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 June 30, 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 August 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 June 30, 2018 and December 31, 2017	3

	Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018 and 2017	5

	Consolidated Statements of Changes in Equity for the six months ended June 30, 2018 and 2017	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 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	37

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	56

ITEM 4.	CONTROLS AND PROCEDURES	56

	PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	56

ITEM 1A.	RISK FACTORS	57

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	59

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	59

ITEM 4.	MINE SAFETY DISCLOSURES	59

ITEM 5.	OTHER INFORMATION	59

ITEM 6.	EXHIBIT INDEX	60

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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


	June 30, 2018			December 31, 2017
ASSETS
Fixed maturity, bonds held-to-maturity, at amortized cost (Fair value $7,835,345 and $7,774,353)	$	7,876,853		$	7,552,959
Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $6,073,143 and $5,957,901)		6,050,137			6,145,308
Equity securities, at fair value (Cost $780,682 and $757,583)		1,820,702			1,784,226
Mortgage loans on real estate, net of allowance		5,114,518			4,749,999
Policy loans		376,128			377,103
Investment real estate, net of accumulated depreciation of $261,921 and $260,904		529,928			532,346
Short-term investments		302,885			658,765
Other invested assets		85,256			80,165

Total investments		22,156,407			21,880,871

Cash and cash equivalents		441,234			375,837
Investments in unconsolidated affiliates		525,371			484,207
Accrued investment income		191,229			187,670
Reinsurance recoverables		436,132			418,589
Prepaid reinsurance premiums		55,790			63,625
Premiums due and other receivables		361,025			314,345
Deferred policy acquisition costs		1,452,888			1,373,844
Property and equipment, net of accumulated depreciation of $227,829 and $217,076		112,834			115,818
Current tax receivable		717			44,170
Other assets		149,727			158,024
Separate account assets		947,484			969,764

Total assets	$	26,830,838		$	26,386,764

LIABILITIES
Future policy benefits
Life	$	3,004,040		$	2,997,353
Annuity		1,477,802			1,400,150
Accident and health		55,366			57,104
Policyholders’ account balances		12,430,673			12,060,045
Policy and contract claims		1,457,790			1,390,561
Unearned premium reserve		928,731			875,294
Other policyholder funds		324,435			334,501
Liability for retirement benefits		109,034			114,538
Notes payable		136,730			137,458
Deferred tax liabilities, net		295,731			316,370
Other liabilities		420,955			477,855
Separate account liabilities		947,484			969,764

Total liabilities		21,588,771			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 26,885,449 and 26,931,884 shares		30,832			30,832
Additional paid-in capital		20,650			19,193
Accumulated other comprehensive income (loss)		(110,734	)		642,216
Retained earnings		5,401,965			4,656,134
Treasury stock, at cost		(108,492	)		(101,616	)

Total American National stockholders’ equity		5,234,221			5,246,759
Noncontrolling interest		7,846			9,012

Total equity		5,242,067			5,255,771

Total liabilities and equity	$	26,830,838		$	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 June 30,						Six months ended June 30,
	2018			2017			2018			2017
PREMIUMS AND OTHER REVENUE
Premiums
Life	$	84,595		$	79,287		$	165,971		$	156,761
Annuity		67,228			65,389			137,844			95,198
Accident and health		48,870			36,593			89,885			73,632
Property and casualty		360,047			333,250			712,020			660,700
Other policy revenues		71,138			66,076			142,477			129,528
Net investment income		246,741			234,618			455,410			463,121
Net realized investment gains		16,082			11,401			18,181			25,409
Other-than-temporary impairments		1,595			(1,469	)		—			(8,252	)
Net unrealized gains on equity securities		44,492			—			11,862			—
Other income		11,283			8,948			21,796			17,793

Total premiums and other revenues		952,071			834,093			1,755,446			1,613,890

BENEFITS, LOSSES AND EXPENSES
Policyholder benefits
Life		96,958			101,460			195,504			202,626
Annuity		82,103			78,489			166,849			122,478
Claims incurred
Accident and health		32,310			23,198			60,450			47,578
Property and casualty		280,126			254,180			522,616			481,710
Interest credited to policyholders’ account balances		105,731			94,548			176,276			190,556
Commissions for acquiring and servicing policies		149,737			141,445			294,433			266,937
Other operating expenses		123,947			125,970			254,341			252,031
Change in deferred policy acquisition costs		(20,116	)		(27,695	)		(37,082	)		(37,182	)

Total benefits, losses and expenses		850,796			791,595			1,633,387			1,526,734

Income before federal income tax and other items		101,275			42,498			122,059			87,156

Less: Provision for federal income taxes
Current		15,638			5,148			13,533			3,944
Deferred		6,319			8,376			9,613			23,315

Total provision for federal income taxes		21,957			13,524			23,146			27,259

Income after federal income tax		79,318			28,974			98,913			59,897

Equity in earnings of unconsolidated affiliates		6,421			12,313			5,876			21,813
Other components of net periodic pension costs, net of tax		(1,677	)		(5,588	)		(2,469	)		(6,820	)

Net income		84,062			35,699			102,320			74,890
Less: Net loss attributable to noncontrolling interest, net of tax		(77	)		(260	)		(596	)		(909	)

Net income attributable to American National	$	84,139		$	35,959		$	102,916		$	75,799

Amounts available to American National common stockholders
Earnings per share
Basic	$	3.13		$	1.34		$	3.83		$	2.82
Diluted		3.12			1.33			3.82			2.81
Cash dividends to common stockholders		0.82			0.82			1.64			1.64
Weighted average common shares outstanding		26,883,276			26,892,656			26,886,196			26,896,965
Weighted average common shares outstanding and dilutive potential common shares		26,910,257			26,955,881			26,933,123			26,966,175

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 June 30,						Six months ended June 30,
	2018			2017			2018			2017
Net income	$	84,062		$	35,699		$	102,320		$	74,890

Other comprehensive income (loss), net of tax
Change in net unrealized gains (losses) on securities		(36,388	)		40,676			(127,721	)		96,588
Foreign currency transaction and translation adjustments		(134	)		171			(500	)		283
Defined benefit pension plan adjustment		1,601			6,207			2,390			7,741

Other comprehensive income (loss), net of tax		(34,921	)		47,054			(125,831	)		104,612

Total comprehensive income (loss)		49,141			82,753			(23,511	)		179,502
Less: Comprehensive loss attributable to noncontrolling interest		(77	)		(260	)		(596	)		(909	)

Total comprehensive income (loss) attributable to American National	$	49,218		$	83,013		$	(22,915	)	$	180,411

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited and in thousands)


	Six months ended June 30,
	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		1,173			1,963
Amortization of restricted stock		284			413

Balance at end of the period		20,650			18,782

Accumulated Other Comprehensive Income (Loss)
Balance as of January 1,		642,216			455,899
Cumulative effect of accounting change		(627,119	)		—
Other comprehensive income (loss)		(125,831	)		104,612

Balance at end of the period		(110,734	)		560,511

Retained Earnings
Balance as of January 1,		4,656,134			4,250,818
Cumulative effect of accounting changes		687,051			—
Net income attributable to American National		102,916			75,799
Cash dividends to common stockholders		(44,136	)		(44,168	)

Balance at end of the period		5,401,965			4,282,449

Treasury Stock
Balance as of January 1,		(101,616	)		(101,777	)
Reissuance (purchase) of treasury shares		(6,876	)		161

Balance at end of the period		(108,492	)		(101,616	)

Noncontrolling Interest
Balance as of January 1,		9,012			9,317
Contributions		—			224
Distributions		(570	)		(245	)
Net loss attributable to noncontrolling interest		(596	)		(909	)

Balance at end of the period		7,846			8,387

Total Equity	$	5,242,067		$	4,799,345

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)


	Six months ended June 30,
	2018			2017
OPERATING ACTIVITIES
Net income	$	102,320		$	74,890
Adjustments to reconcile net income to net cash provided by operating activities
Net realized investment gains		(18,181	)		(25,409	)
Other-than-temporary impairments		—			8,252
Accretion of premiums, discounts and loan origination fees		(4,736	)		(5,368	)
Net capitalized interest on policy loans and mortgage loans		(20,555	)		(18,110	)
Depreciation		25,783			28,037
Interest credited to policyholders’ account balances		176,276			190,556
Charges to policyholders’ account balances		(142,477	)		(129,528	)
Deferred federal income tax expense		9,613			23,315
Equity in earnings of unconsolidated affiliates		(5,876	)		(21,813	)
Distributions from equity method investments		371			852
Changes in
Policyholder liabilities		205,125			149,262
Deferred policy acquisition costs		(37,082	)		(37,182	)
Reinsurance recoverables		(17,543	)		24,229
Premiums due and other receivables		(46,680	)		(29,573	)
Prepaid reinsurance premiums		7,835			(1,036	)
Accrued investment income		(3,559	)		610
Current tax receivable/payable		43,453			(7,397	)
Liability for retirement benefits		(2,479	)		(2,748	)
Fair value of option securities		(7,534	)		(33,194	)
Fair value of equity securities		(11,862	)		—
Other, net		1,911			43,140

Net cash provided by operating activities		254,123			231,785

INVESTING ACTIVITIES
Proceeds from sale/maturity/prepayment of
Held-to-maturity securities		395,053			421,911
Available-for-sale securities		277,143			281,098
Equity securities		24,369			33,186
Investment real estate		11,577			40,549
Mortgage loans		219,153			319,991
Policy loans		28,747			26,258
Other invested assets		50,238			41,684
Disposals of property and equipment		—			3,049
Distributions from unconsolidated affiliates		10,105			15,199
Payment for the purchase/origination of
Held-to-maturity securities		(780,263	)		(285,293	)
Available-for-sale securities		(317,902	)		(273,051	)
Equity securities		(36,894	)		(28,547	)
Investment real estate		(23,640	)		(18,538	)
Mortgage loans		(561,586	)		(607,374	)
Policy loans		(12,886	)		(12,442	)
Other invested assets		(46,212	)		(21,014	)
Additions to property and equipment		(8,825	)		(17,698	)
Contributions to unconsolidated affiliates		(56,907	)		(16,611	)
Change in short-term investments		355,880			(384,652	)
Change in collateral held for derivatives		(1,532	)		16,713
Other, net		(5,739	)		17,082

Net cash used in investing activities		(480,121	)		(448,500	)

FINANCING ACTIVITIES
Policyholders’ account deposits		973,556			1,080,435
Policyholders’ account withdrawals		(636,727	)		(670,071	)
Change in notes payable		(728	)		4,135
Dividends to stockholders		(44,136	)		(44,168	)
Payments to noncontrolling interest		(570	)		(21	)

Net cash provided by financing activities		291,395			370,310

NET INCREASE IN CASH AND CASH EQUIVALENTS		65,397			153,595
Beginning of the period		375,837			289,338

End of the period	$	441,234		$	442,933

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 have identified the majority of the lease contracts and 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 six months ended June 30, 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 $30.4 million participating policyholders’ interest, net of tax, related to unrealized gains and losses on equity securities, were reclassified from accumulated other comprehensive income to retained earnings. In April 2018, an additional $10.2 million deferred policy acquisition cost adjustment, net of tax, related to net unrealized gains and losses on equity securities, was reclassified from accumulated other comprehensive income to retained earnings. Earnings increased $35.1 million and $9.4 million, net of tax, for the three and six months ended June 30, 2018, respectively from the change in unrealized gains and losses on equity securities.

