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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 001-39369
ANAT-20200930_G1.JPG
American National Group, Inc.
(Exact name of registrant as specified in its charter)
(formerly American National Insurance Company)
 

Delaware 30-1221711
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
One Moody Plaza
Galveston, Texas 77550-7999
(Address of principal executive offices) (Zip Code)
(409) 763-4661
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol Name of Each Exchange on which Registered
Common Stock, par value $0.01 ANAT NASDAQ
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ☒  Yes    ☐  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Sections 15(d) of the Exchange Act. ☐ Yes   ☒ No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer   Accelerated filer  
Non-accelerated filer   Smaller reporting company  
Emerging growth company    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒ No
As of October 29, 2020, there were 26,887,200 shares of the registrant’s voting common stock, $0.01 par value per share, outstanding.


AMERICAN NATIONAL GROUP, INC.
TABLE OF CONTENTS
ITEM 1.
3
4
5
6
8
10
ITEM 2.
41
ITEM 3.
65
ITEM 4.
66
ITEM 1.
66
ITEM 1A.
66
ITEM 6.
67



2

AMERICAN NATIONAL GROUP, INC.
(formerly AMERICAN NATIONAL INSURANCE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(In thousands, except share data)
September 30, 2020 December 31, 2019
ASSETS
Fixed maturity, bonds held-to-maturity, at amortized cost, net of allowance for credit losses of $21,491 in 2020 (Fair value $8,248,611 in 2020 and $8,968,690 in 2019)
$ 7,702,347  $ 8,631,261 
Fixed maturity, bonds available-for-sale, at fair value (Allowance for credit losses of $7,638 in 2020) (Amortized cost $6,794,366 in 2020 and $6,435,670 in 2019)
7,236,188  6,725,085 
Equity securities, at fair value (Cost $734,916 in 2020 and $663,058 in 2019)
1,840,855  1,700,960 
Mortgage loans on real estate, net of allowance for credit losses of $112,916 in 2020 and allowance for loan loss of $19,160 in 2019
5,176,474  5,097,017 
Policy loans 374,387  379,657 
Investment real estate, net of accumulated depreciation of $266,697 in 2020 and $256,757 in 2019
514,076  551,219 
Short-term investments 800,793  425,321 
Other invested assets 103,030  76,569 
Total investments 23,748,150  23,587,089 
Cash and cash equivalents 884,083  452,001 
Investments in unconsolidated affiliates 827,364  705,721 
Accrued investment income 211,655  200,856 
Reinsurance recoverables, net of allowance for credit losses of $14,845 in 2020 and allowance for recoverables loss of $8,220 in 2019
477,904  411,830 
Prepaid reinsurance premiums 40,574  44,669 
Premiums due and other receivables 372,535  341,924 
Deferred policy acquisition costs 1,400,440  1,423,007 
Property and equipment, net of accumulated depreciation of $276,047 in 2020 and $257,907 in 2019
117,892  106,303 
Prepaid pension 87,908  78,990 
Other assets 187,665  171,285 
Separate account assets 1,092,574  1,073,891 
Total assets $ 29,448,744  $ 28,597,566 
LIABILITIES
Future policy benefits
Life $ 3,123,027  $ 3,087,578 
Annuity 1,573,480  1,571,263 
Health 50,143  49,886 
Policyholders’ account balances 12,869,130  12,957,989 
Policy and contract claims 1,596,729  1,489,979 
Unearned premium reserve 983,113  933,559 
Other policyholder funds 362,187  361,059 
Liability for retirement benefits 61,043  67,435 
Notes payable 154,788  157,997 
Deferred tax liabilities, net 414,206  394,528 
Current tax payable 5,173  9,757 
Federal Home Loan Bank advances 500,000  — 
Other liabilities 510,337  446,882 
Separate account liabilities 1,092,574  1,073,891 
Total liabilities 23,295,930  22,601,803 
EQUITY
American National Group, Inc. stockholders’ equity:
Common stock, $0.01 par value in 2020 and $1.00 in 2019; 50,000,000 shares authorized; 26,887,200 shares issued and outstanding in 2020 and 30,832,449 shares issued and 26,887,200 outstanding in 2019
269  30,832 
Additional paid-in capital 47,689  21,011 
Accumulated other comprehensive income 194,706  99,518 
Retained earnings 5,903,843  5,946,857 
Treasury stock, at cost —  (108,469)
Total American National stockholders’ equity 6,146,507  5,989,749 
Noncontrolling interest 6,307  6,014 
Total stockholders' equity 6,152,814  5,995,763 
Total liabilities and stockholders' equity $ 29,448,744  $ 28,597,566 
See accompanying notes to the unaudited condensed consolidated financial statements.

3

AMERICAN NATIONAL GROUP, INC.
(formerly AMERICAN NATIONAL INSURANCE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
PREMIUMS AND OTHER REVENUES
Premiums
Life $ 101,182  $ 93,079  $ 282,368  $ 265,634 
Annuity 27,960  41,305  69,413  137,434 
Health 40,934  40,676  126,965  121,581 
Property and casualty 391,388  382,784  1,152,749  1,125,704 
Other policy revenues 79,344  76,784  238,736  226,178 
Net investment income 254,256  246,620  656,888  796,696 
Net realized investment gains 17,387  31,933  25,474  31,943 
Other-than-temporary impairments —  —  —  (6,968)
Change in investment credit loss (4,175) —  (101,163) — 
Net gains on equity securities 152,147  8,589  118,397  282,026 
Other income 9,683  10,730  31,152  32,642 
Total premiums and other revenues 1,070,106  932,500  2,600,979  3,012,870 
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits
Life 153,957  113,652  389,364  327,579 
Annuity 46,424  59,699  126,209  191,248 
Claims incurred
Health 27,933  28,567  89,544  81,042 
Property and casualty 258,412  280,695  768,682  790,447 
Interest credited to policyholders’ account balances 128,946  106,782  271,406  371,703 
Commissions for acquiring and servicing policies 138,365  128,689  409,290  408,629 
Other operating expenses 126,413  128,502  385,516  391,645 
Change in deferred policy acquisition costs (8,387) 1,548  (14,762) (22,391)
Total benefits, losses and expenses 872,063  848,134  2,425,249  2,539,902 
Income before federal income tax and other items 198,043  84,366  175,730  472,968 
Less: Provision for federal income taxes
Current 20,789  4,433  31,578  32,444 
Deferred 23,123  18,042  2,863  79,356 
Total provision for federal income taxes 43,912  22,475  34,441  111,800 
Income after federal income tax 154,131  61,891  141,289  361,168 
Equity in earnings of unconsolidated affiliates 17,029  45,075  19,114  102,325 
Other components of net periodic pension benefit (costs), net of tax 543  (1,023) 1,471  (2,808)
Net income 171,703  105,943  161,874  460,685 
Less: Net income attributable to noncontrolling interest, net of tax 651  13,759  721  11,444 
Net income attributable to American National $ 171,052  $ 92,184  $ 161,153  $ 449,241 
Amounts available to American National common stockholders
Earnings per share
Basic $ 6.36  $ 3.43  $ 6.00  $ 16.71 
Diluted 6.36  3.43  5.99  16.71 
Weighted average common shares outstanding 26,877,200  26,881,700  26,879,178  26,883,025 
Weighted average common shares outstanding and dilutive potential common shares
26,884,758  26,888,172  26,887,874  26,889,338 

See accompanying notes to the unaudited condensed consolidated financial statements.

4

AMERICAN NATIONAL GROUP, INC.
(formerly AMERICAN NATIONAL INSURANCE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Net income $ 171,703  $ 105,943  $ 161,874  $ 460,685 
Other comprehensive income (loss), net of tax
  Change in net unrealized gains (losses) on securities 28,573  (2,569) 89,946  181,305 
  Foreign currency transaction and translation adjustments 371  (293) (214) 297 
  Defined benefit pension plan adjustment 1,851  1,454  5,456  4,365 
Total other comprehensive income (loss), net of tax 30,795  (1,408) 95,188  185,967 
Total comprehensive income 202,498  104,535  257,062  646,652 
Less: Comprehensive income attributable to noncontrolling interest 651  13,759  721  11,444 
Total comprehensive income attributable to American National $ 201,847  $ 90,776  $ 256,341  $ 635,208 

See accompanying notes to the unaudited condensed consolidated financial statements.


5

AMERICAN NATIONAL GROUP, INC.
(formerly AMERICAN NATIONAL INSURANCE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In thousands, except per share data)
  Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Noncontrolling Interest Total Equity
Balance at December 31, 2019 $ 30,832  $ 21,011  $ 99,518  $ 5,946,857  $ (108,469) $ 6,014  $ 5,995,763 
Amortization of restricted stock —  20  —  —  —  —  20 
Cumulative effect of accounting change
—  —  —  (34,702) —  —  (34,702)
Other comprehensive loss —  —  (111,571) —  —  —  (111,571)
Net loss attributable to American National
—  —  —  (220,444) —  —  (220,444)
Cash dividends to common stockholders (declared per share of $0.82)
—  —  —  (22,047) —  —  (22,047)
Contributions —  —  —  —  —  546  546 
Distributions —  —  —  —  —  (323) (323)
Net loss attributable to noncontrolling interest
—  —  —  —  —  (153) (153)
Balance at March 31, 2020 $ 30,832  $ 21,031  $ (12,053) $ 5,669,664  $ (108,469) $ 6,084  $ 5,607,089 
Amortization of restricted stock —  20  —  —  —  —  20 
Cumulative effect of accounting change
—  —  —  1,199  —  —  1,199 
Other comprehensive income —  —  175,964  —  —  —  175,964 
Net income attributable to American National
—  —  —  210,545  —  —  210,545 
Cash dividends to common stockholders (declared per share of $0.82)
—  —  —  (22,047) —  —  (22,047)
Contributions —  —  —  —  —  310  310 
Distributions —  —  —  —  —  (362) (362)
Net income attributable to noncontrolling interest
—  —  —  —  —  223  223 
Balance at June 30, 2020 $ 30,832  $ 21,051  $ 163,911  $ 5,859,361  $ (108,469) $ 6,255  $ 5,972,941 
Reclassification of par value due to reorganization (26,618) 26,618  —  —  —  —  — 
Retirement of treasury shares (3,945) —  —  (104,524) 108,469  —  — 
Amortization of restricted stock —  20  —  —  —  —  20 
Other comprehensive income —  —  30,795  —  —  —  30,795 
Net income attributable to American National
—  —  —  171,052  —  —  171,052 
Cash dividends to common stockholders (declared per share of $0.82)
—  —  —  (22,046) —  —  (22,046)
Contributions —  —  —  —  —  —  — 
Distributions —  —  —  —  —  (599) (599)
Net income attributable to noncontrolling interest
—  —  —  —  —  651  651 
Balance at September 30, 2020 $ 269  $ 47,689  $ 194,706  $ 5,903,843  $   $ 6,307  $ 6,152,814 

See accompanying notes to the unaudited condensed consolidated financial statements.


6

AMERICAN NATIONAL GROUP, INC.
(formerly AMERICAN NATIONAL INSURANCE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In thousands, except per share data)
  Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Noncontrolling Interest Total Equity
Balance at December 31, 2018 $ 30,832  $ 20,694  $ (99,738) $ 5,413,952  $ (108,492) $ 14,267  $ 5,271,515 
Reissuance of treasury shares —  237  —  —  23  —  260 
Amortization of restricted stock —  20  —  —  —  —  20 
Cumulative effect of accounting change
—  —  (785) 785  —  —  — 
Other comprehensive income —  —  86,774  —  —  —  86,774 
Net income attributable to American National
—  —  —  258,217  —  —  258,217 
Cash dividends to common stockholders (declared per share of $0.82)
—  —  —  (22,101) —  —  (22,101)
Contributions —  —  —  —  — 
Distributions —  —  —  —  —  (419) (419)
Net loss attributable to noncontrolling interest
—  —  —  —  —  (1,350) (1,350)
Balance at March 31, 2019 $ 30,832  $ 20,951  $ (13,749) $ 5,650,853  $ (108,469) $ 12,501  $ 5,592,919 
Amortization of restricted stock —  20  —  —  —  —  20 
Other comprehensive income —  —  100,601  —  —  —  100,601 
Net income attributable to American National
—  —  —  98,840  —  —  98,840 
Cash dividends to common stockholders (declared per share of $0.82)
—  —  —  (22,044) —  —  (22,044)
Contributions —  —  —  —  —  168  168 
Distributions —  —  —  —  —  (1,957) (1,957)
Net loss attributable to noncontrolling interest
—  —  —  —  —  (965) (965)
Balance at June 30, 2019 $ 30,832  $ 20,971  $ 86,852  $ 5,727,649  $ (108,469) $ 9,747  $ 5,767,582 
Amortization of restricted stock —  20  —  —  —  —  20 
Other comprehensive loss —  —  (1,408) —  —  —  (1,408)
Net income attributable to American National
—  —  —  92,184  —  —  92,184 
Cash dividends to common stockholders (declared per share of $0.82)
—  —  —  (22,050) —  —  (22,050)
Contributions —  —  —  —  —  56  56 
Distributions —  —  —  —  —  (18,435) (18,435)
Net income attributable to noncontrolling interest
—  —  —  —  —  13,759  13,759 
Balance at September 30, 2019 $ 30,832  $ 20,991  $ 85,444  $ 5,797,783  $ (108,469) $ 5,127  $ 5,831,708 

See accompanying notes to the unaudited condensed consolidated financial statements.

7



AMERICAN NATIONAL GROUP, INC.
(formerly AMERICAN NATIONAL INSURANCE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
  Nine months ended September 30,
  2020 2019
OPERATING ACTIVITIES
Net income $ 161,874  $ 460,685 
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains (25,474) (31,943)
Other-than-temporary impairments —  6,968 
Change in investment credit loss 101,163  — 
Accretion of premiums, discounts and loan origination fees 12,457  (3,862)
Net capitalized interest on policy loans and mortgage loans (22,596) (25,719)
Depreciation 39,389  40,760 
Interest credited to policyholders’ account balances 271,406  371,703 
Charges to policyholders’ account balances (238,736) (226,178)
Deferred federal income tax expense 2,863  79,356 
Equity in earnings of unconsolidated affiliates (19,114) (102,325)
Distributions from unconsolidated affiliates 45,233  103,128 
Changes in:
Policyholder liabilities 187,393  168,352 
Deferred policy acquisition costs (14,762) (22,391)
Reinsurance recoverables (66,074) (7,318)
Premiums due and other receivables (30,611) (15,989)
Prepaid reinsurance premiums 4,095  2,483 
Accrued investment income (10,799) (3,030)
Current tax payable (4,711) (5,335)
Liability for retirement benefits (8,404) (2,956)
Fair value of option securities 2,200  (95,885)
Fair value of equity securities (118,397) (282,026)
Other, net (17,352) (13,282)
    Net cash provided by operating activities 251,043  395,196 
INVESTING ACTIVITIES
Proceeds from sale/maturity/prepayment of:
Held-to-maturity securities 1,167,417  502,141 
Available-for-sale securities 803,665  329,489 
Equity securities 79,623  178,817 
Investment real estate 45,645  64,459 
Mortgage loans 313,009  626,449 
Policy loans 40,502  33,096 
Other invested assets 98,975  53,350 
Disposals of property and equipment 16  69 
Distributions from unconsolidated affiliates 39,190  78,014 
Payment for the purchase/origination of:
Held-to-maturity securities (351,036) (1,121,049)
Available-for-sale securities (1,027,856) (458,635)
Equity securities (101,090) (49,016)
Investment real estate (12,232) (22,218)
Mortgage loans (466,472) (419,144)
Policy loans (17,196) (19,935)
Other invested assets (83,820) (46,221)
Additions to property and equipment (29,799) (16,094)
Contributions to unconsolidated affiliates (203,748) (194,846)
Change in short-term investments (375,472) (192,188)
Change in collateral held for derivatives (43,816) 75,827 
Other, net (2,816) 3,857 
    Net cash used in investing activities (127,311) (593,778)


8

AMERICAN NATIONAL GROUP, INC.
(formerly AMERICAN NATIONAL INSURANCE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
Nine months ended September 30,
2020 2019
FINANCING ACTIVITIES
Policyholders’ account deposits 905,424  1,559,231 
Policyholders’ account withdrawals (1,026,953) (1,126,580)
Proceeds from Federal Home Loan Bank borrowings 500,000  — 
Change in notes payable (3,209) 21,080 
Dividends to stockholders (66,140) (66,195)
Payments to noncontrolling interest (772) (20,811)
    Net cash provided by financing activities 308,350  366,725 
NET INCREASE IN CASH AND CASH EQUIVALENTS 432,082  168,143 
Cash and cash equivalents at beginning of the period 452,001  268,164 
Cash and cash equivalents at end of the period $ 884,083  $ 436,307 
Supplemental cash flow information:
Interest paid $ 512  $ — 
Income taxes paid, net 30,800  58,940 

See accompanying notes to the unaudited condensed consolidated financial statements.

9


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Note 1 – Nature of Operations

On July 1, 2020, American National Insurance Company, a Texas insurance company (“ANICO”), completed its previously announced holding company reorganization. As a result of such reorganization, ANICO became a wholly owned subsidiary of American National Group, Inc., a Delaware corporation (“ANAT”), and ANAT replaced ANICO as the publicly held company. Consequently, all filings with the Securities and Exchange Commission from July 2, 2020 forward will be filed by ANAT under CIK No. 0001801075. For purposes of filing this Form 10-Q for the three and nine months ended September 30, 2020, the accompanying unaudited condensed consolidated financial statements and notes thereto have been titled “American National Group, Inc.” to reflect the current name of the public registrant, with the parenthetical notation “formerly American National Insurance Company” to reflect the reporting entity for the periods covered therein. Upon the effective date of the holding company reorganization, ANAT retired 3,945,249 shares of common stock that were held in treasury at ANICO prior to the reorganization. The amount of retired treasury stock in excess of par value was charged to retained earnings. Before and after the reorganization, the issuer had 50,000,000 authorized shares of common stock and 26,887,200 common shares outstanding. As a result of the reorganization, each share of ANICO common stock, par value $1.00 per share was automatically converted into one duly issued, fully paid and non-assessable share of ANAT common stock, par value $0.01 per share. As a result of the reorganization, the directors and officers of ANICO became directors and officers of ANAT. There is no change in the ultimate ownership of the organization and business operations will continue from our current office locations and companies. ANAT, through its consolidated subsidiaries (collectively “American National” or the "Company”) offers 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.

Note 2 – Summary of Significant Accounting Policies and Practices

The condensed 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.

