Edgar Filing: AMERICAN NATIONAL INSURANCE CO /TX/

Large accelerated filer

Smaller reporting company

Non-accelerated filer

Accelerated filer

Emerging growth company

10-Q

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 March 31, 2018

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

Commission File No. 001- 34280

LOGO

American National Insurance Company

(Exact name of registrant as specified in its charter)

Texas

74-0484030

(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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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:

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 May 01, 2018, there were 26,885,449 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS


	PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS (Unaudited):

	Consolidated Statements of Financial Position as of March 31, 2018 and December 31, 2017	3

	Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	4

	Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2017	5

	Consolidated Statements of Changes in Equity for the three months ended March 31, 2018 and 2017	5

	Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	6

	Notes to the Unaudited Consolidated Financial Statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	36

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	54

ITEM 4.	CONTROLS AND PROCEDURES	55

	PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	55

ITEM 1A.	RISK FACTORS	55

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	55

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	55

ITEM 4.	MINE SAFETY DISCLOSURES	55

ITEM 5.	OTHER INFORMATION	55

ITEM 6.	EXHIBIT INDEX	56

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited and in thousands, except share data)


	March 31, 2018			December 31, 2017
ASSETS
Fixed maturity, bonds held-to-maturity, at amortized cost (Fair value $7,963,724 and $7,774,353)	$	7,915,973		$	7,552,959
Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $6,100,771 and $5,957,901)		6,145,010			6,145,308
Equity securities, at fair value (Cost $776,740 and $757,583)		1,770,753			1,784,226
Mortgage loans on real estate, net of allowance		4,920,041			4,749,999
Policy loans		374,930			377,103
Investment real estate, net of accumulated depreciation of $264,345 and $260,904		536,699			532,346
Short-term investments		284,456			658,765
Other invested assets		82,722			80,165

Total investments		22,030,584			21,880,871

Cash and cash equivalents		329,036			375,837
Investments in unconsolidated affiliates		493,191			484,207
Accrued investment income		193,776			187,670
Reinsurance recoverables		412,805			418,589
Prepaid reinsurance premiums		61,993			63,625
Premiums due and other receivables		329,592			314,345
Deferred policy acquisition costs		1,410,864			1,373,844
Property and equipment, net of accumulated depreciation of $223,034 and $217,076		114,062			115,818
Current tax receivable		6,949			44,170
Other assets		141,420			158,024
Separate account assets		939,605			969,764

Total assets	$	26,463,877		$	26,386,764

LIABILITIES
Future policy benefits
Life	$	3,002,178		$	2,997,353
Annuity		1,435,323			1,400,150
Accident and health		55,940			57,104
Policyholders’ account balances		12,238,653			12,060,045
Policy and contract claims		1,375,793			1,390,561
Unearned premium reserve		898,117			875,294
Other policyholder funds		325,348			334,501
Liability for retirement benefits		111,028			114,538
Notes payable		137,389			137,458
Deferred tax liabilities, net		294,071			316,370
Other liabilities		428,922			477,855
Separate account liabilities		939,605			969,764

Total liabilities		21,242,367			21,130,993

EQUITY
American National stockholders’ equity:
Common stock, $1.00 par value,—Authorized 50,000,000,
Issued 30,832,449 and 30,832,449
Outstanding 26,938,341 and 26,931,884 shares		30,832			30,832
Additional paid-in capital		20,069			19,193
Accumulated other comprehensive income (loss)		(86,070	)		642,216
Retained earnings		5,350,129			4,656,134
Treasury stock, at cost		(101,546	)		(101,616	)

Total American National stockholders’ equity		5,213,414			5,246,759
Noncontrolling interest		8,096			9,012

Total equity		5,221,510			5,255,771

Total liabilities and equity	$	26,463,877		$	26,386,764

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except share and per share data)


	Three months ended March 31,
	2018			2017
PREMIUMS AND OTHER REVENUE
Premiums
Life	$	81,376		$	77,474
Annuity		70,616			29,809
Accident and health		41,015			37,039
Property and casualty		351,973			327,450
Other policy revenues		71,339			63,452
Net investment income		176,039			228,503
Net realized investment gains		2,099			14,008
Other-than-temporary impairments		(1,595	)		(6,783	)
Other income		10,513			8,845

Total premiums and other revenues		803,375			779,797

BENEFITS, LOSSES AND EXPENSES
Policyholder benefits
Life		98,546			101,166
Annuity		84,746			43,989
Claims incurred
Accident and health		28,140			24,380
Property and casualty		242,490			227,530
Interest credited to policyholders’ account balances		70,545			96,008
Commissions for acquiring and servicing policies		144,696			125,492
Other operating expenses		130,394			126,061
Change in deferred policy acquisition costs		(16,966	)		(9,487	)

Total benefits, losses and expenses		782,591			735,139

Income before federal income tax and other items		20,784			44,658

Less: Provision (benefit) for federal income taxes
Current		(2,105	)		(1,204	)
Deferred		3,294			14,939

Total provision for federal income taxes		1,189			13,735

Income after federal income tax		19,595			30,923

Equity in earnings (losses) of unconsolidated affiliates		(545	)		9,500
Other components of net periodic pension costs, net of tax		(792	)		(1,232	)

Net income		18,258			39,191
Less : Net loss attributable to noncontrolling interest, net of tax		(519	)		(649	)

Net income attributable to American National	$	18,777		$	39,840

Amounts available to American National common stockholders
Earnings per share
Basic	$	0.70		$	1.48
Diluted		0.70			1.48
Cash dividends to common stockholders		0.82			0.82
Weighted average common shares outstanding		26,889,151			26,899,648
Weighted average common shares outstanding and dilutive potential common shares		26,964,355			26,972,128

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)


	Three months ended March 31,
	2018			2017
Net income	$	18,258		$	39,191

Other comprehensive income (loss), net of tax
Change in net unrealized gains (losses) on securities		(91,333	)		55,912
Foreign currency transaction and translation adjustments		(366	)		112
Defined benefit pension plan adjustment		789			1,534

Other comprehensive income (loss), net of tax		(90,910	)		57,558

Total comprehensive income (loss)		(72,652	)		96,749
Less: Comprehensive loss attributable to noncontrolling interest		(519	)		(649	)

Total comprehensive income (loss) attributable to American National	$	(72,133	)	$	97,398

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited and in thousands)


	Three months ended March 31,
	2018			2017
Common Stock
Balance at beginning and end of the period	$	30,832		$	30,832

Additional Paid-In Capital
Balance as of January 1,		19,193			16,406
Reissuance of treasury shares		675			1,379
Amortization of restricted stock		201			207

Balance at end of the period		20,069			17,992

Accumulated Other Comprehensive Income (Loss)
Balance as of January 1,		642,216			455,899
Cumulative effect of accounting change		(637,376	)		—
Other comprehensive income (loss)		(90,910	)		57,558

Balance at end of the period		(86,070	)		513,457

Retained Earnings
Balance as of January 1,		4,656,134			4,250,818
Cumulative effect of accounting changes		697,307			—
Net income attributable to American National		18,777			39,840
Cash dividends to common stockholders		(22,089	)		(22,080	)

Balance at end of the period		5,350,129			4,268,578

Treasury Stock
Balance as of January 1,		(101,616	)		(101,777	)
Reissuance of treasury shares		70			182

Balance at end of the period		(101,546	)		(101,595	)

Noncontrolling Interest
Balance as of January 1,		9,012			9,317
Contributions		—			224
Distributions		(397	)		(246	)
Net loss attributable to noncontrolling interest		(519	)		(649	)

Balance at end of the period		8,096			8,646

Total Equity	$	5,221,510		$	4,737,910

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)


	Three months ended March 31,
	2018			2017
OPERATING ACTIVITIES
Net income	$	18,258		$	39,191
Adjustments to reconcile net income to net cash provided by operating activities
Net realized investment gains		(2,099	)		(14,008	)
Other-than-temporary impairments		1,595			6,783
Accretion of premiums, discounts and loan origination fees		(2,325	)		(2,661	)
Net capitalized interest on policy loans and mortgage loans		(10,808	)		(8,368	)
Depreciation		12,992			14,981
Interest credited to policyholders’ account balances		70,545			96,008
Charges to policyholders’ account balances		(71,339	)		(63,452	)
Deferred federal income tax expense		3,294			14,939
Equity in (earnings) losses of unconsolidated affiliates		545			(9,500	)
Distributions from equity method investments		245			410
Changes in
Policyholder liabilities		44,688			39,136
Deferred policy acquisition costs		(16,966	)		(9,487	)
Reinsurance recoverables		5,784			29,163
Premiums due and other receivables		(15,247	)		(16,257	)
Prepaid reinsurance premiums		1,632			239
Accrued investment income		(6,106	)		18
Current tax receivable/payable		37,221			(3,260	)
Liability for retirement benefits		(2,511	)		(3,366	)
Fair value of option securities		14,166			(23,034	)
Fair value of equity securities		32,630			—
Other, net		3,882			22,604

Net cash provided by operating activities		120,076			110,079

INVESTING ACTIVITIES
Proceeds from sale/maturity/prepayment of
Held-to-maturity securities		152,587			203,445
Available-for-sale securities		136,481			118,007
Investment real estate		4,264			3,911
Mortgage loans		89,936			104,007
Policy loans		16,893			12,885
Other invested assets		20,527			14,404
Disposals of property and equipment		—			1,408
Distributions from unconsolidated affiliates		6,461			2,639
Payment for the purchase/origination of
Held-to-maturity securities		(529,876	)		(28,356	)
Available-for-sale securities		(258,285	)		(138,132	)
Investment real estate		(16,052	)		(7,829	)
Mortgage loans		(247,555	)		(212,561	)
Policy loans		(5,976	)		(6,201	)
Other invested assets		(20,128	)		(7,577	)
Additions to property and equipment		(4,232	)		(10,588	)
Contributions to unconsolidated affiliates		(20,926	)		(14,748	)
Change in short-term investments		374,309			(219,723	)
Change in collateral held for derivatives		(17,093	)		14,062
Other, net		(5,058	)		15,649

Net cash used in investing activities		(323,723	)		(155,298	)

FINANCING ACTIVITIES
Policyholders’ account deposits		461,788			393,369
Policyholders’ account withdrawals		(282,386	)		(322,746	)
Change in notes payable		(70	)		3,593
Dividends to stockholders		(22,089	)		(22,080	)
Payments to noncontrolling interest		(397	)		(22	)

Net cash provided by financing activities		156,846			52,114

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(46,801	)		6,895
Beginning of the period		375,837			289,338

End of the period	$	329,036		$	296,233

See accompanying notes to the unaudited consolidated financial statements.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Operations

American National Insurance Company and its consolidated subsidiaries (collectively “American National” or “the Company”) offer a broad spectrum 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 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, 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 consolidated financial statements and notes herein are unaudited and reflect all adjustments which management considers necessary for the fair presentation of the interim consolidated statements of financial position, operations, comprehensive income, changes in equity, and cash flows.

The interim 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, 2017. The 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 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.

Note 3 – Recently Issued Accounting Pronouncements

Future Adoption of New Accounting Standards— The FASB issued the following accounting guidance relevant to American National:

In February 2016, the FASB issued guidance that will require significant changes to the statement of financial position of lessees. With certain limited exceptions, lessees will need to recognize virtually all of their leases on the statement of financial position, by recording a right-of-use asset and a lease liability. Lessor accounting is less affected by the standard, but has been updated to align with certain changes in the lessee model and the new revenue recognition standard. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. We are currently quantifying the expected gross up of our balance sheet for a right of use asset and a lease liability as required. Since the majority of our lease activity is as a lessor, we do not expect the adoption of the standard to be material to the Company’s results of operations or financial position.

