Edgar Filing: AMERICAN NATIONAL INSURANCE CO /TX/

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

¨	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. x 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). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x No

As of July 31, 2013, there were 26,893,544 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, 2013 and December 31, 2012	3

	Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012	5

	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013 and 2012	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	6

	Notes to the Unaudited Consolidated Financial Statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47

ITEM 4.	CONTROLS AND PROCEDURES	47

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	48

ITEM 1A.	RISK FACTORS	48

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	48

ITEM 4.	MINE SAFETY DISCLOSURES	48

ITEM 5.	OTHER INFORMATION	48

ITEM 6.	EXHIBIT INDEX	49

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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


	June 30,			December 31,
	2013			2012
ASSETS
Fixed maturity, bonds held-to-maturity, at amortized cost (Fair Value $9,388,973 and $9,840,751)	$	8,941,077		$	9,009,282
Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $4,360,601 and $4,316,467)		4,559,914			4,665,576
Equity securities, at fair value (Cost $724,590 and $688,579)		1,228,603			1,075,439
Mortgage loans on real estate, net of allowance		3,240,456			3,143,011
Policy loans		393,272			395,333
Investment real estate, net of accumulated depreciation of $212,186 and $223,462		437,748			511,233
Short-term investments		171,785			313,086
Other invested assets		156,837			125,104

Total investments		19,129,692			19,238,064

Cash and cash equivalents		113,870			303,008
Investments in unconsolidated affiliates		293,479			248,425
Accrued investment income		199,591			207,314
Reinsurance recoverables		392,968			418,743
Prepaid reinsurance premiums		52,775			56,826
Premiums due and other receivables		308,601			283,446
Deferred policy acquisition costs		1,275,968			1,247,675
Property and equipment, net		98,102			92,695
Current tax receivable		6,699			14,578
Other assets		207,046			154,911
Separate account assets		885,773			841,389

Total assets	$	22,964,564		$	23,107,074

LIABILITIES
Future policy benefits
Life	$	2,661,007		$	2,650,822
Annuity		844,304			811,192
Accident and health		67,147			69,962
Policyholders’ account balances		11,267,213			11,555,201
Policy and contract claims		1,304,120			1,340,366
Unearned premium reserve		773,049			757,532
Other policyholder funds		298,284			288,391
Liability for retirement benefits		270,745			265,317
Current portion of long-term notes payable		2,236			50,884
Long-term notes payable		112,500			112,500
Deferred tax liabilities, net		106,501			92,150
Other liabilities		438,835			432,041
Separate account liabilities		885,773			841,389

Total liabilities		19,031,714			19,267,747

STOCKHOLDERS’ EQUITY
Common stock, $1.00 par value,—Authorized 50,000,000 Issued 30,832,449 and 30,832,449, Outstanding 26,893,544 and 26,836,664 shares		30,832			30,832
Additional paid-in capital		3,260			—
Accumulated other comprehensive income		252,997			242,010
Retained earnings		3,730,002			3,653,280
Treasury stock, at cost		(97,463	)		(98,286	)

Total American National Insurance Company stockholders’ equity		3,919,628			3,827,836
Noncontrolling interest		13,222			11,491

Total stockholders’ equity		3,932,850			3,839,327

Total liabilities and stockholders’ equity	$	22,964,564		$	23,107,074

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
PREMIUMS AND OTHER REVENUE
Premiums
Life	$	71,546		$	70,699		$	140,201		$	137,150
Annuity		33,625			34,723			66,321			63,135
Accident and health		53,532			54,712			106,261			111,766
Property and casualty		264,147			268,431			529,836			541,600
Other policy revenues		49,937			49,016			99,935			97,063
Net investment income		246,786			240,563			498,152			496,259
Realized investment gains (losses)		45,140			10,139			63,678			19,947
Other-than-temporary impairments		(1,604	)		(5,261	)		(3,191	)		(8,098	)
Other income		10,551			7,940			17,512			14,815

Total premiums and other revenues		773,660			730,962			1,518,705			1,473,637

BENEFITS, LOSSES AND EXPENSES
Policyholder benefits
Life		81,573			76,799			163,075			160,622
Annuity		42,600			43,722			83,295			82,967
Claims incurred
Accident and health		33,006			36,475			71,974			81,150
Property and casualty		208,639			244,966			398,233			432,518
Interest credited to policyholders’ account balances		99,770			91,019			210,876			215,883
Commissions for acquiring and servicing policies		93,733			95,528			178,856			191,042
Other operating expenses		129,160			120,151			253,735			222,144
Change in deferred policy acquisition costs		969			3,662			12,303			5,300

Total benefits, losses and expenses		689,450			712,322			1,372,347			1,391,626

Income (loss) before federal income tax and equity in earnings/losses of unconsolidated affiliates		84,210			18,640			146,358			82,011

Less: Provision (benefit) for federal income taxes
Current		22,415			16,197			27,379			23,484
Deferred		2,388			(18,581	)		8,741			(8,885	)

Total provision (benefit) for federal income taxes		24,803			(2,384	)		36,120			14,599
Equity in earnings (losses) of unconsolidated affiliates, net of tax		1,076			314			9,653			(1,567	)

Net income (loss)		60,483			21,338			119,891			65,845
Less: Net income (loss) attributable to noncontrolling interest, net of tax		2,314			832			1,751			123