The interim condensed consolidated financial statements and notes herein are unaudited and reflect all adjustments which management considers necessary for the fair presentation of the interim condensed consolidated statements of financial position, operations, comprehensive income, changes in equity, and cash flows.

The interim condensed consolidated financial statements and notes should be read in conjunction with the annual consolidated financial statements and notes thereto included in American National’s Annual Report on Form 10-K as of and for the year ended December 31, 2019. The condensed consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported consolidated financial statement balances. Actual results could differ from those estimates.

10


Note 3 – Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards

Standard Description Effective Date and Method of Adoption Impact on Financial Statements
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The new standard significantly changes how entities measure credit losses for most financial assets, reinsurance recoverables and certain other instruments that are not measured at fair value through net income. The guidance replaces the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which the fair value is below amortized cost, and the credit loss is recognized through a valuation allowance. Previously, the credit loss adjustments for available-for-sale debt securities were recognized through a direct write down of the investment under the other-than-temporary impairment model. The standard also requires additional disclosures. The Company adopted this standard on its required effective date of January 1, 2020 using a modified retrospective transition.
Adoption of this guidance resulted in an allowance for credit losses primarily on the commercial mortgage loans and related off-balance sheet unfunded loan commitments, held-to-maturity bonds and reinsurance recoverables. The Company recorded a cumulative effect adjustment to retained earnings of $33.5 million, net of tax, which reduced stockholders' equity. The impact is attributable to a $42.4 million allowance for credit losses on the aforementioned financial assets. See table below for additional detail.

As of January 1, 2020, changes related to the adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326"), had the following effect on assets and liabilities:
Pre-ASC 326 Adoption Adjustment to Adopt ASC 326 Balance as of January 1, 2020
Assets:
Allowance for credit losses
Fixed maturity, bonds held-to-maturity, at amortized cost $ —  $ (21,664) $ (21,664)
Mortgage loans on real estate (19,160) (11,224) (30,384)
Reinsurance recoverables (8,220) (7,920) (16,140)
Liabilities:
Allowance for credit losses
Other policyholder funds —  1,526  1,526 
Other liabilities —  (3,126) (3,126)
Total $ (27,380) $ (42,408) $ (69,788)

11


Note 3 – Recently Issued Accounting Pronouncements – (Continued)
Future Adoption of New Accounting Standards—The FASB issued the following accounting guidance relevant to American National:
Standard Description Effective Date and Method of Adoption Impact on Financial Statements
ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for 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 (market risk benefits), 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. The FASB met on September 30, 2020 and approved delaying the effective date of ASU 2018-12 until January 1, 2023. This proposal is pending final adoption. The guidance allows for one of two adoption methods, a modified retrospective transition or a full retrospective transition except for the changes to accounting for market risk benefits which will require a retrospective transition.
We are currently evaluating the impact of the standard to the Company. Based on the nature of the standard, we expect the impact to be material to our Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements.
ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans The new standard 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 using a retrospective transition. The Company does not expect the adoption of this standard to have a material impact on our Condensed Consolidated Financial Statements or Notes to the Consolidated Financial Statements.
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes The amendments simplify the accounting for income taxes by removing certain exceptions in the existing guidance including those related to intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments require that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax as well as other minor changes. This standard will become effective for the Company for all annual and interim periods beginning January 1, 2021. The new guidance specifies which amendments should be applied prospectively, retrospective to all periods presented or on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company does not expect the adoption of this standard to have a material impact on our Condensed Consolidated Financial Statements or Notes to the Condensed Consolidated Financial Statements.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The amendments in this update provide optional expedients and exceptions for applying Generally Accepted Accounting Principles ("GAAP") to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 and will sunset through December 31, 2022, at which time the application of exceptions and optional expedients will no longer be permitted. We are evaluating our current exposure to LIBOR and the impact this standard would have on the Condensed Consolidated Financial Statements. We expect to have our evaluation of exposure completed by December 31, 2020.





12


Note 4 – Investment in Securities
The cost or amortized cost and fair value of investments in securities are shown below (in thousands):
  September 30, 2020
  Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Allowance for Credit Losses Fair Value
Fixed maturity, bonds held-to-maturity
U.S. states and political subdivisions $ 106,908  $ 4,278  $ (3) $ —  $ 111,183 
Foreign governments 3,865  429  —  —  4,294 
Corporate debt securities 7,315,879  567,282  (32,659) (18,510) 7,831,992 
Residential mortgage-backed securities 146,173  5,589  (1,434) (35) 150,293 
Collateralized debt securities 151,013  4,704  (1,922) (2,946) 150,849 
         Total bonds held-to-maturity 7,723,838  582,282  (36,018) (21,491) 8,248,611 
Fixed maturity, bonds available-for-sale
U.S. treasury and government 32,017  543  (1) —  32,559 
U.S. states and political subdivisions 1,028,802  69,994  (37) —  1,098,759 
Foreign governments 14,992  1,602  —  —  16,594 
Corporate debt securities 5,664,288  410,495  (35,150) (7,437) 6,032,196 
Residential mortgage-backed securities 26,292  1,256  (70) (194) 27,284 
Collateralized debt securities 27,975  892  (64) (7) 28,796 
         Total bonds available-for-sale 6,794,366  484,782  (35,322) (7,638) 7,236,188 
Total investments in fixed maturity $ 14,518,204  $ 1,067,064  $ (71,340) $ (29,129) $ 15,484,799 

  December 31, 2019
  Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Allowance for Credit Losses Fair Value
Fixed maturity, bonds held-to-maturity
U.S. states and political subdivisions $ 165,109  $ 5,005  $ —  $ —  $ 170,114 
Foreign governments 3,907  442  —  —  4,349 
Corporate debt securities 8,099,098  332,410  (6,539) —  8,424,969 
Residential mortgage-backed securities 237,516  6,460  (1,148) —  242,828 
Collateralized debt securities 125,631  1,146  (347) —  126,430 
         Total bonds held-to-maturity 8,631,261  345,463  (8,034)   8,968,690 
Fixed maturity, bonds available-for-sale
U.S. treasury and government 29,505  441  (5) —  29,941 
U.S. states and political subdivisions 1,030,309  47,865  (9) —  1,078,165 
Foreign governments 5,000  1,287  —  —  6,287 
Corporate debt securities 5,338,007  251,408  (12,795) —  5,576,620 
Residential mortgage-backed securities 23,405  739  (201) —  23,943 
Collateralized debt securities 9,444  686  (1) —  10,129 
         Total bonds available-for-sale 6,435,670  302,426  (13,011)   6,725,085 
Total investments in fixed maturity $ 15,066,931  $ 647,889  $ (21,045) $   $ 15,693,775 


13


Note 4 – Investment in Securities – (Continued)
The amortized cost and fair value, by contractual maturity, of fixed maturity securities are shown below (in thousands):
  September 30, 2020
  Bonds Held-to-Maturity Bonds Available-for-Sale
  Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less $ 778,789  $ 789,231  $ 368,975  $ 374,081 
Due after one year through five years 2,947,159  3,133,068  3,230,219  3,410,019 
Due after five years through ten years 3,096,745  3,379,567  2,307,855  2,504,782 
Due after ten years 901,145  946,745  887,317  947,306 
Total $ 7,723,838  $ 8,248,611  $ 6,794,366  $ 7,236,188 
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Residential and commercial mortgage-backed securities, which are not due at a single maturity, have been presented based on the year of final contractual maturity.
Proceeds from sales of bonds available-for-sale, with the related gross realized gains and losses, are shown below (in thousands):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Proceeds from sales of fixed maturity, bonds available-for-sale $ 32,859  $ 14,921  $ 164,372  $ 15,205 
Gross realized gains 212  56  624  56 
Gross realized losses (73) —  (4,145) (23)
Gains and losses are determined using specific identification of the securities sold. During the nine months ended September 30, 2020 and 2019, bonds below investment grade with a carrying value of $88,711,000 and $157,939,000 respectively, were transferred from held-to-maturity to available-for-sale after a deterioration in the issuers’ creditworthiness.
The components of the change in net unrealized gains on debt securities are shown below (in thousands):
  Nine months ended September 30,
  2020 2019
Bonds available-for-sale: change in unrealized gains $ 160,045  $ 326,945 
Adjustments for
Deferred policy acquisition costs (37,329) (82,587)
Participating policyholders’ interest (7,962) (14,989)
Deferred federal income tax expense (24,808) (48,064)
Change in net unrealized gains on debt securities, net of tax $ 89,946  $ 181,305 
The components of the change in net gains on equity securities are shown below (in thousands):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Unrealized gains on equity securities $ 154,104  $ 3,605  $ 119,296  $ 258,209 
Net gains (losses) on equity securities sold (1,957) 4,984  (899) 23,817 
Net gains on equity securities $ 152,147  $ 8,589  $ 118,397  $ 282,026 




14


Note 4 – Investment in Securities – (Continued)
The gross unrealized losses and fair value of bonds available-for-sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position due to market factors are shown below (in thousands, except number of issues):
  September 30, 2020
  Less than 12 months 12 months or more Total
  Number of issues Gross
Unrealized
(Losses)
Fair
Value
Number of issues Gross
Unrealized
(Losses)
Fair
Value
Number of issues Gross
Unrealized
(Losses)
Fair
Value
Fixed maturity, bonds available-for-sale
U.S. treasury and government $ (1) $ 2,868  —  $ —  $ —  $ (1) $ 2,868 
U.S. states and political subdivisions (37) 5,484  —  —  —  (37) 5,484 
Corporate debt securities 86  (22,857) 533,271  11  (12,293) 49,002  97  (35,150) 582,273 
Residential mortgage-backed securities (70) 7,000  —  613  (70) 7,613 
Collateralized debt securities (62) 8,008  (2) 157  (64) 8,165 
Total 91  $ (23,027) $ 556,631  15  $ (12,295) $ 49,772  106  $ (35,322) $ 606,403 


December 31, 2019
  Less than 12 months 12 months or more Total
  Number of issues Gross
Unrealized
(Losses)
Fair
Value
Number of issues Gross
Unrealized
(Losses)
Fair
Value
Number of issues Gross
Unrealized
(Losses)
Fair
Value
Fixed maturity, bonds available-for-sale
U.S. treasury and government —  $ —  $ —  $ (5) $ 8,299  $ (5) $ 8,299 
U.S. states and political subdivisions (9) 1,733  —  —  —  (9) 1,733 
Corporate debt securities 22  (5,257) 94,942  25  (7,538) 132,626  47  (12,795) 227,568 
Residential mortgage-backed securities (9) 10,169  (192) 722  (201) 10,891 
Collateralized debt securities (1) 159  —  —  —  (1) 159 
Total 26  $ (5,276) $ 107,003  33  $ (7,735) $ 141,647  59  $ (13,011) $ 248,650 
Unrealized losses on bonds available-for-sale where an allowance for credit loss was not recorded are due to noncredit related factors caused by market liquidity events related to COVID-19 and the related economic downturn. A number of assumptions and estimates are inherent in evaluating whether an allowance for credit loss is necessary, which include the financial condition, near term and long-term prospects of the issue or issuer, including relevant industry conditions and trends and implications of rating agency actions and offering prices.
Equity securities by market sector distribution are shown below, based on fair value:
September 30, 2020 December 31, 2019
Consumer goods 20.7  % 18.9  %
Energy and utilities 5.1  8.0 
Finance 20.4  18.0 
Healthcare 15.7  13.0 
Industrials 6.5  7.6 
Information technology 27.2  25.0 
Other 4.4  9.5 
        Total 100.0  % 100.0  %


15


Note 4 – Investment in Securities – (Continued)
Allowance for Credit Losses

Held-to-Maturity Securities—Management measures expected credit losses on bonds held-to-maturity on a collective (pool) basis by major security type: corporate bonds, structured products, municipals, specialty products and treasuries. Accrued interest receivable on held-to maturity debt securities are excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current market conditions and reasonable and supportable economic forecasts based upon a third-party valuation model.

Available-for-Sale Securities—For available-for-sale bonds in an unrealized loss position, the Company first assesses whether it intends to sell the security or will be required to sell the security before recovery of its amortized cost basis. If either of these criteria is met, the security’s amortized cost basis is written down to fair value through income. For bonds available-for-sale that do not meet either indicated criteria, the Company evaluates whether the decline in fair value has resulted from credit events or market factors. In making this assessment, management first calculates the extent to which value is less than amortized cost, and then may consider any changes to the rating of the security by a rating agency, and any specific conditions related to the security. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited to the amount fair value is less than amortized cost. Any remaining unrealized loss is recognized in other comprehensive income.

When the discounted cash flow method is used to determine the allowance for credit losses, management's estimates incorporate expected prepayments, if any. Model inputs are considered reasonable and supportable for three years. A mean reversion is applied in years four and five. Credit loss allowance is not measured on accrued interest receivable because the balance is written off to net investment income in a timely manner, within 90 days. Changes in the allowance for credit losses are recognized through the condensed consolidated statement of operations as change in expected credit loss.

No accrued interest receivables were written off as of September 30, 2020.

The rollforward of the allowance for credit losses for bonds held-to-maturity is shown below (in thousands):
Foreign Governments Corporate Debt Securities Collateralized Debt Securities Residential Mortgage Backed Securities Total
Allowance for credit losses
Cumulative adjustment at January 1, 2020 $ 4  $ (18,563) $ (2,968) $ (137) $ (21,664)
Purchases —  (622) (323) —  (945)
Disposition —  6,901  106  134  7,141 
Provision (6,117) 199  —  (5,917)
Balance at March 31, 2020 5  (18,401) (2,986) (3) (21,385)
Purchases —  (116) —  —  (116)
Disposition —  200  —  —  200 
Provision (5) (1,565) 454  (1,113)
Balance at June 30, 2020   (19,882) (2,532)   (22,414)
Purchases —  (4) (6) —  (10)
Disposition —  1,607  —  —  1,607 
Provision —  (231) (408) (35) (674)
Balance at September 30, 2020 $   $ (18,510) $ (2,946) $ (35) $ (21,491)



16


Note 4 – Investment in Securities – (Continued)
The rollforward of the allowance for credit losses for available-for-sale debt securities is shown below (in thousands):
Corporate Debt Securities Collateralized Debt Securities Residential Mortgage Backed Securities Total
Allowance for credit losses
Beginning balance at January 1, 2020 $   $   $   $  
Allowance on securities that had an allowance recorded in a previous period (12,499) (236) (130) (12,865)
Balance at March 31, 2020 (12,499) (236) (130) (12,865)
Increase in allowance related to purchases (73) —  —  (73)
Reduction in allowance related to disposition —  10 
Allowance on securities that had an allowance recorded in a previous period 10,017  155  (83) 10,089 
Allowance on securities where credit losses were not previously recorded (1,276) —  —  (1,276)
Balance at June 30, 2020 (3,824) (81) (210) (4,115)
Increase in allowance related to purchases (28) —  —  (28)
Reduction in allowance related to disposition 33  —  —  33 
Allowance on securities that had an allowance recorded in a previous period 1,153  74  16  1,243 
Allowance on securities where credit losses were not previously recorded (4,771) —  —  (4,771)
Balance at September 30, 2020 $ (7,437) $ (7) $ (194) $ (7,638)

The change in allowance for the nine months ended September 30, 2020 was impacted by economic changes due to the COVID-19 pandemic on the bond market. During the third quarter, energy, retail and real estate sectors were impacted and caused the increase in the allowance.
Credit Quality Indicators

The Company monitors the credit quality of bonds held-to-maturity through the use of credit ratings, which are updated on a monthly basis. The two traditional metrics for assessing interest rate risks are interest-coverage ratios and capitalization ratios which can also be used in the assessment of credit risk. These risks are fairly mitigated through the diversification of all bond investments. Categories of diversification include credit ratings, geographic locations, maturities, and market sector.
The credit quality indicators for the amortized cost of bonds held-to-maturity are shown below (in thousands):
September 30, 2020
Amortized cost of bonds held-to-maturity by credit rating
Fixed maturity, bonds held-to-maturity AAA AA A BBB BB and below Total
U.S. state and political subdivisions $ 29,996  $ 64,232  $ 7,893  $ —  $ 4,787  $ 106,908 
Foreign governments —  2,831  1,034  —  —  3,865 
Corporate debt securities 1,951  276,131  3,074,717  3,859,811  103,269  7,315,879 
Residential mortgage backed securities 61,850  —  —  —  84,323  146,173 
Collateralized debt securities —  —  118,921  5,120  26,972  151,013 
Total $ 93,797  $ 343,194  $ 3,202,565  $ 3,864,931  $ 219,351  $ 7,723,838 

December 31, 2019
Amortized cost of bonds held-to-maturity by credit rating
Fixed maturity, bonds held-to-maturity AAA AA A BBB BB and below Total
U.S. state and political subdivisions $ 58,539  $ 76,542  $ 24,260  $ 500  $ 5,268  $ 165,109 
Foreign governments —  2,861  1,046  —  —  3,907 
Corporate debt securities 2,729  407,070  3,637,144  4,031,931  20,224  8,099,098 
Residential mortgage backed securities 87,003  —  51,771  —  98,742  237,516 
Collateralized debt securities —  —  109,233  16,398  —  125,631 
Total $ 148,271  $ 486,473  $ 3,823,454  $ 4,048,829  $ 124,234  $ 8,631,261 
At September 30, 2020, a bond classified as held-to-maturity with an amortized cost of $38,000 was past due on making an interest payment for over 90 days and is in nonaccrual status.

