Three buildings in League City, Texas, which are used primarily by our Life, Health, and Corporate and Other segments.
Results for the year ended December 31, 2017 include the impact of the U. S. Tax Cut and Jobs Act ("Tax Reform") of a $206.4 million tax benefit, primarily due to the remeasurement of our existing deferred tax balances to a 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 would have been $10.68 and $10.65, respectively.
Certain statements made in this report, including but not limited to the accompanying consolidated financial statements, and the notes thereto appearing in Item 8 herein, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Item 7 ("MD&A"), and the exhibits and financial statement schedules filed as a part hereof or incorporated by reference herein, may contain or incorporate by reference information that includes or is based upon 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, such as:
fluctuations in the markets for fixed maturity securities, equity securities, and commercial real estate, which could adversely affect the valuation of our investment portfolio, our net investment income, our retirement expense, and sales of or fees from certain of our products;
differences between actual experience regarding mortality, morbidity, persistency, expense, surrenders and investment returns, and our assumptions for product pricing, establishing liabilities and reserves or for other purposes;
failures or limitations of our computer, information security and administration systems;
the introduction of alternative healthcare solutions or changes in federal healthcare policy, both of which could impact our supplemental healthcare business;
potential changes in the availability, affordability, adequacy and collectability of reinsurance protection;
potential default or failure to perform by the counterparties to our reinsurance arrangements and derivative instruments;
This MD&A should be read in conjunction with our consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data. For comparison of 2018 to 2017, see "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019.
Chartered in 1905, we are a diversified insurance and financial services company offering a broad spectrum of insurance products in all 50 states, the District of Columbia and Puerto Rico. Our headquarters are in Galveston, Texas.
The 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 Corporate and Other segment acts as the owner of all of the invested assets of the Company. The investment income from the invested assets is allocated to the insurance segments in accordance with the assets allocated to each insurance segment. Earnings of the Corporate and Other segment are derived from income related to invested assets not allocated to the insurance segments and from our non-insurance subsidiaries. All realized investment gains and losses, which includes other-than-temporary impairments (“OTTI”), are recorded in this segment.
To address these challenges, we have expanded the use of technology and social media to enhance our employer brand and educate candidates on why they should work for us. We’ve worked hard to develop a diverse and inclusive workforce which not only strengthens the engagement of our current employee population, but also helps make us an attractive employer. To help improve our employee retention and to continue to learn, we strive to listen to our employees’ voices, value different perspectives and encourage broader employee influence on how decisions are made. Providing robust career development, personal growth opportunities and effective succession planning are also important elements of our retention and employee development efforts.
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 for life, including single premium immediate annuities, are well suited to serve this market.
We expect our Managing General Underwriter (“MGU”) business to remain stable during 2020. We generally retain only 10% of the premiums and risks produced by MGUs. The majority of the revenue generated from this business is fee income included in “Other income” of the Health segment’s operating results.
Demand for property and casualty credit-related insurance products continues to increase. We continue to update credit-related insurance product offerings and pricing to meet changing market needs, as well as adding new agents to expand market share in the credit-related insurance market. We are reviewing and implementing procedures to enhance customer service while, at the same time, looking for efficiencies to reduce administrative costs.
Tabular Claims Reserves-This method is used to calculate the reserves for 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.
Reserves for Claims and Claim Adjustment Expense (“CAE”)-Property and casualty reserves are established to provide for the estimated cost of settling and paying both reported (“case”) as well as incurred but not reported (“IBNR”) claims. The two major categories of CAE are defense and cost containment expense, and adjusting and other expense. The details of property and casualty reserves are shown below (in thousands):
Pegged Frequency and Severity-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.