In June 2016, the FASB issued guidance that will significantly change how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance will replace the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do under the current other-than-temporary impairment model. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company must develop appropriate models to measure expected credit losses to begin determining the impact of adopting the standard on our results of operations or financial position.

In February 2018, the FASB issued guidance that allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company plans to adopt the standard effective January 1, 2019. The guidance changes equity presentation only and will not have an impact on the Company’s consolidated financial position, results of operations, equity or cash flows.

Adoption of New Accounting Standards

In May 2014, the FASB issued guidance that superseded most existing revenue recognition requirements in GAAP. Insurance contracts generally are excluded from the scope of the guidance. For those contracts which are impacted, the transaction price is attributed to the underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. The Company’s revenues include premium, other policy revenue, net investment income, realized investment gains, and other income. Other income includes fee income which is recognized when obligations under the terms specified within a contract with a customer are either (1) satisfied at a point in time or (2) the progress of completion is measured over a period of time as the obligation is performed using the input method. The Company adopted the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The majority of our revenue sources are insurance related and not in the scope of the guidance. The adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three months ended March 31, 2018.

Note 3 – Recently Issued Accounting Pronouncements – (Continued)

Adoption of New Accounting Standards – (Continued)

In January 2016, the FASB issued guidance that changed certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance requires that equity investments, other than those accounted for under the equity method or those that result in consolidation of the investee, be measured at fair value and the changes in fair value are recognized through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance also simplifies the impairment assessment of equity investments and eliminates the disclosure requirements for methods and significant assumptions used to estimate fair value of financial instruments that are measured at amortized cost on the statement of financial position. The Company adopted the standard on its required effective date of January 1, 2018 using a modified retrospective approach. Upon adoption, cumulative unrealized gains and losses on equity securities of $667.7 million, partially offset by participating policyholders’ interest related to unrealized gains and losses on equity securities of $30.4 million, net of tax were reclassified from accumulated other comprehensive income to retained earnings. Net investment income decreased $32.6 million from the change in unrealized gains and losses on equity securities for the three months ended March 31, 2018.

In October of 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Whereas, prior guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset was sold to an outside party. The Company adopted the standard on its required effective date of January 1, 2018 using a modified retrospective approach. Upon adoption, an other liability was released and retained earnings increased by $59.9 million. The adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows for the three months ended March 31, 2018.

In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit costs. The guidance requires the service cost component to be reported in the same line item as other compensation costs. All other components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. The Company adopted the standard on its required effective date of January 1, 2018 using a retrospective approach. Upon adoption, other components of net periodic pension costs of $1,232 net of tax for the three months ended March 31, 2017, were reclassified from other operating expenses. The guidance changed presentation only and did not have an impact on the Company’s consolidated financial position, results of operations, equity or cash flows. Since the Company’s defined benefit plans have been frozen, the components of net periodic benefit cost have not materially changed from year-end 2017.

Note 4 – Investment in Securities

The cost or amortized cost and fair value of investments in securities are shown below (in thousands):


	March 31, 2018
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	269,946	$	8,924	$	(204	)	$	278,666
Foreign governments		3,999		523		—			4,522
Corporate debt securities		7,372,239		112,160		(78,867	)		7,405,532
Residential mortgage-backed securities		267,929		7,679		(2,517	)		273,091
Collateralized debt securities		597		22		—			619
Other debt securities		1,263		31		—			1,294

Total bonds held-to-maturity		7,915,973		129,339		(81,588	)		7,963,724

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		28,483		403		(274	)		28,612
U.S. states and political subdivisions		859,090		16,478		(3,856	)		871,712
Foreign governments		5,000		1,287		—			6,287
Corporate debt securities		5,173,405		83,455		(53,795	)		5,203,065
Residential mortgage-backed securities		31,708		390		(546	)		31,552
Collateralized debt securities		3,085		702		(5	)		3,782

Total bonds available-for-sale		6,100,771		102,715		(58,476	)		6,145,010

Equity securities
Common stock		758,422		1,002,501		(11,545	)		1,749,378
Preferred stock		18,318		3,657		(600	)		21,375

Total equity securities		776,740		1,006,158		(12,145	)		1,770,753

Total investments in securities	$	14,793,484	$	1,238,212	$	(152,209	)	$	15,879,487


	December 31, 2017
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	266,966	$	12,466	$	(37	)	$	279,395
Foreign governments		4,011		582		—			4,593
Corporate debt securities		7,032,464		217,883		(18,020	)		7,232,327
Residential mortgage-backed securities		246,803		9,702		(1,262	)		255,243
Collateralized debt securities		923		31		—			954
Other debt securities		1,792		49		—			1,841

Total bonds held-to-maturity		7,552,959		240,713		(19,319	)		7,774,353

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		27,569		475		(146	)		27,898
U.S. states and political subdivisions		866,250		31,621		(824	)		897,047
Foreign governments		5,000		1,460		—			6,460
Corporate debt securities		5,038,908		170,112		(16,093	)		5,192,927
Residential mortgage-backed securities		15,009		37		(329	)		14,717
Collateralized debt securities		3,171		651		(4	)		3,818
Other debt securities		1,994		447		—			2,441

Total bonds available-for-sale		5,957,901		204,803		(17,396	)		6,145,308

Equity securities
Common stock		738,453		1,029,340		(7,166	)		1,760,627
Preferred stock		19,130		4,469		—			23,599

Total equity securities		757,583		1,033,809		(7,166	)		1,784,226

Total investments in securities	$	14,268,443	$	1,479,325	$	(43,881	)	$	15,703,887

Note 4 – Investment in Securities – (Continued)

The amortized cost and fair value, by contractual maturity, of fixed maturity securities are shown below (in thousands):


	March 31, 2018
	Bonds Held-to-Maturity				Bonds Available-for-Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	226,948	$	229,707	$	137,593	$	139,037
Due after one year through five years		4,349,837		4,415,709		2,228,746		2,265,488
Due after five years through ten years		2,758,080		2,740,046		3,172,783		3,178,309
Due after ten years		581,108		578,262		561,649		562,176

Total	$	7,915,973	$	7,963,724	$	6,100,771	$	6,145,010

Actual maturities 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 allocated to their respective categories based on the year of final contractual maturity.

Proceeds from sales of available-for-sale securities, with the related gross realized gains and losses, are shown below (in thousands):


	Three months ended March 31,
	2018			2017
Proceeds from sales of available-for-sale securities	$	47,181		$	27,723
Gross realized gains		1,424			10,826
Gross realized losses		(555	)		(6	)

Gains and losses are determined using specific identification of the securities sold. During the three months ended March 31, 2018 and 2017, bonds with a carrying value of $34,850,000 and $15,000,000, respectively, were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ credit worthiness became evident. A realized loss of $6,000,000 was recorded in 2017 on a bond that was transferred due to an other-than-temporary impairment.

The components of the change in net unrealized gains (losses) on debt securities are shown below (in thousands):


	Three months ended March 31,
	2018			2017
Bonds available-for-sale	$	(143,168	)	$	36,075
Adjustments for
Deferred policy acquisition costs		20,054			(5,444	)
Participating policyholders’ interest		6,953			(4,971	)
Deferred federal income tax benefit (expense)		24,828			(8,290	)

Change in net unrealized gains (losses) on debt securities, net of tax	$	(91,333	)	$	17,370

The components of the change in unrealized gains (losses) on equity securities are shown below (in thousands):


	Three months ended March 31,
	2018			2017
Net gains (losses) on equity securities	$	(31,575	)	$	70,656
Less: Net gains on equity securities sold		(1,055	)		(11,360	)

Unrealized gains (losses) on equity securities	$	(32,630	)	$	59,296

Note 4 – Investment in Securities – (Continued)

The gross unrealized losses and fair value of the investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are shown below (in thousands):


	March 31, 2018
	Less than 12 months					12 Months or more					Total
	Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	(204	)	$	40,410	$	—		$	—	$	(204	)	$	40,410
Corporate debt securities		(68,999	)		2,869,097		(9,868	)		156,182		(78,867	)		3,025,279
Residential mortgage-backed securities		(1,430	)		104,506		(1,087	)		17,564		(2,517	)		122,070

Total bonds held-to-maturity		(70,633	)		3,014,013		(10,955	)		173,746		(81,588	)		3,187,759

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		(271	)		15,456		(3	)		4,221		(274	)		19,677
U.S. states and political subdivisions		(2,455	)		183,318		(1,401	)		27,197		(3,856	)		210,515
Corporate debt securities		(41,341	)		1,895,863		(12,454	)		146,268		(53,795	)		2,042,131
Residential mortgage-backed securities		(405	)		27,023		(141	)		1,359		(546	)		28,382
Collateralized debt securities		(1	)		159		(4	)		123		(5	)		282

Total bonds available-for-sale		(44,473	)		2,121,819		(14,003	)		179,168		(58,476	)		2,300,987

Equity securities
Common stock		(11,545	)		76,088		—			—		(11,545	)		76,088
Preferred stock		(600	)		5,000		—			—		(600	)		5,000

Total equity securities		(12,145	)		81,088		—			—		(12,145	)		81,088

Total	$	(127,251	)	$	5,216,920	$	(24,958	)	$	352,914	$	(152,209	)	$	5,569,834


	December 31, 2017
	Less than 12 months					12 Months or more					Total
	Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	(37	)	$	1,937	$	—		$	—	$	(37	)	$	1,937
Corporate debt securities		(8,444	)		951,425		(9,576	)		192,737		(18,020	)		1,144,162
Residential mortgage-backed securities		(325	)		49,283		(937	)		18,888		(1,262	)		68,171

Total bonds held-to-maturity		(8,806	)		1,002,645		(10,513	)		211,625		(19,319	)		1,214,270

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		(141	)		20,352		(5	)		3,875		(146	)		24,227
U.S. states and political subdivisions		(160	)		27,669		(664	)		28,010		(824	)		55,679
Corporate debt securities		(6,657	)		559,710		(9,436	)		159,532		(16,093	)		719,242
Residential mortgage-backed securities		(193	)		12,419		(136	)		1,428		(329	)		13,847
Collateralized debt securities		—			—		(4	)		123		(4	)		123

Total bonds available-for-sale		(7,151	)		620,150		(10,245	)		192,968		(17,396	)		813,118

Equity securities
Common stock		(7,166	)		60,391		—			—		(7,166	)		60,391

Total equity securities		(7,166	)		60,391		—			—		(7,166	)		60,391

Total	$	(23,123	)	$	1,683,186	$	(20,758	)	$	404,593	$	(43,881	)	$	2,087,779

As of March 31, 2018, the securities with unrealized losses including those exceeding one year were not deemed to be other-than-temporarily impaired. American National has the ability and intent to hold those securities until a market price recovery or maturity. It is more-likely-than-not that American National will not be required to sell them prior to recovery, and recovery is expected in a reasonable period of time. It is possible an issuer’s financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.