17


Note 5 – Mortgage Loans
Generally, commercial mortgage loans are secured by first liens on income-producing real estate. American National attempts to maintain a diversified portfolio by considering both the location of the underlying collateral as well as the type of mortgage loan. The geographic categories come from the U.S. Census Bureau's "Census Regions and Divisions of the United States." The distribution based on carrying amount of mortgage loans by location is as follows (in thousands, except percentages):
September 30, 2020 December 31, 2019
East North Central $ 724,667  14.0  % $ 667,150  13.1  %
East South Central 147,385  2.8  144,887  2.8 
Mountain 1,245,404  24.1  1,200,434  23.6 
Pacific 830,697  16.1  852,574  16.7 
South Atlantic 626,014  12.1  621,875  12.2 
West South Central 1,284,656  24.8  1,272,522  25.0 
Other 317,651  6.1  337,575  6.6 
Total $ 5,176,474  100.0  % $ 5,097,017  100.0  %
As of September 30, 2020 and December 31, 2019, loans in foreclosure and loans foreclosed are as follows (in thousands, except number of loans):
September 30, 2020 December 31, 2019
Foreclosure and foreclosed Number of Loans Recorded Investment Number of Loans Recorded Investment
In foreclosure 4 $ 24,498  2 $ 13,345 
Filed for bankruptcy* 1 9,230  —  — 
Total in foreclosure 5 $ 33,728  2 $ 13,345 
Foreclosed 1 $ 4,511  2 $ 16,008 
*Borrower filed for bankruptcy after foreclosure proceedings had begun

The age analysis of past due loans is shown below (in thousands, except percentages):
  30-59 Days Past Due 60-89 Days Past Due More Than 90 Days Past Due Total Current Total
September 30, 2020 Amount Percent
Apartment $ —  $ —  $ —  $ —  $ 469,903  $ 469,903  8.9  %
Hotel —  45,386  —  45,386  858,893  904,279  17.1 
Industrial —  —  9,260  9,260  765,337  774,597  14.7 
Office 39,392  —  9,230  48,622  1,511,988  1,560,610  29.5 
Retail —  —  5,000  5,000  801,198  806,198  15.2 
Other —  —  —  —  773,803  773,803  14.6 
Total $ 39,392  $ 45,386  $ 23,490  $ 108,268  $ 5,181,122  $ 5,289,390  100.0  %
Allowance for credit losses (112,916)
Total, net of allowance $ 5,176,474 
December 31, 2019
Apartment $ —  $ —  $ —  $ —  $ 416,865  $ 416,865  8.2  %
Hotel —  —  —  —  901,044  901,044  17.6 
Industrial —  13,076  4,091  17,167  589,722  606,889  11.9 
Office 22,870  —  —  22,870  1,587,591  1,610,461  31.5 
Retail —  —  4,122  4,122  843,466  847,588  16.5 
Other 11,759  —  —  11,759  721,571  733,330  14.3 
Total $ 34,629  $ 13,076  $ 8,213  $ 55,918  $ 5,060,259  $ 5,116,177  100.0  %
Allowance for loan losses (19,160)
Total, net of allowance $ 5,097,017 

18


Note 5 – Mortgage Loans – (Continued)
As a result of the economic impact associated with COVID-19, as of September 30, 2020, 92 loans with a total balance of $1.6 billion primarily related to hotels, retail and parking operations were modified. The terms of the modifications of these loans include forbearance of principal and interest payments for a period of up to six months, extensions of maturity dates, and/or provision for interest only payments. Of these modified loans, one loan totaling $45 million is over 60 days past due. All other loans are current under their modified terms.
There were no unamortized purchase discounts as of September 30, 2020 and December 31, 2019. Total mortgage loans were net of unamortized origination fees of $27,001,000 and $29,294,000 at September 30, 2020 and December 31, 2019, respectively. No unearned income is included in these amounts.

Troubled Debt Restructurings

American National has granted concessions to certain mortgage loan borrowers. Concessions are generally one of, or a combination of, a delay in payment of principal or interest, a reduction of the contractual interest rate or an extension of the maturity date. Loans that have these concessions could be classified as troubled debt restructurings. The carrying value after the allowance, before and after modification in a troubled debt restructuring, may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment. Loan modifications executed due to COVID-19 resulting in a total delay of more than six months were evaluated for troubled debt restructured status under current GAAP guidance.

Troubled debt restructuring mortgage loan information is as follows (in thousands, except number of loans):
Nine months ended September 30,
2020 2019
Number of Loans Recorded Investment Pre-Modification Recorded Investment Post Modification Number of Loans Recorded Investment Pre- Modification Recorded Investment Post Modification
Office $ 76,201  $ 76,201  $ 9,271  $ 9,271 
Retail 79,911  79,911  41,354  41,354 
Industrial 11,473  11,473  —  —  — 
Hotel 34  811,007  811,007  —  —  — 
Parking 13  168,740  168,740  —  —  — 
Other 119,738  119,738  —  —  — 
Total 67  $ 1,267,070  $ 1,267,070  3  $ 50,625  $ 50,625 

American National considers the amount, timing and extent of concessions in determining credit loss allowances for loan losses recorded in connection with a troubled debt restructuring.

Allowance for Credit Losses

Mortgage loans on real estate are stated at unpaid principal balance, adjusted for any unamortized discount, deferred expenses and allowances. The allowance for current expected losses per ASC 326, at the effective date will be based upon the current expected credit loss model. Refer to Note 3, Recently Issued Accounting Pronouncements. The model considers past loss experience, current economic conditions, and reasonable and supportable forecasts of future conditions. Reversion for the allowance calculation is implicit in the models used to determine the allowance. The methodology uses a discounted cash flow approach based on expected cash flows.
The rollforward of the allowance for credit losses for mortgage loans is shown below (in thousands):
Commercial Mortgage Loans
Beginning balance at January 1, 2020 $ (19,160)
Cumulative adjustment at January 1, 2020 (11,216)
Provision (29,069)
Balance at March 31, 2020 (59,445)
Provision (52,035)
Balance at June 30, 2020 (111,480)
Provision (1,436)
Balance at September 30, 2020 $ (112,916)
19


Note 5 – Mortgage Loans – (Continued)
The change in allowance for the nine months ended September 30, 2020 was driven by the economic disruption caused by COVID-19.

The asset and allowance balances for credit losses for mortgage loans by property-type are shown below (in thousands):
September 30, 2020
Asset Balance Allowance
Apartment $ 465,221  $ (4,682)
Hotel 859,119  (45,160)
Industrial 771,951  (2,646)
Office 1,534,903  (25,707)
Retail 795,164  (11,034)
Parking 352,435  (11,129)
Other 397,681  (12,558)
Total $ 5,176,474  $ (112,916)

Credit Quality Indicators

Mortgage loans are segregated by property-type and quantitative and qualitative allowance factors are applied. Qualitative factors are developed quarterly based on the pooling of assets with similar risk characteristics and historical loss experience adjusted for the expected trend in the current market environment. Credit losses are pooled by collateral type as it represents the most similar and reliable risk characteristics in our portfolio. The amortized cost of mortgage loans by year of origination by property-type are shown below (in thousands):
Amortized Cost Basis by Origination Year
2020 2019 2018 2017 2016 Prior Total
Apartment $ 402  $ 136,436  $ 46,267  $ 180,656  $ 68,664  $ 37,478  $ 469,903 
Hotel —  59,402  204,094  219,597  148,078  273,834  905,005 
Industrial 168,467  178,797  134,431  46,676  124,259  121,967  774,597 
Office 6,564  58,345  195,201  345,425  312,693  642,382  1,560,610 
Retail 49,111  41,145  104,694  80,577  161,720  368,951  806,198 
Parking 28,684  13,787  30,523  8,700  169,715  122,757  374,166 
Other 19,879  83,671  112,659  54,917  69,994  57,791  398,911 
Total $ 273,107  $ 571,583  $ 827,869  $ 936,548  $ 1,055,123  $ 1,625,160  $ 5,289,390 
Allowance for loan losses (112,916)
Total, net of allowance $ 5,176,474 
Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. It is the Company's policy to not accrue interest on loans that are 90 days delinquent and where amounts are determined to be uncollectible. At September 30, 2020, commercial loans of $23,490,000 were past due over 90 days and are in nonaccrual status.
Off-Balance Sheet Credit Exposures

The Company has off-balance sheet credit exposures related to non-cancellable unfunded commitment amounts on commercial mortgage loans. We estimate the allowance for these exposures by applying the allowance rate we computed for each property type to the related outstanding commitment amounts. As of September 30, 2020, we have included a $13,429,000 liability in other liabilities on the condensed consolidated statements of financial position based on unfunded loan commitments of $660,924,000.
20


Note 6 – Real Estate and Other Investments

The carrying amount of investment real estate, net of accumulated depreciation, by property-type and geographic distribution are as follows (in thousands, except percentages):
September 30, 2020 December 31, 2019
Industrial $ 40,970  8.0  % $ 68,809  12.5  %
Office 218,005  42.4  219,490  39.8 
Retail 211,464  41.1  215,800  39.1 
Other 43,637  8.5  47,120  8.6 
Total $ 514,076  100.0  % $ 551,219  100.0  %

  September 30, 2020 December 31, 2019
East North Central $ 32,455  6.3  % $ 32,539  5.9  %
East South Central 33,123  6.4  34,248  6.2 
Mountain 66,330  12.9  68,498  12.4 
Pacific 39,000  7.6  40,462  7.3 
South Atlantic 72,802  14.2  83,552  15.2 
West South Central 253,200  49.3  278,833  50.6 
Other 17,166  3.3  13,087  2.4 
Total $ 514,076  100.0  % $ 551,219  100.0  %

American National regularly invests in real estate partnerships and joint ventures. American National frequently participates in the design of these joint venture or partnership entities with the sponsor, but in most cases, our 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 2020 or 2019.

The assets and liabilities relating to the VIEs included in the condensed consolidated financial statements are as follows (in thousands):
September 30, 2020 December 31, 2019
Investment real estate $ 133,152  $ 134,534 
Short-term investments 500  500 
Cash and cash equivalents 5,634  11,155 
Other receivables 3,704  3,673 
Other assets 13,153  15,355 
Total assets of consolidated VIEs $ 156,143  $ 165,217 
Notes payable $ 154,788  $ 157,997 
Other liabilities 6,526  9,731 
Total liabilities of consolidated VIEs $ 161,314  $ 167,728 
The notes payable in the condensed 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 $3,108,000 and $4,304,000 at September 30, 2020 and December 31, 2019, respectively.
The total long-term notes payable of the consolidated VIEs consists of the following (in thousands):
Interest rate Maturity September 30, 2020 December 31, 2019
LIBOR
2021 $ 10,819  $ 10,836 
4% fixed
2022 79,363  81,709 
4.18% fixed
2024 64,606  65,452 
Total $ 154,788  $ 157,997 

21


Note 6 – Real Estate and Other Investments – (Continued)




For other VIEs in which American National is a partner, it is not the primary beneficiary, and these entities are not consolidated, as the major decisions that most significantly impact the economic activities of the VIE require consent of all partners. The carrying amount and maximum exposure to loss relating to unconsolidated VIEs follows (in thousands):
  September 30, 2020 December 31, 2019
  Carrying
Amount
Maximum
Exposure
to Loss
Carrying
Amount
Maximum
Exposure
to Loss
Investment in unconsolidated affiliates $ 347,554  $ 347,554  $ 332,742  $ 332,742 
Mortgage loans 721,899  721,899  657,528  657,528 
Accrued investment income 5,154  5,154  2,198  2,198 
As of September 30, 2020, one real estate investment with a carrying value of $3,364,000 met the criteria as held-for-sale.

Note 7 – Derivative Instruments

American National purchases over-the-counter equity-indexed options as economic hedges against fluctuations in the equity markets to which equity-indexed products are exposed. These options are not designated as hedging instruments for accounting purposes under U.S. GAAP. Equity-indexed contracts include a fixed host universal-life insurance or annuity contract and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands, except number of instruments):
Derivatives Not Designated as Hedging Instruments Location in the Condensed Consolidated Statements of Financial Position September 30, 2020 December 31, 2019
Number of
Instruments
Notional
Amounts
Estimated
Fair Value
Number of
Instruments
Notional
Amounts
Estimated
Fair Value
Equity-indexed options Other invested assets 456  $ 2,761,300  $ 213,782  473  $ 2,654,600  $ 256,005 
Equity-indexed embedded derivative Policyholders’ account balances 108,958  2,625,029  693,780  101,950  2,527,205  731,552 

Derivatives Not Designated as Hedging Instruments Location in the Condensed Consolidated Statements of Operations Gains (Losses) Recognized in Income on Derivatives
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Equity-indexed options Net investment income $ 38,738  $ 6,278  $ (2,200) $ 95,888 
Equity-indexed embedded derivative Interest credited to policyholders’ account balances (44,792) (11,462) (17,702) (105,873)

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 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 condensed consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.
22


Note 7 – Derivative Instruments – (Continued)

Information regarding the Company’s exposure to credit loss on the options it holds is presented below (in thousands):
    September 30, 2020
Counterparty Moody/S&P
Rating
Options Fair
Value
Collateral  Held in Cash Collateral Held in Invested Assets Total
Collateral Held
Collateral Amounts used to Offset Exposure Excess Collateral Exposure
Net of
Collateral
Barclays Baa2/BBB $ 42,627  $ 24,033  $ 18,100  $ 42,133  $ 42,133  $ —  $ 494 
Credit Suisse Baa2/BBB+ 7,936  7,670  —  7,670  7,670  —  266 
Goldman-Sachs A3/BBB+ 1,095  910  —  910  910  —  185 
ING Baa1/A- 20,858  10,770  10,300  21,070  20,858  212  — 
Morgan Stanley A3/BBB+ 22,132  15,426  5,700  21,126  21,126  —  1,006 
NATIXIS* A1/A+ 30,827  31,030  —  31,030  30,827  203  — 
Truist A3/A- 52,586  40,740  11,000  51,740  51,728  12  858 
Wells Fargo A2/A- 35,721  25,030  9,900  34,930  34,930  —  791 
       Total $ 213,782  $ 155,609  $ 55,000  $ 210,609  $ 210,182  $ 427  $ 3,600 

    December 31, 2019
Counterparty Moody/S&P
Rating
Options Fair
Value
Collateral  Held in Cash Collateral Held in Invested Assets Total
Collateral Held
Collateral Amounts used to Offset Exposure Excess Collateral Exposure
Net of
Collateral
Barclays Baa3/BBB $ 54,583  $ 27,343  $ 28,000  $ 55,343  $ 54,583  $ 760  $ — 
Credit Suisse Baa2/BBB+ 7,117  7,390  —  7,390  7,009  381  108 
Goldman-Sachs A3/BBB+ 1,053  930  —  930  930  —  123 
ING Baa1/A- 30,330  14,940  16,000  30,940  30,330  610  — 
Morgan Stanley A3/BBB+ 34,988  25,926  9,000  34,926  34,926  —  62 
NATIXIS* A1/A+ 29,918  30,200  —  30,200  29,918  282  — 
SunTrust A3/A- 60,360  41,720  17,000  58,720  58,645  75  1,715 
Wells Fargo A2/A- 37,656  24,110  15,000  39,110  37,656  1,454  — 
       Total $ 256,005  $ 172,559  $ 85,000  $ 257,559  $ 253,997  $ 3,562  $ 2,008 
*Collateral is prohibited from being held in invested assets
23


Note 8 – Net Investment Income and Realized Investment Gains (Losses)


Net investment income is shown below (in thousands):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Bonds $ 138,743  $ 154,322  $ 426,624  $ 452,786 
Equity securities 7,905  7,985  23,671  25,292 
Mortgage loans 61,561  64,753  181,334  191,110 
Real estate (121) 1,005  3,326  7,310 
Equity-indexed options 38,738  6,278  (2,200) 95,888 
Other invested assets 7,430  12,277  24,133  24,310 
Total $ 254,256  $ 246,620  $ 656,888  $ 796,696 
Net realized investment gains (losses) are shown below (in thousands):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Bonds $ 6,117  $ 6,075  $ 15,547  $ 11,288 
Mortgage loans —  (2,097) —  (2,186)
Real estate 11,265  27,388  9,951  24,502 
Other invested assets 567  (24) (1,661)
Total $ 17,387  $ 31,933  $ 25,474  $ 31,943 
Net realized investment gains (losses) by transaction type are shown below (in thousands):
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Sales $ 11,417  $ 28,518  $ 7,799  $ 27,756 
Calls and maturities 5,986  6,100  19,131  11,029 
Paydowns (7) (81) (61) 206 
Impairments —  (2,590) (1,276) (7,290)
Loss allowance —  (12) —  247 
Others (9) (2) (119) (5)
Total $ 17,387  $ 31,933  $ 25,474  $ 31,943 
Other-than-temporary impairment losses are shown below (in thousands):
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Bonds $ —  $ —  $ —  $ (6,968)

24


Note 9 – Fair Value of Financial Instruments

The carrying amount and fair value of financial instruments are shown below (in thousands):
  September 30, 2020 December 31, 2019
Carrying
Amount
Fair Value Carrying
Amount
Fair Value
Financial assets
Fixed maturity, bonds held-to-maturity $ 7,702,347  $ 8,248,611  $ 8,631,261  $ 8,968,690 
      Fixed maturity, bonds available-for-sale 7,236,188  7,236,188  6,725,085  6,725,085 
Equity securities 1,840,855  1,840,855  1,700,960  1,700,960 
Equity-indexed options 213,782  213,782  256,005  256,005 
Mortgage loans on real estate, net of allowance 5,176,474  5,381,157  5,097,017  5,309,005 
Policy loans 374,387  374,387  379,657  379,657 
Short-term investments 800,793  800,793  425,321  425,321 
Separate account assets ($1,062,762 and $1,049,938 included in fair value hierarchy)
1,092,574  1,092,574  1,073,891  1,073,891 
Separately managed accounts 62,052  62,052  50,503  50,503 
                Total financial assets $ 24,499,452  $ 25,250,399  $ 24,339,700  $ 24,889,117 
Financial liabilities
Investment contracts $ 10,167,018  $ 10,167,018  $ 10,254,959  $ 10,254,959 
Embedded derivative liability for equity-indexed contracts 693,780  693,780  731,552  731,552 
Notes payable 154,788  154,788  157,997  157,997 
Federal Home Loan Bank advances 500,000  500,000  —  — 
Separate account liabilities ($1,062,762 and $1,049,938 included in fair value hierarchy)
1,092,574  1,092,574  1,073,891  1,073,891 
                Total financial liabilities $ 12,608,160  $ 12,608,160  $ 12,218,399  $ 12,218,399 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability. A fair value hierarchy is used to determine fair value based on a hypothetical transaction at the measurement date from the perspective of a market participant. American National has evaluated the types of securities in its investment portfolio to determine an appropriate hierarchy level based upon trading activity and the observability of market inputs. The classification of assets or liabilities within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:
Level 1   Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2   Quoted prices in markets that are not active or inputs that are observable directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3   Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect American National’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models and third-party evaluation, as well as instruments for which the determination of fair value requires significant management judgment or estimation.


