Five buildings, four in Springfield, Missouri, and the other in Glenmont, New York, which are used primarily by our Property and Casualty segment.
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. Results for the years ended December 31, 2017, 2016 and 2015 have not been restated to conform to the current presentation. See Note 3, Recently Issued Accounting Pronouncements.
potential for difficult conditions in the economy, which may not improve in the near future, and risks related to persistently low or unpredictable interest rates;
failure to complete and implement technology initiatives in a timely manner;
potential employee error or misconduct, which may result in fraud or adversely affect the execution and administration of our policies and claims;
potential difficulty in attraction and retention of qualified employees and agents;
adverse determinations in litigation or regulatory proceedings which may result in significant financial losses and harm our reputation;
changes in statutory or U.S. Generally Accepted Accounting Principles (“GAAP”), practices or policies;
control of our company by a small number of stockholders; and
advances in medical technology and testing, which may increase our adverse selection risk.
Interest Rates: The low-interest rate environment is a challenge for life insurers as the spreads on deposit-type contracts remain narrow, especially as interest rates have approached minimum crediting rates. Low market interest rates reduce the spreads between the amounts we credit to fixed annuity and individual life policyholders and the amounts we earn on the investments that support these obligations. Our ALM Committee actively manages the profitability of these in-force blocks of business. In previous years, we reduced the guaranteed minimum crediting rates on new fixed annuity contracts, which has afforded us the flexibility to respond to the unusually low-interest rate environment. We have also reduced crediting rates on in-force contracts, where permitted to do so. These actions help mitigate the adverse impact of low interest rates on the profitability of these products, although sales volume may be negatively impacted as a result. We also maintain assets with various maturities to support product liabilities and ensure liquidity. A gradual increase in longer-term interest rates relative to short-term rates generally will have a favorable effect on the profitability of our products. Rapidly rising interest rates could result in reduced persistency of our spread-based products, if contract holders shift assets into higher yielding investments. We believe our ability to react quickly to the changing marketplace will help us manage this risk.
Importance of Operating Efficiencies: The volatile economic environment and costs associated with greater regulation create a further need for operating efficiencies. We manage our cost base while maintaining our commitment to provide superior customer service to policyholders and agents. Investments in technology are coordinated through a disciplined project management process. We anticipate continually improving our use of technology to enhance our policyholders’ and agents’ experience and increase our overall operating effectiveness.
Increased Role of Advanced Technology: The use of mobile technology has changed the way consumers want to conduct their business, including real-time access to information. Many customers expect to complete transactions in a digital format instead of traditional methods that require a phone call or submission of paper forms. Social media and other customer-facing technologies also reshape the way companies communicate and collaborate with key stakeholders, and new tools exist to better collect and analyze information for potential business opportunities and better manage risks. For example, American National has mobile-enabled all of its Internet-based access and leverages social media channels to reach out to potential customers to promote awareness of the company, including the products and services offered. We expect that technology will continue to evolve, offering new and more effective ways to reach and service our customers and shareholders. We evaluate available and evolving technologies and incorporate those we believe offer appropriate benefits to the company and its customers.
Continued Challenges of Talent Attraction and Retention: Attracting qualified individuals and retaining existing employees is a continuing challenge for employers. Businesses have become extremely competitive in the talent marketplace and particularly with such low unemployment. As a result, it grows increasingly challenging to distinguish American National as the employer of choice.
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 believe 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.
Recoverability-At least annually, we test the adequacy of the net benefit reserves (policy benefit reserves less DAC) recorded for life insurance and annuity products. To perform the tests, we use our current best-estimate assumptions as to policyholder mortality, persistency, maintenance expenses and invested asset returns.
IBNR-IBNR reserves are estimated based on many variables including historical statistical information, inflation, legal environment, economic conditions, trends in claim severity and frequency as well as other factors affecting the adequacy of claim reserves. Loss and premium data is aggregated by exposure class and by accident year. IBNR reserves are estimated by projecting ultimate losses on each class of business and subtracting paid losses and case reserves. Our overall reserve practice provides for ongoing claims evaluation and adjustment based on the development of related data and other relevant information pertaining to claims. Adjustments in aggregate reserves, if any, are included in the results of operations of the period during which such adjustments are made.
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, 2019 and December 31, 2018, respectively.