Note 4 – Investment in Securities – (Continued)

The following table identifies the total bonds distributed by credit quality rating (in thousands, except percentages):


	March 31, 2018							December 31, 2017
	Amortized		Estimated		% of Fair			Amortized		Estimated		% of Fair
	Cost		Fair Value		Value			Cost		Fair Value		Value
AAA	$	631,251	$	646,046		4.6	%	$	638,039	$	664,396		4.8	%
AA		1,239,163		1,256,909		8.9			1,220,544		1,264,282		9.0
A		5,041,380		5,061,204		35.9			4,856,802		4,997,574		35.9
BBB		6,575,551		6,631,221		47.0			6,273,220		6,480,719		46.6
BB and below		529,399		513,354		3.6			522,255		512,690		3.7

Total	$	14,016,744	$	14,108,734		100.0	%	$	13,510,860	$	13,919,661		100.0	%

Equity securities by market sector distribution are shown below:


	March 31, 2018			December 31, 2017
Consumer goods		20.1	%		20.2	%
Energy and utilities		8.1			8.6
Finance		21.3			21.9
Healthcare		11.5			11.8
Industrials		9.6			9.5
Information technology		20.8			20.0
Other		8.6			8.0

Total		100.0	%		100.0	%

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 the location of the underlying collateral. The distribution based on carrying amount of mortgage loans by location is as follows:


	March 31, 2018			December 31, 2017
East North Central		15.2	%		15.4	%
East South Central		3.0			3.1
Mountain		15.2			14.0
Pacific		16.7			16.5
South Atlantic		13.5			14.1
West South Central		29.0			29.8
Other		7.4			7.1

Total		100.0	%		100.0	%

For the three months ended March 31, 2018, American National foreclosed on two loans with recorded investments of $1,940,000 and $8,376,000. Three loans with a total recorded investment of $12,635,000 were in the process of foreclosure. For the year ended December 31, 2017, American National foreclosed on one loan with a recorded investment of $2,285,000, and four loans with a total recorded investment of $17,263,000 were in the process of foreclosure. American National did not sell any loans during the three months ended March 31, 2018 or during the year ended December 31, 2017.

Note 5 – Mortgage Loans – (Continued)

The age analysis of past due loans is shown below (in thousands):


	30-59 Days		60-89 Days		More Than						Total
March 31, 2018	Past Due		Past Due		90 Days		Total		Current		Amount			Percent
Industrial	$	28,822	$	—	$	—	$	28,822	$	778,680	$	807,502			16.4
Office		7,509		5,708		6,432		19,649		1,806,365		1,826,014			37.0
Retail		—		—		—		—		759,257		759,257			15.4
Other		—		15,102		—		15,102		1,530,221		1,545,323			31.2

Total	$	36,331	$	20,810	$	6,432	$	63,573	$	4,874,523	$	4,938,096			100.0

Allowance for loan losses												(18,055	)

Total, net of allowance											$	4,920,041

December 31, 2017
Industrial	$	4,985	$	—	$	—	$	4,985	$	781,385	$	786,370			16.5
Office		—		10,713		8,881		19,594		1,764,151		1,783,745			37.4
Retail		—		—		—		—		750,979		750,979			15.7
Other		—		—		—		—		1,447,771		1,447,771			30.4

Total	$	4,985	$	10,713	$	8,881	$	24,579	$	4,744,286	$	4,768,865			100.0

Allowance for loan losses												(18,866	)

Total, net of allowance											$	4,749,999

Total mortgage loans are calculated net of unamortized purchase discounts. There were no unamortized purchase discounts for the three months ended March 31, 2018 or during the year ended December 31, 2017. Total mortgage loans were also net of unamortized origination fees of $31,923,000 and $32,766,000 at March 31, 2018 and December 31, 2017, respectively. No unearned income is included in these amounts.

Allowance for Credit Losses

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Mortgage loans with temporary difficulties are not considered impaired when the borrower has the financial capacity to fund revenue shortfalls from the properties for the foreseeable future. Individual valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral. Loans not evaluated individually for collectability are segregated by property-type and location, and allowance factors are applied. These factors are developed based on our historical loss experience adjusted for the expected trend in the rate of foreclosure losses. Allowance factors are higher for loans of certain property types and in certain regions based on loss experience or a blended historical loss factor.

The change in allowance for credit losses in mortgage loans is shown below (in thousands, except number of loans):


	Collectively Evaluated for Impairment							Individually Impaired									Total
	Number of Loans		Recorded Investment		Valuation Allowance			Number of Loans			Recorded Investment			Valuation Allowance			Number of Loans		Recorded Investment		Valuation Allowance
Beginning balance, 2018		451	$	4,762,315		16,041			3		$	6,550			2,825			454	$	4,768,865	$	18,866
Change in allowance		—		—		(302	)		—			—			—			—		—		(302	)
Net change in recorded investment		6		171,171		—			(1	)		(1,940	)		(509	)		5		169,231		(509	)

Ending balance at March 31, 2018		457	$	4,933,486	$	15,739			2		$	4,610		$	2,316			459	$	4,938,096	$	18,055

Note 5 – Mortgage Loans – (Continued)

Troubled Debt Restructurings

American National has granted concessions which are classified as troubled debt restructurings 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. American National considers the amount, timing and extent of concessions in determining any impairment or changes in the specific allowance for loan losses recorded in connection with a troubled debt restructuring. The carrying value after specific 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.

Troubled debt restructuring mortgage loan information is as follows (in thousands, except number of loans):


	Three months ended March 31,
	2018						2017
	Number of loans		Recorded investment pre- modification		Recorded investment post modification		Number of loans		Recorded investment pre- modification		Recorded investment post modification
Other (hotel/motel)		—	$	—	$	—		5	$	24,801	$	24,801

Total		—	$	—	$	—		5	$	24,801	$	24,801

There are no loans determined to be troubled debt restructurings for the three months from year end to March 31, 2018.

Note 6 – Real Estate and Other Investments

Investment real estate by property-type and geographic distribution are as follows:


	March 31, 2018			December 31, 2017
Industrial		5.6	%		6.0	%
Office		40.2			39.0
Retail		39.2			39.3
Other		15.0			15.7

Total		100.0	%		100.0	%


	March 31, 2018			December 31, 2017
East North Central		6.0	%		6.1	%
East South Central		4.0			3.6
Mountain		13.0			13.2
Pacific		8.3			8.5
South Atlantic		15.3			14.0
West South Central		51.0			52.4
Other		2.4			2.2

Total		100.0	%		100.0	%

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

American National regularly invests in real estate partnerships and joint ventures. American National frequently participates in the design of these entities with the sponsor, but in most cases, its involvement is limited to financing. Through analysis performed by American National, some of these partnerships and joint ventures have been determined to be variable interest entities (“VIEs”). In certain instances, in addition to an economic interest in the entity, American National holds the power to direct the most significant activities of the entity and is deemed the primary beneficiary or consolidator of the entity. The assets of the consolidated VIEs are restricted and must first be used to settle their liabilities. Creditors or beneficial interest holders of these VIEs have no recourse to the general credit of American National, as American National’s obligation is limited to the amount of its committed investment. American National has not provided financial or other support to the VIEs in the form of liquidity arrangements, guarantees, or other commitments to third parties that may affect the fair value or risk of its variable interest in the VIEs in 2018 or 2017.

The assets and liabilities relating to the VIEs included in the consolidated financial statements are as follows (in thousands):


	March 31, 2018		December 31, 2017
Investment real estate	$	146,533	$	148,456
Short-term investments		500		501
Cash and cash equivalents		9,722		6,320
Other receivables		5,071		4,461
Other assets		13,628		15,920

Total assets of consolidated VIEs	$	175,454	$	175,658

Notes payable	$	137,389	$	137,458
Other liabilities		8,887		5,616

Total liabilities of consolidated VIEs	$	146,276	$	143,074

The notes payable in the consolidated statements of financial position pertain to the borrowings of the consolidated VIEs. The liability of American National relating to notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $27,952,000 and $28,377,000 at March 31, 2018 and December 31,2017, respectively.

The total long-term notes payable of the consolidated VIE’s consists of the following (in thousands):


Interest rate	Maturity	March 31, 2018		December 31, 2017
LIBOR	2020	$	10,129	$	9,702
90 day LIBOR + 2.5%	2021		40,342		40,124
4% fixed	2022		86,918		87,632

Total		$	137,389	$	137,458

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):


	March 31, 2018				December 31, 2017
	Carrying Amount		Maximum Exposure to Loss		Carrying Amount		Maximum Exposure to Loss
Investment in unconsolidated affiliates	$	322,797	$	322,797	$	314,808	$	314,808
Mortgage loans		557,195		557,195		493,014		493,014
Accrued investment income		2,128		2,128		1,817		1,817

As of March 31, 2018, no real estate investments were classified 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):


		March 31, 2018						December 31, 2017
Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Statements of Financial Position	Number of Instruments		Notional Amounts		Estimated Fair Value		Number of Instruments		Notional Amounts		Estimated Fair Value
Equity-indexed options	Other invested assets		488	$	2,086,850	$	204,308		468	$	1,885,600	$	220,190
Equity-indexed embedded derivative	Policyholders’ account balances		80,420		1,976,400		535,641		76,621		1,819,523		512,526


Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Statements of Operations	Gains (Losses) Recognized in Income on Derivatives
		Three months ended March 31,
		2018			2017
Equity-indexed options	Net investment income	$	(14,145	)	$	23,133
Equity-indexed embedded derivative	Interest credited to policyholders’ account balances		13,436			(25,127	)

Note 7 – Derivative Instruments – (Continued)

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 we believe are credit worthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less collateral held. The Company maintains master netting agreements with its current active trading partners. As such, a right of offset has been applied to collateral that supports credit risk and has been recorded in the consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.

Information regarding the Company’s exposure to credit loss on the options it holds is presented below (in thousands):


		March 31, 2018
Counterparty	Moody/S&P Rating	Options Fair Value		Collateral Held		Collateral Amounts used to Offset Exposure		Excess Collateral		Exposure Net of Collateral
Barclays	Baa2/BBB	$	49,066	$	49,443	$	49,066	$	377	$	—
Goldman-Sachs	A3/BBB+		927		1,030		927		103		—
ING	Baa1/A-		25,617		25,890		25,617		273		—
JP Morgan	A3/A-		190		—		—		—		190
Morgan Stanley	A3/BBB+		14,535		14,396		14,396		—		139
NATIXIS*	A2/A		38,140		36,980		36,980		—		1,160
SunTrust	Baa1/BBB+		36,763		34,040		34,040		—		2,723
Wells Fargo	A2/A-		39,070		37,310		37,310		—		1,760

Total		$	204,308	$	199,089	$	198,336	$	753	$	5,972


		December 31, 2017
Counterparty	Moody/S&P Rating	Options Fair Value		Collateral Held		Collateral Amounts used to Offset Exposure		Excess Collateral		Exposure Net of Collateral
Barclays	Baa2/BBB	$	55,215	$	56,883	$	55,215	$	1,668	$	—
Goldman-Sachs	A3/BBB+		956		780		780		—		176
ING	Baa1/A-		26,650		27,330		26,650		680		—
JP Morgan	A3/A-		189		—		—		—		189
Morgan Stanley	A3/BBB+		17,490		18,776		17,490		1,286		—
NATIXIS*	A2/A		37,550		33,860		33,860		—		3,690
SunTrust	Baa1/BBB+		37,266		36,560		36,560		—		706
Wells Fargo	A2/A		44,874		47,230		44,874		2,356		—

Total		$	220,190	$	221,419	$	215,429	$	5,990	$	4,761

*	Includes collateral restrictions.