25


Note 9 – Fair Value of Financial Instruments – (Continued)
Valuation Techniques for Financial Instruments Recorded at Fair Value
Fixed Maturity Securities and Equity Options—American National utilizes a pricing service to estimate fair value measurements. The estimates of fair value for most fixed maturity securities, including municipal bonds, provided by the pricing service are disclosed as Level 2 measurements as the estimates are based on observable market information rather than market quotes. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturity securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, an option adjusted spread model is used to develop prepayment and interest rate scenarios.
The pricing service evaluates each asset class based on relevant market information, credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
American National has reviewed the inputs and methodology used and the techniques applied by the pricing service to produce quotes that represent the fair value of a specific security. The review confirms that the pricing service is utilizing information from observable transactions or a technique that represents a market participant’s assumptions. American National does not adjust quotes received from the pricing service. The pricing service utilized by American National has indicated that they will only produce an estimate of fair value if there is objectively verifiable information available.
American National holds a small amount of private placement debt and fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these securities, a quote from an independent broker (typically a market maker) is obtained. Due to the disclaimers on the quotes that indicate the price is indicative only, American National includes these fair value estimates in Level 3.
For securities priced using a quote from an independent broker, such as the equity-indexed options and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is performed quarterly.
Equity Securities—For publicly-traded equity securities, prices are received from a nationally recognized pricing service that are based on observable market transactions, and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, an estimated fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. If applicable, these estimates would be disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services annually.
Short-Term Investments—Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor's and Moody's, respectively. Commercial paper is carried at amortized cost which approximates fair value. These investments are classified as Level 2 measurements.

26


Note 9 – Fair Value of Financial Instruments – (Continued)
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 condensed consolidated statements of operations.

The separate account assets included on the quantitative disclosures fair value hierarchy table are comprised of short-term investments, equity securities, and fixed maturity bonds available-for-sale. Equity securities are classified as Level 1 measurements. Short-term investments and fixed maturity securities are classified as Level 2 measurements. These classifications for separate account assets reflect the same fair value level methodologies as listed above as they are derived from the same vendors and follow the same process.
The separate account assets also include cash and cash equivalents, investments in unconsolidated affiliates, accrued investment income, and receivables for securities. These are not financial instruments and are not included in the quantitative disclosures of fair value hierarchy table.
Embedded Derivative—The amounts reported within policyholder contract deposits include equity linked interest crediting rates based on the S&P 500 index within indexed annuities and indexed life. The following unobservable inputs are used for measuring the fair value of the embedded derivatives associated with the policyholder contract liabilities:
Lapse rate assumptions are determined by company experience. Lapse rates are generally assumed to be lower during a contract’s surrender charge period and then higher once the surrender charge period has ended. Decreases to the assumed lapse rates generally increase the fair value of the liability as more policyholders persist to collect the crediting interest pertaining to the indexed product. Increases to the lapse rate assumption decrease the fair value.
Mortality rate assumptions vary by age and gender based on company and industry experience. Decreases to the assumed mortality rates increase the fair value of the liabilities as more policyholders earn crediting interest. Increases to the assumed mortality rates decrease the fair value as higher decrements reduce the potential for future interest credits.
Equity volatility assumptions begin with current market volatilities and grow to long-term values. Increases to the assumed volatility will increase the fair value of liabilities, as future projections will produce higher increases in the linked index. At September 30, 2020 and December 31, 2019, the one year implied volatility used to estimate embedded derivative value was 22.6% and 11.3%, respectively.
Fair values of indexed life and annuity liabilities are calculated using the discounted cash flow technique. Shown below are the significant unobservable inputs used to calculate the Level 3 fair value of the embedded derivatives within policyholder contract deposits (in millions, except range percentages):
  Fair Value   Range
  September 30, 2020 December 31, 2019 Unobservable Input September 30, 2020 December 31, 2019
Indexed Annuities $ 677.0  $ 706.5  Lapse Rate
1-70%
1-70%
Mortality Multiplier
90-100%
90-100%
Equity Volatility
17-56%
11-46%
Indexed Life 16.7  18.4  Equity Volatility
17-56%
11-46%

27


Note 9 – Fair Value of Financial Instruments – (Continued)
Quantitative Disclosures
The fair value hierarchy measurements of the financial instruments are shown below (in thousands):
  Assets and Liabilities Carried at Fair Value by Hierarchy Level as of September 30, 2020
  Total
Fair Value
Level 1 Level 2 Level 3
Financial assets
Fixed maturity, bonds available-for-sale
U.S. treasury and government $ 32,559  $ —  $ 32,559  $ — 
U.S. states and political subdivisions 1,098,759  —  1,098,759  — 
Foreign governments 16,594  —  16,594  — 
Corporate debt securities 6,032,196  —  5,913,834  118,362 
Residential mortgage-backed securities 27,284  —  27,284  — 
Collateralized debt securities 28,796  —  28,796  — 
                  Total bonds available-for-sale 7,236,188    7,117,826  118,362 
Equity securities
Common stock 1,822,813  1,822,656  —  157 
Preferred stock 18,042  17,575  —  467 
Total equity securities 1,840,855  1,840,231    624 
Options 213,782  —  —  213,782 
Short-term investments 800,793  —  800,793  — 
Separate account assets 1,062,762  275,667  787,095  — 
Separately managed accounts 62,052  —  —  62,052 
Total financial assets $ 11,216,432  $ 2,115,898  $ 8,705,714  $ 394,820 
Financial liabilities
Embedded derivative for equity-indexed contracts $ 693,780  $ —  $ —  $ 693,780 
Separate account liabilities 1,062,762  275,667  787,095  — 
Total financial liabilities $ 1,756,542  $ 275,667  $ 787,095  $ 693,780 

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

28


Note 9 – Fair Value of Financial Instruments – (Continued)
For financial instruments measured at fair value on a recurring basis using Level 3 inputs during the period, a reconciliation of the beginning and ending balances is shown below (in thousands):
  Level 3
  Three months ended September 30, 2020 Nine months ended September 30, 2020
  Assets Liability Assets Liability
Investment
Securities
Equity-Indexed
Options
Separately Managed Accounts Embedded
Derivative
Investment
Securities
Equity-Indexed
Options
Separately Managed Accounts Embedded
Derivative
Beginning balance $ 104,138  $ 191,486  $ 51,537  $ 675,970  $ 45,307  $ 256,005  $ 50,503  $ 731,552 
Net gain (loss) for derivatives included in net investment income
—  38,738  —  —  —  (2,200) —  — 
Net change included in interest credited —  —  —  44,792  —  —  —  17,702 
Net fair value change included in other comprehensive income —  3,663  —  —  (397) — 
Purchases, sales and settlements or maturities
Purchases 15,222  19,257  7,421  —  124,390  57,695  16,463  — 
Sales (380) —  (569) —  (50,715) —  (4,517) — 
Settlements or maturities —  (35,699) —  —  —  (97,718) —  — 
Premiums less benefits —  —  —  (26,982) —  —  —  (55,474)
Ending balance at September 30, 2020 $ 118,986  $ 213,782  $ 62,052  $ 693,780  $ 118,986  $ 213,782  $ 62,052  $ 693,780 
Level 3
Three months ended September 30, 2019 Nine months ended September 30, 2019
Assets Liability Assets Liability
Investment
Securities
Equity-Indexed
Options
Separately Managed Accounts(1)
Embedded
Derivative
Investment
Securities
Equity-Indexed
Options
Separately Managed Accounts(1)
Embedded
Derivative
Beginning balance $ 4,346  $ 231,044  $ 30,655  $ 695,676  $ 4,346  $ 148,006  $ 16,532  $ 596,075 
Net gain for derivatives included in net investment income —  6,278  —  —  —  95,888  —  — 
Net change included in interest credited —  —  —  11,462  —  —  —  105,873 
Net fair value change included in other comprehensive income —  —  —  —  —  —  (2) — 
Purchases, sales and settlements or maturities
Purchases 463  17,029  9,438  —  463  55,797  23,563  — 
Sales (113) (13,397) —  —  (113) (13,397) —  — 
Settlements or maturities —  (16,770) —  —  —  (62,110) —  — 
Premiums less benefits —  —  —  (15,372) —  —  —  (10,182)
Ending balance at September 30, 2019 $ 4,696  $ 224,184  $ 40,093  $ 691,766  $ 4,696  $ 224,184  $ 40,093  $ 691,766 
(1) Subsequent to the issuance of the Company's interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019, the Company's management determined Separately Managed Accounts were omitted from this disclosure. The amounts included in the disclosure tables above now include disclosures for Separately Managed Accounts for all periods presented.

Within the net gain for derivatives included in net investment income were unrealized gains of $38,788,407 and $79,991,000, relating to assets still held at September 30, 2020 and 2019, respectively.
29


Note 9 – Fair Value of Financial Instruments – (Continued)
Fair Value Information About Financial Instruments Not Recorded at Fair Value

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

Fixed Maturity Securities—The fair value of bonds held-to-maturity is determined consistent with the disclosure under Valuation Techniques for the Financial Instrument Recorded at Fair Value section.

Mortgage Loans—The fair value of mortgage loans is estimated using discounted cash flow analyses on a loan by loan basis by applying a discount rate to expected cash flows from future installment and balloon payments. The discount rate takes into account general market trends and specific credit risk trends for the individual loan. Factors used to arrive at the discount rate include inputs from spreads based on U.S. Treasury notes and the loan’s credit quality, region, property type, lien priority, payment type and current status.

Policy Loans—The carrying value of policy loans is the outstanding balance plus any accrued interest. Due to the collateralized nature of policy loans such that they cannot be separated from the policy contracts, the unpredictable timing of repayments and the fact that settlement is at outstanding value, American National believes the carrying value of policy loans approximates fair value.
Separately Managed Accounts—The amounts reported in separately managed accounts consist primarily of notes and private equity. These investments are private placements and do not have a readily determinable fair value. The carrying value of the separately managed accounts is cost or market value if available from the separately managed account manager. Market value is provided by the separately managed account manager in subsequent quarters. American National believes that cost approximates fair value at initial recognition during the quarter of investment.
Investment Contracts—The carrying value of investment contracts is equivalent to the accrued account balance. The accrued account balance consists of deposits, net of withdrawals, plus or minus interest credited, fees and charges assessed and other adjustments. American National believes that the carrying value of investment contracts approximates fair value because the majority of these contracts’ interest rates reset at anniversary.
Notes Payable—Notes payable are carried at outstanding principal balance. The carrying value of the notes payable approximates fair value because the underlying interest rates approximate market rates at the balance sheet date.
Federal Home Loan Bank advances—The Federal Home Loan Bank advances are carried at outstanding principal balance. The fair value of the advances are obtained from the Federal Home Loan Bank.
30


Note 9 – Fair Value of Financial Instruments – (Continued)
The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis are shown below (in thousands):
  September 30, 2020
FV Hierarchy Level Carrying
Amount
Fair Value
Financial assets
Fixed maturity, bonds held-to-maturity
U.S. states and political subdivisions Level 2 $ 106,908  $ 111,183 
Foreign governments Level 2 3,865  4,294 
Corporate debt securities Level 2 7,297,369  7,831,992 
Residential mortgage-backed securities Level 2 146,138  150,293 
Collateralized debt securities Level 2 148,067  150,849 
Total fixed maturity, bonds held-to-maturity 7,702,347  8,248,611 
Mortgage loans on real estate, net of allowance
Level 3 5,176,474  5,381,157 
Policy loans Level 3 374,387  374,387 
Total financial assets $ 13,253,208  $ 14,004,155 
Financial liabilities
Investment contracts Level 3 $ 10,167,018  $ 10,167,018 
Notes payable Level 3 154,788  154,788 
Federal Home Loan Bank advances Level 3 500,000  500,000 
Total financial liabilities $ 10,821,806  $ 10,821,806 

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

31


Note 10 – Deferred Policy Acquisition Costs
Deferred policy acquisition costs are shown below (in thousands):
Life Annuity Health Property
& Casualty
Total
Beginning balance at January 1, 2020 $ 852,900  $ 415,380  $ 32,578  $ 122,149  $ 1,423,007 
Additions 100,210  37,217  12,117  255,497  405,041 
Amortization (65,338) (65,364) (11,535) (248,042) (390,279)
Effect of change in unrealized gains on bonds available-for-sale debt (7,398) (29,931) —  —  (37,329)
Net change 27,474  (58,078) 582  7,455  (22,567)
Ending balance at September 30, 2020 $ 880,374  $ 357,302  $ 33,160  $ 129,604  $ 1,400,440 
Commissions comprise the majority of the additions to deferred policy acquisition costs.
Note 11 – Liability for Unpaid Claims and Claim Adjustment Expenses

The liability for unpaid claims and claim adjustment expenses (“claims”) for health and property and casualty insurance is included in “Policy and contract claims” in the condensed consolidated statements of financial position and is the amount estimated for incurred but not reported (“IBNR”) claims and claims that have been reported but not settled. The liability for unpaid claims is estimated based upon American National’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, less anticipated salvage and subrogation. The effects of the changes are included in the condensed consolidated results of operations in the period in which the changes occur. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. There have been no significant changes in methodologies or assumptions used to calculate the liability for unpaid claims and claim adjustment expenses.
Information regarding the liability for unpaid claims is shown below (in thousands): 
  Nine months ended September 30,
  2020 2019
Unpaid claims balance, beginning $ 1,322,837  $ 1,305,225 
Less: Reinsurance recoverables 246,447  254,466 
Net beginning balance 1,076,390  1,050,759 
Incurred related to
Current 904,890  917,048 
Prior years (53,090) (47,048)
Total incurred claims 851,800  870,000 
Paid claims related to
Current 495,325  482,729 
Prior years 334,054  370,807 
Total paid claims 829,379  853,536 
Net balance 1,098,811  1,067,223 
Plus: Reinsurance recoverables 286,188  247,174 
Unpaid claims balance, ending $ 1,384,999  $ 1,314,397 
The net and gross reserve calculations have shown favorable development in 2020 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 $53,090,000 during the first nine months of 2020 and decreased by $47,048,000 during the same period in 2019. The favorable development in 2020 was a reflection of lower-than-anticipated settlement of losses in the private passenger automobile, agribusiness, and workers compensation lines of business. The favorable development for the first nine months in 2019 reflects lower-than-anticipated settlement of losses in the workers compensation and agribusiness 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 September 30, 2020 and December 31, 2019 was $20,419,000 and $21,379,000, respectively.

32


Note 12 – Federal Income Taxes
A reconciliation of the effective tax rate to the statutory federal tax rate is shown below (in thousands, except percentages):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
  Amount Rate Amount Rate Amount Rate Amount Rate
Income tax expense before tax on equity in earnings of unconsolidated affiliates $ 41,589  19.3  % $ 17,717  13.7  % $ 36,903  18.9  % $ 99,323  17.3  %
Tax on equity in earnings of unconsolidated affiliates
3,576  1.7  9,465  7.3  4,014  2.1  21,488  3.7 
Total expected income tax expense at the statutory rate 45,165  21.0  27,182  21.0  40,917  21.0  120,811  21.0 
Tax-exempt investment income (1,062) (0.5) (1,027) (0.8) (3,149) (1.6) (2,945) (0.5)
Dividend exclusion 10  —  (817) (0.6) (2,295) (1.2) (2,598) (0.4)
Miscellaneous tax credits, net (2,127) (1.0) (1,521) (1.2) (6,056) (3.1) (6,512) (1.1)
Low income housing tax credit expense 997  0.5  1,324  1.0  3,753  1.9  4,265  0.7 
Noncontrolling interest (104) —  (2,284) (1.8) (104) (0.1) (2,284) (0.4)
Change in valuation allowance 11  —  70  0.1  134  0.1  235  — 
Other items, net 1,022  0.4  (452) (0.3) 1,241  0.7  828  0.1 
Provision for federal income taxes $ 43,912  20.4  % $ 22,475  17.4  % $ 34,441  17.7  % $ 111,800  19.4  %

As of September 30, 2020, American National had no material net operating loss or tax credit carryforwards.

American National’s federal income tax returns for tax 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. In September 2020, American National reached a settlement with the Internal Revenue Service and the audit of tax years 2013, 2014, 2015 and 2016 is now closed. The settlement had no impact on our condensed consolidated statements of financial position or condensed consolidated statements of operations. 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.

As of September 30, 2020, American National had no provision for uncertain tax positions and no provision for penalties or interest were established. In addition, management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would impact American National’s effective tax rate.

Note 13 – Accumulated Other Comprehensive Income (Loss)

The components of and changes in the accumulated other comprehensive income (“AOCI”), and the related tax effects, are shown below (in thousands):
Net Unrealized
Gains (Losses)
on Securities
Defined
Benefit
Pension Plan
Adjustments
Foreign
Currency
Adjustments
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance at January 1, 2020 $ 157,851  $ (55,232) $ (3,101) $ 99,518 
Amounts reclassified from AOCI (net of tax benefit $1,179 and expense $1,450)
(4,434) 5,456  —  1,022 
Unrealized holding gains arising during the period (net of tax expense $34,600)
130,160  —  —  130,160 
Unrealized adjustment to DAC (net of tax benefit $7,839)
(29,490) —  —  (29,490)
Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $1,672)
(6,290) —  —  (6,290)
Foreign currency adjustment (net of tax benefit $57)
—  —  (214) (214)
Ending balance at September 30, 2020 $ 247,797  $ (49,776) $ (3,315) $ 194,706 
Beginning balance at January 1, 2019 $ (42,469) $ (54,236) $ (3,033) $ (99,738)
Amounts reclassified from AOCI (net of tax expense $401 and $1,160)
1,510  4,365  —  5,875 
Unrealized holding gains arising during the period (net of tax expense $68,285)
256,880  —  —  256,880 
Unrealized adjustment to DAC (net of tax benefit $17,343)
(65,244) —  —  (65,244)
Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $3,148)
(11,841) —  —  (11,841)
Foreign currency adjustment (net of tax expense $79)
—  —  297  297 
Cumulative effect of changes in accounting 16,164  (16,491) (458) (785)
Ending balance at September 30, 2019 $ 155,000  $ (66,362) $ (3,194) $ 85,444 

33


Note 14 – Stockholders’ Equity and Noncontrolling Interests


The holding company reorganization effective July 1, 2020, provided for the automatic conversion of ANICO common stock, par value of $1.00 per share, issued and outstanding immediately prior to the effective time of the reorganization, into one duly issued, fully paid and non-assessable share of the common stock, par value $0.01 per share, of ANAT. ANAT has one class of common stock with 50,000,000 authorized shares. Upon the effective date of the holding company reorganization, ANAT retired 3,945,249 shares of common stock that were held in treasury at ANICO prior to the reorganization. The number of shares outstanding at the dates indicated are shown below:
September 30, 2020 December 31, 2019
Common stock
Shares issued 26,887,200  30,832,449 
Treasury shares —  (3,945,249)
Outstanding shares 26,887,200  26,887,200 
Restricted shares (10,000) (10,000)
Unrestricted outstanding shares 26,877,200  26,877,200 
Stock-based Compensation
American National has made grants of Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, and Restricted Stock Units (“RSU”), pursuant to a stock-based compensation plan. The term for granting additional awards under such plan expired in 2019. Pursuant to the plan, grants were made to certain officers meeting established performance objectives, and grants were made to directors as compensation and to align their interests with those of other shareholders. In addition, American National has made grants to directors and advisory directors of RSUs that are cash-settled only, with no provision for conversion to stock. 8,250 of such cash-settled RSUs were granted during the third quarter of 2020 and are currently outstanding as shown in the table below.
SAR, RS and RSU information for the periods indicated are shown below:
  SAR RS Shares RSUs
  Shares Weighted-Average
Grant Date
Fair Value
Shares Weighted-Average
Grant Date
Fair Value
Units Weighted-Average
Grant Date
Fair Value
Outstanding at December 31, 2019 66  $ 110.83  10,000  $ 80.05  8,250  $ 113.19 
Granted —  —  —  —  8,250  75.35 
Exercised —  —  —  —  (8,250) 113.19 
Forfeited —  —  —  —  —  — 
Expired (66) 110.83  —  —  —  — 
Outstanding at September 30, 2020   $   10,000  $ 80.05  8,250  $ 75.35 

SAR RS Shares RSUs
Weighted-average contractual remaining life (in years) 0 2.42 0.58
Exercisable shares —  N/A N/A
Weighted-average exercise price $ —  $ —  $ 75.35 
Weighted-average exercise price exercisable shares —  N/A N/A
Compensation expense (credit)
Three months ended September 30, 2020 $ —  $ 20,000  $ 360,000 
Three months ended September 30, 2019 1,000  20,000  154,000 
Nine months ended September 30, 2020 $ (1,000) $ 60,000  $ 176,000 
Nine months ended September 30, 2019 (14,000) 60,000  1,094,000 
Fair value of liability award
September 30, 2020 $ —  N/A $ 557,000 
December 31, 2019 1,000  N/A 971,000 
The SARs give the holder the right to cash compensation based on the difference between the stock price on the grant date and the stock price on the exercise date. The SARs vest at a rate of 20% per year for five years and expire five years after vesting. All remaining SARs expired on May 1, 2020.
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 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.