Initial Expected Loss Ratio-This method calculates an estimate of ultimate losses by applying an estimated loss ratio to actual earned premium for each calendar/accident year. This method is appropriate for classes of business where the actual paid or reported loss experience is not yet mature enough to influence initial expectations of the ultimate loss ratios.
Bornhuetter-Ferguson-This method uses as a starting point an assumed initial expected loss ratio method and blends in the loss ratio implied by the claims experience to date by using loss development patterns based on our historical experience. This method is generally appropriate where there are few reported claims and an unstable pattern of reported losses.
It is not appropriate to aggregate the impacts shown in the sensitivity analysis above. Each was estimated in isolation of the others and are not expected to occur at the same time and in the same magnitude as shown. The variations are not meant to demonstrate what we believe to be “best-case” or “worst-case” scenarios, and it is possible that future variations will be more or less than the amounts in the sensitivity analysis. While these are possible scenarios based on the information available to us at this time, we do not believe the reader should consider our sensitivity analysis to generate either what we consider to be a range of reasonable reserve estimates or what we consider to be a range of all possible outcomes.
Management believes our reserves at December 31, 2019 are adequate. New information, regulation, events or circumstances unknown at the original valuation date, however, may result in future development resulting in ultimate losses being significantly greater or less than the recorded reserves at December 31, 2019.
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. See Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 18, Pension and Postretirement Benefits for additional details.
Based on information currently available, we believe that amounts ultimately paid, if any, arising from existing and currently potential litigation would not have a material effect on our results of operations and financial condition. However, it should be noted that the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs, continues to create the potential for an unpredictable judgment in any given lawsuit. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than we anticipate, the resulting liability could have a material impact on the consolidated financial statements.
A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.
Decrease in Life segment earnings as a result of an increase in reserves related to benefits for our participating policies
An increase in reserves related to benefits for our participating policies
Life insurance sales are based on the total yearly premium that insurance companies would expect to receive if all recurring premium policies would remain in force, plus 10% of single and excess premiums. Life insurance sales measure activity associated with gaining new insurance business in the current period, and includes deposits received related to interest sensitive life and universal life-type products. GAAP premium revenues, on the other hand, are associated with policies sold in current and prior periods, and deposits received related to interest sensitive life and universal life-type products are recorded in a policyholder account which is reflected as a liability. Therefore, a reconciliation of premium revenues and insurance sales is not meaningful.
For 2019, the companies to whom we have ceded reinsurance for the Life segment are shown below (in thousands, except percentages)
Income from operations for our Annuity segment decreased primarily due to the following:
Spread compression and higher than expected fixed annuity surrenders early in 2019 that resulted in increased DAC amortization for the year.
Higher margins on our indexed products attributable to lower mark-to-market reserve increases in 2019 compared to 2018.
Margins increased primarily due to indexed annuities. Indexed annuity margins experienced mark-to-market reserve increases in both 2019 and 2018, but 2018 was more unfavorable due to the impact of stock market decline in the fourth quarter of 2018 outweighing the impact of declining interest rates during 2019. The following table summarizes the interest margin due to the impact of the investment performance, interest credited to policyholder’s account balances, and the end of period assets measured by account balance (in thousands):
Income from operations for our Health segment decreased primarily due to the following:
Decrease in premium for limited benefit products in our supplemental insurance line of business.
We cede or retrocede the majority of the premium and risk associated with our stop loss and other MGU programs. We maintain reinsurance on a quota share basis for our long-term care and disability income business.
Net written and earned premiums increased for all major personal and commercial lines, partially offset by decreases in our credit-related property products primarily due to a decrease in Collateral Protection Insurance ("CPI") business.
The increase in operating expenses correlated to the increase in premium with our overall underwriting expense ratio being consistent in 2019 compared to 2018.
Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 60% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 33% of net premiums written; and (iii) Credit-related property insurance products, marketed to and through financial institutions and retailers, representing 7% of net premiums written.
Other Personal: These products include coverages for individuals seeking to protect their personal property and liability not covered within their home and auto policies, such as coverages for watercraft, personal umbrella, and rental owners.
Commercial Business: Commercial business products primarily relate to workers compensation and business owners lines of business. Net premiums written and earned increased primarily due to the addition of our Investor Property Protection line of business as well as increased sales of business owners insurance. The loss and loss adjustment expense and combined ratios increased primarily due to the workers compensation line of business which experienced lower than anticipated prior year claim emergence in 2018.