Net income (loss) attributable to American National Insurance Company	$	58,169		$	20,506		$	118,140		$	65,722

Amounts available to American National Insurance Company common stockholders
Earnings per share
Basic	$	2.17		$	0.77		$	4.41		$	2.46
Diluted		2.16			0.76			4.39			2.45
Cash dividends to common stockholders		0.77			0.77			1.54			1.54
Weighted average common shares outstanding		26,779,969			26,685,128			26,777,029			26,675,405
Weighted average common shares outstanding and dilutive potential common shares		26,901,347			26,854,595			26,894,798			26,848,258

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,
	2013			2012			2013		2012
Net income (loss)	$	60,483		$	21,338		$	119,891	$	65,845

Other comprehensive income (loss), net of tax
Change in net unrealized gain (loss) on securities		(57,897	)		(16,794	)		4,822		59,737
Foreign currency transaction and translation adjustments		265			178			414		330
Defined benefit plan adjustment		2,875			2,125			5,751		4,793

Other comprehensive income (loss), net of tax		(54,757	)		(14,491	)		10,987		64,860

Total comprehensive income (loss)		5,726			6,847			130,878		130,705
Less: Comprehensive income (loss) attributable to noncontrolling interest		2,314			832			1,751		123

Total comprehensive income (loss) attributable to American National Insurance Company	$	3,412		$	6,015		$	129,127	$	130,582

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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


	Six months ended June 30,
	2013			2012
Common Stock
Balance at beginning and end of the period	$	30,832		$	30,832

Additional Paid-In Capital
Balance as of January 1,		—			—
Reissuance of treasury shares		2,926			(203	)
Income tax effect from restricted stock arrangement		79			(534	)
Amortization of restricted stock		255			8,651

Balance at end of period		3,260			7,914

Accumulated Other Comprehensive Income (Loss)
Balance as of January 1,		242,010			159,403
Other comprehensive income (loss)		10,987			64,860

Balance at end of the period		252,997			224,263

Retained Earnings
Balance as of January 1,		3,653,280			3,545,546
Net income (loss) attributable to American National Insurance Company		118,140			65,722
Cash dividends to common stockholders		(41,418	)		(41,331	)

Balance at end of the period		3,730,002			3,569,937

Treasury Stock
Balance as of January 1,		(98,286	)		(98,490	)
Reissuance of treasury shares		823			203

Balance at end of the period		(97,463	)		(98,287	)

Noncontrolling Interest
Balance as of January 1,		11,491			12,947
Contributions		1			—
Distributions		(21	)		(17	)
Gain (loss) attributable to noncontrolling interest		1,751			123

Balance at end of the period		13,222			13,053

Total Stockholders’ Equity	$	3,932,850		$	3,747,712

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,
	2013			2012
OPERATING ACTIVITIES
Net income (loss)	$	119,891		$	65,845
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Realized investment (gains) losses		(63,678	)		(19,947	)
Other-than-temporary impairments		3,191			8,098
Accretion (amortization) of discounts, premiums and loan origination fees		1,479			2,495
Net capitalized interest on policy loans and mortgage loans		(13,172	)		(14,469	)
Depreciation		14,973			18,555
Interest credited to policyholders’ account balances		210,876			215,883
Charges to policyholders’ account balances		(99,935	)		(97,063	)
Deferred federal income tax (benefit) expense		8,741			(8,885	)
Equity in (earnings) losses of unconsolidated affiliates		(9,653	)		1,567
Distributions from equity method investments		15,873			9,001
Changes in:
Policyholder liabilities		29,894			88,363
Deferred policy acquisition costs		12,303			5,300
Reinsurance recoverables		25,775			16,225
Premiums due and other receivables		(25,155	)		(26,037	)
Prepaid reinsurance premiums		4,051			4,055
Accrued investment income		7,723			2,688
Current tax receivable/payable		7,879			14,438
Liability for retirement benefits		5,428			1,407
Other, net		(12,848	)		(26,453	)

Net cash provided by (used in) operating activities		243,636			261,066

INVESTING ACTIVITIES
Proceeds from sale/maturity/prepayment of
Held-to-maturity securities		762,394			703,534
Available-for-sale securities		484,501			245,011
Investment real estate		78,067			—
Mortgage loans		252,379			109,951
Policy loans		29,714			33,875
Other invested assets		7,527			5,324
Disposals of property and equipment		783			98
Distributions from unconsolidated affiliates		21,149			10,212
Payment for the purchase/origination of
Held-to-maturity securities		(706,980	)		(610,789	)
Available-for-sale securities		(552,322	)		(300,943	)
Investment real estate		(19,822	)		(14,593	)
Mortgage loans		(344,240	)		(259,093	)
Policy loans		(12,012	)		(21,495	)
Other invested assets		(9,370	)		(8,547	)
Additions to property and equipment		(10,337	)		(12,218	)
Contributions to unconsolidated affiliates		(67,235	)		(14,423	)
Change in short-term investments		141,301			4,132
Other, net		744			5,266

Net cash provided by (used in) investing activities		56,241			(124,698	)