34


Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)
RSU awards to our directors and advisory directors are settled in cash based upon the market price of our common stock generally after one-year or earlier upon death, disability or retirement from service after age 65. RSUs were not granted in May as a result of the uncertainty surrounding the COVID-19 pandemic; however, in August, the Board approved the grant of 8,250 RSUs which will vest on May 1, 2021 and will be settled in cash.
Earnings per Share
Basic earnings per share were calculated using a weighted average number of shares outstanding. Diluted earnings per share include RS and RSU award shares issued in 2019. RSUs issued in 2020 may only be settled in cash.
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Weighted average shares outstanding 26,877,200  26,881,700  26,879,178  26,883,025 
Incremental shares from RS awards and RSUs 7,558  6,472  8,696  6,313 
Total shares for diluted calculations 26,884,758  26,888,172  26,887,874  26,889,338 
Net income attributable to American National (in thousands) $ 171,052  $ 92,184  $ 161,153  $ 449,241 
Basic earnings per share $ 6.36  $ 3.43  $ 6.00  $ 16.71 
Diluted earnings per share $ 6.36  $ 3.43  $ 5.99  $ 16.71 

Statutory Capital and Surplus
Risk Based Capital (“RBC”) is a measure insurance regulators use to evaluate the capital adequacy of American National's 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 September 30, 2020 and December 31, 2019, American National Insurance Company’s statutory capital and surplus was $3,488,293,000 and $3,477,727,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at September 30, 2020 and December 31, 2019, above 200% of the authorized control level.
American National's insurance subsidiaries prepare statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile, which include certain components of the National Association of Insurance Commissioners’ Codification of Statutory Accounting Principles (“NAIC Codification”). NAIC Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting practices continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the statutory capital and surplus of American National Insurance Company and its insurance subsidiaries.
Statutory accounting differs from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, and valuing securities on a different basis. In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus.
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 $73,084,000 and $70,339,000 at September 30, 2020 and December 31, 2019, respectively. The statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary would have remained above the Company action level RBC had it not used the permitted practice.

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):
September 30, 2020 December 31, 2019
Statutory capital and surplus
Life insurance entities $ 2,120,222  $ 2,159,770 
Property and casualty insurance entities 1,379,711  1,329,782 

35


Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Statutory net income (loss)
Life insurance entities $ (11,638) $ 26,498  $ 13,036  $ 32,196 
Property and casualty insurance entities 33,816  15,626  69,094  66,090 

Dividends
Dividends are paid on a quarterly basis. We paid a quarterly dividend of $0.82 per share for each quarter during the nine months ended September 30, 2020 and September 30, 2019, respectively. We expect to continue to pay regular cash dividends, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial conditions.
American National Insurance Company’s payment of dividends to its stockholder, American National Group, Inc. 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.
Noncontrolling Interests
American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company owned by its policyholders. American National Insurance Company has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the condensed 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 September 30, 2020 and December 31, 2019.
American National Group, Inc. and its subsidiaries exercise control or ownership of various joint ventures, resulting in their consolidation into American National’s condensed consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as a noncontrolling deficit of $443,000 and $736,000 at September 30, 2020 and December 31, 2019, respectively.


Note 15 – Segment Information

Management organizes the business into five operating segments:
Life—consists of whole, term, universal, indexed and variable life insurance. Products are primarily sold through career, multiple-line, and independent agents as well as direct marketing channels.
Annuity—consists of fixed, indexed, and variable annuity products. Products are primarily sold through independent agents, brokers, and financial institutions, along with multiple-line and career agents.
Health—consists of Medicare Supplement, stop-loss, other supplemental health products and credit disability insurance. Products are typically distributed through independent agents and managing general underwriters.
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.
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.

The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies and Practices, of American National’s 2019 annual report on Form 10-K. All revenues and expenses specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Revenues and expenses not specifically attributable to policy transactions are allocated to each segment as follows:
Recurring income from bonds and mortgage loans is allocated based on the assets allocated to each line of business at the average yield available from these assets.
Net investment income from all other assets is allocated to the insurance segments in accordance with the amount of capital allocated to each segment, with the remainder recorded in the Corporate and Other segment.
Expenses are charged to segments through direct identification and allocations based upon various factors.
36


Note 15 – Segment Information – (Continued)
The results of operations measured as the income (loss) before federal income tax and other items by operating segments are summarized below (in thousands):
  Three months ended September 30, 2020
Property Corporate
  Life Annuity Health & Casualty & Other Total
PREMIUMS AND OTHER REVENUES
Premiums $ 101,182  $ 27,960  $ 40,934  $ 391,388  $ —  $ 561,464 
Other policy revenues 75,317  4,027  —  —  —  79,344 
Net investment income 69,235  163,125  2,033  16,049  3,814  254,256 
Net realized investment gains —  —  —  —  17,387  17,387 
Change in investment credit loss —  —  —  —  (4,175) (4,175)
Net gains on equity securities —  —  —  —  152,147  152,147 
Other income 358  733  4,971  3,079  542  9,683 
Total premiums and other revenues
246,092  195,845  47,938  410,516  169,715  1,070,106 
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 153,957  46,424  —  —  —  200,381 
Claims incurred —  —  27,933  258,412  —  286,345 
Interest credited to policyholders’ account balances 24,522  104,424  —  —  —  128,946 
Commissions for acquiring and servicing policies
41,974  16,119  7,608  72,664  —  138,365 
Other operating expenses 45,080  12,115  10,013  48,576  10,629  126,413 
Change in deferred policy acquisition costs
(15,499) 8,555  (542) (901) —  (8,387)
Total benefits, losses and expenses 250,034  187,637  45,012  378,751  10,629  872,063 
Income (loss) before federal income tax and other items $ (3,942) $ 8,208  $ 2,926  $ 31,765  $ 159,086  $ 198,043 

  Three months ended September 30, 2019
Property Corporate
  Life Annuity Health & Casualty & Other Total
PREMIUMS AND OTHER REVENUES
Premiums $ 93,079  $ 41,305  $ 40,676  $ 382,784  $ —  $ 557,844 
Other policy revenues 72,446  4,338  —  —  —  76,784 
Net investment income 61,961  141,684  2,381  16,357  24,237  246,620 
Net realized investment gains —  —  —  —  31,933  31,933 
Net gains on equity securities —  —  —  —  8,589  8,589 
Other income 441  653  5,021  3,137  1,478  10,730 
Total premiums and other revenues
227,927  187,980  48,078  402,278  66,237  932,500 
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 113,652  59,699  —  —  —  173,351 
Claims incurred —  —  28,567  280,695  —  309,262 
Interest credited to policyholders’ account balances
22,045  84,737  —  —  —  106,782 
Commissions for acquiring and servicing policies
42,023  13,368  7,405  65,893  —  128,689 
Other operating expenses 46,873  12,264  9,504  50,111  9,750  128,502 
Change in deferred policy acquisition costs
(5,080) 7,006  258  (636) —  1,548 
Total benefits, losses and expenses 219,513  177,074  45,734  396,063  9,750  848,134 
Income before federal income tax and other items
$ 8,414  $ 10,906  $ 2,344  $ 6,215  $ 56,487  $ 84,366 

37


Note 15 – Segment Information – (Continued)
  Nine months ended September 30, 2020
Property Corporate
  Life Annuity Health & Casualty & Other Total
PREMIUMS AND OTHER REVENUES
Premiums $ 282,368  $ 69,413  $ 126,965  $ 1,152,749  $ —  $ 1,631,495 
Other policy revenues 227,083  11,653  —  —  —  238,736 
Net investment income 188,455  394,508  6,480  48,171  19,274  656,888 
Net realized investment gains —  —  —  —  25,474  25,474 
Change in investment credit loss —  —  —  —  (101,163) (101,163)
Net gains on equity securities —  —  —  —  118,397  118,397 
Other income 1,534  2,166  15,001  9,656  2,795  31,152 
Total premiums and other revenues
699,440  477,740  148,446  1,210,576  64,777  2,600,979 
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 389,364  126,209  —  —  —  515,573 
Claims incurred —  —  89,544  768,682  —  858,226 
Interest credited to policyholders’ account balances 47,820  223,586  —  —  —  271,406 
Commissions for acquiring and servicing policies
122,728  38,024  22,792  225,746  —  409,290 
Other operating expenses 137,065  35,737  30,118  151,660  30,936  385,516 
Change in deferred policy acquisition costs
(34,872) 28,147  (582) (7,455) —  (14,762)
Total benefits, losses and expenses 662,105  451,703  141,872  1,138,633  30,936  2,425,249 
Income before federal income tax and other items $ 37,335  $ 26,037  $ 6,574  $ 71,943  $ 33,841  $ 175,730 

  Nine months ended September 30, 2019
Property Corporate
  Life Annuity Health & Casualty & Other Total
PREMIUMS AND OTHER REVENUES
Premiums $ 265,634  $ 137,434  $ 121,581  $ 1,125,704  $ —  $ 1,650,353 
Other policy revenues 213,300  12,878  —  —  —  226,178 
Net investment income 194,633  487,750  7,177  48,085  59,051  796,696 
Net realized investment gains —  —  —  —  24,975  24,975 
Net gains on equity securities —  —  —  —  282,026  282,026 
Other income 1,586  1,916  15,940  8,689  4,511  32,642 
Total premiums and other revenues
675,153  639,978  144,698  1,182,478  370,563  3,012,870 
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 327,579  191,248  —  —  —  518,827 
Claims incurred —  —  81,042  790,447  —  871,489 
Interest credited to policyholders’ account balances 57,561  314,142  —  —  —  371,703 
Commissions for acquiring and servicing policies
120,646  63,373  22,975  201,635  —  408,629 
Other operating expenses 142,520  38,087  31,203  151,677  28,158  391,645 
Change in deferred policy acquisition costs
(19,120) (383) 919  (3,807) —  (22,391)
Total benefits, losses and expenses 629,186  606,467  136,139  1,139,952  28,158  2,539,902 
Income before federal income tax and other items $ 45,967  $ 33,511  $ 8,559  $ 42,526  $ 342,405  $ 472,968 

38


Note 16 – Commitments and Contingencies
Commitments

American National and its subsidiaries lease insurance sales office space, technological equipment, and automobiles. The remaining long-term lease commitments at September 30, 2020 were approximately $10,876,000.

American National had aggregate commitments at September 30, 2020 to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $1,362,900,000 of which $328,144,000 is expected to be funded in 2020 with the remainder funded in 2021 and beyond.

American National had a $100,000,000 short-term variable rate borrowing facility containing a $55,000,000 sub-feature for the issuance of letters of credit. Borrowings under the facility were at the discretion of the lender and would be used only for funding working capital requirements. The combination of borrowings and outstanding letters of credit cannot exceed $100,000,000 at any time. As of September 30, 2020 and December 31, 2019, the outstanding letters of credit were $3,484,000, and there were no borrowings on this facility. This facility expired on October 31, 2020.

Federal Home Loan Bank (FHLB) Agreements

In May 2018, the Company became a member of the Federal Home Loan Bank of Dallas (“FHLB”) to augment its liquidity resources. The Company initially 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 condensed 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 September 30, 2020, certain municipal bonds and collateralized mortgage obligations (CMO’s) with a fair value of approximately $84.1 million and commercial mortgage loans of approximately $1.4 billion were on deposit with the FHLB as collateral for borrowing. As of September 30, 2020, the collateral provided borrowing capacity for the $500 million in outstanding advances as well as approximately $564 million in additional borrowing capacity. The deposited securities and commercial mortgage loans are included in the Company’s condensed consolidated statements of financial position within fixed maturity securities and mortgage loans on real estate, net of allowance, respectively.

FHLB outstanding advances as of September 30, 2020 are shown below (in thousands, except percentages):
Principal Amount Interest Rate Maturity Date
At September 30, 2020
FHLB advance, fixed rate* $ 250,000  0.25  % 10/13/2020
FHLB advance, fixed rate 250,000  0.38  % 4/28/2021
* This advance was repaid in full on its maturity date of October 13, 2020. For more information on the details of this loan repayment, refer to Note 18, Subsequent Events.
Guarantees

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 September 30, 2020, was approximately $121,379,000, while the total cash value of the related life insurance policies was approximately $142,019,000.

Litigation

American National and certain subsidiaries are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information presently available, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s condensed consolidated financial position, liquidity or results of operations; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future.
39


Note 16 – Commitments and Contingencies – (Continued)
Such speculation warrants caution, as the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given lawsuit. These lawsuits are in various stages of development, and future facts and circumstances could result in management changing its conclusions. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than management can anticipate, the resulting liability could have a material impact on our condensed consolidated financial position, liquidity or results of operations. With respect to the existing litigation, management currently believes that the possibility of a material judgment adverse to American National is remote and no estimate of range can be made for loss contingencies that are at least reasonably possible but not accrued.

Note 17 – Related Party Transactions
American National has entered into recurring transactions and agreements with certain related parties. These include mortgage loans, management contracts, agency commission contracts, marketing agreements, health insurance contracts, and legal services. The impact on the condensed consolidated financial statements of significant related party transactions is shown below (in thousands):
    Dollar Amount of Transactions
  Financial Statement Line Impacted Three months ended September 30, Nine months ended September 30, Amount due to (from) American National
Related Party 2020 2019 2020 2019 September 30, 2020 December 31, 2019
Gal-Tex Hotel Corporation Mortgage loan on real estate $ —  $ —  $ —  $ 576  $ —  $ — 
Gal-Tex Hotel Corporation Net investment income —  —  —  —  — 
Greer, Herz & Adams, LLP Other operating expenses 3,033  3,129  10,127  9,025  (558) (519)
Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National held a first mortgage loan which originated in 1999, with an interest rate of 7.25% and final maturity date of April 1, 2019 issued to a subsidiary of Gal-Tex, which was collateralized by a hotel property in San Antonio, Texas. This loan has been paid in full. The Moody Foundation owns 34.0% of Gal-Tex and 22.75% of American National, and the Libbie Shearn Moody Trust owns 50.2% of Gal-Tex and 37.0% of American National.
Transactions with Greer, Herz & Adams, LLP: Irwin M. Herz, Jr. is a member of the Board of Directors of American National Group, Inc. and certain of its subsidiaries, and a Partner with Greer, Herz & Adams, LLP, which serves as American National’s General Counsel.

Note 18 – Subsequent Events
On April 13, 2020, the Company borrowed from the Federal Home Loan Bank of Dallas' COVID-19 Relief Advance Program. The net amount of the advance was approximately $240 million after a required capital stock purchase of approximately $10 million. The loan has an interest rate of 0.25% with a final maturity date of October 13, 2020. The Company paid this advance in full on its maturity date of October 13, 2020. The capital stock purchased for the advance was not sold and is now considered excess stock left at the Federal Home Loan Bank of Dallas, and it will be available to use for potential future advances.

40

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following pages provide management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three and nine months ended September 30, 2020 and 2019 of American National Group, Inc. and its subsidiaries (referred to in this document as “we,” “our,” “us,” or the “Company”). This information should be read in conjunction with our condensed consolidated financial statements included in Item 1, Financial Statements, of this Form 10-Q.
Caution Regarding Forward-Looking Statements
Certain statements made in this report, including but not limited to the accompanying condensed consolidated financial statements, and the notes thereto appearing in Item 1 herein, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Item 2 ("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, and statements relating to the COVID-19 pandemic and its effects on the Company. 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, particularly given the uncertainty relating to the COVID-19 pandemic. We do not make public 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 of our 2019 Form 10-K filed with the SEC on February 28, 2020, as supplemented by the Risk Factors discussion in Part II, Item 1A of our Form 10-Q for the period ending June 30, 2020, filed with the SEC on August 5, 2020, and elsewhere in this report, such as:
Economic & Investment Risk Factors
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;
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;
lack of liquidity for certain of our investments;
the potential for adverse effects on interest rates and the value of certain assets as a result of the discontinuation of the London Inter-Bank Offered Rate (LIBOR);
risk of investment losses and defaults;
Operational Risk Factors
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;
potential ineffectiveness of our risk management policies and procedures;
changes in our experience related to deferred policy acquisition costs;
failures or limitations of our computer, information security and administration systems;
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 ineffectiveness of our internal controls over financial reporting;
41


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Catastrophic Event Risk Factors
natural or man-made catastrophes, pandemic disease such as COVID-19, or other events resulting in increased claims activity from catastrophic loss of life or property;
the effects of unanticipated events on our disaster recovery and business continuity planning;
the effects of global climate change;
Marketplace Risk Factors
the highly competitive nature of the insurance and annuity business;
potential difficulty in attraction and retention of qualified employees and agents;
the introduction of alternative healthcare solutions or changes in federal healthcare policy, both of which could impact our supplemental healthcare business;
Litigation and Regulation Risk Factors
adverse determinations in litigation or regulatory proceedings which may result in significant financial losses and harm to our reputation;
significant changes in government regulation;
changes in tax law;
changes in statutory or U.S. Generally Accepted Accounting Principles (“GAAP”), practices or policies;
Reinsurance and Counterparty Risk Factors
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;
Other Risk Factors
major public health issues, such as the novel coronavirus COVID-19;
potentially adverse rating agency actions;
control of our company by a small number of stockholders; and
advances in medical technology and testing, which may increase our adverse selection risk.
Many of these risks and uncertainties have been exacerbated by the COVID-19 pandemic, particularly those described in the Economic and Investment Risk Factors, Litigation and Regulation Risk Factors, and Reinsurance and Counterparty Risk Factors.