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

Net investment income is shown below (in thousands):


	Three months ended March 31,
	2018			2017
Bonds	$	140,095		$	134,350
Dividends on equity securities		9,440			8,732
Net unrealized losses on equity securities		(32,630	)		—
Mortgage loans		63,868			57,704
Real estate		4,283			(1,195	)
Options		(14,145	)		23,133
Other invested assets		5,128			5,779

Total	$	176,039		$	228,503

Realized investment gains (losses) are shown below (in thousands):


	Three months ended March 31,
	2018			2017
Bonds	$	667		$	3,504
Equity securities		1,055			11,360
Mortgage loans		302			(1,626	)
Real estate		83			788
Other invested assets		(8	)		(18	)

Total	$	2,099		$	14,008

Other-than-temporary impairment losses are shown below (in thousands):


	Three months ended March 31,
	2018			2017
Bonds	$	—		$	(6,000	)
Equity securities		(1,595	)		(783	)

Total	$	(1,595	)	$	(6,783	)

Note 9 – Fair Value of Financial Instruments

The carrying amount and fair value of financial instruments are shown below (in thousands):


	March 31, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity	$	7,915,973	$	7,963,724	$	7,552,959	$	7,774,353
Fixed maturity securities, bonds available-for-sale		6,145,010		6,145,010		6,145,308		6,145,308
Equity securities		1,770,753		1,770,753		1,784,226		1,784,226
Equity-indexed options		204,308		204,308		220,190		220,190
Mortgage loans on real estate, net of allowance		4,920,041		4,961,466		4,749,999		4,811,006
Policy loans		374,930		374,930		377,103		377,103
Short-term investments		284,456		284,456		658,765		658,765
Separate account assets		939,605		939,605		969,764		969,764

Total financial assets	$	22,555,076	$	22,644,252	$	22,458,314	$	22,740,715

Financial liabilities
Investment contracts	$	9,844,880	$	9,844,880	$	8,990,771	$	8,990,771
Embedded derivative liability for equity-indexed contracts		535,641		535,641		512,526		512,526
Notes payable		137,389		137,389		137,458		137,458
Separate account liabilities		939,605		939,605		969,764		969,764

Total financial liabilities	$	11,457,515	$	11,457,515	$	10,610,519	$	10,610,519

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.

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.

Note 9 – Fair Value of Financial Instruments – (Continued)

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 that 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 estimate of fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. These estimates are disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services regularly.

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.

Note 9 – Fair Value of Financial Instruments – (Continued)

Embedded Derivative— The amounts reported within policyholder contract deposits include equity linked interest crediting rates based on the S&P 500 index within index 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 will have the inverse effect decreasing the fair value.

•

Mortality rate assumptions vary by age and by 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 March 31, 2018 and December 31, 2017, the one year implied volatility used to estimate embedded derivative value was 18.0% and 13.7%, 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
	March 31, 2018		December 31, 2017		Unobservable Input	Range
Indexed Annuities	$	524.7	$	498.3	Lapse Rate		1-66%
					Mortality Multiplier		90-100%
					Equity Volatility		7-30%
Indexed Life		10.9		14.2	Equity Volatility		7-30%

Other Financial Instruments—Other financial instruments classified as Level 3 measurements, as there is little or no market activity, are as follows:

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.

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.

Note 9 – Fair Value of Financial Instruments – (Continued)

Quantitative Disclosures

The fair value hierarchy measurements of the financial instruments are shown below (in thousands):


	Fair Value Measurement as of March 31, 2018
	Total Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	278,666	$	—	$	278,666	$	—
Foreign governments		4,522		—		4,522		—
Corporate debt securities		7,405,532		—		7,405,532		—
Residential mortgage-backed securities		273,091		—		273,091		—
Collateralized debt securities		619		—		619		—
Other debt securities		1,294		—		1,294		—

Total bonds held-to-maturity		7,963,724		—		7,963,724		—

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		28,612		—		28,612		—
U.S. states and political subdivisions		871,712		—		871,712		—
Foreign governments		6,287		—		6,287		—
Corporate debt securities		5,203,065		—		5,203,065		—
Residential mortgage-backed securities		31,552		—		31,552		—
Collateralized debt securities		3,782		—		3,782		—

Total bonds available-for-sale		6,145,010		—		6,145,010		—

Equity securities
Common stock		1,749,378		1,749,260		—		118
Preferred stock		21,375		21,375		—		—

Total equity securities		1,770,753		1,770,635		—		118

Options		204,308		—		—		204,308
Mortgage loans on real estate		4,961,466		—		4,961,466		—
Policy loans		374,930		—		—		374,930
Short-term investments		284,456		—		284,456		—
Separate account assets		939,605		—		939,605		—

Total financial assets	$	22,644,252	$	1,770,635	$	20,294,261	$	579,356

Financial liabilities
Investment contracts	$	9,844,880	$	—	$	—	$	9,844,880
Embedded derivative liability for equity-indexed contracts		535,641		—		—		535,641
Notes payable		137,389		—		—		137,389
Separate account liabilities		939,605		—		939,605		—

Total financial liabilities	$	11,457,515	$	—	$	939,605	$	10,517,910

Note 9 – Fair Value of Financial Instruments – (Continued)


	Fair Value Measurement as of December 31, 2017
	Total Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	279,395	$	—	$	276,450	$	2,945
Foreign governments		4,593		—		4,593		—
Corporate debt securities		7,232,327		—		7,232,327		—
Residential mortgage-backed securities		255,243		—		255,243		—
Collateralized debt securities		954		—		954		—
Other debt securities		1,841		—		1,841		—

Total bonds held-to-maturity		7,774,353		—		7,771,408		2,945

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		27,898		—		27,898		—
U.S. states and political subdivisions		897,047		—		897,047		—
Foreign governments		6,460		—		6,460		—
Corporate debt securities		5,192,927		—		5,192,927		—
Residential mortgage-backed securities		14,717		—		14,717		—
Collateralized debt securities		3,818		—		3,818		—
Other debt securities		2,441		—		2,441		—

Total bonds available-for-sale		6,145,308		—		6,145,308		—

Equity securities
Common stock		1,760,627		1,760,499		—		128
Preferred stock		23,599		23,599		—		—

Total equity securities		1,784,226		1,784,098		—		128

Options		220,190		—		—		220,190
Mortgage loans on real estate		4,811,006		—		4,811,006		—
Policy loans		377,103		—		—		377,103
Short-term investments		658,765		—		658,765		—
Separate account assets		969,764		—		969,764		—

Total financial assets	$	22,740,715	$	1,784,098	$	20,356,251	$	600,366

Financial liabilities
Investment contracts	$	8,990,771	$	—	$	—	$	8,990,771
Embedded derivative liability for equity-indexed contracts		512,526		—		—		512,526
Notes payable		137,458		—		—		137,458
Separate account liabilities		969,764		—		969,764		—

Total financial liabilities	$	10,610,519	$	—	$	969,764	$	9,640,755

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 March 31,
	Assets						Liability
	Investment Securities			Equity-Indexed Options			Embedded Derivative
Beginning balance, 2018	$	—		$	220,190		$	512,526
Total realized and unrealized investment gains (losses) included in other comprehensive income		—			—			—
Net fair value change included in realized gains (losses)		—			—			—
Net loss for derivatives included in net investment income		—			(14,145	)		—
Net change included in interest credited		—			—			(13,436	)
Purchases, sales and settlements or maturities
Purchases		—			16,928			—
Sales		—			—			—
Settlements or maturities		—			(18,665	)		—
Premiums less benefits		—			—			36,551
Gross transfers into Level 3		—			—			—
Gross transfers out of Level 3		—			—			—

Ending balance at March 31, 2018	$	—		$	204,308		$	535,641

Beginning balance, 2017	$	14,264		$	156,479		$	314,330
Total realized and unrealized investment losses included in other comprehensive income		(4,467	)		—			—
Net fair value change included in realized gains (losses)		—			—			—
Net gain for derivatives included in net investment income		—			23,058			—
Net change included in interest credited		—			—			25,127
Purchases, sales and settlements or maturities
Purchases		—			7,552			—
Sales		(1,957	)		—			—
Settlements or maturities		(3,010	)		(12,831	)		—
Premiums less benefits		—			—			7,177
Carry value transfers in		15,000			—
Gross transfers into Level 3		382			—			—
Gross transfers out of Level 3		(2,883	)		—			—

Ending balance at March 31, 2017	$	17,329		$	174,258		$	346,634

Within the net gain (loss) for derivatives included in net investment income were unrealized losses of $24,627,000 and gains of $17,028,000, relating to assets still held at March 31, 2018, and 2017, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies during the periods presented. The transfers into Level 3 during the three months ended March 31, 2017 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. Unless information is obtained from the brokers that indicate observable inputs were used in their pricing, there are not enough observable inputs to enable American National to classify the securities priced by the brokers as other than Level 3. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The inputs used by the brokers include recent transactions in the security, similar bonds with same name, ratings, maturity and structure, external dealer quotes in the security, Bloomberg evaluated pricing and prior months pricing. None of them are observable to American National as of March 31, 2018. The transfers out of Level 3 during the three months ended March 31, 2017 were securities being priced by the third-party service at the end of the period, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2.

Note 10 – Deferred Policy Acquisition Costs

Deferred policy acquisition costs are shown below (in thousands):


	Life			Annuity			Accident & Health			Property & Casualty			Total
Beginning balance, 2018	$	791,276		$	426,497		$	36,806		$	119,265		$	1,373,844

Additions		32,624			29,517			2,812			76,640			141,593
Amortization		(26,181	)		(20,644	)		(3,900	)		(73,902	)		(124,627	)
Effect of change in unrealized gains on available-for-sale debt securities		13,556			6,498			—			—			20,054

Net change		19,999			15,371			(1,088	)		2,738			37,020

Ending balance at March 31, 2018	$	811,275		$	441,868		$	35,718		$	122,003		$	1,410,864

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 accident and health, and property and casualty insurance is included in “Policy and contract claims” in the consolidated statements of financial position and is the amount estimated for incurred but not reported (“IBNR”) claims and claims that have been reported but not settled. Liability for unpaid claims are estimated based upon American National’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, less anticipated salvage and subrogation. The effects of the changes are included in the consolidated results of operations in the period in which the changes occur. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. There have been no significant changes in methodologies or assumptions used to calculate the liability for unpaid claims and claim adjustment expenses.

Information regarding the liability for unpaid claims is shown below (in thousands):


	Three months ended March 31,
	2018			2017
Unpaid claims balance, beginning	$	1,199,233		$	1,140,723
Less reinsurance recoverables		237,439			216,903

Net beginning balance		961,794			923,820

Incurred related to
Current		266,225			282,862
Prior years		(10,548	)		(29,054	)

Total incurred claims		255,677			253,808

Paid claims related to
Current		101,617			107,669
Prior years		141,147			127,397

Total paid claims		242,764			235,066

Net balance		974,707			942,562
Plus reinsurance recoverables		221,734			195,836

Unpaid claims balance, ending	$	1,196,441		$	1,138,398

The net and gross reserve calculations have shown favorable development as a result of favorable loss emergence compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred claims attributable to insured events of prior years decreased by approximately $10,548,000 during the first three months of 2018 and decreased by approximately $29,054,000 during the first three months of 2017. This reflected lower-than-anticipated losses in the first three months of 2018 related to accident years prior to 2018 in multi-peril, other commercial, and business owner and commercial package policy lines of business.

For short-duration health insurance claims, the total of IBNR plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses at March 31, 2018 was $34,751,000.