For the lines of business we write, future inflation rates could vary from our assumption of relatively stable rates. Unexpected changes in future inflation rates could impact our financial position and liquidity, and we measure the sensitivity of our reserve levels to unexpected changes in inflation. The impacts of future inflation for a 1.0% decrease and 3.0% increase over the implied inflation rate in the December 31, 2019 gross loss reserve balance on direct written business are as follows (amounts in thousands):
We had a DAC asset of approximately $1.42 billion and $1.5 billion at December 31, 2019 and 2018, respectively. See Note 10, Deferred Policy Acquisition Costs, of the Notes to the Consolidated Financial Statements for additional details.
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, 2019 (in thousands):
The fair value of available-for-sale fixed maturity and equity securities is determined by management using one of the three primary sources of information: the quoted prices in active markets; third-party pricing services; or independent broker quotations. Estimated fair value of securities based on quoted prices in active markets is readily and regularly available; therefore, valuation of these securities generally does not involve management judgment. For securities without quoted prices, fair value measurement is determined using third-party pricing services’ proprietary pricing applications. Typical inputs used by the models are relevant market information, benchmark curves, benchmark pricing of like securities, sector groupings and matrix pricing. Any securities remaining unpriced after utilizing the first two pricing methods are submitted to independent brokers for prices. We have analyzed the third-party pricing services and independent brokers’ valuation methodologies and related inputs, and have evaluated the various types of securities in our investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Management completes certain tests throughout the year and at year-end to determine that prices provided by our pricing services are reasonable.
We utilize over-the-counter equity options to hedge our exposure to equity-indexed universal life and equity-indexed deferred annuity benefits, and the fair values for these options are sourced from broker quotations. Accounting guidance requires a fair value calculation as part of equity-indexed policy reserves. This is called the value of embedded derivative (or VED) and the other part of the indexed policy reserve is called the host reserve. The embedded derivative represents future benefit cash flows in excess of minimum guarantee cash flows. The host covers the minimum guarantee cash flows. Both the VED and the host reserve are calculated by a vendor-sourced reserve valuation system. The VED calculation model incorporates assumptions related to current option pricing (such as implied volatility and LIBOR/swap curve), future policyholder behavior (such as surrenders and withdrawals), and factors affecting the value of future indexed interest periods (such as option budgets).
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, 2019 and 2018. 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, 2019.
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%. 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. As a result of Tax Reform, we recorded a tax benefit of $206.4 million in 2017 primarily due to remeasuring our existing deferred tax balances to the 21% corporate tax rate.
Increase in net gains on equity securities resulting from favorable market conditions
Improvement in earnings generated from our Property and Casualty segment primarily driven by an improved loss ratio in the personal automobile line of business.
The increase in income from operations was partially offset by the following:
Decrease in Annuity segment earnings due to spread compression and higher than expected fixed annuity surrenders early in 2019 that resulted in increased DAC amortization for the year.
Income from operations for our Life segment decreased primarily due to the following:
Higher investment income net of interest credited to policyholders, primarily due to an increase in the asset base.
(1) These are weighted amounts representing 10% of single and excess premiums.
Life insurance sales increased during the twelve months ended December 31, 2019 compared to 2018 primarily due to increased Universal Life and Indexed Universal Life sales.
Life insurance in-force increased despite a reduction of policies in-force due to an increase in sales of higher face amount policies.
Commissions decreased due to a decline in equity indexed products sales in 2019 compared to 2018. Annuity premium and deposits decreased in total but were in line with managements expectations.
Termination of two MGU programs led to a decrease in premium, which correlates to the decrease in claims.
Reinsurance is also used in the credit health business. In certain cases, we may also reinsure the policy written through non-U.S. producer-owned captive reinsurers to allow the dealer to participate in the performance of these credit health contracts. A majority of the treaties entered into by our Specialty Markets Group are written on a 100% coinsurance basis with benefit limits of $1,000 per month.
Income from operations for our Property and Casualty segment increased primarily due to the following:
Homeowners: Net premiums written and earned increased primarily due to increased sales to renters, as well as an increase in rates charged for these policies and due to an increase in the number of policies sold. The loss and loss adjustment expense and combined ratio improved slightly primarily due to increased premium from rate actions.