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 six months ended June 30, 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 $5.6 million and $6.8 million, net of tax, for the three and six months ended June 30, 2017, respectively, 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 pension plans have been frozen, the components of net periodic benefit costs 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):


	June 30, 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	$	268,760	$	7,183	$	(442	)	$	275,501
Foreign governments		3,986		461		—			4,447
Corporate debt securities		7,328,304		74,389		(126,294	)		7,276,399
Residential mortgage-backed securities		273,945		6,529		(3,370	)		277,104
Collateralized debt securities		595		16		—			611
Other debt securities		1,263		20		—			1,283

Total bonds held-to-maturity		7,876,853		88,598		(130,106	)		7,835,345

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		28,306		355		(356	)		28,305
U.S. states and political subdivisions		857,229		14,506		(4,671	)		867,064
Foreign governments		5,000		1,179		—			6,179
Corporate debt securities		5,147,199		52,642		(86,922	)		5,112,919
Residential mortgage-backed securities		32,425		351		(761	)		32,015
Collateralized debt securities		2,984		677		(6	)		3,655

Total bonds available-for-sale		6,073,143		69,710		(92,716	)		6,050,137

Equity securities
Common stock		762,365		1,044,696		(8,593	)		1,798,468
Preferred stock		18,317		3,917		—			22,234

Total equity securities		780,682		1,048,613		(8,593	)		1,820,702

Total investments in securities	$	14,730,678	$	1,206,921	$	(231,415	)	$	15,706,184


	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):


	June 30, 2018
	Bonds Held-to-Maturity				Bonds Available-for-Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	310,936	$	317,255	$	90,967	$	91,987
Due after one year through five years		4,143,583		4,172,564		2,407,071		2,424,032
Due after five years through ten years		2,815,126		2,753,428		3,030,740		2,993,068
Due after ten years		607,208		592,098		544,365		541,050

Total	$	7,876,853	$	7,835,345	$	6,073,143	$	6,050,137

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 June 30,						Six months ended June 30,
	2018			2017			2018			2017
Proceeds from sales of available-for-sale securities	$	42,932		$	16,834		$	90,113		$	44,557
Gross realized gains		11,123			4,162			12,547			14,988
Gross realized losses		(32	)		(140	)		(587	)		(146	)

Gains and losses are determined using specific identification of the securities sold. During the six months ended June 30, 2018 and 2017, bonds with a carrying value of $73,071,000 and $15,000,000, respectively, were transferred from held-to-maturity to available-for-sale after a 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):


	Six months ended June 30,
	2018			2017
Bonds available-for-sale	$	(210,413	)	$	73,102
Adjustments for
Deferred policy acquisition costs		41,962			(8,701	)
Participating policyholders’ interest		11,924			(8,185	)
Deferred federal income tax benefit (expense)		28,806			(19,457	)

Change in net unrealized gains (losses) on debt securities, net of tax	$	(127,721	)	$	36,759

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


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Net gains on equity securities	$	55,567		$	36,483		$	23,992		$	107,139
Less: Net gains on equity securities sold		(11,075	)		(3,735	)		(12,130	)		(15,095	)

Unrealized gains on equity securities	$	44,492		$	32,748		$	11,862		$	92,044

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):


	June 30, 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	$	(442	)	$	38,792	$	—		$	—	$	(442	)	$	38,792
Corporate debt securities		(116,879	)		3,691,888		(9,415	)		168,632		(126,294	)		3,860,520
Residential mortgage-backed securities		(2,218	)		107,172		(1,152	)		16,854		(3,370	)		124,026

Total bonds held-to-maturity		(119,539	)		3,837,852		(10,567	)		185,486		(130,106	)		4,023,338

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		(355	)		23,092		(1	)		549		(356	)		23,641
U.S. states and political subdivisions		(3,236	)		229,026		(1,435	)		26,551		(4,671	)		255,577
Corporate debt securities		(74,246	)		2,644,766		(12,676	)		142,449		(86,922	)		2,787,215
Residential mortgage-backed securities		(594	)		26,565		(167	)		1,292		(761	)		27,857
Collateralized debt securities		(1	)		159		(5	)		121		(6	)		280

Total bonds available-for-sale		(78,432	)		2,923,608		(14,284	)		170,962		(92,716	)		3,094,570

Equity securities
Common stock		(8,460	)		65,955		(133	)		776		(8,593	)		66,731

Total equity securities		(8,460	)		65,955		(133	)		776		(8,593	)		66,731

Total	$	(206,431	)	$	6,827,415	$	(24,984	)	$	357,224	$	(231,415	)	$	7,184,639


	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 June 30, 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):


	June 30, 2018							December 31, 2017
	Amortized		Estimated		% of Fair			Amortized		Estimated		% of Fair
	Cost		Fair Value		Value			Cost		Fair Value		Value
AAA	$	622,719	$	634,678		4.6	%	$	638,039	$	664,396		4.8	%
AA		1,264,185		1,273,017		9.1			1,220,544		1,264,282		9.0
A		4,963,507		4,927,798		35.5			4,856,802		4,997,574		35.9
BBB		6,604,589		6,569,963		47.3			6,273,220		6,480,719		46.6
BB and below		494,996		480,026		3.5			522,255		512,690		3.7

Total	$	13,949,996	$	13,885,482		100.0	%	$	13,510,860	$	13,919,661		100.0	%

Equity securities by market sector distribution are shown below:


	June 30, 2018			December 31, 2017
Consumer goods		21.1	%		20.2	%
Energy and utilities		8.9			8.6
Finance		19.8			21.9
Healthcare		11.7			11.8
Industrials		9.2			9.5
Information technology		21.5			20.0
Other		7.8			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:


	June 30, 2018			December 31, 2017
East North Central		14.9	%		15.4	%
East South Central		2.9			3.1
Mountain		16.5			14.0
Pacific		16.3			16.5
South Atlantic		12.5			14.1
West South Central		29.9			29.8
Other		7.0			7.1

Total		100.0	%		100.0	%

For the six months ended June 30, 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 six months ended June 30, 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
	Past Due		Past Due		90 Days		Total		Current		Amount			Percent
June 30, 2018
Industrial	$	—	$	—	$	28,822	$	28,822	$	834,897	$	863,719			16.8
Office		—		—		19,625		19,625		1,774,265		1,793,890			34.9
Retail		—		—		—		—		766,843		766,843			14.9
Other		—		—		—		—		1,708,977		1,708,977			33.4

Total	$	—	$	—	$	48,447	$	48,447	$	5,084,982	$	5,133,429			100.0

Allowance for loan losses												(18,911	)

Total, net of allowance											$	5,114,518

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

There were no unamortized purchase discounts for the six months ended June 30, 2018 or during the year ended December 31, 2017. Total mortgage loans were also net of unamortized origination fees of $31,510,000 and $32,766,000 at June 30, 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 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 at January 1, 2018		451	$	4,762,315		16,041		3		$	6,550			2,825			454	$	4,768,865	$	18,866

Change in allowance		—		—		554		—			—			(509	)		—		—		45
Net change in recorded investment		5		366,504		—		(1	)		(1,940	)		—			4		364,564		—

Ending balance at June 30, 2018		456	$	5,128,819	$	16,595		2		$	4,610		$	2,316			458	$	5,133,429	$	18,911

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):


	Six months ended June 30,
	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 were no loans determined to be troubled debt restructurings for the six months ended June 30, 2018.

Note 6 – Real Estate and Other Investments

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


	June 30, 2018			December 31, 2017
Industrial		5.5	%		6.0	%
Office		40.0			39.0
Retail		40.0			39.3
Other		14.5			15.7

Total		100.0	%		100.0	%


	June 30, 2018			December 31, 2017
East North Central		5.4	%		6.1	%
East South Central		4.5			3.6
Mountain		13.2			13.2
Pacific		8.3			8.5
South Atlantic		15.4			14.0
West South Central		50.7			52.4
Other		2.5			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):


	June 30, 2018		December 31, 2017
Investment real estate	$	143,154	$	148,456
Short-term investments		501		501
Cash and cash equivalents		10,365		6,320
Other receivables		4,447		4,461
Other assets		13,651		15,920

Total assets of consolidated VIEs	$	172,118	$	175,658

Notes payable	$	136,730	$	137,458
Other liabilities		5,373		5,616

Total liabilities of consolidated VIEs	$	142,103	$	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 $27,515,000 and $28,377,000 at June 30, 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	June 30, 2018		December 31, 2017
LIBOR	2020	$	10,131	$	9,702
90 day LIBOR + 2.5%	2021		40,403		40,124
4% fixed	2022		86,196		87,632

Total		$	136,730	$	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):


	June 30, 2018				December 31, 2017
	Carrying Amount		Maximum Exposure to Loss		Carrying Amount		Maximum Exposure to Loss
Investment in unconsolidated affiliates	$	342,821	$	342,821	$	314,808	$	314,808
Mortgage loans		621,663		621,663		493,014		493,014
Accrued investment income		6,838		6,838		1,817		1,817

As of June 30, 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):


Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Statements of Financial Position	June 30, 2018						December 31, 2017
		Number of Instruments		Notional Amounts		Estimated Fair Value		Number of Instruments		Notional Amounts		Estimated Fair Value
		Number of Instruments		Notional Amounts		Estimated Fair Value		Number of Instruments		Notional Amounts		Estimated Fair Value
Equity-indexed options	Other invested assets		482	$	2,219,850	$	217,341		468	$	1,885,600	$	220,190
Equity-indexed embedded derivative	Policyholders’ account balances		85,281		2,134,700		592,913		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 June 30,						Six months ended June 30,
		2018			2017			2018			2017
Equity-indexed options	Net investment income	$	21,778		$	13,430		$	7,633		$	36,563
Equity-indexed embedded derivative	Interest credited to policyholders’ account balances		(17,599	)		(18,977	)		(4,163	)		(44,104	)

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):


		June 30, 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	$	50,343	$	50,313	$	50,313	$	—	$	30
Goldman-Sachs	A3/BBB+		992		1,030		992		38		—
ING	Baa1/A-		26,646		26,930		26,646		284		—
Morgan Stanley	A3/BBB+		17,822		17,506		17,506		—		316
NATIXIS*	A2/A		40,501		40,370		40,370		—		131
SunTrust	Baa1/BBB+		40,766		39,210		39,210		—		1,556
Wells Fargo	A2/A-		40,271		38,860		38,860		—		1,411

Total		$	217,341	$	214,219	$	213,897	$	322	$	3,444


		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 June 30,					Six months ended June 30,
	2018		2017			2018		2017
Bonds	$	142,529	$	135,453		$	282,624	$	269,803
Dividends on equity securities		10,898		10,274			20,338		19,006
Mortgage loans		58,999		67,316			122,867		125,020
Real estate		4,212		(554	)		8,495		(1,749	)
Options		21,778		13,430			7,633		36,563
Other invested assets		8,325		8,699			13,453		14,478

Total	$	246,741	$	234,618		$	455,410	$	463,121

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


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Bonds	$	6,070		$	6,564		$	6,737		$	10,068
Equity securities		11,075			3,735			12,130			15,095
Mortgage loans		(856	)		(3,079	)		(554	)		(4,705	)
Real estate		(197	)		4,211			(114	)		4,999
Other invested assets		(10	)		(30	)		(18	)		(48	)

Total	$	16,082		$	11,401		$	18,181		$	25,409

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


	Three months ended June 30,					Six months ended June 30,
	2018		2017			2018		2017
Bonds	$	—	$	—		$	—	$	(6,000	)
Equity securities		1,595		(1,469	)		—		(2,252	)

Total	$	1,595	$	(1,469	)	$	—	$	(8,252	)

Note 9 – Fair Value of Financial Instruments

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


	June 30, 2018				December 31, 2017
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity	$	7,876,853	$	7,835,345	$	7,552,959	$	7,774,353
Fixed maturity securities, bonds available-for-sale		6,050,137		6,050,137		6,145,308		6,145,308
Equity securities		1,820,702		1,820,702		1,784,226		1,784,226
Equity-indexed options		217,341		217,341		220,190		220,190
Mortgage loans on real estate, net of allowance		5,114,518		5,138,434		4,749,999		4,811,006
Policy loans		376,128		376,128		377,103		377,103
Short-term investments		302,885		302,885		658,765		658,765
Separate account assets		947,484		947,484		969,764		969,764

Total financial assets	$	22,706,048	$	22,688,456	$	22,458,314	$	22,740,715

Financial liabilities
Investment contracts	$	9,981,106	$	9,981,106	$	8,990,771	$	8,990,771
Embedded derivative liability for equity-indexed contracts		592,913		592,913		512,526		512,526
Notes payable		136,730		136,730		137,458		137,458
Separate account liabilities		947,484		947,484		969,764		969,764

Total financial liabilities	$	11,658,233	$	11,658,233	$	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. If applicable, these estimates would be disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services 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 June 30, 2018 and December 31, 2017, the one year implied volatility used to estimate embedded derivative value was 13.7%.

Fair values of indexed life and annuity liabilities are calculated using the discounted cash flow technique. Shown below are the significant unobservable inputs used to calculate the Level 3 fair value of the embedded derivatives within policyholder contract deposits (in millions, except range percentages):


	Fair Value					Range
	June 30, 2018		December 31, 2017		Unobservable Input	June 30, 2018			December 31, 2017
Indexed Annuities	$	581.6	$	498.3	Lapse Rate		1-66	%		1-66	%
					Mortality Multiplier		90-100	%		90-100	%
					Equity Volatility		10-40	%		7-30	%
Indexed Life		11.3		14.2	Equity Volatility		10-40	%		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 June 30, 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	$	275,501	$	—	$	275,501	$	—
Foreign governments		4,447		—		4,447		—
Corporate debt securities		7,276,399		—		7,276,399		—
Residential mortgage-backed securities		277,104		—		277,104		—
Collateralized debt securities		611		—		611		—
Other debt securities		1,283		—		1,283		—

Total bonds held-to-maturity		7,835,345		—		7,835,345		—

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		28,305		—		28,305		—
U.S. states and political subdivisions		867,064		—		867,064		—
Foreign governments		6,179		—		6,179		—
Corporate debt securities		5,112,919		—		5,112,919		—
Residential mortgage-backed securities		32,015		—		32,015		—
Collateralized debt securities		3,655		—		3,655		—

Total bonds available-for-sale		6,050,137		—		6,050,137		—

Equity securities
Common stock		1,798,468		1,798,350		—		118
Preferred stock		22,234		22,234		—		—

Total equity securities		1,820,702		1,820,584		—		118

Options		217,341		—		—		217,341
Mortgage loans on real estate		5,138,434		—		5,138,434		—
Policy loans		376,128		—		—		376,128
Short-term investments		302,885		—		302,885		—
Separate account assets		947,484		—		947,484		—

Total financial assets	$	22,688,456	$	1,820,584	$	20,274,285	$	593,587

Financial liabilities
Investment contracts	$	9,981,106	$	—	$	—	$	9,981,106
Embedded derivative liability for equity-indexed contracts		592,913		—		—		592,913
Notes payable		136,730		—		—		136,730
Separate account liabilities		947,484		—		947,484		—

Total financial liabilities	$	11,658,233	$	—	$	947,484	$	10,710,749

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 June 30, 2018								Six months ended June 30, 2018
	Assets						Liability		Assets						Liability
	Investment			Equity-Indexed			Embedded		Investment			Equity-Indexed			Embedded
	Securities			Options			Derivative		Securities			Options			Derivative
Beginning balance, 2018	$	—		$	204,308		$	535,641	$	—		$	220,190		$	512,526
Net gain for derivatives included in net investment income		—			21,712			—		—			7,567			—
Net change included in interest credited		—			—			17,599		—			—			4,163
Purchases, sales and settlements or maturities
Purchases		—			26,084			—		—			43,012			—
Sales		—			—			—		—			—			—
Settlements or maturities		—			(34,763	)		—		—			(53,428	)		—
Premiums less benefits		—			—			39,673		—			—			76,224

Ending balance at June 30, 2018	$	—		$	217,341		$	592,913	$	—		$	217,341		$	592,913

Beginning balance, 2017	$	17,329		$	174,258		$	346,634	$	14,264		$	156,479		$	314,330
Total realized and unrealized investment gains (losses) included in other comprehensive income		105			—			—		(4,362	)		—			—
Net gain for derivatives included in net investment income		—			13,275			—		. —			36,333			—
Net change included in interest credited		—			—			18,977		—			—			44,104
Purchases, sales and settlements or maturities
Purchases		—			13,463			—		—			21,015			—
Sales		(1,582	)		(12,837	)		—		(3,539	)		(12,837	)		—
Settlements or maturities		—			(15,782	)		—		(3,010	)		(28,613	)		—
Premiums less benefits		—			—			24,578		—			—			31,755
Carry value transfers in		—			—					15,000
Gross transfers into Level 3		—			—			—		382			—			—
Gross transfers out of Level 3		—			—			—		(2,883	)		—			—

Ending balance at June 30, 2017	$	15,852		$	172,377		$	390,189	$	15,852		$	172,377		$	390,189

Within the net gain for derivatives included in net investment income were unrealized losses of $18,321,000 and gains of $13,660,000, relating to assets still held at June 30, 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 six months ended June 30, 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 June 30, 2018. The transfers out of Level 3 during the six months ended June 30, 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):


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

Additions		65,577			59,691			5,931			156,552			287,751
Amortization		(51,885	)		(42,007	)		(7,525	)		(149,252	)		(250,669	)
Effect of change in unrealized gains on available-for-sale debt securities		11,123			30,839			—			—			41,962

Net change		24,815			48,523			(1,594	)		7,300			79,044

Ending balance at June 30, 2018	$	816,091		$	475,020		$	35,212		$	126,565		$	1,452,888

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):


	Six months ended June 30,
	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		596,530			563,959
Prior years		(12,515	)		(40,137	)

Total incurred claims		584,015			523,822

Paid claims related to
Current		288,591			288,731
Prior years		240,544			205,702

Total paid claims		529,135			494,433

Net balance		1,016,845			953,209
Plus reinsurance recoverables		255,684			195,072

Unpaid claims balance, ending	$	1,272,529		$	1,148,281

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 $12,515,000 during the first six months of 2018 and decreased by approximately $40,137,000 during the first six months of 2017. This reflected lower-than-anticipated losses in the first six months of 2018 related to accident years prior to 2018 in workers compensation, 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 June 30, 2018 was $44,443,000.

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 June 30,												Six months ended June 30,
	2018						2017						2018						2017
	Amount			Rate			Amount*			Rate*			Amount			Rate			Amount*			Rate*
Income tax expense before tax on equity in earnings of unconsolidated affiliates	$	21,267			20.0	%	$	14,875			27.1	%	$	25,632			20.0	%	$	30,505			28.0	%
Tax on equity in earnings of unconsolidated affiliates		1,348			1.0			4,309			7.9			1,234			1.0			7,634			7.0

Total expected income tax expense at the statutory rate		22,615			21.0			19,184			35.0			26,866			21.0			38,139			35.0
Tax-exempt investment income		(836	)		(0.8	)		(1,769	)		(3.2	)		(1,679	)		(1.3	)		(3,601	)		(3.3	)
Deferred tax change		(600	)		(0.6	)		(464	)		(0.8	)		(909	)		(0.7	)		(1,231	)		(1.1	)
Dividend exclusion		(1,001	)		(0.9	)		(2,322	)		(4.2	)		(1,986	)		(1.6	)		(4,164	)		(3.8	)
Miscellaneous tax credits, net		(2,529	)		(2.3	)		(2,542	)		(4.6	)		(4,742	)		(3.7	)		(4,799	)		(4.4	)
Low income housing tax credit expense		1,252			1.2			1,256			2.3			2,504			2.0			2,509			2.3
Change in valuation allowance		2,700			2.5			—			—			2,700			2.1			—			—
Other items, net		356			0.3			141			0.3			392			0.3			322			0.3

Provision for federal income tax before interest expense		21,957			20.4			13,484			24.8			23,146			18.1			27,175			25.0
Interest expense		—			—			40			0.1			—			—			84			0.1

Total	$	21,957			20.4	%	$	13,524			24.9	%	$	23,146			18.1	%	$	27,259			25.1	%

Prior year revised to reflect the January 1, 2018 adoption of ASU 2017-07 Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. See Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements.