Agricultural Business: Our agricultural business product allows policyholders to customize and cover their agriculture exposure using a package policy, which includes coverage for residences and household contents, farm and ranch buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased due to an increase in policies in force. While the loss and loss adjustment expense ratio increased slightly, the combined ratio was in-line with the prior year-end primarily due to the improvement in the expense ratio.
Net written and earned premiums decreased primarily due to a transition to a Collateral Protection Insurance ("CPI") program with lower rates and the loss of certain CPI accounts. The loss and loss adjustment expense and combined ratios increased mainly due to increased property losses incurred in 2019.
The Corporate Program covers all non-credit property and casualty business, subject to certain limits, and is not specific to the Company or any of its subsidiaries, or any state or region. The program does cover the Mortgage Security Insurance (MSI) and Guaranteed Auto Protection (GAP) credit business written by the Specialty Markets Group.
We purchase a Catastrophe Aggregate reinsurance coverage that provides for $30 million of limit excess of $90 million of aggregated catastrophe losses. Qualifying losses include amounts of retained losses below $10 million on Property Claims Services (“PCS”) declared catastrophe events and internally declared catastrophe events exceeding $5 million. The Catastrophe Aggregate reinsurance coverage has been placed at 100.0% for 2019 and does not include a reinstatement.
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, of the Notes to the Consolidated Financial Statements.
Income from operations for our Corporate and Other segment increased primarily due to the following:
The increase in our total investments at December 31, 2019 compared to December 31, 2018 was primarily a result of an increase in short-term investments and bonds available-for-sale. These increases were somewhat offset by a reduction in mortgage loans.
Bonds-We allocate most of our fixed maturity securities to support our insurance business. At December 31, 2019, our fixed maturity securities had an estimated fair value of $15.7 billion, which was $0.6 billion, or 4.2%, above amortized cost. 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. The estimated fair value for securities due in one year or less was $1.2 billion as of December 31, 2019 and $0.5 billion as of December 31, 2018. 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.
Equity Securities-We invest in companies publicly traded on national U.S. stock exchanges. See Note 4, Investments in Securities, of the Notes to the Consolidated Financial Statements for the unrealized and realized gains and losses of equity securities.
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, 2019, we had $379.7 million in policy loans with a loan to surrender value of approximately 56%, and at December 31, 2018, we had $376.3 million in policy loans with a loan to surrender value of approximately 60%. 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.
Funds received as premium payments and deposits that are not used for liquidity requirements are generally invested in bonds and commercial mortgages. Funds are invested with the intent that income from the investments and proceeds from the maturities will meet our ongoing cash flow needs. We historically have not had to liquidate invested assets in order to cover cash flow needs. We believe our portfolio of highly liquid available-for-sale investment securities, including equity securities, is sufficient to meet future liquidity needs as necessary. Deposits of certain securities and mortgage loans under the Company’s membership with the Federal Home Loan Bank of Dallas (“FHLB”) provided approximately $488.0 million of borrowing capacity as of December 31, 2019, which increased to approximately $1.1 billion as of January 8, 2020, should we require additional liquidity resources for operations or for opportunities related to a merger or acquisition.
The Company holds collateral of $257.6 million at December 31, 2019 to offset exposure from its derivative counterparties. Cash flows associated with collateral received from counterparties change as the market value of the underlying derivative contract changes.
Our cash and cash equivalents and short-term investment position increased from $474.9 million at December 31, 2018 to $877.3 million at December 31, 2019. The increase primarily relates to an increase in commercial paper to fund investments and other operating requirements.
We have notes payable relating to borrowings by real estate joint ventures that we consolidate into our financial statements that are not part of our capital resources. The lenders for the notes payable generally have no recourse against us in the event of default by the joint ventures. Therefore, the liability we have for these notes payable is limited to our investment in the respective ventures, which totaled $4.3 million and $26.6 million at December 31, 2019 and 2018, respectively.
Includes undiscounted case reserves for reported claims and reserves for IBNR with the timing of future payments based on our historical payment patterns. The timing of these payments may vary significantly from the pattern shown in the preceding table. The ultimate losses may vary materially from the recorded amounts, which are our best estimates.
Reflects estimated future claim payments for claims incurred based on mortality and morbidity assumptions that are consistent with historical claims experience. These are not discounted with interest and will exceed the liabilities recorded in reserves for future claim payment, which are discounted with interest. Due to the significance of the assumptions used, the amounts presented could materially differ from actual payments.