42


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

COVID-19 Response
On March 11, 2020, the World Health Organization formally declared the outbreak of the novel coronavirus COVID-19 to be a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, alternative arrangements and shutdowns for business and schools, reduction in business activity, widespread unemployment, and overall economic and financial market instability. Through the third quarter of 2020, American National is for the most part conducting its normal business operations. However, because of the impact of COVID-19 we have approximately 80% of our back-office employees working remotely.
Below is a summary of significant actions we have taken through the date of this report to manage the risks of disruption to business operation from COVID-19:
We have taken steps to protect employees with the goals of maintaining their health and sustaining an adequate workforce, including directing as many employees as possible to work from home and offering flexibility for employees negotiating scheduling conflicts due to the impacts of COVID-19, such as caring for family, alternative arrangements and shutdowns for business and schools, self-isolation or personal illness, including granting additional paid time off to address these hardships.
We are communicating on a regular basis with our board of directors, senior management and employees regarding the ongoing developments of the COVID-19 pandemic. We are communicating through email, company intranet, videos, posters and other signage, an HR email hotline, teleconferences, and online MS Teams meetings.
We have implemented multiple communication avenues to keep our customers, vendors and producers informed, including:
Providing regular communications to producers with updates on our operations and service, contacts for support, available resources, and expectations;
Engaging in ongoing communications with critical vendors related to their business continuity plans; and
Providing an overview of our response to COVID-19 on our corporate website.
We are offering leniency on premium payments and other deadlines, in some cases pursuant to recent regulatory requirements, for customers impacted by the COVID-19 outbreak, as discussed elsewhere in this report.
We have reduced premiums for some of our property and casualty policies by providing policy credits or exposure adjustments to personal automobile insurance, workers compensation or other commercial policies, in some cases pursuant to regulatory requirements.
We have assessed our facilities, systems, policies and procedures and have implemented plans to continue critical operations and services while many employees are working off-site. The implementation of these plans across all locations was addressed simultaneously in accordance with standards and procedures for remote access that existed prior to the current challenges COVID-19 has introduced. We also have plans for increasing capacity in critical operations should employees in any of our locations become unavailable to work due to COVID-19 health issues. We are continuing to evaluate our cybersecurity program for the next challenges that COVID-19 is likely to create.
We have provided our employees education and training with respect to cybersecurity issues that may arise relating to COVID-19 and working remotely.
We have provided our managers resources on leading virtually, virtual meeting tips and transitioning back to the office.
We deferred salary merit and promotional increases in May 2020. Promotions were effective without compensation adjustments. During the third quarter, the board of directors approved the salary actions that had previously been deferred. Salary merit and promotional increases were paid to employees effective September 15, 2020. The pay was not retroactive.
We have suspended our summer Internship Program for 2020 and plan to resume these efforts in 2021.
We are developing return-to-office programs as we transition through the different reopening situations at our locations. At the end of the third quarter of 2020, many of the locations in which we operate had begun to ease restrictions that were in place earlier in the period. However, viral infections in the general population have begun to increase again resulting in resumption of restrictions in certain areas in which we operate. As a result, we have temporarily paused further return-to-office plans at our locations until January 2021.
We have provided alternatives to employees who are working remotely who wish to receive a free flu shot.
43


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

We have taken numerous steps to promote the safety of our employees in keeping current with the local and state mandates and health expert recommendations including:
Enhancing cleaning protocols by increasing the cleaning rounds per day and focusing on high touch areas, including door handles, elevator knobs, etc.
Practicing social distancing and promoting safe interactions by not congregating in general areas such as workrooms, breakrooms and copier rooms, refraining from shaking hands, staying 6 feet apart, and keeping in-person meetings short and opting for teleconference, email and phone calls.
Requiring all employees to wear face coverings when they enter our buildings, in common areas and whenever they are away from their workspace.
Providing face masks to all employees, primarily those who are unable to work remotely and those returning to the office.
Placed signs regarding social distancing guidelines, wearing of face masks, and washing hands around high traffic areas.
Posted social distancing markers and additional signage throughout the buildings as reminders to remain six feet apart.
Procured and maintained sufficient supply of hand sanitizer and sanitizing wipes for use at entry points and common areas
Arranged chairs in reception areas and other communal seating areas by removing chairs to maintain social distancing.
Installed transparent shields in work areas where social distancing cannot be practiced.
Adjusted air fan/filtration systems, where possible, to help enhance air flow by letting more fresh air into the buildings, while maintaining adequate comfort levels.
Approved procedures for suspected and confirmed employee cases of COVID-19 that include notification, quarantine and cleaning practices that are in line with the current CDC guidelines.

No assurance can be given that these actions will be successful, nor can we predict the level of disruption that will occur should the COVID-19 pandemic and its related macroeconomic risks continue for an extended period of time. Given this uncertainty, we are unable to quantify with reasonable confidence the expected impact of the COVID-19 pandemic on our future operations, financial condition, liquidity and results of operations. The wide-ranging social, economic and financial consequences of the COVID-19 pandemic and the possible effects of ongoing and future governmental action in response to COVID-19 compound this uncertainty. American National may see an increased level of claims, a reduction in sales, and an increased level of asset impairments during 2020 related to COVID-19. Additional information regarding risks and uncertainties related to the COVID-19 pandemic are set forth in Part II, Item 1A of our Form 10-Q for the period ending June 30, 2020, filed with the SEC on August 5, 2020.
COVID-19 Update
Our investment results during the first nine months of the year were impacted by the disruption caused by COVID-19. Net investment income was lower primarily on bonds, mortgage loans and equity indexed options. Significant volatility in financial markets resulted in increased credit allowances established for mortgage loans and to a lesser extent certain bonds negatively impacted income. Economic disruption as a result of COVID-19 has also resulted in requests for loan modifications from certain mortgage loans borrowers related to loans with a total carrying amount of $1.6 billion. These loan modifications related primarily to hotels, retail businesses and parking operations. The terms of the modifications of these loans include forbearance of principal and interest payments for a period of up to six months, extensions of maturity dates, and/or provision for interest only payments.







44


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Sales growth in our operating segments was negatively impacted by stay-at-home orders and the increased economic uncertainty caused by COVID-19. Additionally, we reduced premiums for some of our property and casualty policies by providing credit or exposure adjustments to personal automobile insurance, workers compensation or other commercial policies, in some cases pursuant to regulatory requirements.
Life claims experience through September 2020 has increased compared to the same period 2019. We are analyzing the increase to determine if it is directly or indirectly related to COVID-19.
Loss and loss adjustment expenses in our operating segments included modestly lower loss estimates in certain product lines, primarily personal and commercial automobile due to a decrease in claim frequency as policyholders drove fewer miles due to shelter-in-place orders. In addition, to date we have received 316 business interruption claims related to COVID-19 and have closed 315 of those claims without payment and have one open claim. Our policies generally exclude coverage for damage resulting from a virus or bacteria. However, it is possible that courts, state insurance regulators, or both could require us to extend coverage beyond our policy language and underwriting intent.
This MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included in Part I - Financial Information - Item 1, Financial Statements.
Overview
American National Insurance Company, founded in 1905 and headquartered in Galveston, Texas, and its subsidiaries offer a broad spectrum of products and services, which include life insurance, annuities, property and casualty insurance, health insurance, credit insurance, and pension products. The American National companies operate in all 50 states, the District of Columbia and Puerto Rico. Major insurance subsidiaries include American National Life Insurance Company of Texas, American National Life Insurance Company of New York, American National Property and Casualty Company, Garden State Life Insurance Company, Standard Life and Accident Insurance Company, Farm Family Casualty Insurance Company and United Farm Family Insurance Company.
45


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

General Trends
During the third quarter of 2020, American National had no material changes to the general trends discussed in the MD&A included in our 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020. However, please see the "COVID-19 Response" discussion above for general information about the pandemic's impact on us.
Critical Accounting Estimates
The unaudited interim condensed consolidated financial statements have been prepared in conformity with GAAP. In addition to GAAP, insurance companies apply specific SEC regulations when preparing the condensed consolidated financial statements. The preparation of the condensed consolidated financial statements and notes requires us to make estimates and assumptions that affect the amounts reported. Actual results could differ from results reported using those estimates and assumptions. Our accounting policies inherently require the use of judgment relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity, persistency, expenses, interest rates, and property and casualty loss frequency, severity, claim reporting and settlement patterns. Due to the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could vary from those reported in the condensed consolidated financial statements.
For a discussion of our critical accounting estimates, see the MD&A in our 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020. There have been no changes except as follows.
On January 1, 2020, we adopted ASC 326 accounting guidance related to the allowance for credit losses. Refer to Note 3, Recently Issued Accounting Pronouncements. The new standard significantly changes how entities measure credit losses for most financial assets and reinsurance recoverables that are not measured at fair value through net income. The guidance replaces the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. Refer to Note 4, Investment in Securities, and Note 5, Mortgage Loans, of the Notes to the Unaudited Condensed Consolidated Financial Statements in Item 1 for further discussion of the accounting policies and methodologies for establishing the allowance for credit losses.
The accounting estimates relating to the allowance for credit losses over financial assets held at amortized cost have been evaluated and monitored since adoption and management has deemed these estimates to be critical for the following reasons:
Changes in the provision for credit losses can be material to the financial position and results of operations for the Company;
Estimates relating to the allowance for credit losses require us to project future cash flows, delinquencies, collateral values, occupancy rates, prepayments based on a reasonable and supportable forecast in order to estimate probability of default and the loss given default;
The allowance for credit losses is also affected by factors outside of our control including, but not limited to, market volatility, deterioration in the credit or prospects of companies and governmental entities, political uncertainty, industry trends, and trends in interest rates;
Management judgment is required to determine which models, methodologies, and scenario conditions are used to calculate the allowance for credit losses to produce a reasonable estimate that encompasses the expected lifetime credit losses.
Since our estimate for the allowance for credit losses relies on management judgment and is sensitive to factors outside of our control, as noted above, there are inherent uncertainties within the estimates. As a result, the changes in the allowance for credit losses could materially impact our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Refer to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Condensed Consolidated Financial Statements in Item 1.
46


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Condensed Consolidated Results of Operations
The following sets forth the condensed consolidated results of operations (in thousands):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
PREMIUMS AND OTHER REVENUES
Premiums $ 561,464  $ 557,844  $ 3,620  $ 1,631,495  $ 1,650,353  $ (18,858)
Other policy revenues 79,344  76,784  2,560  238,736  226,178  12,558 
Net investment income 254,256  246,620  7,636  656,888  796,696  (139,808)
Net realized investments gains 17,387  31,933  (14,546) 25,474  24,975  499 
Change in investment credit loss (4,175) —  (4,175) (101,163) —  (101,163)
Net gains on equity securities 152,147  8,589  143,558  118,397  282,026  (163,629)
Other income 9,683  10,730  (1,047) 31,152  32,642  (1,490)
Total premiums and other revenues
1,070,106  932,500  137,606  2,600,979  3,012,870  (411,891)
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 200,381  173,351  27,030  515,573  518,827  (3,254)
Claims incurred 286,345  309,262  (22,917) 858,226  871,489  (13,263)
Interest credited to policyholders’ account balances
128,946  106,782  22,164  271,406  371,703  (100,297)
Commissions for acquiring and servicing policies
138,365  128,689  9,676  409,290  408,629  661 
Other operating expenses 126,413  128,502  (2,089) 385,516  391,645  (6,129)
Change in deferred policy acquisition costs(1)
(8,387) 1,548  (9,935) (14,762) (22,391) 7,629 
Total benefits, losses and expenses 872,063  848,134  23,929  2,425,249  2,539,902  (114,653)
Income before federal income taxes and other items $ 198,043  $ 84,366  $ 113,677  $ 175,730  $ 472,968  $ (297,238)
 (1) A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

Comparison of the three months ended September 30, 2020 to 2019
Earnings increased primarily due to the following:
Increase in net gains on equity securities resulting from favorable market conditions
The increase in earnings was partially offset due to the following:
Increase in claim experience in our Life segment

Comparison of the nine months ended September 30, 2020 to 2019
Earnings decreased primarily due to the following:
A decrease in net gains on equity securities resulting from unfavorable market conditions
An increase in the allowance for credit losses due to the economic disruptions caused by the COVID-19 pandemic


47


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Life
Life segment financial results for the periods indicated were as follows (in thousands):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
PREMIUMS AND OTHER REVENUES
Premiums $ 101,182  $ 93,079  $ 8,103  $ 282,368  $ 265,634  $ 16,734 
Other policy revenues 75,317  72,446  2,871  227,083  213,300  13,783 
Net investment income 69,235  61,961  7,274  188,455  194,633  (6,178)
Other income 358  441  (83) 1,534  1,586  (52)
Total premiums and other revenues
246,092  227,927  18,165  699,440  675,153  24,287 
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 153,957  113,652  40,305  389,364  327,579  61,785 
Interest credited to policyholders’ account balances
24,522  22,045  2,477  47,820  57,561  (9,741)
Commissions for acquiring and servicing policies
41,974  42,023  (49) 122,728  120,646  2,082 
Other operating expenses 45,080  46,873  (1,793) 137,065  142,520  (5,455)
Change in deferred policy acquisition costs(1)
(15,499) (5,080) (10,419) (34,872) (19,120) (15,752)
Total benefits, losses and expenses 250,034  219,513  30,521  662,105  629,186  32,919 
Income (loss) before federal income taxes and other items $ (3,942) $ 8,414  $ (12,356) $ 37,335  $ 45,967  $ (8,632)
(1) A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

Comparison of the three months ended September 30, 2020 to 2019
Earnings for our Life segment decreased primarily due to the following:
An overall increase in mortality
Annual assumption review resulting in unlocking due to a decrease in long term interest rate assumptions
The decrease in earnings was partially offset by the following:
Increase in other policy revenues resulting from the persistency and aging of our interest sensitive block of business

Comparison of the nine months ended September 30, 2020 to 2019
Earnings for our Life segment decreased primarily due to the following:
An overall increase in mortality
Annual assumption review resulting in unlocking due to a decrease in long term interest rate assumptions
The decrease in earnings was partially offset by the following:
Decrease in policyholder benefits related to our participating polices resulting from a 2019 increase that was higher than normal
Increase in other policy revenues resulting from the persistency and aging of our interest sensitive block of business

48


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Life insurance sales
The following table presents life insurance sales as measured by annualized premium, a statistical measure used by the insurance industry, which allows a comparison of new policies sold by an insurance company during the period (in thousands):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Traditional life $ 16,073  $ 13,711  $ 2,362  $ 46,056  $ 42,409  $ 3,647 
Universal life 7,859  7,062  797  20,613  20,759  (146)
Indexed UL 8,328  9,980  (1,652) 21,972  26,981  (5,009)
Total recurring 32,260  30,753  1,507  88,641  90,149  (1,508)
Single and excess (1)
387  420  (33) 852  1,334  (482)
Credit life (1)
2,015  2,691  (676) 6,063  8,159  (2,096)
Total annualized premium $ 34,662  $ 33,864  $ 798  $ 95,556  $ 99,642  $ (4,086)
(1)  These are weighted amounts representing 10% of single and excess premiums.
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.

Total Life sales increased during the three months ended September 30, 2020 compared to 2019 primarily due to higher traditional life sales. Total Life sales decreased during the nine months ended September 30, 2020 compared to 2019 primarily due to lower Indexed Universal Life and Credit Life sales which we believe was due to the economic uncertainty from COVID-19.
Policy in-force information
The following table summarizes changes in the Life segment’s in-force amounts (in thousands):
September 30, 2020 December 31, 2019 Change
Life insurance in-force
Traditional life $ 89,919,097  $ 84,129,193  $ 5,789,904 
Interest-sensitive life 35,616,434  33,975,092  1,641,342 
Total life insurance in-force
$ 125,535,531  $ 118,104,285  $ 7,431,246 
The following table summarizes changes in the Life segment’s number of policies in-force:
September 30, 2020 December 31, 2019 Change
Number of policies in-force
Traditional life 1,846,338  1,911,305  (64,967)
Interest-sensitive life 265,982  256,146  9,836 
Total number of policies in-force 2,112,320  2,167,451  (55,131)
Life insurance in-force increased during the nine months ended September 30, 2020 compared to December 31, 2019 despite a reduction of policies in-force due to an increase in sales of higher face amount policies.
Change in Deferred Policy Acquisition Costs
The change in DAC represents acquisition costs capitalized less the amortization of existing DAC.
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Acquisition cost capitalized $ (34,498) $ (34,393) $ (105) $ (100,210) $ (98,812) $ (1,398)
Amortization of DAC 18,999  29,313  (10,314) 65,338  79,692  (14,354)
Change in DAC $ (15,499) $ (5,080) $ (10,419) $ (34,872) $ (19,120) $ (15,752)
The reduction in DAC amortization for the three and nine months ended September 30, 2020 relates to the annual assumption review and unlocking and lower gross profits.
49


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Annuity
Annuity segment financial results for the periods indicated were as follows (in thousands):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 Change 2020 2019 Change
PREMIUMS AND OTHER REVENUES
Premiums $ 27,960  $ 41,305  $ (13,345) $ 69,413  $ 137,434  $ (68,021)
Other policy revenues 4,027  4,338  (311) 11,653  12,878  (1,225)
Net investment income 163,125  141,684  21,441  394,508  487,750  (93,242)
Other income 733  653  80  2,166  1,916  250 
Total premiums and other revenues
195,845  187,980  7,865  477,740  639,978  (162,238)
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 46,424  59,699  (13,275) 126,209  191,248  (65,039)
Interest credited to policyholders’ account balances
104,424  84,737  19,687  223,586  314,142  (90,556)
Commissions for acquiring and servicing policies
16,119  13,368  2,751  38,024  63,373  (25,349)
Other operating expenses 12,115  12,264  (149) 35,737  38,087  (2,350)
Change in deferred policy acquisition costs(1)
8,555  7,006  1,549  28,147  (383) 28,530 
Total benefits, losses and expenses 187,637  177,074  10,563  451,703  606,467  (154,764)
Income before federal income taxes and other items
$ 8,208  $ 10,906  $ (2,698) $ 26,037  $ 33,511  $ (7,474)
(1) A positive amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Comparison of the three months ended September 30, 2020 to 2019
Earnings for our Annuity segment decreased primarily due to the following:
Annual assumption review resulting in unlocking on our fixed deferred annuity block due to decrease in long-term interest rate assumptions
Higher interest credited on indexed annuities
The decrease in earnings was partially offset by the following:
An increase in net investment income due to higher option gains resulting from favorable market conditions

Comparison of the nine months ended September 30, 2020 to 2019
Earnings for our Annuity segment decreased primarily due to the following:
An increase in reserves for indexed annuity products due to mark-to-market based adjustments attributable to lower interest rates and unfavorable equity market conditions
Annual assumption review resulting in unlocking on our fixed deferred annuity block due to decrease in long-term interest rate assumptions
Increased spread compression on fixed annuities due to declining portfolio yield

50


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Annuity premium and deposit amounts received are shown below (in thousands):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Fixed deferred annuity $ 126,820  $ 77,342  $ 49,478  $ 318,629  $ 909,859  $ (591,230)
Single premium immediate annuity 36,217  50,815  (14,598) 92,327  184,823  (92,496)
Equity-indexed deferred annuity 95,105  74,876  20,229  230,485  281,720  (51,235)
Variable deferred annuity 16,816  18,400  (1,584) 46,673  50,511  (3,838)
Total premium and deposits 274,958  221,433  53,525  688,114  1,426,913  (738,799)
Less: Policy deposits 246,998  180,128  66,870  618,701  1,289,479  (670,778)
Total earned premiums $ 27,960  $ 41,305  $ (13,345) $ 69,413  $ 137,434  $ (68,021)
Annuity premium and deposits decreased primarily for fixed deferred products during the nine months ended September 30, 2020 compared to 2019. The low interest rate environment and choices we made on setting crediting rates, coupled with the economic impact attributable to COVID-19 and significant reduction of face-to-face interactions with prospective policyholders has resulted in lower sales of fixed deferred annuities during the three and nine months ended September 30, 2020.

