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.
Within the net gain (loss) for derivatives included in net investment income were unrealized losses of $94,883,000, and unrealized gains of $50,805,000, and $44,615,000 relating to assets still held at December 31, 2018, 2017, and 2016, respectively.
The liability for unpaid claims and claim adjustment expenses (“claims”) for health and property and casualty insurance is included in “Policy and contract claims” in the consolidated statements of financial position and is the amount estimated for incurred but not reported (“IBNR”) claims and claims that have been reported but not settled. Liability for unpaid claims are estimated based upon American National’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, less anticipated salvage and subrogation. The effects of the changes are included in the consolidated results of operations in the period in which the changes occur. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. There have been no significant changes in methodologies or assumptions used to calculate the liability for unpaid claims and claim adjustment expenses.
For any given line of business, none of these methods are relied on exclusively. With minor exception, we will typically run all of these methods for most lines. While we may not ultimately utilize a given method for a given line, we will review as a check for reasonableness of our selected result.
Short Tail Property-Consists of auto physical damage, fire, rental owners, standard fire policy, country estates, inland marine and watercraft. 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):
Note 12 - Liability for Unpaid Claims and Claim Adjustment Expenses-(Continued)
Health-Consists of stop loss, other supplemental health products and credit disability insurance. This line of business has substantially all claims settled and paid in less than four years. Claims and claim adjustment expenses are shown below (in thousands):
For the Property and Casualty segment, American National retains the first $500,000 of loss per workers’ compensation risk and $1.5 million of loss per non-workers’ compensation risk. Workers’ compensation reinsurance coverage for losses between $500,000 and $1 million follows satisfaction of a $2 million annual aggregate deductible. 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. This coverage is provided by two contracts. The first contract provides for $30 million of coverage after $90 million of aggregated catastrophe losses has been reached. The first $10 million of each catastrophe loss contributes to the $90 million aggregation of losses. The second aggregate contract is the Stretch & Aggregate cover. It consists of a $35 million annual limit available either wholly or in part across two layers. The first layer is 8.75% of $400 million excess of $100 million on an occurrence basis. The second layer provides aggregate protection with subject loss of $35 million excess of $5 million of each catastrophe. Recoveries follow satisfaction of a $40 million annual aggregate deductible. This cover was placed at 90% on July 1, 2018. American National expects to place the cover again on July 1, 2019.
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 amounts recoverable from reinsurers of $427,475,000 and $418,589,000 at December 31, 2018 and 2017, respectively. None of the amount outstanding at December 31, 2018 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.
* Prior years revised to reflect the January 1, 2018 adoption of ASU 2017-07 Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. See Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Consolidated Financial Statements.
As of December 31, 2018, American National has an alternative minimum tax (“AMT”) credit carryforward of $6,933,000, a general business credit carryforward of $758,000 and capital loss carryforwards of $656,000. Under Tax Reform, AMT credit carryforwards may be utilized to offset regular tax liability. If not utilized, the credits are fully refundable by 2021. The general business credits and capital loss carryforwards will expire in 2037 and 2021, respectively, if not utilized.
American National has a stock-based compensation plan, which allows for grants of Non-Qualified Stock Options, Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, Restricted Stock Units (“RSU”), Performance Awards, Incentive Awards or any combination thereof. This plan is administered by the American National Board Compensation Committee. To date, only SAR, RS and RSU awards have been made. All awards are subject to review and approval by the Board Compensation Committee both at the time of setting applicable performance objectives and at payment of the awards. The number of shares available for grants under the plan cannot exceed 2,900,000 shares, and no more than 200,000 shares may be granted to any one individual in any calendar year. Grants were made to certain officers meeting established performance objectives, and grants are made to directors as compensation and to align their interests with those of other shareholders.
American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company owned by its policyholders. American National 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 $6,750,000 at December 31, 2018 and 2017.
Health-consists of Medicare Supplement, stop loss, other supplemental health products and credit disability insurance. Products are typically distributed through independent agents and managing general underwriters.
American National sponsors a qualified defined contribution (401(k) plan) for all employees, and non-qualified defined contribution plans for certain employees whose otherwise eligible earnings exceed the statutory limits under the qualified plans. The total expense associated with these plans was $10,157,000, $13,466,000, and $13,658,000 for 2018, 2017, and 2016, respectively.
The accrued postretirement benefit obligation, included in the liability for retirement benefits, was $6,085,000 and $6,424,000 at December 31, 2018 and 2017, respectively. These amounts were approximately equal to the unfunded accumulated postretirement benefit obligation.
In May 2018, the Company became a member of the Federal Home Loan Bank of Dallas (“FHLB”) to augment its liquidity resources. As membership requires the ownership of member stock, the Company purchased $7.0 million of stock to meet the FHLB’s membership requirement. The FHLB member stock is recorded in other invested assets on the Company’s consolidated statements of financial position. Through its membership, the Company has access to the FHLB’s financial services including advances that provide an attractive funding source for short-term borrowing and for access to other funding agreements. As of December 31, 2018, certain collateralized mortgage obligations (CMO’s) with a fair value of approximately $120.5 million were on deposit with the FHLB as collateral for amounts subject to funding agreements. The deposited securities are included in bonds held-to-maturity on the Company’s consolidated statements of financial position.
American National 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 American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on a bank loan, American National 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, 2018, was approximately $192,848,000, while the total cash value of the related life insurance policies was approximately $199,159,000.