American National made income tax payments of $14,135,000 and $8,466,000 during the six months ended June 30, 2018 and 2017, respectively.

Management assesses both positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of its existing deferred tax assets. During the three months ended June 30, 2018, management determined that it is more-likely-than-not that the benefit from a deferred tax asset related to its investment in a joint venture will not be realized. In recognition of this risk, American National provided a valuation allowance of $2,700,000 as of June 30, 2018. The valuation allowance resulted in an increase to tax expense on the consolidated statements of operations.

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. With few exceptions, American National is no longer subject to examination for years before 2014. During the six months ended June 30, 2018, we 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 at January 1, 2018	$	716,878		$	(72,772	)	$	(1,890	)	$	642,216
Amounts reclassified from AOCI (net of tax benefit $462 and expense $635)		(1,740	)		2,390			—			650
Unrealized holding losses arising during the period (net of tax benefit $39,660)		(168,551	)		—			—			(168,551	)
Unrealized adjustment to DAC (net of tax expense $8,812)		33,150			—			—			33,150
Unrealized losses on investments attributable to participating policyholders’ interest (net of tax expense $2,504)		9,420			—			—			9,420
Foreign currency adjustment (net of tax benefit $133)		—			—			(500	)		(500	)
Cumulative effect of changes in accounting (net of tax benefit $334,955)		(627,119	)		—			—			(627,119	)

Ending balance at June 30, 2018	$	(37,962	)	$	(70,382	)	$	(2,390	)	$	(110,734	)

Beginning balance January 1, 2017	$	547,138		$	(88,603	)	$	(2,636	)	$	455,899
Amounts reclassified from AOCI (net of tax benefit $5,809 and expense $4,168)		(10,789	)		7,741			—			(3,048	)
Unrealized holding gains arising during the period (net of tax expense $63,610)		118,134			—			—			118,134
Unrealized adjustment to DAC (net of tax benefit $3,264)		(5,437	)		—			—			(5,437	)
Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $2,865)		(5,320	)		—			—			(5,320	)
Foreign currency adjustment (net of tax expense $152)		—			—			283			283

Ending balance at June 30, 2017	$	643,726		$	(80,862	)	$	(2,353	)	$	560,511

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:


	June 30, 2018			December 31, 2017
Common stock
Shares issued		30,832,449			30,832,449
Treasury shares		(3,947,000	)		(3,900,565	)

Outstanding shares		26,885,449			26,931,884
Restricted shares		(11,333	)		(74,000	)

Unrestricted outstanding shares		26,874,116			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		—			—		—			—		8,250			121.93
Exercised		(100	)		116.48		(62,667	)		116.48		(41,949	)		106.94
Forfeited		—			—		—			—		—			—
Expired		(1,601	)		114.17		—			—		—			—

Outstanding at June 30, 2018		885		$	92.11		11,333		$	75.44		19,066		$	111.54


	SAR			RS Shares		RS Units
Weighted-average contractual remaining life (in years)		0.45			4.63		0.78
Exercisable shares		885			N/A		N/A
Weighted-average exercise price	$	92.11		$	75.44	$	111.54
Weighted-average exercise price exercisable shares		92.11			N/A		N/A
Compensation expense (credit)
Three months ended June 30, 2018	$	(5,000	)	$	83,000	$	760,000
Three months ended June 30, 2017		(14,000	)		205,000		1,519,000
Six months ended June 30, 2018		(34,000	)		284,000		549,000
Six months ended June 30, 2017		(49,000	)		412,000		1,649,000
Fair value of liability award
June 30, 2018	$	27,000			N/A	$	2,280,000
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 11,333 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 June 30,				Six months ended June 30,
	2018		2017		2018		2017
Weighted average shares outstanding		26,883,276		26,892,656		26,886,196		26,896,965
Incremental shares from RS awards and RSUs		26,981		63,225		46,927		69,210

Total shares for diluted calculations		26,910,257		26,955,881		26,933,123		26,966,175

Net income attributable to American National (in thousands)	$	84,139	$	35,959	$	102,916	$	75,799
Basic earnings per share	$	3.13	$	1.34	$	3.83	$	2.82
Diluted earnings per share	$	3.12	$	1.33	$	3.82	$	2.81

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 June 30, 2018 and December 31, 2017, American National Insurance Company’s statutory capital and surplus was $3,234,095,000 and $3,293,474,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at June 30, 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 $69,345,000 and $66,625,000 at June 30, 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):


	June 30, 2018		December 31, 2017
Statutory capital and surplus
Life insurance entities	$	2,074,948	$	2,141,573
Property and casualty insurance entities		1,170,214		1,162,761


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018		2017
Statutory net income (loss)
Life insurance entities	$	12,850		$	20,809		$	16,113	$	18,342
Property and casualty insurance entities		(3,828	)		(5,639	)		9,230		1,172

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 June 30, 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 $1,096,000 and $2,262,000 at June 30, 2018 and December 31, 2017, respectively.

Note 15– Segment Information

Management organizes the business into five operating segments:

•

Life—consists of whole, term, universal, indexed and variable life insurance. Products are primarily sold through career, multiple-line, and independent agents as well as direct marketing channels.

•

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

•

Health—consists of medicare supplement, stop loss, other supplemental health products and credit disability insurance. Products are typically distributed through independent agents and managing general underwriters.

•

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

•

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

The accounting policies of the segments are the same as those described in Note 2 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 June 30, 2018
	Life			Annuity			Accident & Health		Property & Casualty			Corporate & Other		Total
Premiums and other revenues
Premiums	$	84,595		$	67,228		$	48,870	$	360,047		$	—	$	560,740
Other policy revenues		67,231			3,907			—		—			—		71,138
Net investment income		61,082			148,710			2,263		15,493			19,193		246,741
Net realized investment gains		—			—			—		—			17,677		17,677
Net unrealized gains on equity securities		—			—			—		—			44,492		44,492
Other income		512			631			6,809		2,264			1,067		11,283

Total premiums and other revenues		213,420			220,476			57,942		377,804			82,429		952,071

Benefits, losses and expenses
Policyholder benefits		96,958			82,103			—		—			—		179,061
Claims incurred		—			—			32,310		280,126			—		312,436
Interest credited to policyholders’ account balances		21,046			84,685			—		—			—		105,731
Commissions for acquiring and servicing policies		39,391			30,355			9,126		70,865			—		149,737
Other operating expenses		48,189			11,853			10,090		45,166			8,649		123,947
Change in deferred policy acquisition costs		(7,249	)		(8,811	)		506		(4,562	)		—		(20,116	)

Total benefits, losses and expenses		198,335			200,185			52,032		391,595			8,649		850,796

Income (loss) before federal income tax and other items	$	15,085		$	20,291		$	5,910	$	(13,791	)	$	73,780	$	101,275


	Three months ended June 30, 2017
	Life			Annuity			Accident & Health		Property & Casualty			Corporate & Other		Total
Premiums and other revenues
Premiums	$	79,287		$	65,389		$	36,593	$	333,250		$	—	$	514,519
Other policy revenues		62,464			3,612			—		—			—		66,076
Net investment income		60,689			131,952			2,505		15,775			23,697		234,618
Net realized investment gains		—			—			—		—			9,932		9,932
Other income		503			974			4,321		2,196			954		8,948

Total premiums and other revenues		202,943			201,927			43,419		351,221			34,583		834,093

Benefits, losses and expenses
Policyholder benefits		101,460			78,489			—		—			—		179,949
Claims incurred		—			—			23,198		254,180			—		277,378
Interest credited to policyholders’ account balances		19,876			74,672			—		—			—		94,548
Commissions for acquiring and servicing policies		36,773			33,407			6,270		64,995			—		141,445
Other operating expenses		47,660			11,992			9,627		44,506			12,185		125,970
Change in deferred policy acquisition costs		(10,707	)		(14,539	)		817		(3,266	)		—		(27,695	)

Total benefits, losses and expenses		195,062			184,021			39,912		360,415			12,185		791,595

Income (loss) before federal income tax and other items	$	7,881		$	17,906		$	3,507	$	(9,194	)	$	22,398	$	42,498

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):


	Six months ended June 30, 2018
	Life			Annuity			Accident & Health		Property & Casualty			Corporate & Other		Total
Premiums and other revenues
Premiums	$	165,971		$	137,844		$	89,885	$	712,020		$	—	$	1,105,720
Other policy revenues		134,962			7,515			—		—			—		142,477
Net investment income		118,850			262,190			4,617		31,354			38,399		455,410
Net realized investment gains		—			—			—		—			18,181		18,181
Net unrealized gains on equity securities		—			—			—		—			11,862		11,862
Other income		1,267			1,356			11,966		4,327			2,880		21,796

Total premiums and other revenues		421,050			408,905			106,468		747,701			71,322		1,755,446

Benefits, losses and expenses
Policyholder benefits		195,504			166,849			—		—			—		362,353
Claims incurred		—			—			60,450		522,616			—		583,066
Interest credited to policyholders’ account balances		37,311			138,965			—		—			—		176,276
Commissions for acquiring and servicing policies		78,911			60,359			15,142		140,021			—		294,433
Other operating expenses		99,139			23,172			20,448		92,967			18,615		254,341
Change in deferred policy acquisition costs		(13,692	)		(17,684	)		1,594		(7,300	)		—		(37,082	)

Total benefits, losses and expenses		397,173			371,661			97,634		748,304			18,615		1,633,387

Income (loss) before federal income tax and other items	$	23,877		$	37,244		$	8,834	$	(603	)	$	52,707	$	122,059


	Six months ended June 30, 2017
	Life			Annuity			Accident & Health		Property & Casualty			Corporate & Other		Total
Premiums and other revenues
Premiums	$	156,761		$	95,198		$	73,632	$	660,700		$	—	$	986,291
Other policy revenues		122,373			7,155			—		—			—		129,528
Net investment income		122,898			271,629			5,012		29,815			33,767		463,121
Net realized investment gains		—			—			—		—			17,157		17,157
Other income		1,119			1,639			8,667		4,134			2,234		17,793

Total premiums and other revenues		403,151			375,621			87,311		694,649			53,158		1,613,890

Benefits, losses and expenses
Policyholder benefits		202,626			122,478			—		—			—		325,104
Claims incurred		—			—			47,578		481,710			—		529,288
Interest credited to policyholders’ account balances		35,281			155,275			—		—			—		190,556
Commissions for acquiring and servicing policies		71,583			50,691			12,160		132,503			—		266,937
Other operating expenses		96,843			22,680			19,857		90,788			21,863		252,031
Change in deferred policy acquisition costs		(18,564	)		(17,170	)		2,149		(3,597	)		—		(37,182	)

Total benefits, losses and expenses		387,769			333,954			81,744		701,404			21,863		1,526,734

Income (loss) before federal income tax and other items	$	15,382		$	41,667		$	5,567	$	(6,755	)	$	31,295	$	87,156

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at June 30, 2018, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $748,380,000 of which $381,365,000 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 June 30, 2018 and December 31, 2017, the outstanding letters of credit were $3,031,000 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.

