Investment in Securities

3 Months Ended

Mar. 31, 2020

Investments, Debt and Equity Securities [Abstract]

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


	March 31, 2020
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Allowance for Credit Losses		Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	155,151	$	4,778	$	—	$	—	$	159,929
Foreign governments	3,894		525		(5)		5		4,419
Corporate debt securities	8,029,559		193,701		(248,247)		(18,401)		7,956,612
Residential mortgage-backed securities	179,087		8,578		(743)		(3)		186,919
Collateralized debt securities	208,501		—		(11,738)		(2,986)		193,777

Total bonds held-to-maturity	8,576,192		207,582		(260,733)		(21,385)		8,501,656
Fixed maturity securities, bonds available-for-sale
U.S. treasury and government	29,500		804		—		—		30,304
U.S. states and political subdivisions	1,028,590		50,335		(8)		—		1,078,917
Foreign governments	5,000		1,432		—		—		6,432
Corporate debt securities	5,338,626		128,845		(135,711)		(12,499)		5,319,261
Residential mortgage-backed securities	29,599		229		(7)		(236)		29,585
Collateralized debt securities	16,262		462		(719)		(130)		15,875
Total bonds available-for-sale	6,447,577		182,107		(136,445)		(12,865)		6,480,374
Total investments in fixed maturity securities	$	15,023,769	$	389,689	$	(397,178)	$	(34,250)	$	14,982,030


	December 31, 2019
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Allowance for Credit Losses		Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. states and political subdivisions	$	165,109	$	5,005	$	—	$	—	$	170,114
Foreign governments	3,907		442		—		—		4,349
Corporate debt securities	8,099,098		332,410		(6,539)		—		8,424,969
Residential mortgage-backed securities	237,516		6,460		(1,148)		—		242,828
Collateralized debt securities	125,631		1,146		(347)		—		126,430

Total bonds held-to-maturity	8,631,261		345,463		(8,034)		—		8,968,690
Fixed maturity securities, bonds available-for-sale
U.S. treasury and government	29,505		441		(5)		—		29,941
U.S. states and political subdivisions	1,030,309		47,865		(9)		—		1,078,165
Foreign governments	5,000		1,287		—		—		6,287
Corporate debt securities	5,338,007		251,408		(12,795)		—		5,576,620
Residential mortgage-backed securities	23,405		739		(201)		—		23,943
Collateralized debt securities	9,444		686		(1)		—		10,129

Total bonds available-for-sale	6,435,670		302,426		(13,011)		—		6,725,085
Total investments in fixed maturity securities	$	15,066,931	$	647,889	$	(21,045)	$	—	$	15,693,775

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


	March 31, 2020
	Bonds Held-to-Maturity						Bonds Available-for-Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	905,262	$	907,767	$	524,449	$	524,574
Due after one year through five years	3,178,976		3,191,015		3,040,598		3,015,422
Due after five years through ten years	3,403,404		3,342,208		2,180,525		2,207,898
Due after ten years	1,088,550		1,060,666		702,005		732,480
Total	$	8,576,192	$	8,501,656	$	6,447,577	$	6,480,374

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 presented based on the year of final contractual maturity.

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


	Three months ended March 31,
	2020		2019
Proceeds from sales of fixed maturity available-for-sale securities	$	46,513	$	285
Gross realized gains	412		—
Gross realized losses	(4,072)		(23)

Gains and losses are determined using specific identification of the securities sold. During the three months ended March 31, 2019, bonds below investment grade with a carrying value of $157,939,000 were transferred from held-to-maturity to available-for-sale after a deterioration in the issuers’ creditworthiness. There was no transfer of bonds from held-to-maturity to available-for-sale during the three months ended March 31, 2020. No realized losses were recorded at March 31, 2020 and 2019.

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


	Three months ended March 31,
	2020		2019
Bonds available-for-sale: change in unrealized gains (losses)	$	(244,361)	$	154,167
Adjustments for
Deferred policy acquisition costs	89,326		(38,893)
Participating policyholders’ interest	11,151		(7,690)
Deferred federal income tax (expense)	31,481		(22,070)
Change in net unrealized gains (losses) on debt securities, net of tax	$	(112,403)	$	85,514

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


	Three months ended March 31,
	2020		2019
Unrealized gains (losses) on equity securities	$	(333,601)	$	203,022
Net gains on equity securities sold	1,026		3,355
Net gains (losses) on equity securities	$	(332,575)	$	206,377