FINANCING ACTIVITIES
Policyholders’ account deposits		444,357			608,843
Policyholders’ account withdrawals		(843,286	)		(656,544	)
Change in notes payable		(48,648	)		1,313
Dividends to stockholders		(41,418	)		(41,331	)
Proceeds from (payments to) noncontrolling interest		(20	)		(17	)

Net cash provided by (used in) financing activities		(489,015	)		(87,736	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(189,138	)		48,632
Beginning of the period		303,008			102,114

End of period	$	113,870		$	150,746

See accompanying notes to the unaudited consolidated financial statements.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

American National Insurance Company and its consolidated subsidiaries (collectively “American National”) offer a broad spectrum of insurance products, including individual and group life insurance, health insurance, annuities, and property and casualty insurance. Through non-insurance subsidiaries, American National invests primarily in stocks and real estate. Business is conducted in 50 states, the District of Columbia, Puerto Rico, Guam and American Samoa. The majority of revenues are generated by the insurance business. Various distribution systems are utilized, including multiple-line exclusive agents, independent agents, third-party marketing organizations, career agents, and direct sales to the public.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and are reported in U.S. currency. American National consolidates all entities that are wholly-owned and those in which American National owns less than 100% but controls, as well as any variable interest entities in which American National is the primary beneficiary. All material intercompany 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 (loss), changes in stockholders’ 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, 2012. 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.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards—The Financial Accounting Standards Board (“FASB”) issued the following accounting guidance relevant to American National, including technical amendments and corrections to make the accounting standards easier to understand and fair value measurement easier to apply. Each became effective for American National on January 1, 2013, and unless stated otherwise, did not have a material effect on the consolidated financial statements:

Amended guidance for derecognition of an in substance real estate subsidiary. The amendment clarifies that when a reporting entity ceases to have a controlling financial interest in a subsidiary that is in substance real estate because of a default on the subsidiary’s nonrecourse debt secured by the real estate, the reporting entity should apply the guidance for real estate sales when evaluating the subsidiary for deconsolidation.

Guidance that amends the disclosures about offsetting assets and liabilities. The new guidance requires disclosures of both gross and net information about offsetting and related arrangements. Subsequently, amendments were issued to clarify the scope of this guidance covering only those derivatives that are either offsets in accordance with the right of setoff conditions, the balance sheet netting criteria or subject to an enforceable master netting arrangement or similar agreement.

Amended guidance on presentation of accumulated other comprehensive income (“AOCI”). The amendments require disclosures about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement of operations or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.

Future Adoption of New Accounting Standards—The FASB issued the following significant accounting guidance relevant to American National. Each will become effective for American National on January 1, 2014 and unless stated otherwise, is not expected to have a material effect on the consolidated financial statements:

Guidance addressing questions on the recognition and classification of fees mandated by the Patient Protection and Affordable Care Act on the health insures’ financial statements. The guidance specifies that the liability for the fee should be recorded in full once the entity provides qualifying health insurance in the applicable calendar year. The corresponding deferred cost is then amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable.

Amended guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, except for obligations addressed within existing GAAP guidance.

4. INVESTMENTS IN SECURITIES

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


	June 30, 2013
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and government	$	1,973	$	32	$	—		$	2,005
U.S. states and political subdivisions		370,477		24,047		(342	)		394,182
Foreign governments		29,085		3,223		—			32,308
Corporate debt securities		8,047,408		480,818		(89,646	)		8,438,580
Residential mortgage-backed securities		452,074		28,901		(1,883	)		479,092
Collateralized debt securities		2,374		267		—			2,641
Other debt securities		37,686		2,479		—			40,165

Total bonds held-to-maturity		8,941,077		539,767		(91,871	)		9,388,973

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		21,550		889		(2	)		22,437
U.S. states and political subdivisions		601,263		27,328		(10,323	)		618,268
Foreign governments		5,000		1,873		—			6,873
Corporate debt securities		3,613,906		203,991		(42,682	)		3,775,215
Residential mortgage-backed securities		72,178		3,547		(662	)		75,063
Commercial mortgage-backed securities		20,934		12,992		—			33,926
Collateralized debt securities		15,737		1,223		(24	)		16,936
Other debt securities		10,033		1,163		—			11,196

Total bonds available-for-sale		4,360,601		253,006		(53,693	)		4,559,914

Equity securities
Common stock		696,900		497,164		(8,419	)		1,185,645
Preferred stock		27,690		15,361		(93	)		42,958

Total equity securities		724,590		512,525		(8,512	)		1,228,603

Total investments in securities	$	14,026,268	$	1,305,298	$	(154,076	)	$	15,177,490


	December 31, 2012
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and government	$	3,593	$	69	$	—		$	3,662
U.S. states and political subdivisions		393,541		40,161		(7	)		433,695
Foreign governments		29,071		4,367		—			33,438
Corporate debt securities		7,993,167		748,773		(6,782	)		8,735,158
Residential mortgage-backed securities		549,384		42,313		(1,195	)		590,502
Collateralized debt securities		2,500		321		—			2,821
Other debt securities		38,026		3,449		—			41,475