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 March 31,
	2018						2017
	Amount			Rate			Amount			Rate*
Income tax expense before tax on equity in earnings of unconsolidated affiliates*	$	4,365			21.6	%	$	15,630			28.9	%
Tax on equity in earnings of unconsolidated affiliates		(114	)		(0.6	)		3,325			6.1

Total expected income tax expense at the statutory rate		4,251			21.0			18,955			35.0
Tax-exempt investment income		(843	)		(4.2	)		(1,832	)		(3.4	)
Deferred tax change		(309	)		(1.5	)		(767	)		(1.4	)
Dividend exclusion		(985	)		(4.9	)		(1,842	)		(3.4	)
Miscellaneous tax credits, net		(2,213	)		(10.9	)		(2,257	)		(4.2	)
Low income housing tax credit expense		1,252			6.2			1,253			2.3
Other items, net		36			0.2			181			0.3

Provision for federal income tax before interest expense		1,189			5.9			13,691			25.2
Interest expense		—			—			44			0.1

Total	$	1,189			5.9	%	$	13,735			25.3	%

*	Prior year revised to reflect adoption of the new accounting standard issued March 2017. For details, see Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements.

American National made income tax payments of $7,000,000 during the three months ended March 31, 2018 and made no income tax payments for the same period in 2017.

Management believes that a sufficient taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of March 31, 2018 and 2017. There are no operating or capital loss carryforwards that will expire by December 31, 2018.

American National’s federal income tax returns for years 2014 to 2016 are subject to examination by the Internal Revenue Service. The years 2005 to 2013 have been closed by the Internal Revenue Service and we have received $48.0 million in refunds related to 2013, 2014, 2015, and 2016. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld. No provision for penalties or interest were established during 2018 relating to a dispute with the Internal Revenue Service. Management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease 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, 2018	$	716,878		$	(72,772	)	$	(1,890	)	$	642,216
Amounts reclassified from AOCI (net of tax expense $26 and expense $210)		100			789			—			889
Unrealized holding losses arising during the period (net of tax benefit $30,091)		(113,203	)		—			—			(113,203	)
Unrealized adjustment to DAC (net of tax expense $3,777)		16,277			—			—			16,277
Unrealized losses on investments attributable to participating policyholders’ interest (net of tax expense $1,460)		5,493			—			—			5,493
Foreign currency adjustment (net of tax benefit $97)		—			—			(366	)		(366	)
Cumulative effect of changes in accounting (net of tax benefit $356,847)		(637,376	)		—			—			(637,376	)

Ending balance at March 31, 2018	$	(11,831	)	$	(71,983	)	$	(2,256	)	$	(86,070	)

Beginning balance, 2017	$	547,138		$	(88,603	)	$	(2,636	)	$	455,899
Amounts reclassified from AOCI (net of tax benefit $1,547 and expense $826)		(2,873	)		1,534			—			(1,339	)
Unrealized holding gains arising during the period (net of tax expense $34,927)		64,864			—			—			64,864
Unrealized adjustment to DAC (net of tax benefit $2,596)		(2,848	)		—			—			(2,848	)
Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $1,740)		(3,231	)		—			—			(3,231	)
Foreign currency adjustment (net of tax expense $60)		—			—			112			112

Ending balance at March 31, 2017	$	603,050		$	(87,069	)	$	(2,524	)	$	513,457

Note 14 – Stockholders’ Equity and Noncontrolling Interests

American National has one class of common stock with a par value of $1.00 per share and 50,000,000 authorized shares. The amounts outstanding at the dates indicated are shown below:


	March 31, 2018			December 31, 2017
Common stock
Shares issued		30,832,449			30,832,449
Treasury shares		(3,894,108	)		(3,900,565	)

Outstanding shares		26,938,341			26,931,884
Restricted shares		(74,000	)		(74,000	)

Unrestricted outstanding shares		26,864,341			26,857,884

Stock-based compensation

American National has a stock-based compensation plan, which allows for grants of Non-Qualified Stock Options, Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, Restricted Stock Units (“RSU”), Performance Awards, Incentive Awards or any combination thereof. This plan is administered by the American National Board Compensation Committee. To date, only SAR, RS and RSU awards have been made. All awards are subject to review and approval by the Board Compensation Committee both at the time of setting applicable performance objectives and at payment of the awards. The number of shares available for grants under the plan cannot exceed 2,900,000 shares, and no more than 200,000 shares may be granted to any one individual in any calendar year. Grants were made to certain officers meeting established performance objectives, and grants are made to directors as compensation and to align their interests with those of other shareholders.

Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)

SAR, RS and RSU information for the periods indicated are shown below:


	SAR				RS Shares				RS Units
	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, 2017		2,586	$	106.70		74,000	$	110.19		52,765		$	106.26
Granted		—		—		—		—		—			—
Exercised		—		—		—		—		(33,699	)		104.39
Forfeited		—		—		—		—		—			—
Expired		—		—		—		—		—			—

Outstanding at March 31, 2018		2,586	$	106.70		74,000	$	110.19		19,066		$	109.56


	SAR			RS Shares		RS Units
Weighted-average contractual remaining life (in years)		0.30			4.23		0.77
Exercisable shares		2,586			N/A		N/A
Weighted-average exercise price	$	106.70		$	110.19	$	109.56
Weighted-average exercise price exercisable shares		106.70			N/A		N/A
Compensation expense (credit)
Three months ended March 31, 2018	$	(28,000	)	$	201,000	$	(211,000	)
Three months ended March 31, 2017		(35,000	)		207,000		130,000
Fair value of liability award
March 31, 2018	$	33,000			N/A	$	1,528,000
December 31, 2017		63,000			N/A		6,376,000

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.

RS awards entitle the participant to full dividend and voting rights. Each RS share awarded has the value of one share of restricted stock and vests 10 years from the grant date. Unvested shares are restricted as to disposition, and are subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years and most of these awards feature a graded vesting schedule in the case of the retirement, death or disability of an award holder. Restricted stock awards for 350,334 shares have been granted at an exercise price of zero, of which 74,000 shares are unvested.

RSU awards allow the recipient of the awards to settle the vested RSUs in either shares of American National’s common stock, cash or a combination of both. RSUs granted vest after a one-year or three-year graded vesting requirement or over a shorter period as a result of death, disability or retirement after age 65.

Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)

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.


	Three months ended March 31,
	2018		2017
Weighted average shares outstanding		26,889,151		26,899,648
Incremental shares from RS awards and RSUs		75,204		72,480

Total shares for diluted calculations		26,964,355		26,972,128

Net income attributable to American National (in thousands)	$	18,777	$	39,840
Basic earnings per share	$	0.70	$	1.48
Diluted earnings per share	$	0.70	$	1.48

Statutory Capital and Surplus

Risk Based Capital (“RBC”) is a measure insurance regulators use to evaluate the capital adequacy of American National Insurance Company and its insurance subsidiaries. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level at least 200% of the authorized control level RBC are required to take certain actions. At March 31, 2018 and December 31, 2017, American National Insurance Company’s statutory capital and surplus was $3,244,268,000 and $3,293,474,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2018 and December 31, 2017, substantially above 200% of the authorized control level.

American National and its 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 $69,096,000 and $66,625,000 at March 31, 2018 and December 31, 2017, respectively. The statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary would have remained substantially above the company action level RBC had it not used the permitted practice.

Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)

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):


	March 31, 2018		December 31, 2017
Statutory capital and surplus
Life insurance entities	$	2,075,945	$	2,141,573
Property and casualty insurance entities		1,172,698		1,162,761


	Three months ended March 31,
	2018		2017
Statutory net income
Life insurance entities	$	3,263	$	2,467
Property and casualty insurance entities		13,058		6,811

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by insurance law. The restrictions require life insurance companies to maintain minimum amounts of capital and surplus, and in the absence of special approval, limit the payment of dividends to the greater of the prior year’s statutory net income from operations, or 10% of prior year statutory surplus. American National Insurance Company is permitted without prior approval of the Texas Department of Insurance to pay total dividends of $329,347,000 during 2018. 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 has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at March 31, 2018 and December 31, 2017.

American National Insurance Company and its subsidiaries exercise control or ownership of various joint ventures, resulting in their consolidation into American National’s consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as noncontrolling interests of $1,346,000 and $2,262,000 at March 31, 2018 and December 31, 2017, respectively.

Note 15 – Segment Information

Management organizes the business into five operating segments:

•

Life—markets whole, term, universal, indexed and variable life insurance on a national basis primarily through career, multiple-line, and independent agents as well as direct marketing channels.

•

Annuity—offers fixed, indexed, and variable annuity products. These products are primarily sold through independent agents, brokers, and financial institutions, along with multiple-line and career agents.

•

Health—primary lines of business are Medicare supplement, stop loss, other supplemental health products and credit disability insurance. Health products are typically distributed through independent agents and managing general underwriters.

•

Property and Casualty—writes personal, agricultural and targeted commercial coverages and credit-related property insurance. These products are primarily sold through multiple-line and independent agents.

•

Corporate and Other—consists of net investment income from investments not allocated to the insurance segments and revenues from non-insurance operations.

The accounting policies of the segments are the same as those described in Note 2 to American National’s 2017 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 business segment.

•

Expenses are allocated based upon various factors, including premium and commission ratios of the operating segments.

Note 15 – Segment Information – (Continued)

The results of operations measured as the income before federal income tax and other items by operating segments are summarized below (in thousands):


	Three months ended March 31, 2018
	Life			Annuity			Accident & Health		Property & Casualty			Corporate & Other			Total
Premiums and other revenues
Premiums	$	81,376		$	70,616		$	41,015	$	351,973		$	—		$	544,980
Other policy revenues		67,731			3,608			—		—			—			71,339
Net investment income		57,768			113,480			2,354		15,861			(13,424	)		176,039
Net realized investment gains		—			—			—		—			504			504
Other income		755			725			5,157		2,063			1,813			10,513

Total premiums and other revenues		207,630			188,429			48,526		369,897			(11,107	)		803,375

Benefits, losses and expenses
Policyholder benefits		98,546			84,746			—		—			—			183,292
Claims incurred		—			—			28,140		242,490			—			270,630
Interest credited to policyholders’ account balances		16,265			54,280			—		—			—			70,545
Commissions for acquiring and servicing policies		39,520			30,004			6,016		69,156			—			144,696
Other operating expenses		50,950			11,319			10,358		47,801			9,966			130,394
Change in deferred policy acquisition costs		(6,443	)		(8,873	)		1,088		(2,738	)		—			(16,966	)

Total benefits, losses and expenses		198,838			171,476			45,602		356,709			9,966			782,591

Income before federal income tax and other items	$	8,792		$	16,953		$	2,924	$	13,188		$	(21,073	)	$	20,784


	Three months ended March 31, 2017
	Life			Annuity			Accident & Health		Property & Casualty			Corporate & Other			Total
Premiums and other revenues
Premiums	$	77,474		$	29,809		$	37,039	$	327,450		$	—		$	471,772
Other policy revenues		59,909			3,543			—		—			—			63,452
Net investment income		62,209			139,677			2,507		14,040			10,070			228,503
Net realized investment gains		—			—			—		—			7,225			7,225
Other income		616			665			4,346		1,938			1,280			8,845

Total premiums and other revenues		200,208			173,694			43,892		343,428			18,575			779,797

Benefits, losses and expenses
Policyholder benefits		101,166			43,989			—		—			—			145,155
Claims incurred		—			—			24,380		227,530			—			251,910
Interest credited to policyholders’ account balances		15,405			80,603			—		—			—			96,008
Commissions for acquiring and servicing policies		34,810			17,284			5,890		67,508			—			125,492
Other operating expenses		49,183			10,688			10,230		46,282			9,678			126,061
Change in deferred policy acquisition costs		(7,857	)		(2,631	)		1,332		(331	)		—			(9,487	)

Total benefits, losses and expenses		192,707			149,933			41,832		340,989			9,678			735,139

Income before federal income tax and other items	$	7,501		$	23,761		$	2,060	$	2,439		$	8,897		$	44,658

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at March 31, 2018, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $916,728,000 of which $664,335,000 is expected to be funded in 2018 with the remainder funded in 2019 and beyond.