Federal Home Loan Bank (FHLB) Agreements

In May 2018, the Company became a member of the Federal Home Loan Bank of Dallas (“FHLB”) to augment its liquidity resources. As membership requires the ownership of member stock, the Company purchased $7.0 million of stock to meet the FHLB’s membership requirement. The FHLB member stock is recorded in other invested assets on the Company’s consolidated statements of financial position. Through its membership, the Company has access to the FHLB’s financial services including advances that provide an attractive funding source for short-term borrowing and for access to other funding agreements. As of June 30, 2018, certain collateralized mortgage obligations (CMO’s) with a fair value of approximately $132.5 million were on deposit with the FHLB as collateral for amounts subject to funding agreements. The deposited securities are included in bonds held-to-maturity on the Company’s consolidated statements of financial position.

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 June 30, 2018, was approximately $196,442,000, while the total cash value of the related life insurance policies was approximately $202,089,000.

Note 16 – Commitments and Contingencies – (Continued)

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
		Six months ended June 30,				Amount due to (from) American National
Related Party	Financial Statement Line Impacted	2018		2017		June 30, 2018			December 31, 2017
Gal-Tex Hotel Corporation	Mortgage loan on real estate	$	809	$	752	$	1,414		$	2,223
Gal-Tex Hotel Corporation	Net investment income		68		125		9			13
Greer, Herz & Adams, LLP	Other operating expenses		5,379		5,624		(574	)		(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 22.71% of American National, and the Libbie Shearn Moody Trust owns 50.2% of Gal-Tex and 36.93% 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 and six months ended June 30, 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 in Part II, Item IA, Risk Factors, of this Form 10-Q 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 June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Premiums and other revenues
Premiums	$	560,740		$	514,519		$	46,221		$	1,105,720		$	986,291		$	119,429
Other policy revenues		71,138			66,076			5,062			142,477			129,528			12,949
Net investment income		246,741			234,618			12,123			455,410			463,121			(7,711	)
Realized investments gains, net		17,677			9,932			7,745			18,181			17,157			1,024
Net unrealized gains on equity securities		44,492			—			44,492			11,862			—			11,862
Other income		11,283			8,948			2,335			21,796			17,793			4,003

Total premiums and other revenues		952,071			834,093			117,978			1,755,446			1,613,890			141,556

Benefits, losses and expenses
Policyholder benefits		179,061			179,949			(888	)		362,353			325,104			37,249
Claims incurred		312,436			277,378			35,058			583,066			529,288			53,778
Interest credited to policyholders’ account balances		105,731			94,548			11,183			176,276			190,556			(14,280	)
Commissions for acquiring and servicing policies		149,737			141,445			8,292			294,433			266,937			27,496
Other operating expenses		123,947			125,970			(2,023	)		254,341			252,031			2,310
Change in deferred policy acquisition costs ⁽¹⁾		(20,116	)		(27,695	)		7,579			(37,082	)		(37,182	)		100

Total benefits and expenses		850,796			791,595			59,201			1,633,387			1,526,734			106,653

Income before other items and federal income taxes	$	101,275		$	42,498		$	58,777		$	122,059		$	87,156		$	34,903

(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.

Income (loss) before other items and federal income taxes (“Earnings”)

Earnings increased during the three months ended June 30, 2018 compared to 2017 primarily attributable to a $44.5 million unrealized gain on equity securities and an increase in realized investment gains. Earnings increased during the six months ended June 30, 2018 compared to 2017 attributable to an $11.9 million unrealized gain on equity securities and higher operating earnings in the majority of insurance segments. Earnings for the three and six months ended June 30, 2018 included unrealized gains on equity securities as a result of our adoption of new accounting guidance which impacted the second quarter of 2018, but not the second quarter of 2017.

Life

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


	Three months ended June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Premiums and other revenues
Premiums	$	84,595		$	79,287		$	5,308		$	165,971		$	156,761		$	9,210
Other policy revenues		67,231			62,464			4,767			134,962			122,373			12,589
Net investment income		61,082			60,689			393			118,850			122,898			(4,048	)
Other income		512			503			9			1,267			1,119			148

Total premiums and other revenues		213,420			202,943			10,477			421,050			403,151			17,899

Benefits, losses and expenses
Policyholder benefits		96,958			101,460			(4,502	)		195,504			202,626			(7,122	)
Interest credited to policyholders’ account balances		21,046			19,876			1,170			37,311			35,281			2,030
Commissions for acquiring and servicing policies		39,391			36,773			2,618			78,911			71,583			7,328
Other operating expenses		48,189			47,660			529			99,139			96,843			2,296
Change in deferred policy acquisition costs ⁽¹⁾		(7,249	)		(10,707	)		3,458			(13,692	)		(18,564	)		4,872

Total benefits and expenses		198,335			195,062			3,273			397,173			387,769			9,404

Income before other items and federal income taxes	$	15,085		$	7,881		$	7,204		$	23,877		$	15,382		$	8,495

(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 and six months ended June 30, 2018 compared to 2017 primarily due to continued premium growth. Claims on certain universal life products resulted in the release of reserves, leading to variances in other policy revenues, policyholder benefits, and change in DAC. The net effect of increased claims had little impact on earnings and was in line with sales growth.

Premiums and other revenues

Premiums increased during the three and six months ended June 30, 2018 compared to 2017 primarily due to continued growth in renewal premium on traditional life products.

Other policy revenues, which include cost of insurance charges, earned policy service fees and surrender charges, have also increased during the three and six months ending June 30, 2018 as the size of interest sensitive block continues to grow; both through increased sales and aging of the in-force. An additional component of other policy revenues is the release of unearned revenue reserves related to universal life contracts.

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 June 30,							Six months ended June 30,
	2018		2017		Change			2018		2017		Change
Traditional Life	$	15,478	$	15,439	$	39		$	30,489	$	29,704	$	785
Universal Life		6,195		6,165		30			12,104		11,490		614
Indexed UL		7,821		6,878		943			15,284		12,787		2,497

Total Recurring	$	29,494	$	28,482	$	1,012		$	57,877	$	53,981	$	3,896

Single and excess⁽¹⁾	$	751	$	821	$	(70	)	$	1,214	$	1,422	$	(208	)
Credit life⁽¹⁾		2,220		2,223		(3	)		4,178		4,309		(131	)

⁽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 are based on the total yearly premium that insurance companies would expect to receive if all recurring premium policies would remain in force, plus 10% of single and excess premiums and 31% of credit life premium. 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 during the three and six months ended June 30, 2018 compared to 2017 primarily due to increased indexed universal life sales.

Benefits, losses and expenses

Although the severity of claims increased, policyholder benefits decreased during the three and six months ended June 30, 2018 compared to 2017 attributable to higher reserves released as mentioned above.

Commissions increased during the three and six months ended June 30, 2018 compared to 2017 driven by an increase in indexed universal life and traditional life sales.

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


	Three months ended June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Acquisition cost capitalized	$	32,953		$	31,604		$	1,349		$	65,577		$	60,650		$	4,927
Amortization of DAC		(25,704	)		(20,897	)		(4,807	)		(51,885	)		(42,086	)		(9,799	)

Change in DAC	$	7,249		$	10,707		$	(3,458	)	$	13,692		$	18,564		$	(4,872	)

The change in DAC decreased during the three and six months ended June 30, 2018 compared to 2017 as a result of an increase in DAC amortization attributable to the release of reserves as mentioned above.

Policy in-force information

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


	June 30, 2018		December 31, 2017		Change
Life insurance in-force
Traditional life	$	76,462,731	$	73,452,519	$	3,010,212
Interest-sensitive life		30,514,868		29,648,405		866,463

Total life insurance in-force	$	106,977,599	$	103,100,924	$	3,876,675

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


	June 30, 2018		December 31, 2017		Change
Number of policies in-force
Traditional life		1,721,399		1,800,425		(79,026	)
Interest-sensitive life		237,979		232,251		5,728

Total number of policies		1,959,378		2,032,676		(73,298	)

Total life insurance in-force increased during the six months ended June 30, 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 decrease in lower face amount policies.