Total bonds held-to-maturity		9,009,282		839,453		(7,984	)		9,840,751

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		19,649		1,156		—			20,805
U.S. states and political subdivisions		570,751		44,792		(105	)		615,438
Foreign governments		5,000		2,344		—			7,344
Corporate debt securities		3,582,913		303,908		(14,188	)		3,872,633
Residential mortgage-backed securities		89,486		5,165		(266	)		94,385
Commercial mortgage-backed securities		20,933		3,509		—			24,442
Collateralized debt securities		17,676		1,448		(33	)		19,091
Other debt securities		10,059		1,379		—			11,438

Total bonds available-for-sale		4,316,467		363,701		(14,592	)		4,665,576

Equity securities
Common stock		660,889		383,634		(6,739	)		1,037,784
Preferred stock		27,690		9,995		(30	)		37,655

Total equity securities		688,579		393,629		(6,769	)		1,075,439

Total investments in securities	$	14,014,328	$	1,596,783	$	(29,345	)	$	15,581,766

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


	June 30, 2013
	Bonds Held-to-Maturity				Bonds Available-for-Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	910,170	$	925,314	$	542,969	$	556,380
Due after one year through five years		2,566,756		2,800,700		1,363,358		1,490,856
Due after five years through ten years		4,913,212		5,084,699		2,048,682		2,097,928
Due after ten years		545,089		573,210		400,592		409,950
Without single maturity date		5,850		5,050		5,000		4,800

Total	$	8,941,077	$	9,388,973	$	4,360,601	$	4,559,914

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 the 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,
	2013			2012			2013			2012
Proceeds from sales of available-for-sale securities	$	79,191		$	5,632		$	156,048		$	38,305
Gross realized gains		12,612			947			23,350			12,027
Gross realized losses		(4	)		(11	)		(526	)		(170	)

All gains and losses for securities sold throughout the year were determined using specific identification of the securities sold. During the six months ended June 30, 2013, bonds with a carrying value of $13,492,000 were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuer’s creditworthiness became evident. An unrealized loss of $263,000 was established at the time of the transfer. There were no transfers during the same period in 2012.

Change in net unrealized gains (losses) on securities

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


	Six months ended June 30,
	2013			2012
Bonds available-for-sale	$	(149,796	)	$	57,126
Equity securities		117,153			61,405

Change in net unrealized gains (losses) on securities during the year		(32,643	)		118,531
Adjustments for:
Deferred policy acquisition costs		40,596			(22,098	)
Participating policyholders’ interest		248			(4,417	)
Deferred federal income tax benefit (expense)		(3,379	)		(32,279	)

Change in net unrealized gains (losses) on securities, net of tax	$	4,822		$	59,737

Gross unrealized losses on investment securities and the fair value of the related 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, 2013
	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	$	(342	)	$	10,545	$	—		$	—	$	(342	)	$	10,545
Corporate debt securities		(85,632	)		1,539,954		(4,014	)		36,547		(89,646	)		1,576,501
Residential mortgage-backed securities		(1,164	)		39,401		(719	)		10,982		(1,883	)		50,383

Total bonds held-to-maturity		(87,138	)		1,589,900		(4,733	)		47,529		(91,871	)		1,637,429

Fixed maturity securities, bonds available-for-sale
U.S. treasury and other U.S. government corporations and agencies		(2	)		9,086		—			—		(2	)		9,086
U.S. states and political subdivisions		(10,323	)		135,550		—			—		(10,323	)		135,550
Corporate debt securities		(38,954	)		801,335		(3,728	)		65,663		(42,682	)		866,998
Residential mortgage-backed securities		(514	)		17,684		(148	)		2,011		(662	)		19,695
Collateralized debt securities		(5	)		281		(19	)		698		(24	)		979

Total bonds available-for-sale		(49,798	)		963,936		(3,895	)		68,372		(53,693	)		1,032,308

Equity securities
Common stock		(8,419	)		74,429		—			—		(8,419	)		74,429
Preferred stock		(93	)		1,907		—			—		(93	)		1,907

Total equity securities		(8,512	)		76,336		—			—		(8,512	)		76,336

Total investments in securities	$	(145,448	)	$	2,630,172	$	(8,628	)	$	115,901	$	(154,076	)	$	2,746,073


	December 31, 2012
	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	$	(6	)	$	914	$	(1	)	$	80	$	(7	)	$	994
Corporate debt securities		(4,394	)		319,434		(2,388	)		39,632		(6,782	)		359,066
Residential mortgage-backed securities		(147	)		13,824		(1,048	)		24,666		(1,195	)		38,490

Total bonds held-to-maturity		(4,547	)		334,172		(3,437	)		64,378		(7,984	)		398,550

Fixed maturity securities, bonds available-for-sale
U.S. states and political subdivisions		(105	)		6,523		—			—		(105	)		6,523
Corporate debt securities		(2,077	)		242,261		(12,111	)		70,187		(14,188	)		312,448
Residential mortgage-backed securities		(34	)		1,527		(232	)		8,029		(266	)		9,556
Collateralized debt securities		(8	)		527		(25	)		911		(33	)		1,438

Total bonds available-for-sale		(2,224	)		250,838		(12,368	)		79,127		(14,592	)		329,965

Equity securities
Common stock		(6,739	)		64,003		—			—		(6,739	)		64,003
Preferred stock		(30	)		30		—			—		(30	)		30

Total equity securities		(6,769	)		64,033		—			—		(6,769	)		64,033

Total investments in securities	$	(13,540	)	$	649,043	$	(15,805	)	$	143,505	$	(29,345	)	$	792,548

As of June 30, 2013, the securities with unrealized losses were not deemed to be other-than-temporarily impaired, including those with the duration of the unrealized losses exceeding one year. American National has the ability and intent to hold those securities until a market price recovery or maturity. Further, it is not more-likely-than-not that American National will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time. It is possible the issuer’s financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.