American National has 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 are 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 March 31, 2018 and December 31, 2017, the outstanding letters of credit were $3,047,000 and $4,586,000, respectively, and there were no borrowings on this facility. This facility expires on October 31, 2018. American National expects it will be able to be renewed on substantially equivalent terms upon expiration.

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 March 31, 2018, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $211,003,000.

Litigation

American National and certain subsidiaries, in common with the insurance industry in general, 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 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.

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 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, accident and health insurance contracts, and legal services. The impact on the consolidated financial statements of significant related party transactions is shown below (in thousands):


		Dollar Amount of Transactions				Amount due to (from) American National
		Three months ended March 31,				March 31,			December 31,
Related Party	Financial Statement Line Impacted	2018		2017		2018			2017
Gal-Tex Hotel Corporation	Mortgage loan on real estate	$	400	$	373	$	1,823		$	2,223
Gal-Tex Hotel Corporation	Net investment income		38		66		11			13
Greer, Herz & Adams, LLP	Other operating expenses		2,607		2,527		(483	)		(386	)

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National holds a first mortgage loan 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 is collateralized by a hotel property in San Antonio, Texas. This loan is current as to principal and interest payments. 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 37.01% of American National.

Transactions with Greer, Herz & Adams, LLP: Irwin M. Herz, Jr. is an American National advisory director and a Partner with Greer, Herz & Adams, LLP, which serves as American National’s General Counsel.

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 months ended March 31, 2018 and 2017 of American National Insurance Company and its subsidiaries (referred to in this document as “we”, “our”, “us”, or the “Company”). This information should be read in conjunction with our consolidated financial statements included in Item 1, Financial Statements (unaudited), of this Form 10-Q.

Forward-Looking Statements

This document contains forward-looking statements that reflect our estimates and assumptions related to business, economic, competitive and legislative developments. 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. Forward-looking statements are not guarantees of future performance and involve various risks and uncertainties. Moreover, forward-looking statements speak only as of the date made, and we undertake no obligation to update them. Certain important factors could cause our actual results to differ, possibly materially, from our expectations or estimates. These factors are described in greater detail in Item IA, Risk Factors, in our 2017 Annual Report on Form 10-K filed with the SEC on February 28, 2018, and they include among others:

•

Economic & Investment Risk Factors

•

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;

•

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, data security and administration systems;

•

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;

•

Catastrophic Event Risk Factors

•

natural or man-made catastrophes, pandemic disease, 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;

•

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 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

•

potentially adverse rating agency actions; and

•

control of our company by a small number of stockholders.

Overview

Chartered in 1905, we are a diversified insurance and financial services company offering a broad spectrum of insurance products in all 50 states, the District of Columbia and Puerto Rico. Our headquarters are in Galveston, Texas.

General Trends

American National had no material changes to the general trends, as discussed in the MD&A included in our 2017 Annual Report on Form 10-K filed with the SEC on February 28, 2018.

Critical Accounting Estimates

The unaudited interim consolidated financial statements have been prepared in conformity with GAAP. In addition to GAAP, insurance companies apply specific SEC regulations when preparing the consolidated financial statements. The preparation of the 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 consolidated financial statements.

For a discussion of our critical accounting estimates, see the MD&A in our 2017 Annual Report on Form 10-K filed with the SEC on February 28, 2018. There have been no material changes in accounting policies since December 31, 2017.

Recently Issued Accounting Pronouncements

Refer to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements in Item 1.

Consolidated Results of Operations

The following sets forth the consolidated results of operations (in thousands):


	Three months ended March 31,
	2018			2017			Change
Premiums and other revenues
Premiums	$	544,980		$	471,772		$	73,208
Other policy revenues		71,339			63,452			7,887
Net investment income		176,039			228,503			(52,464	)
Realized investments gains (losses), net		504			7,225			(6,721	)
Other income		10,513			8,845			1,668

Total premiums and other revenues		803,375			779,797			23,578

Benefits, losses and expenses
Policyholder benefits		183,292			145,155			38,137
Claims incurred		270,630			251,910			18,720
Interest credited to policyholders’ account balances		70,545			96,008			(25,463	)
Commissions for acquiring and servicing policies		144,696			125,492			19,204
Other operating expenses		130,394			126,061			4,333
Change in deferred policy acquisition costs ⁽¹⁾		(16,966	)		(9,487	)		(7,479	)

Total benefits and expenses		782,591			735,139			47,452

Income before other items and federal income taxes	$	20,784		$	44,658		$	(23,874	)

(1)	A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

A positive amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings

Earnings decreased during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in net investment income attributable to a $32.6 million unrealized loss on equity securities and a decrease in realized investment gains, partially offset by an increase in property and casualty earnings attributable to a lower combined ratio. Net investment income for the three months ended March 31, 2018 included unrealized losses on equity securities as a result of our adoption of new accounting guidance which impacted the first quarter of 2018, but not the first quarter of 2017.

Life

Life segment financial results for the periods indicated were as follows (in thousands):


	Three months ended March 31,
	2018			2017			Change
Premiums and other revenues
Premiums	$	81,376		$	77,474		$	3,902
Other policy revenues		67,731			59,909			7,822
Net investment income		57,768			62,209			(4,441	)
Other income		755			616			139

Total premiums and other revenues		207,630			200,208			7,422

Benefits, losses and expenses
Policyholder benefits		98,546			101,166			(2,620	)
Interest credited to policyholders’ account balances		16,265			15,405			860
Commissions for acquiring and servicing policies		39,520			34,810			4,710
Other operating expenses		50,950			49,183			1,767
Change in deferred policy acquisition costs ⁽¹⁾		(6,443	)		(7,857	)		1,414

Total benefits and expenses		198,838			192,707			6,131

Income before other items and federal income taxes	$	8,792		$	7,501		$	1,291

(1)	A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

A positive amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings

Current operating income of $8.8 million is $1.3 million higher than prior year. Premiums continued to show strong growth, as did benefits, which were consistent with that growth. Decreases in liabilities helped to offset the expected increase in benefits.

Premiums and other revenues

Premiums increased during the three months ended March 31, 2018 compared to 2017 primarily due to continued growth in renewal premium on traditional life products.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies.

Life insurance sales

The following table presents life insurance sales as measured by annualized premium, a non-GAAP 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 March 31,
	2018		2017		Change
Traditional Life	$	15,011	$	14,265	$	746
Universal Life		5,909		5,325		584
Indexed UL		7,463		5,909		1,554

Total Recurring	$	28,383	$	25,499	$	2,884

Single and excess⁽¹⁾	$	463	$	601	$	(138	)
Credit life⁽¹⁾		1,958		2,086		(128	)

⁽¹⁾	These are weighted amounts representing 10% of single and excess premiums and 31% of credit life premiums. In 2018, credit life weighting changed from 15% to 31% due to an increase in monthly outstanding balance; 2017 amounts have been updated for comparison purposes.

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. Whereas GAAP premium revenues 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.

Life insurance sales increased for all major lines during the three months ended March 31, 2018 compared to 2017.

Benefits, losses and expenses

Policyholder benefits decreased during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in participating policyholders’ interest.

Commissions increased during the three months ended March 31, 2018 compared to 2017 which was commensurate with the increase in life sales.

The following table presents the components of the change in DAC (in thousands):


	Three months ended March 31,
	2018			2017			Change
Acquisition cost capitalized	$	32,624		$	29,046		$	3,578
Amortization of DAC		(26,181	)		(21,189	)		(4,992	)

Change in DAC	$	6,443		$	7,857		$	(1,414	)

Policy in-force information

The following table summarizes changes in the Life segment’s in-force amounts (in thousands):


	March 31, 2018		December 31, 2017		Change
Life insurance in-force
Traditional life	$	74,836,261	$	73,452,519	$	1,383,742
Interest-sensitive life		30,058,596		29,648,405		410,191

Total life insurance in-force	$	104,894,857	$	103,100,924	$	1,793,933

The following table summarizes changes in the Life segment’s number of policies in-force:


	March 31, 2018		December 31, 2017		Change
Number of policies in-force
Traditional life		1,728,413		1,800,425		(72,012	)
Interest-sensitive life		235,047		232,251		2,796

Total number of policies		1,963,460		2,032,676		(69,216	)

Total life insurance in-force increased during the three months ended March 31, 2018 compared to December 31, 2017 due to increased sales, despite a reduction of policies in-force. The reduction in policies in-force reflects continued termination of lower face amount policies.

Annuity

Annuity segment financial results for the periods indicated were as follows (in thousands):


	Three months ended March 31,
	2018			2017			Change
Premiums and other revenues
Premiums	$	70,616		$	29,809		$	40,807
Other policy revenues		3,608			3,543			65
Net investment income		113,480			139,677			(26,197	)
Other income		725			665			60

Total premiums and other revenues		188,429			173,694			14,735

Benefits, losses and expenses
Policyholder benefits		84,746			43,989			40,757
Interest credited to policyholders’ account balances		54,280			80,603			(26,323	)
Commissions for acquiring and servicing policies		30,004			17,284			12,720
Other operating expenses		11,319			10,688			631
Change in deferred policy acquisition costs ⁽¹⁾		(8,873	)		(2,631	)		(6,242	)

Total benefits and expenses		171,476			149,933			21,543

Income before other items and federal income taxes	$	16,953		$	23,761		$	(6,808	)

(1)	A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

A positive amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings

Earnings were lower during the three months ended March 31, 2018 compared to 2017 primarily due to an increase in DAC amortization. The increase in DAC amortization resulted from an increase in surrenders compared to the very favorable surrenders experienced in the same period in 2017.

Premiums and other revenues

Annuity premium and deposit amounts received are shown below (in thousands):


	Three months ended March 31,
	2018		2017		Change
Fixed deferred annuity	$	79,126	$	147,202	$	(68,076	)
Single premium immediate annuity		78,133		36,177		41,956
Equity-indexed deferred annuity		273,771		132,901		140,870
Variable deferred annuity		15,673		20,306		(4,633	)

Total premium and deposits		446,703		336,586		110,117
Less: Policy deposits		376,087		306,777		69,310

Total earned premiums	$	70,616	$	29,809	$	40,807

Sales strengthened during the three months ended March 31, 2018 compared to 2017 led by the equity indexed products. These are deposit type contracts and do not contribute to earned premiums. Earned premiums are reflective of single premium immediate annuity sales which increased during the three months ended March 31, 2018 compared to 2017.

We monitor account values and changes in those values as a key indicator of performance in our Annuity segment. Shown below are the changes in account values (in thousands):


	Three months ended March 31,
	2018			2017
Fixed deferred and equity-indexed annuity
Account value, beginning of period	$	10,033,354		$	9,118,350
Net inflows		281,657			212,995
Surrenders		(172,562	)		(199,701	)
Fees		(1,862	)		(1,882	)
Interest credited		52,056			79,001

Account value, end of period		10,192,643			9,208,763

Single premium immediate annuity
Reserve, beginning of period		1,691,502			1,566,440
Net inflows		30,680			(8,110	)
Interest and mortality		13,420			15,136

Reserve, end of period		1,735,602			1,573,466

Variable deferred annuity
Account value, beginning of period		381,902			392,345
Net inflows		15,456			17,004
Surrenders		(28,262	)		(40,037	)
Fees		(1,092	)		(1,155	)
Change in market value and other		(548	)		20,454

Account value, end of period		367,456			388,611

Total account value, end of period	$	12,295,701		$	11,170,840

Benefits, losses and expenses

Policyholder benefits consist of annuity payments and reserve increases for SPIA contracts. Reserve increases are highly correlated to the sales volume of SPIA contracts, which explains the change in benefits for the three months ended March 31, 2018 compared to 2017.