Annuity

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


	Three months ended June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Premiums and other revenues
Premiums	$	67,228		$	65,389		$	1,839		$	137,844		$	95,198		$	42,646
Other policy revenues		3,907			3,612			295			7,515			7,155			360
Net investment income		148,710			131,952			16,758			262,190			271,629			(9,439	)
Other income		631			974			(343	)		1,356			1,639			(283	)

Total premiums and other revenues		220,476			201,927			18,549			408,905			375,621			33,284

Benefits, losses and expenses
Policyholder benefits		82,103			78,489			3,614			166,849			122,478			44,371
Interest credited to policyholders’ account balances		84,685			74,672			10,013			138,965			155,275			(16,310	)
Commissions for acquiring and servicing policies		30,355			33,407			(3,052	)		60,359			50,691			9,668
Other operating expenses		11,853			11,992			(139	)		23,172			22,680			492
Change in deferred policy acquisition costs ⁽¹⁾		(8,811	)		(14,539	)		5,728			(17,684	)		(17,170	)		(514	)

Total benefits and expenses		200,185			184,021			16,164			371,661			333,954			37,707

Income before other items and federal income taxes	$	20,291		$	17,906		$	2,385		$	37,244		$	41,667		$	(4,423	)

(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 higher during the three months ended June 30, 2018 compared to 2017 primarily due to an increase in interest margin driven by a higher asset base. Earnings were lower during the six months ended June 30, 2018 compared to 2017 primarily due to an increase in DAC amortization. The increase in DAC amortization resulted from normal levels of surrenders experienced for 2018 compared to the more 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 June 30,							Six months ended June 30,
	2018		2017		Change			2018		2017		Change
Fixed deferred annuity	$	86,768	$	306,954	$	(220,186	)	$	165,894	$	454,156	$	(288,262	)
Single premium immediate annuity		81,012		80,724		288			159,145		116,901		42,244
Equity-indexed deferred annuity		304,839		256,899		47,940			578,610		389,800		188,810
Variable deferred annuity		17,074		19,606		(2,532	)		32,747		39,912		(7,165	)

Total premium and deposits		489,693		664,183		(174,490	)		936,396		1,000,769		(64,373	)
Less: Policy deposits		422,465		598,794		(176,329	)		798,552		905,571		(107,019	)

Total earned premiums	$	67,228	$	65,389	$	1,839		$	137,844	$	95,198	$	42,646

Sales declined during the three and six months ended June 30, 2018 compared to 2017 driven by the fixed deferred products partially offset by an increase in 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 and six months ended June 30, 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):


	Six months ended June 30,
	2018			2017
Fixed deferred and equity-indexed annuity
Account value, beginning of period	$	10,033,354		$	9,118,350
Net inflows		591,937			699,473
Surrenders		(370,123	)		(410,957	)
Fees		(3,827	)		(3,742	)
Interest credited		134,211			152,332

Account value, end of period		10,385,552			9,555,456

Single premium immediate annuity
Reserve, beginning of period		1,691,502			1,566,440
Net inflows		63,658			29,405
Interest and mortality		28,887			27,101

Reserve, end of period		1,784,047			1,622,946

Variable deferred annuity
Account value, beginning of period		381,902			392,345
Net inflows		32,528			37,495
Surrenders		(50,223	)		(78,881	)
Fees		(2,157	)		(2,281	)
Change in market value and other		8,403			33,502

Account value, end of period		370,453			382,180

Total account value, end of period	$	12,540,052		$	11,560,582

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 six months ended June 30, 2018 compared to 2017.

Commissions decreased during the three months ended June 30, 2018 compared to 2017 driven by a decrease in sales of fixed deferred products. Commissions increased during the six months ended June 30, 2018 compared to 2017 driven by an increase in sales of equity indexed products.

Other operating expenses remained relatively flat during the three and six months ended June 30, 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 June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Acquisition cost capitalized	$	30,174		$	33,010		$	(2,836	)	$	59,691		$	50,856		$	8,835
Amortization of DAC		(21,363	)		(18,471	)		(2,892	)		(42,007	)		(33,686	)		(8,321	)

Change in DAC	$	8,811		$	14,539		$	(5,728	)	$	17,684		$	17,170		$	514

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 six months ended June 30, 2018 and 2017 were 40.7% and 33.9% respectively. A higher ratio is less favorable due to a higher proportion of the margin used to amortize DAC.

The change in DAC increased during the three and six months ended June 30, 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 six months ended June 30, 2018 compared to 2017, mainly due to growth in annuity assets over the past year. Margin results by product are discussed further below.

The interest margin earned on fixed deferred annuities interest decreased by $10.4 million for the six months ended June 30, 2018 compared to 2017 due to a decrease in fixed investment yields.

The margin on equity-indexed annuities increased $12.7 million during the six months ended June 30, 2018 compared to 2017, mainly due to growth in the asset base. The $12.7 million increase in margin represents a 62% increase compared to same period in 2017 and the account balance grew by an approximately equal amount during the same period in 2017.

Single premium immediate annuity margins increased $4.7 million during the six months ended June 30, 2018 compared to 2017 primarily due to more favorable mortality experience during 2018.

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 June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Fixed deferred annuities
Fixed investment income	$	78,624		$	84,296		$	(5,672	)	$	158,091		$	168,973		$	(10,882	)
Interest credited		(42,180	)		(48,017	)		5,837			(97,436	)		(97,878	)		442

Interest margin		36,444			36,279			165			60,655			71,095			(10,440	)

Account balance, end of period		6,937,210			7,016,236			(79,026	)		6,937,210			7,310,275			(373,065	)

Equity-indexed annuities
Fixed investment income		32,980			23,764			9,216			63,266			42,722			20,544
Option return		19,664			11,968			7,696			6,607			32,144			(25,537	)
Interest credited		(31,100	)		(25,060	)		(6,040	)		(36,775	)		(54,454	)		17,679

Interest margin		21,544			10,672			10,872			33,098			20,412			12,686

Account balance, end of period		3,448,342			2,245,181			1,203,161			3,448,342			2,245,181			1,203,161

Single premium immediate annuities
Fixed investment income		17,442			11,924			5,518			34,226			27,790			6,436
Interest and mortality		(28,887	)		(11,965	)		(16,922	)		(28,887	)		(27,101	)		(1,786	)

Interest and mortality margin		(11,445	)		(41	)		(11,404	)		5,339			689			4,650

Reserve, end of period		1,784,047			1,609,921			174,126			1,784,047			1,622,946			161,101

Total interest and mortality margin	$	46,543		$	46,910		$	(367	)	$	99,092		$	92,196		$	6,896

Total account balance and reserve, end of period	$	12,169,599		$	10,871,338		$	1,298,261		$	12,169,599		$	11,178,402		$	991,197

Health

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


	Three months ended June 30,							Six months ended June 30,
	2018		2017		Change			2018		2017		Change
Premiums and other revenues
Premiums	$	48,870	$	36,593	$	12,277		$	89,885	$	73,632	$	16,253
Net investment income		2,263		2,505		(242	)		4,617		5,012		(395	)
Other income		6,809		4,321		2,488			11,966		8,667		3,299

Total premiums and other revenues		57,942		43,419		14,523			106,468		87,311		19,157

Benefits, losses and expenses
Claims incurred		32,310		23,198		9,112			60,450		47,578		12,872
Commissions for acquiring and servicing policies		9,126		6,270		2,856			15,142		12,160		2,982
Other operating expenses		10,090		9,627		463			20,448		19,857		591
Change in deferred policy acquisition costs ⁽¹⁾		506		817		(311	)		1,594		2,149		(555	)

Total benefits and expenses		52,032		39,912		12,120			97,634		81,744		15,890

Income before other items and federal income taxes	$	5,910	$	3,507	$	2,403		$	8,834	$	5,567	$	3,267

(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 and six months ended June 30, 2018 compared to 2017, primarily due to an improvement in Medical Expense and Supplemental results. The improvement in both lines was associated with a decline in the benefit ratio. Contributing to the decline in the medical expense benefit ratio is the impact of recent rate increases.

Premiums and other revenues

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


	Three months ended June 30,								Six months ended June 30,
	2018				2017				2018				2017
Medicare Supplement	$	17,638	36.1	%	$	16,400	44.7	%	$	34,904	38.8	%	$	32,851	44.7	%
Credit accident and health		4,425	9.1			4,464	12.2			8,915	9.9			9,232	12.5
MGU		15,635	32.0			4,385	12.0			23,002	25.6			8,898	12.1
Supplemental insurance		6,657	13.6			6,249	17.1			13,314	14.8			12,468	16.9
Medical expense		2,809	5.7			3,167	8.7			5,683	6.3			6,380	8.7
Group health		610	1.2			586	1.6			1,864	2.1			1,209	1.6
All other		1,096	2.3			1,342	3.7			2,203	2.5			2,594	3.5

Total	$	48,870	100.0	%	$	36,593	100.0	%	$	89,885	100.0	%	$	73,632	100.0	%

Earned premiums increased during the three and six months ended June 30, 2018 compared to 2017 primarily due to an increase in MGU and Medicare Supplement. The MGU premium increase is a combination of new producers and more production from current MGU’s. 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:


	Six months ended June 30,
	2018				2017
Medicare Supplement		36,426	5.8	%		33,887	6.6	%
Credit accident and health		169,475	27.1			183,884	35.9
MGU		328,202	52.5			194,851	38.1
Supplemental insurance		53,926	8.6			50,521	9.9
Medical expense		1,606	0.3			2,055	0.4
Group health		10,511	1.7			14,686	2.9
All other		25,574	4.0			31,852	6.2

Total		625,720	100.0	%		511,736	100.0	%

Total in-force policies increased during the six months ended June 30, 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 and six months ended June 30, 2018 compared to 2017 due to the correlated change 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 June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Acquisition cost capitalized	$	3,119		$	2,732		$	387		$	5,931		$	5,603		$	328
Amortization of DAC		(3,625	)		(3,549	)		(76	)		(7,525	)		(7,752	)		227

Change in DAC	$	(506	)	$	(817	)	$	311		$	(1,594	)	$	(2,149	)	$	555

Property and Casualty

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


	Three months ended June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Premiums and other revenues
Net premiums written	$	395,676		$	365,797		$	29,879		$	775,181		$	715,909		$	59,272

Net premiums earned	$	360,047		$	333,250		$	26,797		$	712,020		$	660,700		$	51,320
Net investment income		15,493			15,775			(282	)		31,354			29,815			1,539
Other income		2,264			2,196			68			4,327			4,134			193

Total premiums and other revenues		377,804			351,221			26,583			747,701			694,649			53,052

Benefits, losses and expenses
Claims incurred		280,126			254,180			25,946			522,616			481,710			40,906
Commissions for acquiring and servicing policies		70,865			64,995			5,870			140,021			132,503			7,518
Other operating expenses		45,166			44,506			660			92,967			90,788			2,179
Change in deferred policy acquisition costs ⁽¹⁾		(4,562	)		(3,266	)		(1,296	)		(7,300	)		(3,597	)		(3,703	)

Total benefits and expenses		391,595			360,415			31,180			748,304			701,404			46,900

Loss before other items and federal income taxes	$	(13,791	)	$	(9,194	)	$	(4,597	)	$	(603	)	$	(6,755	)	$	6,152

Loss ratio		77.8	%		76.3	%		1.5	%		73.4	%		72.9	%		0.5	%
Underwriting expense ratio		31.0			31.9			(0.9	)		31.7			33.3			(1.6	)

Combined ratio		108.8	%		108.2	%		0.6	%		105.1	%		106.2	%		(1.1	)%

Impact of catastrophe events on combined ratio		11.8			12.4			(0.6	)		7.1			10.3			(3.2	)

Combined ratio without impact of catastrophe events		97.0	%		95.8	%		1.2	%		98.0	%		95.9	%		2.1	%

Gross catastrophe losses	$	42,529		$	41,262		$	1,267		$	50,831		$	68,034		$	(17,203	)
Net catastrophe losses	$	42,121		$	41,213		$	908		$	53,003		$	67,988		$	(14,985	)

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

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 decreased during the three months ended June 30, 2018 compared to 2017 due primarily to losses impacting the commercial auto and agricultural lines of business. Property and Casualty earnings increased during the six months ended June 30, 2018 compared to 2017 due to lower catastrophe losses and 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 and six months ended June 30, 2018 compared to 2017. The largest increases were in the personal auto, personal homeowners, and other commercial lines of business.