Credit Risk Management

The bond portfolio distributed by credit quality rating, using both S&P and Moody’s ratings, is shown below:


	June 30, 2013			December 31, 2012
AAA		5.0	%		5.5	%
AA		10.7			10.6
A		41.0			38.2
BBB		39.4			41.4
BB and below		3.9			4.3

Total		100.0	%		100.0	%

Equity securities by market sector distribution are shown below:


	June 30, 2013			December 31, 2012
Financials		19.6	%		18.9	%
Consumer goods		19.5			20.3
Energy and utilities		16.1			15.8
Information technology		15.7			16.9
Healthcare		12.4			12.7
Industrials		8.7			9.1
Other		8.0			6.3

Total		100.0	%		100.0	%

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 property-type and property location of the underlying mortgage collateral. Mortgage loans by property-type and geographic distribution are as follows:


	June 30, 2013			December 31, 2012
Office		25.9	%		34.9	%
Industrial		31.3			24.0
Retail		19.4			17.7
Hotel and motel		12.6			13.9
Other		10.8			9.5

Total		100.0	%		100.0	%


	June 30, 2013			December 31, 2012
West South Central		25.0	%		23.2	%
South Atlantic		21.3			23.0
East North Central		19.0			18.2
Pacific		13.9			13.3
East South Central		7.4			7.1
Mountain		5.6			7.0
Other		7.8			8.2

Total		100.0	%		100.0	%

There were no loans sold or foreclosed and no significant non-cash transactions occurred during the six months ended June 30, 2013 or 2012.

Credit Quality

Commercial mortgage loan balances placed on nonaccrual status are shown below (in thousands):


	June 30, 2013		December 31, 2012
Commercial mortgages
Retail	$	13,354	$	13,354
Office		6,220		—

Total	$	19,574	$	13,354

The credit quality of the mortgage loan portfolio is assessed by evaluating the credit risk of each borrower. A loan is classified as performing or non-performing based on whether all of the contractual terms of the loan have been met.

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


	June 30, 2013
	30-59 Days		60-89 Days		Greater Than		Total Past				Total
	Past Due		Past Due		90 Days		Due		Current		Mortgage Loans
Commercial mortgages
Office	$	18,866	$	—	$	6,220	$	25,086	$	992,988	$	1,018,074
Industrial		—		—		—		—		841,027		841,027
Retail		—		—		13,354		13,354		622,970		636,324
Other		—		—		—		—		758,712		758,712

Total	$	18,866	$	—	$	19,574	$	38,440	$	3,215,697		3,254,137

Allowance for loan losses												13,681

Mortgage loans on real estate, net of allowance											$	3,240,456


	December 31, 2012
	30-59 Days		60-89 Days		Greater Than		Total Past				Total
	Past Due		Past Due		90 Days		Due		Current		Mortgage Loans
Commercial mortgages
Office	$	—	$	—	$	—	$	—	$	1,100,407	$	1,100,407
Industrial		—		—		—		—		755,198		755,198
Retail		—		—		13,354		13,354		547,472		560,826
Other		—		—		—		—		738,592		738,592

Total	$	—	$	—	$	13,354	$	13,354	$	3,141,669		3,155,023

Allowance for loan losses												12,012

Mortgage loans on real estate, net of allowance											$	3,143,011

Total mortgage loans are net of unamortized discounts of $1,490,000 and $4,346,000 and unamortized origination fees of $14,556,000 and $14,076,000 at June 30, 2013 and December 31, 2012, respectively. No unearned income is included in these amounts.

Allowance for Credit Losses

Loans not evaluated individually for collectibility are segregated by collateral property-type and location and allowance factors are applied. These factors are developed annually, and reviewed quarterly based on our historical loss experience adjusted for the expected trend in the rate of foreclosure losses. Allowance factors are higher for loans of certain property types and in certain regions based on loss experience or a blended historical loss factor.

The change in allowance for credit losses in commercial mortgage loans is shown below (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	Collectively		Individually			Collectively		Individually
	Evaluated		Evaluated			Evaluated		Evaluated
	for Impairment		for Impairment			for Impairment		for Impairment
Beginning balance, 2012	$	9,640	$	493		$	10,828	$	493
Write down		—		(2,277	)		—		(2,277	)
Change in allowance		2,233		2,277			1,045		2,277

Ending balance, 2012	$	11,873	$	493		$	11,873	$	493

Beginning balance, 2013	$	11,231	$	493		$	11,519	$	493
Change in allowance		788		1,169			500		1,169

Ending balance, 2013	$	12,019	$	1,662		$	12,019	$	1,662

At June 30, 2013 and 2012, the recorded investment for loans collectively evaluated for impairment was $3,144,566,000 and $2,976,969,000, respectively, and the recorded investment for loans individually evaluated for impairment was $111,936,000 and $105,515,000, respectively.