Commercial Automobile: Net premiums written and earned increased primarily due to an increase in policies in force and rate increases. The loss and loss adjustment expense and combined ratios improved primarily due to the increase in premiums.
We retain 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.
The following table summarizes the Company’s catastrophe reinsurance coverage effective during 2019:
A mid-year Aggregate cover is purchased which consists of a $35 million annual limit after satisfaction of a $40 million annual aggregate deductible. Subject loss is $35 million excess of $5 million of each catastrophe. This cover was placed at 87.75% on July 1, 2019, and remains in place until June 30, 2020.
We use multiple reinsurers with each reinsurer absorbing part of the overall risk ceded. The primary reinsurers in the 2019 programs and the coverage each provides are shown in the following table:
Net investment income increased $219.0 million during 2019 compared to 2018 primarily due to gains on options from an improvement in the S&P 500 Index.
Net realized investment gains increased $13.8 million during 2019 compared to 2018 primarily attributable to the sale of real estate.
The net change in the unrealized gains on fixed maturity securities between December 31, 2019 and December 31, 2018 is primarily attributable to the decrease in benchmark ten-year interest rates which were 1.9% and 2.7% 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.
Our liquidity requirements have been and are expected to continue to be met by funds from operations, comprised of premiums received from our customers, collateral for derivative transactions, and investment income and maturities. 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 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.
Increasing interest rates may lead to an increase in annuity surrenders, which may be partially offset by an increase in new annuity sales. 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. Additionally, due to changes in the tax law, there was 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. We are currently evaluating the renovation and modernization of our home office facilities. This could result in capital expenditures that could aggregate approximately $100 million over a three year period beginning in 2021. There are no other 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.
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, 2019 and December 31, 2018, American National Insurance Company’s statutory capital and surplus was $3,477,727,000 and $3,162,808,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at December 31, 2019 and December 31, 2018, substantially above 200% of the authorized control level.
The following summarizes our contractual obligations as of December 31, 2019 (in thousands):
Life and annuity obligations include undiscounted estimated claim, benefit, surrender and commission obligations offset by expected future premiums and deposits on in-force insurance policies and annuity contracts. All amounts are gross of any reinsurance recoverable. Estimated claim, benefit and surrender obligations are based on mortality and lapse assumptions comparable with historical experience. Estimated payments on interest-sensitive life and annuity obligations include interest credited to those products. The interest crediting rates are derived by deducting current product spreads from a constant investment yield. As a result, the estimated obligations for insurance liabilities included in the table exceed the liabilities recorded in the liability for future policy benefits and policy and contract claims. Due to the significance of the assumptions used, the amounts presented could materially differ from actual payments. Separate account obligations have not been included in the table since those obligations are not part of the general account obligations and will be funded by cash flows from separate account assets. The general account obligations for insurance liabilities will be funded by cash flows from general account assets and future premiums and deposits. Participating policyholder dividends payable consists of liabilities related to dividends payable in the following calendar year and are presented in the less than one-year category. All estimated cash payments are net of estimated future premiums on policies currently in-force net of future policyholder dividends payable. The participating policyholders’ share obligation included in other policyholder funds and the timing and amount of the ultimate participating policyholder obligation is subject to significant uncertainty and the amount of the participating policyholder obligation is based upon a long-term projection of the performance of the participating policy block.
The estimated payments due by period for notes payable reflect the contractual maturities of principal for amounts borrowed by real estate joint ventures and collateralized by real-estate owned by the respective entity. American National’s liability is limited to its investment in the respective joint venture. See Note 6, Real Estate and Other Investments, of the Notes to the Consolidated Financial Statements for additional details.