Benefits, losses and expenses

Claims increased during the three and six months ended June 30, 2018 compared to 2017 as a result of increases in claims related to the agricultural and commercial automobile lines.

Commissions for acquiring and servicing policies increased during the three and six months ended June 30, 2018 compared to 2017 correlated to the increase in premiums.

Operating expenses increased during the six months ended June 30, 2018 compared to 2017, but at a rate less than the increase in premiums. Our underwriting expense ratio was lower in both the three and six month periods in 2018.

Products

Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 57.0% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 33.7% of net premiums written; and (iii) Credit-related property insurance products, marketed to and through financial institutions and retailers, representing 9.3% of net premiums written.

Personal Products

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


	Three months ended June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Net premiums written
Automobile	$	139,878		$	122,998		$	16,880		$	281,737		$	245,863		$	35,874
Homeowner		75,759			69,507			6,252			134,478			123,963			10,515
Other Personal		13,098			11,851			1,247			25,472			23,316			2,156

Total net premiums written	$	228,735		$	204,356		$	24,379		$	441,687		$	393,142		$	48,545

Net premiums earned
Automobile	$	134,179		$	118,832		$	15,347		$	262,141		$	231,781		$	30,360
Homeowner		65,257			60,753			4,504			128,668			119,678			8,990
Other Personal		11,756			10,850			906			23,085			21,357			1,728

Total net premiums earned	$	211,192		$	190,435		$	20,757		$	413,894		$	372,816		$	41,078

Loss ratio
Automobile		78.3	%		83.1	%		(4.8	)%		77.4	%		79.2	%		(1.8	)%
Homeowner		95.7			99.7			(4.0	)		80.5			89.1			(8.6	)
Other Personal		69.2			84.9			(15.7	)		69.9			70.3			(0.4	)
Personal line loss ratio		83.1	%		88.5	%		(5.4	)%		78.0	%		81.9	%		(3.9	)%
Combined Ratio
Automobile		101.2	%		106.5	%		(5.3	)%		100.8	%		103.2	%		(2.4	)%
Homeowner		128.6			134.1			(5.5	)		114.8			124.6			(9.8	)
Other Personal		105.1			122.0			(16.9	)		107.1			110.6			(3.5	)
Personal line combined ratio		109.9	%		116.2	%		(6.3	)%		105.5	%		110.6	%		(5.1	)%

Automobile: Net premiums written and earned increased in our personal automobile line during the three and six months ended June 30, 2018 compared to 2017 due to rate increases and an increase in policies in force. The loss and combined ratios decreased during the three and six months ended June 30, 2018 compared to 2017 primarily due to increased premiums outpacing claim activity.

Homeowners: Net premiums written and earned increased during the three and six months ended June 30, 2018 compared to 2017 primarily due to increased sales to renters. The loss and combined ratios decreased during the three and six months ended June 30, 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, personal umbrella, and rental owners. The loss and combined ratios decreased during the three months ended June 30, 2018 compared to 2017 due to a decrease in umbrella claims incurred. The combined ratio further decreased during the six months ended June 30, 2018 compared to 2017 due to a favorable underwriting expense ratio.

Commercial Products

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


	Three months ended June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Net premiums written
Other Commercial	$	62,221		$	60,782		$	1,439		$	121,442		$	114,932		$	6,510
Agricultural Business		40,735			39,414			1,321			76,809			73,894			2,915
Automobile		31,385			29,605			1,780			63,299			59,384			3,915

Total net premiums written	$	134,341		$	129,801		$	4,540		$	261,550		$	248,210		$	13,340

Net premiums earned
Other Commercial	$	51,564		$	47,095		$	4,469		$	101,541		$	92,057		$	9,484
Agricultural Business		35,572			34,898			674			70,267			68,561			1,706
Automobile		26,282			24,814			1,468			51,841			48,793			3,048

Total net premiums earned	$	113,418		$	106,807		$	6,611		$	223,649		$	209,411		$	14,238

Loss ratio
Other Commercial		47.1	%		58.2	%		(11.1	)%		51.0	%		56.5	%		(5.5	)%
Agricultural Business		82.3			63.6			18.7			82.0			75.2			6.8
Automobile		101.7			56.2			45.5			83.2			62.8			20.4
Commercial line loss ratio		70.8	%		59.5	%		11.3	%		68.2	%		64.0	%		4.2	%
Combined ratio
Other Commercial		79.6	%		91.5	%		(11.9	)%		83.6	%		90.2	%		(6.6	)%
Agricultural Business		119.9			101.1			18.8			120.4			113.0			7.4
Automobile		125.8			79.9			45.9			107.6			87.3			20.3
Commercial line combined ratio		103.0	%		91.9	%		11.1	%		100.7	%		97.0	%		3.7	%

Other Commercial: Net premiums written and earned increased during the three and six months ended June 30, 2018 compared to 2017 primarily due to increased sales of business owners and workers’ compensation. The decrease in the loss and combined ratio for the three and six months ended June 30, 2018 compared to 2017 is primarily due to decreased claim activity on workers’ compensation, umbrella, and mortgage security business.

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 and six months ended June 30, 2018 compared to 2017 primarily as a result of an increase in policies in force. The loss and combined ratios increased during the three and six months ended June 30, 2018 compared to 2017 primarily due to increased non-catastrophe claim activity.

Commercial Automobile: Net premiums written and earned increased during the three and six months ended June 30, 2018 compared to 2017, primarily due to increased sales as well as improved rate adequacy. The loss and combined ratios increased during the three and six months ended June 30, 2018 compared to 2017 primarily due to an increase in the average severity of losses from prior accident years.

Credit Products

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


	Three months ended June 30,									Six months ended June 30,
	2018			2017			Change			2018			2017			Change
Net premiums written	$	32,600		$	31,640		$	960		$	71,944		$	74,557		$	(2,613	)
Net premiums earned		35,437			36,008			(571	)		74,477			78,473			(3,996	)
Loss ratio		68.5	%		61.4	%		7.1	%		63.7	%		53.9	%		9.8	%
Combined ratio		120.4	%		117.1	%		3.3	%		116.2	%		111.5	%		4.7	%

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 six months ended June 30, 2018 compared to 2017 primarily due to a decrease in Collateral Protection Insurance (CPI) business. The loss and combined ratios increased during the three and six months ended June 30, 2018 compared to 2017 primarily due to an increase in claims in the Guaranteed Auto Protection (GAP) business.

Corporate and Other

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


	Three months ended June 30,							Six months ended June 30,
	2018		2017		Change			2018		2017		Change
Other revenues
Net investment income	$	19,193	$	23,697	$	(4,504	)	$	38,399	$	33,767	$	4,632
Realized investment gains, net		17,677		9,932		7,745			18,181		17,157		1,024
Net unrealized gains on equity securities		44,492		—		44,492			11,862		—		11,862
Other Income		1,067		954		113			2,880		2,234		646

Total other revenues		82,429		34,583		47,846			71,322		53,158		18,164

Benefits, losses and expenses
Other operating expenses		8,649		12,185		(3,536	)		18,615		21,863		(3,248	)

Total benefits, losses and expenses		8,649		12,185		(3,536	)		18,615		21,863		(3,248	)

Income before other items and federal income taxes	$	73,780	$	22,398	$	51,382		$	52,707	$	31,295	$	21,412

Earnings

Earnings increased during the three months ended June 30, 2018 compared to 2017 primarily due to an increase in unrealized gains on equity securities and an increase in realized investment gains on common stock due to favorable market conditions reflected in the S&P 500 index. Earnings increased during the six months ended June 30, 2018 compared to 2017 primarily due to an increase in net investment income, unrealized gains on equity securities and a favorable decrease in operating expenses. The favorable decrease in operating expenses for the three and six months ended June 30, 2018 compared to 2017 was attributable to the pension cost of $7.2 million relating to the completion of a one-time pension payment window that occurred in 2017. Earnings for the three and six months ended June 30, 2018 included unrealized gains on equity securities as a result of our adoption of new accounting guidance which impacted the second quarter of 2018, but not the second 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):


	June 30, 2018				December 31, 2017
Bonds held-to-maturity, at amortized cost	$	7,876,853	35.6	%	$	7,552,959	34.5	%
Bonds available-for-sale, at fair value		6,050,137	27.3			6,145,308	28.1
Equity securities, at fair value		1,820,702	8.2			1,784,226	8.2
Mortgage loans, net of allowance		5,114,518	23.1			4,749,999	21.7
Policy loans		376,128	1.7			377,103	1.7
Investment real estate, net of accumulated depreciation		529,928	2.4			532,346	2.4
Short-term investments		302,885	1.4			658,765	3.0
Other invested assets		85,256	0.3			80,165	0.4

Total investments	$	22,156,407	100.0	%	$	21,880,871	100.0	%

The increase in our total investments at June 30, 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 June 30, 2018, our fixed maturity securities had an estimated fair value of $13.89 billion, which was a decrease of $64.5 million, or 0.4%, below amortized cost. At December 31, 2017, our fixed maturity securities had an estimated fair value of $13.92 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 $0.3 billion as of June 30, 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 4.9% and 4.7% at June 30, 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 June 30, 2018, we had $376.1 million in policy loans with a loan to surrender value of approximately 60.0%, 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 $7.7 million during the six months ended June 30, 2018 compared to 2017 primarily due to an increase in unrealized losses on equity-indexed options as a result of lower increases in the S&P 500, partially offset by an increase in income from bonds. Equity-indexed options are recorded at fair value with changes in fair value recorded as investment income.