Commissions increased during the three months ended March 31, 2018 compared to 2017 driven by an increase in sales of equity-indexed products.

Other operating expenses remained relatively flat during the three months ended March 31, 2018 compared to 2017.

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 March 31,
	2018			2017			Change
Acquisition cost capitalized	$	29,517		$	17,846		$	11,671
Amortization of DAC		(20,644	)		(15,215	)		(5,429	)

Change in DAC	$	8,873		$	2,631		$	6,242

The amortization of DAC as a percentage of gross profits is an important ratio for the Annuity segment. Changes in this ratio reflect the impact of emerging experience. The ratios for the three months ended March 31, 2018 and 2017 were 41.8% and 30.8% respectively. A higher ratio is less favorable due to a higher proportion of the margin used to amortize DAC.

The change in DAC decreased during the three months ended March 31, 2018 compared to 2017 due to an increase in the amortization due to less than expected surrenders in 2017 creating a more favorable surrender experience compared to 2018.

Interest Margin

Overall, the margin earned on annuity reserves increased during the three months ended March 31, 2018 compared to 2017, mainly due to growth in annuity assets over the past year driven primarily by sales. Margin results by product are discussed further below.

The interest margin earned on fixed deferred annuities interest decreased by $5.0 million for the three months ended March 31, 2018 compared to 2017 due to a decrease in fixed investment yields.

The margin on equity-indexed annuities increased $4.9 million during the three months ended March 31, 2018 compared to 2017 mainly due to growth in assets. Interest margin is highly correlated with asset base as large changes in interest credited are offset by option return. The S&P 500 Index decreased by approximately 1.2% during the three months ended March 31, 2018 compared to an increase of 5.5% during the three months ended March 31, 2017. This change in index performance led to a decrease in option return of $33.2 million during the three months ended March 31, 2018 compared to 2017. Interest credited similarly declined over the same period.

Single premium immediate annuity margins increased $2.5 million during the three months ended March 31, 2018 compared to 2017 primarily due to better mortality experience compared to last 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 March 31,
	2018			2017			Change
Fixed deferred annuities
Fixed investment income	$	79,467		$	84,574		$	(5,107	)
Interest credited		(49,502	)		(49,607	)		105

Interest margin		29,965			34,967			(5,002	)

Account balance, end of period		7,033,241			7,048,859			(15,618	)

Equity-indexed annuities
Fixed investment income		30,286			18,958			11,328
Option return		(13,057	)		20,176			(33,233	)
Interest credited		(2,554	)		(29,394	)		26,840

Interest margin		14,675			9,740			4,935

Account balance, end of period		3,159,402			2,159,904			999,498

Single premium immediate annuities
Fixed investment income		16,784			15,969			815
Interest and mortality		(13,420	)		(15,136	)		1,716

Interest and mortality margin		3,364			833			2,531

Reserve, end of period		1,735,602			1,573,466			162,136

Total interest and mortality margin	$	48,004		$	45,540		$	2,464

Total account balance and reserve, end of period	$	11,928,245		$	10,782,229		$	1,146,016

Health

Health segment results for the periods indicated were as follows (in thousands):


	Three months ended March 31,
	2018		2017		Change
Premiums and other revenues
Premiums	$	41,015	$	37,039	$	3,976
Net investment income		2,354		2,507		(153	)
Other income		5,157		4,346		811

Total premiums and other revenues		48,526		43,892		4,634

Benefits, losses and expenses
Claims incurred		28,140		24,380		3,760
Commissions for acquiring and servicing policies		6,016		5,890		126
Other operating expenses		10,358		10,230		128
Change in deferred policy acquisition costs ⁽¹⁾		1,088		1,332		(244	)

Total benefits and expenses		45,602		41,832		3,770

Income before other items and federal income taxes	$	2,924	$	2,060	$	864

(1)	A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

A positive amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings

Earnings increased during the three months ended March 31, 2018 compared to 2017, primarily due to an increase in other income driven by the increase in fee income resulting from the growth of MGU business.

Premiums and other revenues

Health earned premiums for the periods indicated were as follows (in thousands, except percentages):


	Three months ended March 31,
	2018				2017
Medicare Supplement	$	17,266	42.1	%	$	16,451	44.4	%
Credit accident and health		4,490	10.9			4,768	12.9
MGU		7,367	18.0			4,513	12.2
Supplemental insurance		6,657	16.2			6,219	16.8
Medical expense		2,874	7.0			3,213	8.7
Group health		1,254	3.1			623	1.7
All other		1,107	2.7			1,252	3.3

Total	$	41,015	100.0	%	$	37,039	100.0	%

Earned premiums increased during the three months ended March 31, 2018 compared to 2017 primarily due to an increase in MGU and Medicare Supplement. MGU premiums increased due to the production from new producers. Medicare supplement premiums increased primarily due to an increase in sales of more comprehensive plans with higher premiums.

Our in-force certificates or policies as of the dates indicated are as follows:


	Three months ended March 31,
	2018				2017
Medicare Supplement		35,892	6.1	%		33,690	7.0	%
Credit accident and health		172,885	29.4			189,038	39.5
MGU		288,757	49.0			157,582	32.8
Supplemental insurance		52,329	8.9			49,937	10.4
Medical expense		1,681	0.3			2,126	0.4
Group health		10,518	1.8			14,915	3.1
All other		26,710	4.5			32,812	6.8

Total		588,772	100.0	%		480,100	100.0	%

Total in-force policies increased during the three months ended March 31, 2018 compared to 2017 primarily due to an increase in MGU business consistent with the increase in sales.

Benefits, losses and expenses

Claims incurred increased during the three months ended March 31, 2018 compared to 2017 due to the correlated growth in MGU business.

Change in Deferred Policy Acquisition Costs

The following table presents the components of the change in DAC (in thousands):


	Three months ended March 31,
	2018			2017			Change
Acquisition cost capitalized	$	2,812		$	2,871		$	(59	)
Amortization of DAC		(3,900	)		(4,203	)		303

Change in DAC	$	(1,088	)	$	(1,332	)	$	244

Property and Casualty

Property and Casualty results for the periods indicated were as follows (in thousands, except percentages):


	Three months ended March 31,
	2018			2017			Change
Premiums and other revenues
Net premiums written	$	379,505		$	350,112		$	29,393

Net premiums earned	$	351,973		$	327,450		$	24,523
Net investment income		15,861			14,040			1,821
Other income		2,063			1,938			125

Total premiums and other revenues		369,897			343,428			26,469

Benefits, losses and expenses
Claims incurred		242,490			227,530			14,960
Commissions for acquiring and servicing policies		69,156			67,508			1,648
Other operating expenses		47,801			46,282			1,519
Change in deferred policy acquisition costs ⁽¹⁾		(2,738	)		(331	)		(2,407	)

Total benefits and expenses		356,709			340,989			15,720

Income before other items and federal income	$	13,188		$	2,439		$	10,749

Loss ratio		68.9	%		69.5	%		(0.6	)%
Underwriting expense ratio		32.4			34.6			(2.2	)

Combined ratio		101.3	%		104.1	%		(2.8	)%

Impact of catastrophe events on combined ratio		2.3			8.1			(5.8	)

Combined ratio without impact of catastrophe events		99.0	%		96.0	%		3.0	%

Gross catastrophe losses	$	8,302		$	26,772		$	(18,470	)
Net catastrophe losses	$	10,882		$	26,775		$	(15,893	)

(1)	A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated.

A positive net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings

Property and Casualty earnings increased during the three months ended March 31, 2018 compared to 2017 due to the improvement in the combined ratio. The improvement in the combined ratio was primarily due to a favorable underwriting expense ratio component.

Premiums and other revenues

Net premiums written and earned increased for all major lines of business during the three months ended March 31, 2018 compared to 2017. The largest increases were in the personal automobile and other commercial lines of business.

Benefits, losses and expenses

Claims incurred increased during the three months ended March 31, 2018 compared to 2017 as a result of increases in personal auto claims consistent with the increase in premium growth.

Commissions for acquiring and servicing policies increased during the three months ended March 31, 2018 compared to 2017 correlated to the increase in premiums.

Operating expenses increased during three months ended March 31, 2018 compared to 2017, but at a rate less than the increase in premiums.

Products

Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 56.1% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 33.5% of net premiums written; and (iii) Credit-related property insurance products, marketed to and through financial institutions and retailers, representing 10.4% of net premiums written.

Personal Products

Personal Products results for the periods indicated were as follows (in thousands, except percentages):


	Three months ended March 31,
	2018			2017			Change
Net premiums written
Automobile	$	141,859		$	122,865		$	18,994
Homeowner		58,719			54,456			4,263
Other Personal		12,374			11,465			909

Total net premiums written	$	212,952		$	188,786		$	24,166

Net premiums earned
Automobile	$	127,962		$	112,949		$	15,013
Homeowner		63,411			58,925			4,486
Other Personal		11,329			10,507			822

Total net premiums earned	$	202,702		$	182,381		$	20,321

Loss ratio
Automobile		76.5	%		75.2	%		1.3	%
Homeowner		64.8			78.1			(13.3	)
Other Personal		71.1			55.3			15.8
Personal line loss ratio		72.6	%		75.0	%		(2.4	)%
Combined Ratio
Automobile		100.2	%		99.7	%		0.5	%
Homeowner		100.5			114.9			(14.4	)
Other Personal		102.7			98.8			3.9
Personal line combined ratio		100.5	%		104.6	%		(4.1	)%

Automobile: Net premiums written and earned increased in our personal automobile line during the three months ended March 31, 2018 compared to 2017 due to rate increases and an increase in policies in force. The loss and combined ratios increased during the three months ended March 31, 2018 compared to 2017 primarily due to an increase in development on prior year auto liability reserves.

Homeowners: Net premiums written and earned increased during the three months ended March 31, 2018 compared to 2017 primarily due to increased sales to renters. The loss and combined ratios decreased during the three months ended March 31, 2018 compared to 2017 due to a decrease in catastrophe losses.

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, recreational vehicles, motorcycle and personal umbrella. The loss and combined ratios increased during the three months ended March 31, 2018 compared to 2017 due to an increase in umbrella claims incurred.

Commercial Products

Commercial Products results for the periods indicated were as follows (in thousands, except percentages):


	Three months ended March 31,
	2018			2017			Change
Net premiums written
Other Commercial	$	59,221		$	54,150		$	5,071
Agricultural Business		36,074			34,480			1,594
Automobile		31,914			29,779			2,135

Total net premiums written	$	127,209		$	118,409		$	8,800

Net premiums earned
Other Commercial	$	49,977		$	44,962		$	5,015
Agricultural Business		34,695			33,663			1,032
Automobile		25,559			23,979			1,580

Total net premiums earned	$	110,231		$	102,604		$	7,627

Loss ratio
Other Commercial		55.1	%		54.6	%		0.5	%
Agricultural Business		81.6			87.2			(5.6	)
Automobile		64.1			69.5			(5.4	)
Commercial line loss ratio		65.5	%		68.8	%		(3.3	)%
Combined ratio
Other Commercial		87.7	%		88.7	%		(1.0	)%
Agricultural Business		120.8			125.4			(4.6	)
Automobile		88.9			94.8			(5.9	)
Commercial line combined ratio		98.4	%		102.2	%		(3.8	)%

Other Commercial: Net premiums written and earned increased during the three months ended March 31, 2018 compared to 2017 primarily due to increased sales of business owners and workers’ compensation. The slight increase in the loss ratio for the three months ended March 31, 2018 compared to 2017 is primarily due to increased claim activity on business owners and workers’ compensation. The combined ratio decreased primarily due to a favorable underwriting expense ratio.