We have audited the accompanying consolidated statements of financial position of American National Insurance Company and subsidiaries (the Company) as of December 31, 2019 and 2018, 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, 2019, and 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial statements, some of the Company’s universal life policies contain secondary guarantees for which additional reserves are recorded. As of December 31, 2019, the balance of the estimated liability for secondary guarantees was included within the life future policy holder benefits balance of $3,088 million in the consolidated statements of financial position. The liabilities for universal life secondary guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balances with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier actuarial assumptions should be revised based on the Company’s best estimate.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate the liability for secondary guarantees for universal life policies including controls related to assessment of actuarial assumptions through an analysis of actuarial assumptions used relative to the Company’s historical experience. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
Evaluating the Company’s decisions to change or not to change actuarial assumptions based on the above mentioned analysis; and
As discussed in Note 9 to the consolidated financial statements, the Company issues equity-indexed annuity contracts. The equity-indexed feature is required to be accounted for separately as a derivative instrument (embedded derivative liability). The fair value of the embedded derivative liability is estimated using the discounted cash flow technique utilizing various assumptions. The fair value of the embedded derivatives in equity-indexed annuity contracts is $596 million as of December 31, 2019.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate the embedded derivative liability including controls related to the assessment of surrender assumptions based on analysis of anticipated surrenders as compared to historical experience. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
Evaluating the Company’s valuation methodology to ascertain whether the methodology is designed to produce a fair value estimate as required by generally accepted accounting principles;
Evaluating the surrender assumptions utilized in developing the estimate based on an analysis of anticipated surrenders as compared to actual experience and current economic environmental factors affecting policyholder behavior;
Evaluating the Company’s decisions to change or not to change surrender assumptions based on the above mentioned analysis;
Developing independent estimates for certain equity indexed embedded derivative fair values based on assumptions and data elements used by the Company;
We identified the assessment of the Company’s estimate of property and casualty reserves as a critical audit matter because specialized skills and knowledge of actuarial methodologies were required to evaluate the estimate. Evaluation of the following assumptions required subjective auditor judgment: 1) selection and weighting of actuarial methodologies in the actuarial estimates; and 2) selection of loss development factors in the actuarial estimates.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate the property and casualty reserves, including controls over: 1) assessment of actuarial loss development factors and selection and weighting of actuarial methodologies and 2) a comparison of the independent analysis performed by a third party actuary. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
Assessing the Company’s selection and weighting of actuarial methodologies, including the selection of loss development factors, by performing an independent estimate of reserves for major lines of business;
Developing an independent range of reserves based on actuarial methodologies to evaluate the Company’s total recorded reserves; and
Assessing the year-over-year movements of the Company’s total recorded property and casualty reserves within the independently developed range.
Investment securities - Bonds classified as held-to-maturity are carried at amortized cost. Bonds classified as available-for-sale are carried at fair value. As a result of FASB issued guidance, equity investments, other than those accounted for under the equity method or those that result in consolidation of the investor, are measured at fair value with changes in fair value recognized in earnings.
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.
Impairments are evaluated quarterly and where management believes the carrying value will not be realized, an other-than-temporary impairment (“OTTI”) loss is recorded.
DAC on traditional life (including limited-pay contracts) and health products is amortized with interest over the anticipated premium-paying period of the related policies, in proportion to the ratio of annual premium revenue expected to be received over the life of the policies. Expected premium revenue is estimated by using the same mortality, morbidity and withdrawal assumptions used in computing liabilities for future policy benefits. DAC is reduced by a provision for possible inflation of maintenance and settlement expenses determined by means of grading interest rates.
Policyholders’ account balances represent the contract value that has accrued to the benefit of the policyholders related to universal-life and investments-type contracts. For fixed products, these are generally equal to the accumulated deposits, plus interest credited, reduced by withdrawals, payouts, and accumulated policyholder assessments. Indexed product account balances are equal to the sum of host and embedded derivative reserves computed per derivative accounting guidance.
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 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.
Restricted Stock Units (“RSUs”) may be settled in cash, resulting in classifying RSUs as a liability award. The liability is remeasured each reporting period through the vesting date and is adjusted for changes in fair value. The compensation liability related to the RSUs is included in “Other Liabilities” in the consolidated statements of financial position.