Loans individually evaluated for impairment with and without an allowance are shown below (in thousands):


	June 30, 2013				June 30, 2012
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Three months ended
With an allowance recorded
Office	$	22,209	$	799	$	—	$	—

Without an allowance recorded
Office	$	27,904	$	30	$	26,064	$	1,377
Industrial		—		—		890		—
Retail		17,166		282		22,261		(193	)
Other		55,043		907		59,698		303

Total	$	100,113	$	1,219	$	108,913	$	1,487

Six months ended
With an allowance recorded
Office	$	23,450	$	799	$	—	$	—

Without an allowance recorded
Office	$	19,417	$	643	$	45,358	$	1,482
Retail		17,166		565		15,224		446
Other		55,125		1,831		45,354		1,520

Total	$	91,708	$	3,039	$	105,936	$	3,448


	June 30, 2013				December 31, 2012
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal
	Investment		Balance		Investment		Balance
With an allowance recorded
Retail (related allowance of $493 and $493)	$	—	$	493	$	—	$	493
Office (related allowance of $1,169 and $0)		22,209		23,378		—		—

Total with an allowance recorded	$	22,209	$	23,871	$	—	$	493

Without an allowance recorded
Office	$	19,375	$	19,375	$	36,544	$	36,544
Retail		17,152		17,152		17,180		17,180
Other		54,862		54,862		55,320		55,320

Total without an allowance recorded	$	91,389	$	91,389	$	109,044	$	109,044

Troubled Debt Restructurings

A small portion of the mortgage loan portfolio for which American National has granted concessions related to the borrowers’ ability to pay the loans is classified as troubled debt restructurings. 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. There was one mortgage loan that has been modified in troubled debt restructurings during the six months ended June 30, 2013, with no such modifications during the same period in 2012. The outstanding recorded investment was $6,432,000 both before and after the modification.

6. INVESTMENT REAL ESTATE

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


	June 30, 2013			December 31, 2012
Shopping centers		33.4	%		41.0	%
Office buildings		25.7			21.9
Industrial		17.8			18.1
Other		23.1			19.0

Total		100.0	%		100.0	%


	June 30, 2013			December 31, 2012
West South Central		58.8	%		60.8	%
South Atlantic		10.7			11.2
East North Central		8.9			10.3
Mountain		6.9			6.2
East South Central		6.4			5.3
Other		8.3			6.2

Total		100.0	%		100.0	%

American National and its wholly-owned subsidiaries regularly invest in real estate partnerships and joint ventures. American National 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 be used first to settle the liabilities of the VIE. 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 2013 or 2012.

The assets and liabilities relating to VIEs which are consolidated in American National’s financial statements are as follows (in thousands):


	June 30, 2013		December 31, 2012
Investment real estate	$	113,879	$	162,502
Short-term investments		674		969
Cash and cash equivalents		2,326		3,671
Accrued investment income		1,927		2,641
Other receivables		8,699		11,709
Other assets		4,603		6,487

Total assets of consolidated VIEs	$	132,108	$	187,979

Notes payable	$	114,736	$	163,384
Other liabilities		4,153		6,647

Total liabilities of consolidated VIEs	$	118,889	$	170,031

The total notes payable in the consolidated statements of financial position pertain to the borrowings of American National Insurance Company’s consolidated VIEs. The liability of American National Insurance Company on notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $12,740,000 and $18,063,000 at June 30, 2013 and December 31, 2012, respectively. The average interest rate on the current portion of the notes payable was 4.0% during 2013. The total long-term portion of notes payable consists of three notes with the following interest rates: 4.0%, adjusted LIBOR plus 1.0% and adjusted LIBOR plus 2.5%. Of the long-term notes payable, $12,500,000 will mature in 2016, with the remainder maturing beyond 5 years.

For other VIEs in which American National is a partner, it is not the primary beneficiary and these entities were not consolidated, as the major decisions that most significantly impact the economic activities of the VIE require unanimous consent of all partners. The following table presents the carrying amount and maximum exposure to loss relating to unconsolidated VIEs (in thousands):


	June 30, 2013				December 31, 2012
	Carrying Amount		Maximum Exposure to Loss		Carrying Amount		Maximum Exposure to Loss
Investment in unconsolidated affiliates	$	133,192	$	133,192	$	81,548	$	81,548

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. Equity-indexed contracts include a fixed host universal-life or annuity contract and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands):


Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Statements of Financial Position	June 30, 2013						December 31, 2012
Derivatives Not Designated as Hedging Instruments		Number of Instruments		Notional Amounts		Estimated Fair Value		Number of Instruments		Notional Amounts		Estimated Fair Value
Equity-indexed options	Other invested assets		366	$	884,100	$	115,558		356	$	846,900	$	82,625
Equity-indexed embedded derivative	Future policy benefits		28,400		760,300		100,963		22,941		722,500		75,032


	Location in the Consolidated Statements of Operations	Gains (Losses) Recognized in Income on Derivatives
Derivatives Not Designated		Three months ended June 30,						Six months ended June 30,
as Hedging Instruments		2013			2012			2013			2012
Equity-indexed options	Net investment income	$	10,419		$	(8,189	)	$	34,759		$	11,458
Equity-indexed embedded derivative	Interest credited to policyholders’ account balances		(8,047	)		9,447			(28,694	)		(9,010	)

8. NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES)

Net investment income, before federal income taxes, is shown below (in thousands):


	Three months ended June 30,					Six months ended June 30,
	2013		2012			2013			2012
Bonds	$	157,975	$	170,443		$	321,408		$	342,722
Equity securities		8,421		7,508			15,236			13,753
Mortgage loans		56,083		50,749			107,868			100,507
Real estate		352		8,498			(1,069	)		8,283
Options		10,419		(8,189	)		34,759			11,458
Other invested assets		13,536		11,554			19,950			19,536

Total	$	246,786	$	240,563		$	498,152		$	496,259

Realized investment gains (losses), before federal income taxes, are shown below (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Bonds	$	3,696		$	9,610		$	6,919		$	13,420
Equity securities		11,836			2,859			20,519			10,214
Mortgage loans		101			(2,233	)		389			(3,322	)
Real estate		29,563			—			35,946			(252	)
Other invested assets		(56	)		(97	)		(95	)		(113	)

Total	$	45,140		$	10,139		$	63,678		$	19,947

The OTTI losses are shown below (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Equity securities	$	(1,604	)	$	(5,261	)	$	(3,191	)	$	(8,098	)

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

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


	June 30, 2013				December 31, 2012
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity	$	8,941,077	$	9,388,973	$	9,009,282	$	9,840,751
Fixed maturity securities, bonds available-for-sale		4,559,914		4,559,914		4,665,576		4,665,576
Equity securities		1,228,603		1,228,603		1,075,439		1,075,439
Equity-indexed options		115,558		115,558		82,625		82,625
Mortgage loans on real estate, net of allowance		3,240,456		3,441,676		3,143,011		3,441,645
Policy loans		393,272		393,272		395,333		395,333
Short-term investments		171,785		171,785		313,086		313,086
Separate account assets		885,773		885,773		841,389		841,389

Total financial assets	$	19,536,438	$	20,185,554	$	19,525,741	$	20,655,844

Financial liabilities
Investment contracts	$	9,581,289	$	9,581,289	$	9,987,431	$	9,987,431
Embedded derivative liability for equity-indexed contracts		100,963		100,963		75,032		75,032
Notes payable		114,736		114,736		163,384		163,384
Separate account liabilities		885,773		885,773		841,389		841,389

Total financial liabilities	$	10,682,761	$	10,682,761	$	11,067,236	$	11,067,236

Summary

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.

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, relevant 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 the 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.

The pricing of certain commercial mortgage-backed securities use discounted cash flow models and these securities are classified as Level 3 measurements. These models include significant non-observable inputs including an internally determined credit rating of the security and an externally provided credit spread. At June 30, 2013 and December 31, 2012, the modeled discount rate ranges from 5.9% to 6.0%.

For securities priced using a quote from an independent broker, such as the equity options and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received from an independent broker. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is generally performed on a weekly basis, but no less frequently than on a monthly basis.

Equity Securities—For publicly-traded equity securities, prices are received from a nationally recognized pricing service that are based on observable market transactions and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, an estimate of fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. These estimates are disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services regularly.

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

Embedded Derivative—The embedded derivative liability for equity-indexed contracts is measured at fair value and is recalculated each reporting period using equity option pricing models. To validate the assumptions used to price the embedded derivative liability, American National measures and compares embedded derivative returns against the returns of equity options held to hedge the liability cash flows.

The significant unobservable input used to calculate the fair value of the embedded derivatives is equity option implied volatility. This volatility assumption is the range of implied volatilities that American National has determined market participants would use to price equity options that match the current derivative characteristics of our in-force equity-indexed contracts. Implied volatility can vary by term and strike price. An increase in implied volatility will result in an increase in the value of the equity-indexed embedded derivatives, all other things being equal. At June 30, 2013 and December 31, 2012, the implied volatility used to estimate embedded derivative value ranges from 15.2% to 31.0% and 15.9.% to 30.1%, respectively.

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, unpredictable timing of repayments and the fact that it cannot be separated from the policy contract and it is settled at outstanding value, American National believes that the carrying value of policy loans approximates fair value.

Investment contracts liability—The carrying value of investment contracts liability 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 liability approximates fair value because the majority of these contracts’ interest rates reset to current rates offered 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.

Quantitative Disclosures

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


	Fair Value Measurement as of June 30, 2013
	Total Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and government	$	2,005	$	—	$	2,005	$	—
U.S. states and political subdivisions		394,182		—		394,182		—
Foreign governments		32,308		—		32,308		—
Corporate debt securities		8,438,580		—		8,376,947		61,633
Residential mortgage-backed securities		479,092		—		478,057		1,035
Collateralized debt securities		2,641		—		—		2,641
Other debt securities		40,165		—		40,165		—

Total bonds held-to-maturity		9,388,973		—		9,323,664		65,309

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		22,437		—		22,437		—
U.S. states and political subdivisions		618,268		—		615,743		2,525
Foreign governments		6,873		—		6,873		—
Corporate debt securities		3,775,215		—		3,760,252		14,963
Residential mortgage-backed securities		75,063		—		72,857		2,206
Commercial mortgage-backed securities		33,926		—		—		33,926
Collateralized debt securities		16,936		—		15,001		1,935
Other debt securities		11,196		—		11,196		—

