anat-20200930

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


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-39369

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.

Table of Contents

AMERICAN NATIONAL GROUP, INC.

TABLE OF CONTENTS



	PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS:

	Condensed Consolidated Statements of Financial Position as of September 30, 2020 and December 31, 2019 (unaudited)	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	5

	Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)	8

	Notes to the Condensed Consolidated Financial Statements (unaudited)	10

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	41

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	65

ITEM 4.	CONTROLS AND PROCEDURES	66

	PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	66

ITEM 1A.	RISK FACTORS	66









ITEM 6.	EXHIBITS	67

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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.

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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.

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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.

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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.

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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	—		—		—		—		—		3		3
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.

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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)

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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.

Table of Contents

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.

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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)

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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.

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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

Table of Contents

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

Table of Contents

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	$	(1)	$	2,868	—	$	—	$	—	1	$	(1)	$	2,868
U.S. states and political subdivisions	2	(37)		5,484		—	—		—		2	(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	1	(70)		7,000		3	—		613		4	(70)		7,613
Collateralized debt securities	1	(62)		8,008		1	(2)		157		2	(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	$	(5)	$	8,299	5	$	(5)	$	8,299
U.S. states and political subdivisions	2	(9)		1,733		—	—		—		2	(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	1	(9)		10,169		3	(192)		722		4	(201)		10,891
Collateralized debt securities	1	(1)		159		—	—		—		1	(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	%

Table of Contents

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	1		(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		3		(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)

Table of Contents

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	7		—		3		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.

Table of Contents

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

Table of Contents

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	7	$	76,201	$	76,201	1	$	9,271	$	9,271
Retail	6	79,911		79,911		2	41,354		41,354
Industrial	2	11,473		11,473		—	—		—
Hotel	34	811,007		811,007		—	—		—
Parking	13	168,740		168,740		—	—		—
Other	5	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)

Table of Contents

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.

Table of Contents

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

Table of Contents

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.

Table of Contents

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

Table of Contents

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	5		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)

Table of Contents

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.

Table of Contents

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.

Table of Contents

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%

Table of Contents

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

Table of Contents

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	6		—		3,663		—		4		—		(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.

Table of Contents

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.

Table of Contents

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

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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.

Table of Contents

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

Table of Contents

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.

Table of Contents

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

Table of Contents

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.

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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

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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

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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.

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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	—		—		—		9		—		—
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.

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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;

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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.

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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.

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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.

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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.

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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.

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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

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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

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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.

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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

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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.

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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

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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)

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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

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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)

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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

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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.

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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.

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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.

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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

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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.

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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	5		567		(24)		(1,661)
Total	$	17,387	$	31,933	$	25,474	$	31,943

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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.

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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

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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.

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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 II – OTHER 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.

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ITEM 6.						EXHIBITS


Exhibit Number						Description

3.1						Amended and Restated Certificate of Incorporation of American National Group. Inc. (incorporated by reference to Annex II of the Proxy Statement/Prospectus filed with the SEC on March 25, 2020).

3.2						Restated Articles of Incorporation, as amended, of American National Insurance Company (incorporated by reference to Exhibit No. 3.1 to the registrant's Registration Statement on Form 10-12B filed April 10, 2009).

3.3						Amended and Restated Bylaws of American National Group, Inc. (incorporated by reference to Annex III of the Proxy Statement/Prospectus filed with the SEC on March 25, 2020)

3.4						Amended and Restated Bylaws of American National Insurance Company (incorporated by reference to Exhibit No. 3.2 to the registrant's Current Report on Form 8-K filed February 23, 2018).

10.11						Form of Restricted Stock Unit Agreement for Directors (filed herewith).*

31.1						Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2						Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1						Certification of the principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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.

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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