Existing and potential litigation is reviewed quarterly to determine if any adjustments to liabilities for possible losses are necessary. Reserves for losses are established whenever they are probable and reasonably estimable. If no one estimate within the range of possible losses is more probable than any other, a reserve is recorded based on the lowest amount of the range.
In August 2018, the FASB issued ASU 2018-12, “Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts,” that impacts financial reporting for insurance companies that issue long-duration contracts. The guidance will improve the timeliness of recognizing changes in the liability for future policy benefits for traditional and limited payment long-duration contracts and will modify the rate used to discount future cash flows. The guidance will also simplify the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, simplify the amortization of deferred acquisition costs and add significant qualitative and quantitative disclosures. This standard will become effective for the Company for all annual and interim periods beginning January 1, 2022. This standard will have a material impact on our results of operations and financial position.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” guidance that modifies the disclosure requirements on fair value measurements. Certain disclosure requirements are removed, modified or added to improve the relevancy of the fair value measurement disclosures. The new standard will become effective for the Company for all interim and annual periods beginning January 1, 2020. The Company does not expect the adoption of this guidance to have any material impact on the results of operations or financial position.
In accordance with various regulations, American National has bonds on deposit with regulating authorities with a carrying value of $48,017,000 and $48,068,000 at December 31, 2019 and 2018, 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 $162,233,000 and $168,118,000 at December 31, 2019 and 2018, respectively.
During 2019, American National foreclosed on two loans with a total recorded investment of $16,008,000, and two loans with a recorded investment of $13,345,000 were in the process of foreclosure at December 31, 2019. For the year ended December 31, 2018, American National foreclosed on four loans with a total recorded investment of $22,608,000, and one loan with a total recorded investment of $7,363,000 was in the process of foreclosure. American National did not sell any loans during 2019 or 2018.
The change in allowance for credit losses in mortgage loans is shown below (in thousands, except number of loans):
There were three loans determined to be a troubled debt restructuring for the year ended December 31, 2019. 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, 2019, one real estate investment with a carrying value of $3,364,000 met the criteria as held-for-sale.
The Company’s total investment in and equity in earnings of unconsolidated affiliates, of which substantially all are LLCs or limited partnerships, were comprised of the following (in thousands):
The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by the counterparties. The Company has a policy of only dealing with counterparties it believes are creditworthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The Company holds collateral in cash and notes secured by U.S. government backed assets. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less the fair value of collateral held. The Company maintains master netting agreements with its current active trading partners. As such, a right of offset has been applied to collateral that supports credit risk and has been recorded in the consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.
Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, unrealized gains and losses on equity securities are no longer recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in earnings. Since changes in fair value are recognized in earnings each reporting period, OTTI is no longer recognized on equity securities in a loss position. Results for the year ended December 31, 2017 have not been restated to conform to the current presentation. See Note 3, Recently Issued Accounting Pronouncements.
Fixed Maturity Securities and Equity Options-American National utilizes SS&C Technologies, Inc. pricing service to estimate fair value measurements. The estimates of fair value for most fixed maturity securities, including municipal bonds, provided by the pricing service are disclosed as Level 2 measurements as the estimates are based on observable market information rather than market quotes. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturity securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, an option adjusted spread model is used to develop prepayment and interest rate scenarios.
Short-term investments-Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor's and Moody's, respectively. Commercial paper is carried at amortized cost which approximates fair value. These investments are classified as Level 2 measurements.
Separate account assets and liabilities-Separate account assets and liabilities are funds that are held separate from the general assets and liabilities of American National and that represent the investments of variable insurance product contract holders, who bear the investment risk of such funds. Investment income and investment gains and losses from these separate funds accrue to the benefit of the contract holders. Separate accounts are established in conformity with insurance laws and are not chargeable with liabilities that arise from any other business of American National. American National reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are legally insulated from American National’s general account liabilities; (iii) investments are directed by the contract holder; and (iv) all investment performance, net of contract fees and assessments, is passed through to the contract holder. The assets of these accounts are carried at fair value. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses in the consolidated statements of operations.