We have off-balance sheet arrangements relating to third-party marketing operation bank loans as discussed in Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements. We could be exposed to a liability for these loans, which are supported by the cash value of the underlying insurance contracts. The cash value of the life insurance policies is designed to always equal or exceed the balance of the loans. Accordingly, management does not foresee any material loss related to these arrangements.
Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018, and 2017
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for equity investments as of January 1, 2018 due to the adoption of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
Assessment of the estimate of liability for secondary guarantees for universal life policies
We identified the assessment of the Company’s estimate of liability for secondary guarantees for universal life policies as a critical audit matter. A high degree of subjective auditor judgment was required in the evaluation of mortality, surrender and premium persistency assumptions (actuarial assumptions) related to determining the present value of the excess payments. In addition, specialized skills and knowledge were required to evaluate the estimate and actuarial assumptions.
Developing independent estimates for certain cohorts (group of policies) based on assumptions and data used by the Company.
We have identified the assessment of the Company’s estimate of the embedded derivative liability as a critical audit matter. As assumptions required predictions of policyholder behavior, the evaluation of surrender assumptions utilized in the estimation of the embedded derivative liability required specialized skills and knowledge and a high degree of auditor judgment.
Evaluating the ratio of the fair value of the embedded derivative to policyholder account value of equity indexed annuities to assess the consistency of the ratio throughout the year and in comparison to prior year.
Assessment of the estimate of property and casualty liability for unpaid claims
We have audited American National Insurance Company and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, 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, 2019, 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 statements of financial position of the Company as of December 31, 2019 and 2018, the related consolidated statements of operation, 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), and our report dated February 28, 2020 expressed an unqualified opinion on those consolidated financial statements.
American National Insurance Company and its consolidated subsidiaries (collectively “American National” or “the Company”) offer a broad portfolio of insurance products, including individual and group life insurance, annuities, health insurance, and property and casualty insurance. Business is conducted in all 50 states, the District of Columbia and Puerto Rico.
The consolidated financial statements and notes thereto have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and are reported in U.S. currency. American National consolidates entities that are wholly-owned and those in which American National owns less than 100% but controls the voting rights, as well as variable interest entities in which American National is the primary beneficiary. Intercompany balances and transactions with consolidated entities have been eliminated. Investments in unconsolidated affiliates are accounted for using the equity method of accounting. Certain amounts in prior years have been reclassified to conform to current year presentation.
Mortgage loans on real estate are stated at unpaid principal balance, adjusted for any unamortized discount, deferred expenses, and allowances. Accretion of discounts is recorded using the effective yield method. Interest income, prepayment fees and accretion of discounts and origination fees are reported in “Net investment income” in the consolidated statements of operations. Interest income earned on impaired and non-impaired loans is accrued on the principal amount of the loan based on contractual interest rate. However, interest ceases to accrue for loans on which interest is more than 90 days past due, when the collection of interest is not probable or when a loan is in foreclosure. Income on past due loans is reported on a cash basis. When a loan becomes current, it is placed back into accrual status. Cash receipts on impaired loans are recorded as a reduction of principal, interest income, expense reimbursement or other manner in accordance with the loan agreement. Gains and losses from the sale of loans and changes in allowances are reported in “Net realized investment gains” in the consolidated statements of operations.
Real estate joint ventures and other limited partnership interests in which the Company has more than a minor interest or influence over the investee’s operations, but it does not have a controlling interest and is not the primary beneficiary, are accounted for using the equity method. These investments are reported as “Investments in unconsolidated affiliates” in the consolidated statements of financial position. For certain joint ventures, American National records its share of earnings using a lag methodology of one to three months when timely financial information is not available and the contractual right does not exist to receive such financial information. In addition to the investees’ impairment analysis of its underlying investments, American National routinely evaluates its investments in those investees for impairments. American National considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether impairment has occurred. When an impairment is deemed to have occurred at the joint venture level, American National recognizes its share as an adjustment to “Equity in earnings of unconsolidated affiliates” to record the investment at its fair value. When an impairment results from American National’s separate analysis, an adjustment is made through “Net realized investment gains” to record the investment at its fair value.
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, which are carried at cost, less allowance for depletion, where applicable. Separately managed accounts are also included in other invested assets and are carried at cost or market value if available from the account manager.
Property and casualty premiums are recognized as revenue proportionately over the contract period, net of reinsurance ceded. Claims incurred consist of claims and CAE paid and the change in reserves, net of reinsurance received and recoverable.