Change in Deferred Policy Acquisition Costs

The change in DAC represents acquisition costs capitalized less the amortization of existing DAC, which is calculated in proportion to expected gross profits. The following shows the components of the change in DAC (in thousands):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Acquisition cost capitalized $ (14,899) $ (13,611) $ (1,288) $ (37,217) $ (61,779) $ 24,562 
Amortization of DAC 23,454  20,617  2,837  65,364  61,396  3,968 
Change in DAC $ 8,555  $ 7,006  $ 1,549  $ 28,147  $ (383) $ 28,530 
The change in amortization for the three and nine months ended September 30, 2020 was primarily due to unlocking assumptions. Long run earned rate assumptions were lowered from 5.75% to 4.75%, which lowered DAC by $7.2 million. This was offset by raising assumed spread targets to match recent trends in renewal rate setting, which raised DAC by $2.3 million. The combined impact of assumptions unlocking was a $4.9 million decrease in DAC. The change in acquisition costs capitalized for the nine months ended September 30, 2020 strongly correlates with the change in commissions, which declined due to lower sales in the first half of the year.


51


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Shown below are the changes in account values (in thousands):
  Nine months ended September 30,
  2020 2019
Fixed deferred annuity
Reserve, beginning of period $ 6,893,174  $ 6,773,603 
Premiums 318,629  909,859 
Death and other benefits (162,750) (180,120)
Surrenders (417,390) (617,457)
Fees (754) (2,237)
Interest and mortality 141,895  153,272 
Reserve, end of period 6,772,804  7,036,920 
Equity-indexed annuity
Reserve, beginning of period 3,985,166  3,668,645 
Premiums 230,485  281,720 
Death and other benefits (35,891) (29,426)
Surrenders (258,140) (135,281)
Fees (2,443) (2,833)
Interest and mortality 77,996  157,517 
Reserve, end of period 3,997,173  3,940,342 
Single premium immediate annuity
Reserve, beginning of period 1,874,942  1,826,137 
Premiums 92,327  184,823 
Payments (162,248) (161,161)
Interest and mortality 53,741  47,245 
Reserve, end of period 1,858,762  1,897,044 
Variable deferred annuity
Account value, beginning of period 385,736  332,898 
Premiums 46,673  50,511 
Other flows 637  152 
Surrenders (60,605) (61,314)
Fees (3,301) (3,562)
Change in market value and other 21,154  48,607 
Reserve, end of period 390,294  367,292 
Total reserve, end of period $ 13,019,033  $ 13,241,598 


52


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Interest Margin
Margins were relatively flat during the three months ended September 30, 2020 compared to 2019. Margins decreased during the nine months ended September 30, 2020 compared to 2019 due to spread compression on fixed annuities and unfavorable changes in reserves for indexed annuities due to mark-to-market adjustments in the first quarter this year. 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):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Fixed annuity
Fixed investment income $ 92,020  $ 97,545  $ (5,525) $ 279,175  $ 289,036  $ (9,861)
Interest credited and mortality (64,637) (69,377) 4,740  (195,637) (200,517) 4,880 
Interest and mortality margin 27,383  28,168  (785) 83,538  88,519  (4,981)
Equity-indexed annuity
Fixed investment income 39,634  38,471  1,163  119,685  113,186  6,499 
Option return 31,471  5,667  25,804  (4,352) 85,528  (89,880)
Interest credited and mortality (56,131) (31,063) (25,068) (77,996) (157,517) 79,521 
Interest and mortality margin 14,974  13,075  1,899  37,337  41,197  (3,860)
Variable annuity
Separate account management fees 1,078  1,085  (7) 3,021  3,101  (80)
Interest and mortality margin
1,078  1,085  (7) 3,021  3,101  (80)
Total interest and mortality margin $ 43,435  $ 42,328  $ 1,107  $ 123,896  $ 132,817  $ (8,921)

53


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Health
Health segment financial results for the periods indicated were as follows (in thousands):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
PREMIUMS AND OTHER REVENUES
Premiums $ 40,934  $ 40,676  $ 258  $ 126,965  $ 121,581  $ 5,384 
Net investment income 2,033  2,381  (348) 6,480  7,177  (697)
Other income 4,971  5,021  (50) 15,001  15,940  (939)
Total premiums and other revenues
47,938  48,078  (140) 148,446  144,698  3,748 
BENEFITS, LOSSES AND EXPENSES
Claims incurred 27,933  28,567  (634) 89,544  81,042  8,502 
Commissions for acquiring and servicing policies
7,608  7,405  203  22,792  22,975  (183)
Other operating expenses 10,013  9,504  509  30,118  31,203  (1,085)
Change in deferred policy acquisition costs (1)
(542) 258  (800) (582) 919  (1,501)
Total benefits, losses and expenses 45,012  45,734  (722) 141,872  136,139  5,733 
Income before federal income taxes and other items
$ 2,926  $ 2,344  $ 582  $ 6,574  $ 8,559  $ (1,985)
 (1) A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

Comparison of the three months ended September 30, 2020 to 2019
Earnings for our Health segment increased primarily due to the following:
Lower loss ratio in our Medical Expense block, primarily attributable to the release of reserves for larger claims
Lower loss ratio in our Group insurance line of business, primarily attributable to the receipt of a reinsurer's commutation payment
Favorable reserve changes for legacy long-term care products due to an increase in claim terminations
The increase in earnings was partially offset by:
A decrease in MGU earnings resulting from an increase in our allowance for uncollectible reinsurance receivables
Higher loss ratio in our Supplemental insurance block, primarily driven by increased claim severity on the legacy master cancer plan

Comparison of the nine months ended September 30, 2020 to 2019
Earnings for our Health segment decreased primarily due to the following:
Higher loss ratio in our Supplemental insurance block, primarily driven by increased claim severity on the legacy master cancer plan
A decrease in MGU earnings resulting from an increase in our allowance for uncollectible reinsurance receivables
The decrease in earnings was partially offset by:
Favorable reserve changes for legacy long-term care products due to an increase in claim terminations


54


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Health earned premiums for the periods indicated were as follows (in thousands):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 Change 2020 2019 Change
Medicare Supplement $ 21,137  $ 19,982  $ 1,155  $ 64,336  $ 57,211  $ 7,125 
MGU 4,702  6,358  (1,656) 16,306  21,344  (5,038)
Supplemental insurance 4,417  5,344  (927) 14,152  16,233  (2,081)
Credit Health 3,460  4,492  (1,032) 11,196  13,475  (2,279)
Medical expense 2,075  2,374  (299) 6,468  7,221  (753)
Worksite 3,808  766  3,042  10,800  2,451  8,349 
Group health 505  441  64  1,303  1,426  (123)
All other 830  919  (89) 2,404  2,220  184 
Total $ 40,934  $ 40,676  $ 258  $ 126,965  $ 121,581  $ 5,384 
Increased sales in late 2019 drove premium growth in Medicare Supplement. Similarly, Worksite premium increased due to the addition of a large group. The decline in MGU premium is driven by the completion of prior treaties for a large MGU program that is inactive for 2020.
Health claims incurred for the periods indicated were as follows (in thousands):

  Three months ended September 30, Nine months ended September 30,
  2020 2019 Change 2020 2019 Change
Medicare Supplement $ 15,969  $ 16,096  $ (127) $ 50,695  $ 46,514  $ 4,181 
MGU 5,947  6,029  (82) 15,556  18,790  (3,234)
Supplemental insurance 2,226  2,192  34  8,029  6,464  1,565 
Credit Health 1,072  1,020  52  2,328  2,493  (165)
Medical expense 807  1,665  (858) 5,918  3,950  1,968 
Worksite 2,144  261  1,883  4,898  1,186  3,712 
Group health 23  464  (441) 898  394  504 
All other (255) 840  (1,095) 1,222  1,251  (29)
Total $ 27,933  $ 28,567  $ (634) $ 89,544  $ 81,042  $ 8,502 
Favorable claim experience for the three months ended September 30, 2020 is driven by the aforementioned increase in claim terminations and resulting claim reserve releases in our legacy long-term care products.
Change in Deferred Policy Acquisition Costs
The following table presents the components of the change in DAC (in thousands):

  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Acquisition cost capitalized $ (4,534) $ (1,085) $ (3,449) $ (12,117) $ (7,629) $ (4,488)
Amortization of DAC 3,992  1,343  2,649  11,535  8,548  2,987 
Change in DAC $ (542) $ 258  $ (800) $ (582) $ 919  $ (1,501)

55


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Property and Casualty
Property and Casualty segment financial results for the periods indicated were as follows (in thousands, except percentages):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
PREMIUMS AND OTHER REVENUES
Net premiums written $ 397,780  $ 390,799  $ 6,981  $ 1,211,444  $ 1,180,451  $ 30,993 
Net premiums earned $ 391,388  $ 382,784  $ 8,604  $ 1,152,749  $ 1,125,704  $ 27,045 
Net investment income 16,049  16,357  (308) 48,171  48,085  86 
Other income 3,079  3,137  (58) 9,656  8,689  967 
Total premiums and other revenues
410,516  402,278  8,238  1,210,576  1,182,478  28,098 
BENEFITS, LOSSES AND EXPENSES
Claims incurred 258,412  280,695  (22,283) 768,682  790,447  (21,765)
Commissions for acquiring and servicing policies
72,664  65,893  6,771  225,746  201,635  24,111 
Other operating expenses 48,576  50,111  (1,535) 151,660  151,677  (17)
Change in deferred policy acquisition costs(1)
(901) (636) (265) (7,455) (3,807) (3,648)
Total benefits, losses and expenses
378,751  396,063  (17,312) 1,138,633  1,139,952  (1,319)
Income before federal income taxes and other items $ 31,765  $ 6,215  $ 25,550  $ 71,943  $ 42,526  $ 29,417 
Loss and loss adjustment expense ratio 66.0  % 73.3  % (7.3) % 66.7  % 70.2  % (3.5) %
Underwriting expense ratio 30.7  30.1  0.6  32.1  31.0  1.1 
Combined ratio 96.7  % 103.4  % (6.7) % 98.8  % 101.2  % (2.4) %
Impact of catastrophe events on combined ratio
8.1  9.6  (1.5) 11.5  7.2  4.3 
Combined ratio without impact of catastrophe events 88.6  % 93.8  % (5.2) % 87.3  % 94.0  % (6.7) %
Gross catastrophe losses $ 80,054  $ 36,634  $ 43,420  $ 180,410  $ 80,456  $ 99,954 
Net catastrophe losses $ 27,141  $ 36,796  $ (9,655) $ 127,179  $ 81,005  $ 46,174 
 (1) A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

Comparison of the three months ended September 30, 2020 to 2019
Earnings for our Property and Casualty segment increased primarily due to the following:
An improvement in the combined ratio for our personal auto products attributable to fewer miles driven by policyholders and favorable claim development
Although gross catastrophe losses increased, those losses were partially mitigated through reinsurance coverages which resulted in a decrease in net catastrophe losses

Comparison of the nine months ended September 30, 2020 to 2019
Earnings for our Property and Casualty segment increased primarily due to the following:
An improvement in the combined ratio for our personal auto products attributable to fewer miles driven by policyholders and favorable claim development
The increase in earnings was partially offset by the following:
Significantly higher catastrophe losses, having the greatest impact on our homeowners loss ratio

Additional information:
Net premiums written and earned for the first nine months were reduced by COVID-19 relief policy credits for auto policyholders totaling $17.7 million; $16.8 million for personal auto policies and $0.9 million for commercial auto policies. The policy credits were based on 10%-15% of monthly premiums
The increase in commissions expense for the third quarter and first nine months was primarily due to the increase in premiums written and an increase in contingent commissions due to the improvement in the loss ratios for the Specialty Markets Group products
56


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Products
Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 55% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 31% of net premiums written; and (iii) Specialty Markets Group products, marketed through independent managing general agents and managing general underwriters, representing 14% of net premiums written.

Personal Products
Personal Products results for the periods indicated were as follows (in thousands, except percentages):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Net premiums written
Automobile $ 142,702  $ 145,574  $ (2,872) $ 408,509  $ 432,796  $ (24,287)
Homeowner 77,267  71,718  5,549  215,854  197,055  18,799 
Other Personal 13,668  13,515  153  40,032  39,113  919 
Total net premiums written $ 233,637  $ 230,807  $ 2,830  $ 664,395  $ 668,964  $ (4,569)
Net premiums earned
Automobile $ 139,155  $ 142,474  $ (3,319) $ 397,088  $ 419,666  $ (22,578)
Homeowner 66,472  63,508  2,964  200,354  185,177  15,177 
Other Personal 13,142  12,487  655  37,922  36,513  1,409 
Total net premiums earned $ 218,769  $ 218,469  $ 300  $ 635,364  $ 641,356  $ (5,992)
Loss and loss adjustment expense ratio
Automobile 57.9  % 72.7  % (14.8) % 58.6  % 71.9  % (13.3) %
Homeowner 101.3  % 110.0  % (8.7) % 102.0  % 89.0  % 13.0  %
Other Personal 51.6  % 59.1  % (7.5) % 63.0  % 59.6  % 3.4  %
Personal line loss and loss adjustment expense ratio 70.7  % 82.8  % (12.1) % 72.6  % 76.2  % (3.6) %
Combined Ratio
Automobile 79.1  % 95.3  % (16.2) % 82.9  % 95.0  % (12.1) %
Homeowner 132.4  % 139.7  % (7.3) % 133.3  % 120.4  % 12.9  %
Other Personal 79.2  % 103.2  % (24.0) % 95.1  % 104.2  % (9.1) %
Personal line combined ratio 95.3  % 108.6  % (13.3) % 99.5  % 102.9  % (3.4) %

Comparison of 2020 to 2019

Automobile: COVID-19 relief policy credits decreased net premiums written and earned for the third quarter by $0.7 million and first nine months by $16.8 million, as previously discussed, as well as exposure changes primarily caused by fewer miles driven due to the impact of COVID-19. The loss and loss adjustment expense and combined ratios improved for the third quarter and first nine months due to a decrease in loss and loss adjustment expenses incurred, largely attributable to fewer miles driven by policyholders due to shelter-in-place orders and favorable claim development.

Homeowners: Net premiums written and earned increased for the third quarter and first nine months primarily due to rate increases. The loss and loss adjustment expense and combined ratios improved for the third quarter due to decreased catastrophe losses and increased for the first nine months due to increased catastrophe losses due to multiple wind and hail storms. Catastrophe losses decreased by $10.7 million, to $18.6 million from $29.1 million in the third quarter and increased by $27.7 million, to $83.3 million from $55.6 million in the first nine months in 2020 compared to 2019.

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. The loss and loss adjustment expense and combined ratios improved for the third quarter due to decreased catastrophe losses. For the first nine months, the loss and loss adjustment ratio increased due to the increase in non-catastrophe losses incurred and the combined ratio decreased due to decreased commissions and operating expenses.