The separate account assets included on the quantitative disclosures fair value hierarchy table is comprised of short-term investments, equity securities, and fixed maturity available-for-sale bonds. Equity securities are classified as Level 1 measurements. Short-term investments and fixed maturity securities are classified as Level 2 measurements. These classifications for separate account assets reflect the same fair value level methodologies as listed above as they are derived from the same vendors and follow the same process.
Mortality rate assumptions vary by age and gender based on company and industry experience. Decreases to the assumed mortality rates increase the fair value of the liabilities as more policyholders earn crediting interest. Increases to the assumed mortality rates decrease the fair value as higher decrements reduce the potential for future interest credits.
Equity volatility assumptions begin with current market volatilities and grow to long-term values. Increases to the assumed volatility will increase the fair value of liabilities, as future projections will produce higher increases in the linked index. At December 31, 2019 and 2018, the one-year implied volatility used to estimate embedded derivative value was 11.3% and 23.2%, respectively
There were no transfers between Level 1 and Level 2 fair value hierarchies during the periods presented. The transfers into Level 3 during the year ended December 31, 2017 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. Unless information is obtained from the brokers that indicates observable inputs were used in their pricing, there are not enough observable inputs to enable American National to classify the securities priced by the brokers as other than Level 3. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The inputs used by the brokers include recent transactions in the security, similar bonds with same name, ratings, maturity and structure, external dealer quotes in the security, Bloomberg evaluated pricing and prior months pricing. None of them are observable to American National as of December 31, 2019. The transfers out of Level 3 during the years ended December 31, 2019, and 2017, were the result of securities being priced by the third-party service at the end of the period, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2.
American National periodically reviews its estimates of actuarial liabilities for future policy benefits and compares them with its actual experience. Differences between actual experience and the assumptions used in pricing these policies, guarantees and riders and in the establishment of the related liabilities result in variances in profit and could result in losses. The effects of changes in such estimated liabilities are included in the consolidated statements of operations in the period in which the changes occur.
Policyholder account balances relate to investment-type contracts and universal life-type policies. Investment-type contracts principally include traditional individual fixed annuities in the accumulation phase and non-variable group annuity contracts. Policyholder account balances are equal to (i) policy account values, which consist of an accumulation of gross premium payments; (ii) credited interest, ranging from 1.0% to 8.0% (some annuities have enhanced first year crediting rates ranging from 1.0% to 7.0%), less expenses, mortality charges, and withdrawals; and (iii) fair value adjustment.
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 $57,979,000, $19,852,000, $75,632,000 in 2019, 2018, and 2017, respectively. The favorable development in 2019 was a reflection of lower-than-anticipated losses in the workers compensation, business owner and commercial package policy, agribusiness, and private passenger automobile lines of business. The decrease during 2018 and 2017 reflects lower-than-anticipated losses in other commercial and automobile lines of business respectively as well as workers compensation and business owner and commercial package policy lines of business.
For short-duration health insurance claims, the total of IBNR plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses at December 31, 2019 was $21,379,000.
Bornhuetter-Ferguson-This method uses an assumed initial expected loss ratio method as a starting point and blends in the loss ratio implied by the claims experience to date by using loss development patterns based on our historical experience.
The expected development on reported claims is the sum of a pay-to-current reserve and a future reserve. The pay-to-current reserve is calculated for each open claim having a monthly indemnity and contains the monies required to pay the open claim from the last payment date to the current valuation date. The future reserve is calculated by assigning to each open claim a fixed reserve amount based on the historical average severity. For debt cancellation products and involuntary unemployment insurance, this reserve is calculated using published valuation tables.
Cumulative claim frequency information is calculated on a per claim basis. Claims that do not result in a liability are not considered in the determination of unpaid liabilities.