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 increased $1.0 million during the six months ended June 30, 2018 compared to 2017 primarily due to a reduction in other-than-temporary impairments.

Net Unrealized Gains and Losses

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


	June 30, 2018			December 31, 2017			Change
Held-to-Maturity
Gains	$	88,598		$	240,713		$	(152,115	)
Losses		(130,106	)		(19,319	)		(110,787	)

Net gains (losses)		(41,508	)		221,394			(262,902	)

Available-for-Sale
Gains		69,710			204,803			(135,093	)
Losses		(92,716	)		(17,396	)		(75,320	)

Net gains (losses)		(23,006	)		187,407			(210,413	)

Equity Securities
Gains		1,048,613			1,033,809			14,804
Losses		(8,593	)		(7,166	)		(1,427	)

Net gains		1,040,020			1,026,643			13,377

Total	$	975,506		$	1,435,444		$	(459,938	)

The net change in the unrealized gains on fixed maturity securities between June 30, 2018 and December 31, 2017 is primarily attributable to the increase in benchmark ten-year interest rates which were 2.86% 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 increased as of June 30, 2018 compared to December 31, 2017 attributable to the favorable market conditions reflected in the S&P 500 index.

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 pension 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. In addition, the increase in funding also provides an opportunity to realize tax savings on contributions made prior to September 15, 2018. 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 $744.1 million at June 30, 2018. The decrease primarily relates to a decrease in commercial paper to fund additional investments.

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.

Federal Home Loan Bank (FHLB) Agreements

In May 2018, the Company became a member of the Federal Home Loan Bank of Dallas (“FHLB”) to augment its liquidity resources. Through its membership, the Company has access to the FHLB’s financial services including advances that provide an attractive funding source for short-term borrowing and for access to other funding agreements. The Company has determined its current borrowing capacity based upon the current level of collateral at $129,000,000 as of June 30, 2018. For additional details, see Note 16, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

Capital Resources

Our capital resources are summarized below (in thousands):


	June 30, 2018			December 31, 2017
American National stockholders’ equity, excluding accumulated other comprehensive income, net of tax (“AOCI”)	$	5,344,955		$	4,604,543
Accumulated other comprehensive income (loss)		(110,734	)		642,216

Total American National stockholders’ equity	$	5,234,221		$	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 $27.5 million and $28.4 million at June 30, 2018 and December 31, 2017, respectively.

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


	Six months ended June 30, 2018
	Capital and Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Net income attributable to American National	$	102,916		$	—		$	102,916
Dividends to shareholders		(44,136	)		—			(44,136	)
Change in net unrealized losses on debt securities		—			(127,721	)		(127,721	)
Defined benefit pension plan adjustment		—			2,390			2,390
Foreign currency transaction and translation adjustment		—			(500	)		(500	)
Cumulative effect of accounting changes		687,051			(627,119	)		59,932
Other		(5,419	)		—			(5,419	)

Total	$	740,412		$	(752,950	)	$	(12,538	)

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 June 30, 2018 and December 31, 2017, American National Insurance Company’s statutory capital and surplus was $3,234,095,000 and $3,293,474,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at June 30, 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 June 30, 2018. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 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 six months ended June 30, 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, except as set forth below.

We are subject to extensive regulation, and potential further regulation may increase our operating costs and limit our growth. We are subject to extensive insurance laws and regulations that affect nearly every aspect of our business. We are also subject to additional laws and regulations administered and enforced by a number of different governmental authorities, such as state securities and workforce regulators, the SEC, the Internal Revenue Service (“IRS”), FINRA, the U.S. Department of Justice, the U.S. Department of Labor (“DOL”), the U.S. Department of Housing and Urban Development (“HUD”), HHS, the Federal Trade Commission and state attorneys general, each of which exercises a degree of interpretive latitude. We face the risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may conflict with that of another regulator or enforcement authority or may change over time to our detriment. Regulatory investigations, which can be broad and unpredictable, may raise issues not identified previously and could result in new legal actions against us and industry-wide regulations that could adversely affect us. Further, we are experiencing increasing information requests from regulators without corresponding direct regulation being applicable to us, on issues such as climate change and our investments in certain companies or industries. Responding to such requests adds to our compliance burden.

The laws and regulations applicable to us are complex and subject to change, and compliance is time consuming and personnel-intensive. Changes in these laws and regulations, or interpretations by courts or regulators, may materially increase our costs of doing business and may result in changes to our practices that may limit our ability to grow and improve our profitability. Regulatory developments or actions against us could have material adverse financial effects and could harm our reputation. Among other things, we could be fined, prohibited from engaging in some or all of our business activities, or made subject to limitations or conditions on our business activities.

As insurance industry practices and legal, judicial, social, and other conditions outside of our control change, unexpected issues related to claims and coverage may emerge. These changes may include modifications to long established business practices or policy interpretations, which may adversely affect us by extending coverage beyond our underwriting intent or by increasing the type, number, or size of claims. For example, a growing number of states have adopted legislation that is similar to the Model Unclaimed Life Insurance Benefits Act. Such legislation imposes new requirements on insurers to periodically compare their life insurance and annuity contracts and retained asset accounts against the U.S. Social Security Administration’s Death Master File, investigate any potential matches, determine whether benefits are payable, and attempt to locate beneficiaries. Some states are attempting to apply these laws retroactively to existing policies. A number of states have aggressively audited life insurance companies, including us and some of our subsidiaries, for compliance with such laws, and more states could do so. Such audits have sought to identify unreported insured deaths and to determine whether any unpaid benefits, proceeds or other payments under life insurance or annuity contracts should be treated as unclaimed property to be escheated to the state. We have modified our claims process to stay current with emerging trends. It is possible that such audits may result in regulatory actions, litigation, administrative fines and penalties, interest, and additional changes to our procedures.

Federal regulatory changes and initiatives have a growing impact on us. For example, Dodd-Frank provides for enhanced federal oversight of the financial services industry through multiple initiatives. Provisions of Dodd-Frank are or may become applicable to us, our competitors, or certain entities with which we do business. For example, it is possible that regulations issued by the Consumer Financial Protection Bureau (“CFPB”) may extend, or be interpreted to extend, to the sale of certain insurance products by covered financial institutions, which could adversely affect sales of such products. The Federal Insurance Office, as a result of various studies it conducts, may also recommend changes in laws or regulations that affect our business.

Certain federal regulation may impact our property and casualty operations. In 2013, HUD finalized a “disparate impact” regulation that may adversely impact our ability to differentiate pricing for homeowners policies using traditional risk selection analysis. Various legal challenges to this regulation are being pursued by the industry. If this regulation is implemented, whether or not modified by HUD, it is uncertain to what extent it may impact property and casualty industry underwriting practices. Such regulation could increase litigation costs, force changes in underwriting practices, and impair our ability to write homeowners business profitably. In addition, Congress or states may enact legislation affecting insurers’ ability to use credit-based insurance scores as part of the property and casualty underwriting or rating process, which could force changes in underwriting practices and impair our property and casualty operations’ ability to write homeowners business profitably.

There have been federal efforts to change the standards of care applicable to broker-dealers and investment advisers. We have previously reported that in April 2016, the U.S. Department of Labor (“DOL”) issued a regulation that significantly expanded the range of activities considered to be fiduciary investment advice under the Employee Retirement and Income Security Act of 1974 and the Internal Revenue Code of 1986 (the “fiduciary rule”). The fiduciary rule impacted individuals and entities that offer investment advice to purchasers of qualified retirement products, such as IRA’s and qualified retirement plans. It applied ERISA’s fiduciary standard to many insurance agents, broker-dealers, advisers and others not previously subject to the standard when they sell annuities to IRA’s and qualified retirement plans. On June 21, 2018, the U.S. Court of Appeals for the Fifth Circuit issued an order vacating the fiduciary rule, ending the rule’s effectiveness, after finding that the DOL had exceeded its authority in implementing the rule. As a result, the DOL rules regarding ERISA fiduciary status that existed prior to the adoption of the fiduciary rule are again applicable.

On April 18, 2018, the SEC released a proposal to address the standards of care applicable to broker-dealers and investment advisers. With respect to broker-dealers, the SEC proposed “Regulation Best Interest,” which would require a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities. With respect to investment advisers, the SEC proposal contained interpretive guidance regarding the responsibilities of investment advisers arising from the statutory fiduciary duty owed by advisers to their clients. The proposal also would require broker-dealers and investment advisers to disclose their SEC registration status in certain retail investor communications and to provide retail customers a client relationship summary on proposed Form CRS to disclose certain information about the nature of the customer’s relationship with their investment professional. The proposal is currently subject to a 90-day public comment period, which could be extended by the SEC. In addition, the NAIC and several states have passed legislation or proposed regulations requiring investment advisers and broker-dealers to disclose conflicts of interest to clients or to meet standards that advice be in the best interest of customers. Such legislation and regulations, if adopted, could affect how our variable insurance products are designed, sold and serviced.

International standards continue to emerge in response to the globalization of the insurance industry and evolving standards of regulation, solvency measurement and risk management. Any international conventions or mandates that directly or indirectly impact or influence the nature of U.S. regulation or industry operations could negatively affect us.

For further discussions of the kinds of regulation applicable to us, see Item 1, Business, Regulation Applicable to Our Business, 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

Issuer Purchases of Equity Securities

The table below represents all share repurchases for the three months ended June 30, 2018:


Period	Total Number of Shares Purchased		Average Price Paid per Share
April 1 – April 30		—		—
May 1 – May 31		6,667	$	121.93
June 1 – June 30		—		—

All of the shares included in the table above represent shares of restricted stock granted pursuant to the Company’s 1999 Stock and Incentive Plan. The Compensation Committee of the Company’s Board of Directors has authorized the settlement of restricted stock awards in cash upon expiration of the forfeiture restrictions with respect to such awards. Consistent with such authorization, the Company repurchased a total of 6,667 shares of restricted stock from two Company directors and two advisory directors following the May 1, 2018 expiration of such shares’ forfeiture restrictions. Similar repurchases may occur in the future upon restricted stock vesting. Further information regarding restricted stock awards is provided in Note 14, Stockholders’ Equity and Noncontrolling Interests, of the Notes to the Unaudited Consolidated Financial Statements.

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 six months ended June 30, 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: August 7, 2018