For the majority of this participating business, profits earned are reserved for the payment of dividends to policyholders, except for the stockholders’ share of profits on participating policies, which is limited to the greater of 10% of the profit on participating business, or 50 cents per thousand dollars of the face amount of participating life insurance in-force. Participating policyholders’ interest includes the accumulated net income from participating policies reserved for payment to such policyholders in the form of dividends (less net income allocated to stockholders as indicated above) as well as a pro rata portion of unrealized investment gains (losses) net of tax. Dividends to participating policyholders were $8.4 million, $7.6 million, and $6.1 million for the years ended 2019, 2018, and 2017, respectively. Additional income of $34.0 million, $4.2 million, and $16.2 million was allocated to participating policyholders for the years ended 2019, 2018, and 2017, respectively.
Deferred income tax assets and liabilities are recognized to reflect the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases. Deferred taxes are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled.
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"). 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.
American National uses a discount rate to determine the present value of future benefits on the measurement date. The guideline for setting this rate is a high-quality long-term corporate bond rate. For this purpose, a hypothetical bond portfolio to match the expected monthly benefit payments under the pension plan was constructed with the resulting yield of the portfolio used as a discount rate. To determine the expected long-term rate of return on plan assets, a building-block method is used. The expected rate of return on each asset is broken down into inflation, the real risk-free rate of return (i.e., the long-term estimate of future returns on default-free U.S. government securities), and the risk premium for each asset class (i.e., the expected return in excess of the risk-free rate). Using this approach, the calculated return will fluctuate from year to year; however, it is American National’s policy to hold this long-term assumption relatively constant.
In January 2016, the FASB issued ("ASU") 2016-01, "Financial Instruments," which changed certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance requires that equity investments, other than those accounted for under the equity method or those that result in consolidation of the investee, be measured at fair value with the changes in fair value recognized through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance also simplifies the impairment assessment of equity investments and eliminates the disclosure requirements for methods and significant assumptions used to estimate fair value of financial instruments that are measured at amortized cost on the statement of financial position. The Company adopted the standard on its required effective date of January 1, 2018 using a modified retrospective approach. Upon adoption, cumulative unrealized gains on equity securities, net of tax, of $667.7 million, partially offset by $30.4 million participating policyholders’ interest in such gains, net of tax, were reclassified from accumulated other comprehensive income to retained earnings. In April 2018, an additional $10.2 million deferred policy acquisition cost adjustment, net of tax, related to net unrealized gains and losses on equity securities, was reclassified from accumulated other comprehensive income to retained earnings. The change in net gains and losses on equity securities increased earnings by
$333.8 million, net of tax, for the year ended December 31, 2019 and decreased earnings by $84.7 million, net of tax, for the year ended December 31, 2018.
In October of 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory,” which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. 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 2016, the FASB issued ASU 2016-02, “Leases,” that required significant changes to the statement of financial position of lessees. The new standard required lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by the lessee. This classification is used to determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their classification. Lessor accounting was less affected by the standard but was updated to align with certain changes in the lessee model and the new revenue recognition standard. The Company adopted the standard on its required effective date of January 1, 2019 using the effective date method, which required a cumulative-effect adjustment to the opening balance of retained earnings. Upon adoption, the Company recorded a right-of-use asset and lease liability of $13.1 million.
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which 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 was adopted on its required effective date of January 1, 2019 and resulted in a $0.8 million increase in retained earnings and a corresponding decrease to accumulated other comprehensive income.
In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans,” which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance removes certain defined benefit pension or other postretirement plan disclosures that are no longer cost beneficial, clarifies the specific requirements for each disclosure and adds disclosure requirements. This standard will become effective for the annual period ending December 31, 2020. The Company does not expect the adoption of this standard to have any material impact on our results of operations or financial position.
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which seeks to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Current GAAP does not specifically address the implementation costs of a cloud computing arrangement that is service contract. This standard will become effective for the Company for all interim and annual periods beginning January 1, 2020. The standard is adopted prospectively and is not expected to be material to the Company's results of operations or financial position.
Gains and losses are determined using specific identification of the securities sold. During 2019 and 2018, bonds below with a carrying value of $157,939,000 and $34,850,000, respectively, were transferred from held-to-maturity to available-for-sale after a deterioration in the issuers’ creditworthiness. Further, during 2018, a bond with a carrying value of $38,221,000 was transferred from held-to-maturity to available-for-sale due to an isolated event that could not have been reasonably anticipated by the Company. No realized losses were recorded in 2019 or 2018.