The gross unrealized losses and fair value of available-for-sale debt securities, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position due to noncredit related factors at March 31, 2020 are shown below (in thousands):


	March 31, 2020
	Less than 12 months						12 months or more						Total
	Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)		Fair Value






Fixed maturity securities, bonds available-for-sale

U.S. states and political subdivisions	$	(8)	$	1,471	$	—	$	121	$	(8)	$	1,592
Corporate debt securities	(20,013)		165,169		(115,698)		1,587,397		(135,711)		1,752,566
Residential mortgage-backed securities	—		—		(7)		618		(7)		618
Collateralized debt securities	—		—		(719)		13,545		(719)		13,545

Total	$	(20,021)	$	166,640	$	(116,424)	$	1,601,681	$	(136,445)	$	1,768,321

Unrealized losses on available-for-sale debt securities where an allowance for credit loss was not recorded are due to noncredit related factors caused by market liquidity events related to COVID-19 and the economic downturn. A number of assumptions and estimates are inherent in evaluating whether an allowance for credit loss is necessary, which include the financial condition, near term and long-term prospects of the issue or issuer, including relevant industry conditions and trends and implications of rating agency actions and offering prices.


	December 31, 2019
	Less than 12 months						12 months or more						Total
	Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)		Fair Value		Gross Unrealized (Losses)		Fair Value





Fixed maturity securities, bonds available-for-sale
U.S. treasury and government	$	—	$	—	$	(5)	$	8,299	$	(5)	$	8,299
U.S. states and political subdivisions	(9)		1,733		—		—		(9)		1,733
Corporate debt securities	(5,257)		94,942		(7,538)		132,626		(12,795)		227,568
Residential mortgage-backed securities	(9)		10,169		(192)		722		(201)		10,891
Collateralized debt securities	(1)		159		—		—		(1)		159
Total	$	(5,276)	$	107,003	$	(7,735)	$	141,647	$	(13,011)	$	248,650

Equity securities by market sector distribution are shown below, based on fair value:


	March 31, 2020		December 31, 2019
Consumer goods	19.7	%	18.9	%
Energy and utilities	6.3		8.0
Finance	15.7		18.0
Healthcare	14.2		13.0
Industrials	7.1		7.6
Information technology	27.2		25.0
Other	9.8		9.5
Total	100.0	%	100.0	%

Allowance for Credit Losses

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

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

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

The rollforward of the allowance for credit losses for held-to-maturity securities is shown below (in thousands):


	Foreign governments		Corporate debt securities		Collateralized debt securities		Residential mortgage backed securities		Total
Allowance for credit losses
Cumulative adjustment at January 1, 2020	$	4	$	(18,563)	$	(2,968)	$	(137)	$	(21,664)



Provision	1		162		(18)		134		279

Ending balance at March 31, 2020	$	5	$	(18,401)	$	(2,986)	$	(3)	$	(21,385)

The rollforward of the allowance for credit losses for available-for-sale debt securities is shown below (in thousands):


	Corporate debt securities		Residential mortgage backed securities		Collateralized debt securities		Total
Allowance for credit losses





Current period adjustments	$	(12,499)	$	(236)	$	(130)	$	(12,865)

The change in allowance for the three months ended March 31, 2020 was impacted by economic changes due to the COVID-19 pandemic on the bond market.

Credit Quality Indicators

The Company monitors the credit quality of debt securities held-to-maturity through the use of credit ratings, which are updated on a monthly basis.

The credit quality indicators for the amortized cost of held-to-maturity debt securities as of March 31, 2020 are shown below (in thousands):


	Amortized cost of held-to-maturity debt securities by credit rating
Fixed maturity securities, bonds held-to-maturity	AAA		AA		A		BBB		BB and below		Total
U.S. state and political subdivisions	$	54,145	$	71,923	$	23,814	$	—	$	5,269	$	155,151
Foreign governments	—		2,852		1,042		—		—		3,894
Corporate debt securities	1,942		366,335		3,517,245		3,962,838		181,199		8,029,559
Residential mortgage backed securities	80,387		—		4,745		—		93,955		179,087
Collateralized debt securities	—		—		164,765		16,053		27,683		208,501
Total	$	136,474	$	441,110	$	3,711,611	$	3,978,891	$	308,106	$	8,576,192

At March 31, 2020, a held-to-maturity bond with amortized cost of $38,000 was past due over 90 days with non accrual status.

AMERICAN NATIONAL INSURANCE CO 10-Q