57


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)


Commercial Products
Commercial Products results for the periods indicated were as follows (in thousands, except percentages):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Net premiums written
Agricultural Business $ 40,201  $ 38,783  $ 1,418  $ 127,679  $ 120,080  $ 7,599 
Automobile 27,700  27,925  (225) 102,078  97,059  5,019 
Business Owner 17,893  16,685  1,208  62,674  56,295  6,379 
Workers Compensation 12,935  14,414  (1,479) 56,202  60,000  (3,798)
Other Commercial 7,920  8,681  (761) 26,664  28,808  (2,144)
Total net premiums written $ 106,649  $ 106,488  $ 161  $ 375,297  $ 362,242  $ 13,055 
Net premiums earned
Agricultural Business $ 40,145  $ 38,038  $ 2,107  $ 119,605  $ 112,044  $ 7,561 
Automobile 32,492  29,495  2,997  93,790  85,510  8,280 
Business Owner 19,498  17,918  1,580  56,935  51,110  5,825 
Workers Compensation 17,634  19,137  (1,503) 52,709  56,542  (3,833)
Other Commercial 8,310  8,993  (683) 24,704  26,476  (1,772)
Total net premiums earned $ 118,079  $ 113,581  $ 4,498  $ 347,743  $ 331,682  $ 16,061 
Loss and loss adjustment expense ratio
Agricultural Business 47.8  % 64.7  % (16.9) % 56.3  % 72.5  % (16.2) %
Automobile 84.9  % 82.9  % 2.0  % 73.1  % 79.7  % (6.6) %
Business Owner 81.5  % 50.1  % 31.4  % 85.9  % 55.7  % 30.2  %
Workers Compensation 63.5  % 57.7  % 5.8  % 60.5  % 48.3  % 12.2  %
Other Commercial 67.8  % 34.8  % 33.0  % 62.9  % 43.4  % 19.5  %
Commercial line loss and loss adjustment expense ratio
67.3  % 63.6  % 3.7  % 66.8  % 65.4  % 1.4  %
Combined ratio
Agricultural Business 85.6  % 100.6  % (15.0) % 93.8  % 109.3  % (15.5) %
Automobile 105.7  % 107.8  % (2.1) % 95.7  % 104.6  % (8.9) %
Business Owner 115.9  % 88.6  % 27.3  % 120.8  % 94.8  % 26.0  %
Workers Compensation 79.6  % 74.3  % 5.3  % 77.7  % 66.2  % 11.5  %
Other Commercial 106.9  % 76.9  % 30.0  % 102.8  % 85.9  % 16.9  %
Commercial line combined ratio 96.7  % 94.3  % 2.4  % 96.9  % 96.6  % 0.3  %

Comparison of 2020 to 2019

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 for the third quarter and first nine months primarily due to rate increases and an increase in policies in-force. The loss and loss adjustment expense and combined ratios improved for the third quarter and first nine months primarily due to fewer claims as well as favorable prior year severity development.
Commercial Automobile: Net premiums written and earned increased for the third quarter and first nine months and net premiums written increased for the first nine months primarily due to rate increases and an increase in policies in-force. The loss and loss adjustment expense ratio increased for the third quarter primarily due to an increase in allocated loss adjustment expense reserves. The combined ratio improved for the third quarter primarily due to improvement in the expense ratio. The loss and loss adjustment expense and combined ratios improved for the first nine months primarily due to a decrease in claim frequency as policyholders drove fewer miles due to shelter-in-place orders.
Business Owner: Our business owner product allows policyholders to customize and cover their property and liability exposures using a package policy. Net premiums written and earned increased for the third quarter and first nine months primarily due to rate increases and an increase in policies in-force. The loss and loss adjustment expense and combined ratios increased for the third quarter and first nine months primarily due to unfavorable prior year claim development.
58


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Workers Compensation: Net premiums written and earned decreased for the third quarter and first nine months primarily due to rate decreases. The loss and loss adjustment expense and combined ratios increased for the third quarter primarily due to the severity of claims and increased for the first nine months primarily due to an increase in the severity of claims and an increase in allocated loss adjustment expense reserves.
Other Commercial: Other commercial products primarily provide umbrella and other liability coverages. Net premiums written and earned decreased for the third quarter and first nine months primarily due to an increase in ceded premiums for reinsurance coverage. The loss and loss adjustment expense and combined ratios increased for the third quarter and the first nine months primarily due to an increase in claim severity and frequency.

Specialty Markets Products
Specialty Markets product results for the periods indicated were as follows (in thousands, except percentages):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
Net premiums written $ 57,494  $ 53,505  $ 3,989  $ 171,752  $ 149,245  $ 22,507 
Net premiums earned 54,539  50,736  3,803  169,641  152,666  16,975 
Loss and loss adjustment expense ratio(1)
44.5  % 54.4  % (9.9) % 44.5  % 55.8  % (11.3) %
Combined ratio(1)
102.6  % 101.7  % 0.9  % 99.8  % 104.6  % (4.8) %
(1) Ratio does not include fee income

Specialty Markets products provide protection to borrowers and the creditors that extend credit to them. Products offer coverage against unpaid indebtedness as a result of death, disability, involuntary unemployment or untimely loss to the collateral securing a personal or mortgage loan. Specialty Markets products also include renters, aviation, and private flood insurance.

Net written and earned premiums increased for the third quarter and first nine months primarily due to the addition of new accounts for Mortgage Security Insurance (“MSI”), Collateral Protection Insurance, and Investor Property Protection (“IPP”) products. The loss and loss adjustment expense and combined ratios decreased for the third quarter and first nine months primarily due to the improvement of loss ratios on Guaranteed Asset Protection (“GAP”) products and IPP.
59


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Corporate and Other
Corporate and Other segment financial results for the periods indicated were as follows (in thousands):
  Three months ended September 30,   Nine months ended September 30,  
  2020 2019 Change 2020 2019 Change
OTHER REVENUES
Net investment income $ 3,814  $ 24,237  $ (20,423) $ 19,274  $ 59,051  $ (39,777)
Realized investment gains 17,387  31,933  (14,546) 25,474  24,975  499 
Change in investment credit loss (4,175) —  (4,175) (101,163) —  (101,163)
Net gains on equity securities 152,147  8,589  143,558  118,397  282,026  (163,629)
Other income 542  1,478  (936) 2,795  4,511  (1,716)
Total other revenues 169,715  66,237  103,478  64,777  370,563  (305,786)
BENEFITS, LOSSES AND EXPENSES
Other operating expenses 10,629  9,750  879  30,936  28,158  2,778 
Total benefits, losses and expenses
10,629  9,750  879  30,936  28,158  2,778 
Income before federal income taxes and other items $ 159,086  $ 56,487  $ 102,599  $ 33,841  $ 342,405  $ (308,564)

Comparison of the three months ended September 30, 2020 to 2019
Earnings for our Corporate and Other segment increased primarily due to the following:
An increase in the S&P 500 Index of 8.5% for the three months ended September 30, 2020 compared to a 1.2% increase for the same period in 2019 resulting in an increase in net gains on equity securities
The increase in earnings was partially offset by the following:
A decrease in net investment income driven by bonds, mortgage loans and real estate
A decrease in realized investment gains from sales of investments in real estate related joint ventures

Comparison of the nine months ended September 30, 2020 to 2019
Earnings for our Corporate and Other segment decreased primarily due to the following:
An increase in the S&P 500 index of 4.1% compared to an increase of 18.7% during the same period in 2019
The change in investment credit loss due to economic disruptions caused by COVID-19
A decrease in net investment income driven by bonds, mortgage loans and real estate


60


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Investments
We manage our investment portfolio to optimize the rate of return commensurate with sound and prudent asset selection and to maintain a well-diversified portfolio in support of our products and capital. Our investment operations are regulated primarily by the state insurance departments where our insurance companies are domiciled. Investment activities, including setting investment policies and defining acceptable risk levels, are subject to oversight by our Board of Directors, which is assisted by our Finance Committee and Enterprise Risk Management Committee.
Our insurance and annuity products are generally supported by investment-grade bonds and commercial mortgage loans. We also invest in equity options as a hedge for our indexed products. We purchase fixed maturity securities and designate them as either held-to-maturity or available-for-sale considering our estimated future cash flow needs. We also monitor the composition of our fixed maturity securities classified as held-to-maturity and available-for-sale and adjust the mix within the portfolio as investments mature or new investments are purchased.
We invest in commercial mortgage loans when the yield and credit risk compare favorably with fixed maturity securities. Individual residential mortgage loans including sub-prime or Alt-A mortgage loans have not been and are not expected to be part of our investment portfolio. We purchase real estate and equity investments based on a risk and reward analysis where we believe there are opportunities for enhanced returns.
The following summarizes the carrying values of our invested assets (other than investments in unconsolidated affiliates) by asset class (in thousands, except percentages):
  September 30, 2020 December 31, 2019
Fixed maturity, bond held-to-maturity, at amortized cost $ 7,702,347  32.4  % $ 8,631,261  36.6  %
Fixed maturity, bond available-for-sale, at fair value 7,236,188  30.5  6,725,085  28.5 
Equity securities, at fair value 1,840,855  7.8  1,700,960  7.2 
Mortgage loans on real estate, net of allowance 5,176,474  21.8  5,097,017  21.6 
Policy loans 374,387  1.6  379,657  1.6 
Investment real estate, net of accumulated depreciation
514,076  2.2  551,219  2.3 
Short-term investments 800,793  3.4  425,321  1.8 
Other invested assets 103,030  0.3  76,569  0.4 
Total investments $ 23,748,150  100.0  % $ 23,587,089  100.0  %
The increase in our total investments at September 30, 2020 compared to year-end 2019 was primarily the result of increases in bonds available-for-sale, short term investments, and other invested assets. These increases were somewhat offset by a decrease in bonds held-to-maturity.

Bonds—We allocate most of our fixed maturity securities to support our insurance business. At September 30, 2020, our fixed maturity securities had an estimated fair value of $15.5 billion, which was $1.0 billion, or 6.8% higher than the amortized cost for the period. 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. The estimated fair value for securities due in one year or less was $1.2 billion as of September 30, 2020 and December 31, 2019. For additional information regarding total bonds by credit quality rating refer to Note 4, Investments in Securities, of the Notes to the Unaudited Condensed 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 Unaudited Condensed Consolidated Financial Statements for the unrealized and realized gains and losses of equity securities.
Mortgage Loans—We invest in commercial mortgage loans that are diversified by property-type and geography. Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. Mortgage loans are generally carried at outstanding principal balances, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of allowances. The weighted average coupon yield on the principal funded for mortgage loans was 4.8% at September 30, 2020 and December 31, 2019, respectively. For additional information regarding mortgage loans refer to Note 5, Mortgage Loans, of the Notes to the Unaudited Condensed Consolidated Financial Statements.

61


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

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 September 30, 2020, we had $374.4 million in policy loans with a loan to surrender value of 55%, and at December 31, 2019, we had $379.7 million in policy loans with a loan to surrender value of approximately 56%. 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.

Investment Real Estate—We invest in commercial real estate where positive cash flows and/or appreciation in value is expected. Real estate may be owned directly by our insurance companies or non-insurance affiliates or indirectly in joint ventures with real estate developers or investors we determine share our perspective regarding risk and return relationships. The carrying value of real estate is stated at cost, less accumulated depreciation and impairments, if any. Depreciation is provided over the estimated useful lives of the properties.
Short-Term Investments—Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor’s and Moody’s, respectively. The amount fluctuates depending on our view of the desirability of investing in the available long-term investment opportunities and our liquidity needs, including mortgage investment-funding commitments.
Other Invested Assets—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. Investments in separately managed accounts and Federal Home Loan Bank stock are also included in other invested assets and are carried at cost or market value if available from the account manager.
Net Investment Income and Net Realized Gains (Losses)
Net investment income decreased $139.8 million during the nine months ended September 30, 2020 compared to 2019 primarily due to losses on options from a decline in the S&P 500 Index.
Interest income on mortgage loans is accrued on the principal amount of the loan at the contractual interest rate. Accretion of discounts is recorded using the effective yield method. Interest income, accretion of discounts and prepayment fees are reported in net investment income. Interest is not accrued on loans generally more than 90 days past due or when the collection of interest is not considered probable. Loans in foreclosure are placed on nonaccrual status. Interest received on nonaccrual status mortgage loans is included in net investment income in the period received.
Net realized investment gains decreased $6.5 million during the nine months ended September 30, 2020 compared to 2019 primarily attributable to decreased sales of real estate. Net realized investment gains (losses) are shown below (in thousands):
  Three months ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
Bonds $ 6,117  $ 6,075  $ 15,547  $ 11,288 
Mortgage loans —  (2,097) —  (2,186)
Real estate 11,265  27,388  9,951  24,502 
Other invested assets 567  (24) (1,661)
Total $ 17,387  $ 31,933  $ 25,474  $ 31,943 



62


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Net Unrealized Gains and Losses
The unrealized gains and losses of our fixed maturity securities investment portfolio are shown below (in thousands):
September 30, 2020 December 31, 2019 Change
Held-to-Maturity
Gains $ 582,282  $ 345,463  $ 236,819 
Losses (36,018) (8,034) (27,984)
Net gains 546,264  337,429  208,835 
Available-for-Sale
Gains 484,782  302,426  182,356 
Losses (35,322) (13,011) (22,311)
Net gains 449,460  289,415  160,045 
Total $ 995,724  $ 626,844  $ 368,880 
The net change in the unrealized gains on fixed maturity securities between September 30, 2020 and December 31, 2019 is primarily attributable to the decrease in benchmark ten-year interest rates, which were 0.7% and 1.9% respectively. The Company does not expect to be required to sell any of the securities in an unrealized loss position.

Liquidity

As a result of the holding company reorganization, ANICO became a wholly owned subsidiary of ANAT. ANAT's source of liquidity is solely derived from dividends received from ANICO.
In April 2020, the Company borrowed $500 million from the Federal Home Loan Bank of Dallas' COVID-19 Relief Advance Program. One advance was approximately $240 million after a required capital stock purchase of approximately $10 million. The loan has an interest rate of 0.25%. The Company paid this advance in full on its maturity date of October 13, 2020.
We are monitoring our liquidity needs closely. Should the Company require additional liquidity, deposits of certain securities and mortgage loans under the Company's membership with the FHLB provide approximately $816 million of additional available credit to us as of October 28, 2020.
As a result of the impacts of COVID-19, state insurance departments across the country had issued regulations that required us not to cancel policies for non-payment for varying amounts of time but generally for at least 90-day periods which began in March and early April 2020. The cancellation and grace periods have been lifted in most states. At this time, however, our liquidity requirements have been and are expected to continue to be met by funds from operations.
The primary use of cash has been and is expected to continue to be payment of policyholder benefits and claims incurred. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management currently considers our current liquidity position to be sufficient to meet anticipated demands over the next twelve months. Our contractual obligations are not expected to have a significant negative impact to cash flows from operations.

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.

We are currently evaluating the renovation and modernization of our home office facilities. This could result in capital expenditures that could aggregate to approximately $100 million over a three year period beginning in 2021. To date, the economic disruption relating to the COVID-19 pandemic has not caused the Company to lower or delay anticipated spending on capital investment projects. There are no other unusually large capital expenditures expected in the next 12-24 months.

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, although disruptions relating to the COVID-19 pandemic could still significantly impact one or more of these items.
63


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

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. While our investment portfolio has been significantly impacted by volatility associated with COVID-19, and likely will continue to be, at this time, we believe our portfolio of highly liquid bonds available-for-sale, including equity securities, is sufficient to meet future liquidity needs as necessary.
As a result of the economic disruption caused by COVID-19, we modified 92 loans with a total balance of $1.6 billion. These modifications primarily related to hotels, retail and parking operations. The terms of the modifications of these loans include forbearance of principal and interest payments for a period of up to six months, extensions of maturity dates, and/or provision of interest only payments.
The Company holds collateral of $210.6 million at September 30, 2020 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 $877.3 million at December 31, 2019 to $1.7 billion at September 30, 2020. The increase in liquidity primarily relates to an increase in money market accounts due to the decline in bond purchases.
A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flows from operations.
Further information regarding additional sources or uses of cash is described in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Capital Resources
Our capital resources are summarized below (in thousands):
September 30, 2020 December 31, 2019
American National stockholders’ equity, excluding accumulated other comprehensive income (“AOCI”), net of tax $ 5,951,801  $ 5,890,231 
Accumulated other comprehensive income 194,706  99,518 
Total American National stockholders’ equity $ 6,146,507  $ 5,989,749 
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 $3.1 million and $4.3 million at September 30, 2020 and December 31, 2019, respectively.
The changes in our capital resources are summarized below (in thousands):
  September 30, 2020 December 31, 2019
Capital and
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total Capital and
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Net income attributable to American National $ 161,153  $ —  $ 161,153  $ 620,363  $ —  $ 620,363 
Dividends to shareholders (66,140) —  (66,140) (88,243) —  (88,243)
Change in net unrealized gains on debt securities —  89,946  89,946  —  184,156  184,156 
Foreign currency transaction and translation adjustment —  (214) (214) —  390  390 
Defined benefit pension plan adjustment —  5,456  5,456  —  15,495  15,495 
Cumulative effect of accounting change (33,503) —  (33,503) 785  (785) — 
Other 60  —  60  340  —  340 
Total $ 61,570  $ 95,188  $ 156,758  $ 533,245  $ 199,256  $ 732,501 

64


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Statutory Capital and Surplus and Risk-based Capital
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 September 30, 2020 and December 31, 2019, American National Insurance Company’s statutory capital and surplus was $3,488,293,000 and $3,477,727,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at September 30, 2020 and December 31, 2019 above 200% of the authorized control level.
The achievement of long-term growth will require growth in American National Insurance Company’s and our other insurance subsidiaries’ statutory capital and surplus. Our subsidiaries may obtain additional statutory capital through various sources, such as retained statutory earnings or equity contributions from us.
Contractual Obligations
Our future cash payments associated with claims and claims adjustment expenses, life, annuity and disability obligations, contractual obligations pursuant to operating leases for office space and equipment, and notes payable have not materially changed since December 31, 2019. We expect to have the capacity to pay our obligations as they come due.
At September 30, 2020, the Company had $500 million in outstanding advances with Federal Home Loan Bank. On October 13, 2020, one of these advances totaling $250 million had been paid in full. It is expected the Company will have sufficient cash flow to meet its current lending commitments. For additional details see Note 16, Commitments and Contingencies, and Note 18, Subsequent Events, of the Notes to the Unaudited Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We have off-balance sheet arrangements relating to third-party marketing operation bank loans as discussed in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Condensed 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.
Related-Party Transactions
We have various agency, consulting and service arrangements with individuals and entities considered to be related parties. Each of these arrangements has been reviewed and approved by our Audit Committee, which retains final decision-making authority for these transactions. The amounts involved, both individually and in the aggregate, with these arrangements are not material to any segment or to our overall operations. For additional details regarding significant related party transactions, see Note 17, Related Party Transactions, of the Notes to the Unaudited Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk has not changed materially from those disclosed in our 2019 Annual Report on form 10-K filed with the SEC on February 28, 2020, although the recent economic disruptions caused by the COVID-19 pandemic has added greater uncertainty to the credit risk and equity risk that we face.

65

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2020. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Management has monitored the internal controls over financial reporting, including any material changes to the internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
Information required for Item 1 is incorporated by reference to the discussion under the heading “Litigation” in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Condensed Consolidated Financial Statements.

ITEM 1A. RISK FACTORS
There have been no material changes to the "Risk Factors" discussion in Item 1A of our 2019 Form 10-K filed with the SEC on February 28, 2020, as supplemented by the "Risk Factors" discussion in Part II, Item 1A of our Form 10-Q for the period ending June 30, 2020, filed with the SEC on August 5, 2020.






66


ITEM 6. EXHIBITS

Exhibit Number Description
3.1
3.2
3.3
3.4
10.11
31.1
31.2
32.1
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
104 Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

*Management contract or compensatory plan or arrangement.















67


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
By:   /s/ James E. Pozzi
Name:   James E. Pozzi
Title:   President and Chief Executive Officer
By:   /s/ Timothy A. Walsh
Name:   Timothy A.Walsh
Title:   Executive Vice President, CFO, Treasurer and ML and P&C Operations
Date: November 4, 2020

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