The components of the change in net gains (losses) on equity securities are shown below (in thousands):
As of December 31, 2019, the securities with unrealized losses including those exceeding one year were not deemed to be other-than-temporarily impaired. American National has the ability and intent to hold those securities until a market price recovery or maturity. It is not more-likely-than-not that American National will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time. It is possible an issuer’s financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.
There were no unamortized purchase discounts as of December 31, 2019 or 2018. Total mortgage loans were net of unamortized origination fees of $29,294,000 and $31,586,000 at December 31, 2019 and 2018, respectively. No unearned income is included in these amounts.
A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Mortgage loans with temporary difficulties are not considered impaired when the borrower has the financial capacity to fund revenue shortfalls from the properties for the foreseeable future. Individual valuation allowances are established for impaired loans to reduce the carrying value to the estimated fair value of the collateral. Loans not evaluated individually for collectability are segregated by property-type and location, and allowance factors are applied. These factors are developed based on historical loss experience adjusted for the expected trend in the rate of foreclosure losses. Allowance factors are higher for loans of certain property types and in certain regions based on loss experience or a blended historical loss factor.
American National regularly invests in real estate partnerships and joint ventures. American National frequently participates in the design of these entities with the sponsor, but in most cases, its involvement is limited to financing. Through analysis performed by American National, some of these partnerships and joint ventures have been determined to be variable interest entities (“VIEs”). In certain instances, in addition to an economic interest in the entity, American National holds the power to direct the most significant activities of the entity and is deemed the primary beneficiary or consolidator of the entity. The assets of the consolidated VIEs are restricted and must first be used to settle their liabilities. Creditors or beneficial interest holders of these VIEs have no recourse to the general credit of American National, as American National’s obligation is limited to the amount of its committed investment. American National has not provided financial or other support to the VIEs in the form of liquidity arrangements, guarantees, or other commitments to third parties that may affect the fair value or risk of its variable interest in the VIEs in 2019 or 2018.
The notes payable in the consolidated statements of financial position pertain to the borrowings of the consolidated VIEs. The liability of American National relating to notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $4,304,000 and $26,635,000 at December 31, 2019 and 2018, respectively.
The Company’s equity in earnings of unconsolidated affiliates is the Company’s share of operating earnings and realized gains from investments in real estate joint ventures and other limited partnership interests (“joint ventures”) using the equity method of accounting. In 2019 and 2018 certain joint ventures took advantage of market opportunities to generate realized gains on the sale of real estate held or developed by the ventures.
Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $113,282,000, unrealized losses of $94,883,000, and unrealized gains of $50,805,000 relating to assets still held at December 31, 2019, 2018, and 2017, respectively.
The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis are shown below (in thousands):
Health-Consists of stop-loss and other supplemental health products. 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):
American National reinsures portions of certain life insurance policies to provide a greater diversification of risk and manage exposure on larger risks. For the issue ages zero to 75, the maximum amount that would be retained by one life insurance company (American National) would be $5.0 million individual life, $250,000 individual accidental death, $100,000 group life, and $125,000 credit life. If individual, group and credit insurance were all in force at the same time, the maximum risk on any one life aged zero to 75 could be $5.475 million. For the issue ages 76 to 80, the maximum amount that would be retained by one life insurance company (American National) would be $2.0 million individual life, $250,000 individual accidental death, $100,000 group life, and $125,000 credit life. If individual, group and credit insurance were all in force at the same time, the maximum risk on any one life aged 76 to 80 could be $2.475 million. For the issue ages 81 and over, the maximum amount that would be retained by one life insurance company (American National) would be $1.0 million individual life, $250,000 individual accidental death, $100,000 group life, and $125,000 credit life. If individual, group and credit insurance were all in force at the same time, the maximum risk on any one life aged 81 and over could be $1.475 million.
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 $411,830,000 and $427,475,000 at December 31, 2019 and 2018, respectively. None of the amount outstanding at December 31, 2019 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.