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 buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased during the three months ended March 31, 2018 compared to 2017 primarily as a result of an increase in policies in force. The loss and combined ratios decreased during the three months ended March 31, 2018 compared to 2017 primarily due to decreased non-catastrophe claim activity.

Commercial Automobile: Net premiums written and earned increased during the three months ended March 31, 2018 compared to 2017, primarily due to increased sales as well as improved rate adequacy. The loss and combined ratios decreased during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in the average severity of losses.

Credit Products

Credit-related property product results for the periods indicated were as follows (in thousands, except percentages):


	Three months ended March 31,
	2018			2017			Change
Net premiums written	$	39,344		$	42,917		$	(3,573	)
Net premiums earned		39,040			42,465			(3,425	)
Loss ratio		59.3	%		47.5	%		11.8	%
Combined ratio		114.3	%		106.7	%		7.6	%

Credit-related property products are offered on automobiles, furniture and appliances in connection with the financing of those items. These policies pay an amount if the insured property is lost or damaged and the amount paid is not directly related to an event affecting the consumer’s ability to pay the debt.

Net written and earned premiums decreased during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in Collateral Protection Insurance (CPI) business. The loss and combined ratios increased during the three months ended March 31, 2018 compared to 2017 primarily due to an increase in claims in the Guaranteed Auto Protection (GAP) business partially resulting from 2017 catastrophes that caused flooding to automobiles.

Corporate and Other

Corporate and Other segment financial results for the periods indicated were as follows (in thousands):


	Three months ended March 31,
	2018			2017		Change
Other revenues
Net investment income	$	(13,424	)	$	10,070	$	(23,494	)
Realized investment gains, net		504			7,225		(6,721	)
Other Income		1,813			1,280		533

Total other revenues		(11,107	)		18,575		(29,682	)

Benefits, losses and expenses
Other operating expenses		9,966			9,678		288

Total benefits, losses and expenses		9,966			9,678		288

Income (loss) before other items and federal income taxes	$	(21,073	)	$	8,897	$	(29,970	)

Earnings

Earnings decreased during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in net investment income attributable to an unrealized loss on equity securities and a decrease in realized investment gains on common stock due to unfavorable market conditions. Net investment income for the three months ended March 31, 2018 included unrealized losses on equity securities as a result of our adoption of new accounting guidance which impacted the first quarter of 2018, but not the first quarter of 2017.

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. Our investment operations are regulated primarily by the state insurance departments where our insurance companies are domiciled. Investment activities, including setting investment policies and defining acceptable risk levels, are subject to oversight by our Board of Directors, which is assisted by our Finance Committee and Management Risk Committee.

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):


	March 31, 2018				December 31, 2017
Bonds held-to-maturity, at amortized cost	$	7,915,973	35.9	%	$	7,552,959	34.5	%
Bonds available-for-sale, at fair value		6,145,010	27.9			6,145,308	28.1
Equity securities, at fair value		1,770,753	8.0			1,784,226	8.2
Mortgage loans, net of allowance		4,920,041	22.3			4,749,999	21.7
Policy loans		374,930	1.7			377,103	1.7
Investment real estate, net of accumulated depreciation		536,699	2.4			532,346	2.4
Short-term investments		284,456	1.4			658,765	3.0
Other invested assets		82,722	0.4			80,165	0.4

Total investments	$	22,030,584	100.0	%	$	21,880,871	100.0	%

The increase in our total investments at March 31, 2018 compared to December 31, 2017 was primarily a result of an increase in bonds held-to-maturity and mortgage loans somewhat offset by a reduction in short-term investments.

Bonds—We allocate most of our fixed maturity securities to support our insurance business. At March 31, 2018, our fixed maturity securities had an estimated fair value of $14.1 billion, which was $92.0 million, or 0.65%, above amortized cost. At December 31, 2017, our fixed maturity securities had an estimated fair value of $13.9 billion, which was $0.4 billion, or 3.0%, above amortized cost. The estimated fair value for securities due in one year or less decreased from $0.5 billion as of December 31, 2017 to $0.4 billion as of March 31, 2018. For additional information regarding total bonds by credit quality rating, refer to Note 4, Investments in Securities, of the Notes to the Unaudited Consolidated Financial Statements.

Equity Securities—We invest in companies that are publicly traded on national U.S. stock exchanges. See Note 4, Investments in Securities, of the Notes to the Unaudited Consolidated Financial Statements for the cost, gross unrealized gains and losses, and fair value of the 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 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 4.7% at March 31, 2018 and December 31, 2017.

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 March 31, 2018, we had $374.9 million in policy loans with a loan to surrender value of 62.5%, and at December 31, 2017, we had $377.1 million in policy loans with a loan to surrender value of 62.8%. 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 valuation allowances, 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.

Net Investment Income and Net Realized Gains (Losses)

Net investment income decreased $52.5 million during the three months ended March 31, 2018 compared to 2017 primarily due to a $32.6 million unrealized loss on equity securities and a $37.2 million decrease in net realized and net unrealized gains and losses on equity-indexed options as a result of decreases in the S&P 500, partially offset by an increase in bonds and mortgage loan income. Equity-indexed options are recorded at fair value with changes in fair value recorded as investment income. Net investment income for the three months ended March 31, 2018 included unrealized losses on equity securities as a result of our adoption of new accounting guidance which impacted the first quarter of 2018, but not the first quarter of 2017.

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 generally not accrued on loans more than 90 days past due or when the collection of interest is not considered probable. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in net investment income in the period received.

Net realized gains decreased $11.9 million during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in the sale of bonds, equity securities and certain real estate holdings. Other-than-temporary impairment on investment securities decreased $5.2 million during the three months ended March 31, 2018 compared to 2017.

Net Unrealized Gains and Losses

The unrealized gains and losses of our fixed maturity and equity securities investment portfolio are shown below (in thousands):


	March 31, 2018			December 31, 2017			Change
Held-to-Maturity
Gains	$	129,339		$	240,713		$	(111,374	)
Losses		(81,588	)		(19,319	)		(62,269	)

Net gains (losses)		47,751			221,394			(173,643	)

Available-for-Sale
Gains		102,715			204,803			(102,088	)
Losses		(58,476	)		(17,396	)		(41,080	)

Net gains (losses)		44,239			187,407			(143,168	)

Equity Securities
Gains		1,006,158			1,033,809			(27,651	)
Losses		(12,145	)		(7,166	)		(4,979	)

Net gains (losses)		994,013			1,026,643			(32,630	)

Total	$	1,086,003		$	1,435,444		$	(349,441	)

The net change in the unrealized gains on fixed maturity securities between March 31, 2018 and December 31, 2017 is primarily attributable to the increase in benchmark ten-year interest rates which were 2.74% and 2.41% respectively. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.

The net unrealized gains of our equity securities decreased $32.6 million at March 31, 2018 compared to December 31, 2017 attributable to unfavorable market conditions.

Liquidity

Our liquidity requirements have been and are expected to continue to be met by funds from operations, comprised of premiums received from our customers, collateral for derivative transactions, and investment income. The primary use of cash has been and is expected to continue to be payment of policyholder benefits and claims incurred and to fund our operating expenses. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management considers our current liquidity position to be sufficient to meet anticipated demands over the next twelve months. Our contractual obligations are not expected to have a significant negative impact to cash flow from operations.

Changes in interest rates during 2018 and market expectations for potentially higher rates through 2019, may lead to an increase in the volume of annuity contracts, which may be partially offset by increases in surrenders. Our defined benefit plans are frozen and currently adequately funded; however, low interest rates, increased longevity of participants, and rising Pension Benefit Guaranty Corporation (“PBGC”) premiums may cause us to increase our funding of the plans. Future contributions to our defined benefit plans are not expected to significantly impact cash flow and are expected to enhance overall funded status of plans. No unusually large capital expenditures are expected in the next 12-24 months. We have paid dividends to stockholders for over 110 consecutive years and expect to continue this trend. There are no other known trends or uncertainties regarding product pricing, changes in product lines or rising costs that are expected to have a significant impact to cash flows from operations.

Funds received as premium payments and deposits, that are not used for liquidity requirements are generally invested in bonds and commercial mortgages. Funds are invested with the intent that income from the investments and proceeds from the maturities will meet our ongoing cash flow needs. We historically have not had to liquidate invested assets in order to cover cash flow needs. We believe our portfolio of highly liquid available-for-sale investment securities, including equity securities, is sufficient to meet future liquidity needs as necessary.

The Company holds collateral 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. As the value of a derivative asset declines or increases, the collateral requirements would also decline or increase respectively. For more information, see Note 7, Derivative Instruments, of the Notes to the Unaudited Consolidated Financial Statements.

Our cash and cash equivalents and short-term investment position decreased from $1.0 billion at December 31, 2017 to $0.6 billion at March 31, 2018. The decrease primarily relates to a decrease in commercial paper.

A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flow 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 Consolidated Financial Statements.

Capital Resources

Our capital resources are summarized below (in thousands):


	March 31, 2018			December 31, 2017
American National stockholders’ equity, excluding accumulated other comprehensive income, net of tax (“AOCI”)	$	5,299,484		$	4,604,543
Accumulated other comprehensive income (loss)		(86,070	)		642,216

Total American National stockholders’ equity	$	5,213,414		$	5,246,759

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 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 $28.0 million and $28.4 million at March 31, 2018 and December 31, 2017, respectively.

The changes in our capital resources are summarized below (in thousands):


	Three months ended March 31, 2018
	Capital and Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Net income attributable to American National	$	18,777		$	—		$	18,777
Dividends to shareholders		(22,089	)		—			(22,089	)
Change in net unrealized losses on debt securities		—			(91,333	)		(91,333	)
Defined benefit pension plan adjustment		—			789			789
Foreign currency transaction and translation adjustment		—			(366	)		(366	)
Cumulative effect of accounting changes		697,307			(637,376	)		59,931
Other		946			—			946

Total	$	694,941		$	(728,286	)	$	(33,345	)

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 March 31, 2018 and December 31, 2017, American National Insurance Company’s statutory capital and surplus was $3,244,268,000 and $3,293,474,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2018 and December 31, 2017, substantially above 200% of the authorized control level.

The achievement of long-term growth will require growth in American National Insurance Company’s and our 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, 2017. We expect to have the capacity to pay our obligations as they come due.

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 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 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 see Note 17, Related Party Transactions, of the Notes to the Unaudited Consolidated Financial Statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk has not changed materially from those disclosed in our 2017 Annual Report on form 10-K filed with the SEC on February 28, 2018.

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 March 31, 2018. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, 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 March 31, 2018 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 Consolidated Financial Statements.

ITEM 1A.

RISK FACTORS

There have been no material changes with respect to the risk factors as previously disclosed in our 2017 Annual Report on Form 10-K filed with the SEC on February 28, 2018.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS


Exhibit Number		Basic Documents

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

3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit No. 3.2 to the registrant’s Current Report on Form 8-K filed February 23, 2018).

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		The following unaudited financial information from American National Insurance Company’s Quarterly Report on Form 10-Q for three months ended March 31, 2018 formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Financial Position, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to the Unaudited Consolidated Financial Statements.

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: May 8, 2018