Non-Auto Liability-Consists of workers’ compensation and other liability occurrence. Claims and claim adjustment expenses are shown below (in thousands):
Credit Life-For credit life products, IBNR is calculated as a percentage of life insurance in force. 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):
Credit Health-The claim liability consists of credit disability. This line of business has substantially all claims settled and paid in less than five years. Claims and claim adjustment expenses are shown below (in thousands):
The following table is supplementary information. A10-year average annual percentage payout of incurred claims is shown below:
As of December 31, 2019, American National had no material net operating loss or tax credit carryforwards.
RSU awards to our directors and advisory directors vest after one-year or upon earlier death, disability or retirement from service after age 65. Upon vesting, RSU awards are settled in cash based upon the market price of our common stock on the date of vesting.
Risk Based Capital (“RBC”) is a measure insurance regulators use to evaluate the capital adequacy of American National Insurance Company and its insurance subsidiaries. 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 at least 200% of the authorized control level RBC are required to take certain actions. At December 31, 2019 and 2018, American National Insurance Company’s statutory capital and surplus was $3,477,727,000 and $3,162,808,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at December 31, 2019 and 2018, substantially above 200% of the authorized control level.
The statutory capital and surplus and net income of our life and property and casualty insurance entities in accordance with statutory accounting practices are shown below (in thousands):
American National Insurance Company's payment of dividends to stockholders is restricted by insurance law. The restrictions require life insurance companies to maintain minimum amounts of capital and surplus, and in the absence of special approval, limit the payment of dividends to the greater of the prior year's statutory net income from operations, or 10% of prior year statutory surplus. American National Insurance Company is permitted without prior approval of the Texas Department of Insurance to pay total dividends of $347,773,000 during 2020. Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to American National Insurance Company apply to its insurance subsidiaries.
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, 2019 and 2018.
American National Insurance Company 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 $736,000 and noncontrolling equity of $7,517,000 at December 31, 2019 and 2018, respectively.
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.
Expenses are charged to segments through direct identification and allocations based upon various factors.
The results of operations measured as the income before federal income taxes and other items by operating segments are summarized below (in thousands):
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 $9,493,000, $10,157,000, and $13,466,000 for 2019, 2018, and 2017, respectively.
American National’s funding policy for the qualified pension plans is to make annual contributions to meet the minimum funding standards of ERISA. American National and its affiliates did not contribute to its qualified plans in 2019 and do not expect to contribute in 2020 due to the substantial contribution over minimum funding standards made in 2018. American National contributed $60,000,000 and $25,023,000 to the qualified pension plans in 2018 and 2017, respectively. The benefits paid from the non-qualified plans were $8,703,000, $8,901,000 and $12,212,000 in 2019, 2018 and 2017, respectively. Future payments from the non-qualified pension benefit plans will be funded out of general corporate assets.
American National utilizes third-party pricing services to estimate fair value measurements of its pension plan assets. Refer to Note 9 Fair Value of Financial Instruments for further information concerning the valuation methodologies and related inputs utilized by the third-party pricing services. The fair value (hierarchy measurements) of the pension plan assets by asset category are shown below (in thousands):
American National sponsors a contributory health and dental benefit plan to a closed block of retirees and their dependents who met certain age and length of service requirements as of December 31, 1993. The primary retiree health benefit plan provides Medicare Supplemental and prescription drug benefits. American National’s contribution is limited to $40 per month for retirees and spouses. Since American National’s contributions to the cost of the retiree benefits plans are fixed, the health care cost trend rate will have no effect on the future expense or the accumulated postretirement benefit obligation. 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.
The accrued postretirement benefit obligation, included in the liability for retirement benefits, was $4,687,000 and $6,085,000 at December 31, 2019 and 2018, respectively. These amounts were approximately equal to the unfunded accumulated postretirement benefit obligation.
American National and its subsidiaries lease insurance sales office space, technological equipment, and automobiles. The remaining long-term lease commitments at December 31, 2019 were approximately $14,095,000.