During 2018, American National recorded an income tax benefit of $20,301,000 related to the filing of its 2017 tax return. The tax benefit was primarily a result of tax deductions taken at the prior year federal tax rate of 35% as opposed to the new federal tax rate of 21% primarily due to a pension plan contribution, depreciation on fixed assets and changes in our estimated income from joint ventures.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted. The Tax Reform included numerous changes to existing federal income tax laws, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. In addition, there were several changes that were 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 the Tax Reform, we recorded a provisional tax benefit of $206.4 million in our 2017 financial statements. This tax benefit was primarily due to the remeasurement of our existing deferred tax balances to the 21% corporate income tax rate. There were no adjustments to the provisional tax benefit we recorded in 2017.
American National made income tax payments of $86,440,000, $22,234,000 and $33,640,000 during 2019, 2018, and 2017, respectively.
US 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 at this time.
American National’s federal income tax returns for years 2016 to 2018 are subject to examination by the Internal Revenue Service. Tax returns for 2013 to 2015 are subject to examination with certain limitations. In April 2019, American National received notice from the Internal Revenue Service of its intent to audit tax years 2013 to 2016. The audit is ongoing. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld. No provision for penalties or interest were established during 2019 or 2018 relating to a dispute with the Internal Revenue Service. As of December 31, 2019, American National had no provision for uncertain tax positions.
RS awards entitle the participant to full dividend and voting rights. Each RS share awarded has the value of one share of restricted stock and vests 10 years from the grant date. Unvested shares are restricted as to disposition, and are subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years and most of these awards feature a graded vesting schedule in the case of the retirement, death or disability of an award holder. Restricted stock awards for 350,334 shares have been granted at an exercise price of zero, of which 10,000 shares are unvested.
Basic earnings per share were calculated using a weighted average number of shares outstanding. Diluted earnings per share include RS and RSU award shares.
One of American National’s insurance subsidiaries has been granted a permitted practice from the Missouri Department of Insurance to record as the valuation of its investment in a wholly-owned subsidiary that is the attorney-in-fact for a Texas domiciled insurer, the statutory capital and surplus of the Texas domiciled insurer. This permitted practice increases the statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary by $70,339,000 and $69,787,000 at December 31, 2019 and 2018, respectively. The statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary would have remained substantially above the Company action level RBC had it not used the permitted practice.
Life-consists of whole, term, universal, indexed and variable life insurance. Products are primarily sold through career, multiple-line, and independent agents as well as direct marketing channels.
Corporate and Other-consists of net investment income from investments and certain expenses not allocated to the insurance segments and revenues and related expenses from non-insurance operations.
American National sponsors qualified and non-qualified defined benefit pension plans, all of which have been frozen. As such, no additional benefits are accrued through these plans for additional years of service credit or future salary increase credit, and no new participants are added to the plans. Benefits earned by eligible employees prior to the plans being frozen have not been affected. 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 funded from pension plan assets. A $7.2 million pension expense was recognized in the second quarter of 2017 for this de-risking. There was an additional pension settlement expense of $5.3 million recognized in the fourth quarter of 2017. This was part of the normal year-end actuarial valuation process of the defined pension plans. Due to plan amendments to make this option available in 2017, higher lump sum payouts were recorded.
Amounts related to the defined benefit pension plans recognized as a component of AOCI are shown below (in thousands):
The estimated actuarial loss for the plan that will be amortized from AOCI into the net periodic benefit cost over the next fiscal year is $4,789,000. Amounts recognized as a component of AOCI that have not been recognized as a component of the combined net periodic benefit cost of the defined benefit pension plans, are shown below (in thousands):
The following table shows pension benefit payments expected to be paid (in thousands):
American National had aggregate commitments at December 31, 2019, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $1,292,620,000 of which $723,908,000 is expected to be funded in 2020 with the remainder funded in 2021 and beyond.
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, 2019, certain municipal bonds and collateralized mortgage obligations (CMO’s) with a fair value of approximately $117.5 million and commercial mortgage loans of approximately $1.5 billion were on deposit with the FHLB as collateral for amounts subject to funding agreements, and there were no outstanding advances. The deposited securities and commercial mortgage loans are included in the Company’s consolidated statements of financial position within fixed maturity securities and mortgage loans on real estate, net of allowance, respectively.
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, 2019, was approximately $123,574,000, while the total cash value of the related life insurance policies was approximately $142,744,000.
Transactions with Greer, Herz & Adams, LLP: Irwin M. Herz, Jr. is a director on the American National Board of Directors and a Partner with Greer, Herz & Adams, LLP, which serves as American National’s General Counsel.