Total bonds available-for-sale		4,559,914		—		4,504,359		55,555

Equity securities
Common stock		1,185,645		1,185,645		—		—
Preferred stock		42,958		42,955		—		3

Total equity securities		1,228,603		1,228,600		—		3

Options		115,558		—		—		115,558
Mortgage loans on real estate		3,441,676		—		3,441,676		—
Policy loans		393,272		—		—		393,272
Short-term investments		171,785		—		171,785		—
Separate account assets		885,773		—		885,773		—

Total financial assets	$	20,185,554	$	1,228,600	$	18,327,257	$	629,697

Financial liabilities
Investment contracts	$	9,581,289	$	—	$	—	$	9,581,289
Embedded derivative liability for equity-indexed contracts		100,963		—		—		100,963
Notes payable		114,736		—		—		114,736
Separate account liabilities		885,773		—		885,773		—

Total financial liabilities	$	10,682,761	$	—	$	885,773	$	9,796,988


	Fair Value Measurement as of December 31, 2012
	Total Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and government	$	3,662	$	—	$	3,662	$	—
U.S. states and political subdivisions		433,695		—		433,695		—
Foreign governments		33,438		—		33,438		—
Corporate debt securities		8,735,158		—		8,662,164		72,994
Residential mortgage-backed securities		590,502		—		589,441		1,061
Collateralized debt securities		2,821		—		—		2,821
Other debt securities		41,475		—		41,475		—

Total bonds held-to-maturity		9,840,751		—		9,763,875		76,876

Fixed maturity securities, bonds available-for-sale
U.S. treasury and government		20,805		—		20,805		—
U.S. states and political subdivisions		615,438		—		612,913		2,525
Foreign governments		7,344		—		7,344		—
Corporate debt securities		3,872,633		—		3,796,949		75,684
Residential mortgage-backed securities		94,385		—		91,938		2,447
Commercial mortgage-backed securities		24,442		—		—		24,442
Collateralized debt securities		19,091		—		17,156		1,935
Other debt securities		11,438		—		11,438		—

Total bonds available-for-sale		4,665,576		—		4,558,543		107,033

Equity securities
Common stock		1,037,784		1,037,784		—		—
Preferred stock		37,655		37,652		—		3

Total equity securities		1,075,439		1,075,436		—		3

Options		82,625		—		—		82,625
Mortgage loans on real estate		3,441,645		—		3,441,645		—
Policy loans		395,333		—		—		395,333
Short-term investments		313,086		—		313,086		—
Separate account assets		841,389		—		841,389		—

Total financial assets	$	20,655,844	$	1,075,436	$	18,918,538	$	661,870

Financial liabilities
Investment contracts	$	9,987,431	$	—	$	—	$	9,987,431
Embedded derivative liability for equity-indexed contracts		75,032		—		—		75,032
Notes payable		163,384		—		—		163,384
Separate account liabilities		841,389		—		841,389		—

Total financial liabilities	$	11,067,236	$	—	$	841,389	$	10,225,847

For financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, a reconciliation of the beginning and ending balances is shown below at estimated fair value (in thousands):


	Level 3
	Three months ended June 30,									Six months ended June 30,
	Asset						Liability			Asset						Liability
				Equity-									Equity-
	Investment			Indexed			Embedded			Investment			Indexed			Embedded
	Securities			Options			Derivative			Securities			Options			Derivative
Beginning balance, 2012	$	15,737		$	84,706		$	(78,654	)	$	15,815		$	65,188		$	(63,275	)
Total realized and unrealized investment gains/losses
Included in other comprehensive income		(692	)		—			—			(536	)		—			—
Net fair value change included in realized gains/losses		14			—			—			30			—			—
Net gain (loss) for derivatives included in net investment income		—			(9,628	)		—			—			8,170			—
Net change included in interest credited		—			—			9,447			—			—			(9,010	)
Purchases, sales and settlements or maturities
Purchases		552			4,140			—			552			8,481			—
Sales		(16	)		—			—			(266	)		—			—
Settlements or maturities		(395	)		(2,082	)		—			(395	)		(4,703	)		—
Premiums less benefits		—			—			(2,987	)		—			—			91
Gross transfers into Level 3		32,721			—			—			32,721			—			—

Ending balance June 30, 2012	$	47,921		$	77,136		$	(72,194	)	$	47,921		$	77,136		$	(72,194	)


	Level 3
	Three months ended June 30,									Six months ended June 30,
	Asset						Liability			Asset						Liability
				Equity-									Equity-
	Investment			Indexed			Embedded			Investment			Indexed			Embedded
	Securities			Options			Derivative			Securities			Options			Derivative
Beginning balance, 2013	$	114,373		$	105,254		$	(93,988	)	$	107,036		$	82,625		$	(75,032	)
Total realized and unrealized investment gains/losses
Included in other comprehensive income		2,720			—			—			11,129			—			—
Net fair value change included in realized gains/losses		8			—			—			219			—			—
Net gain (loss) for derivatives included in net investment income		—			8,700			—			—			31,166			—
Net change included in interest credited		—			—			(8,047	)		—			—			(28,694	)
Purchases, sales and settlements or maturities
Purchases		63			4,418			—			2,070			7,708			—
Sales		(10,844	)		—			—			(14,134	)		—			—
Settlements or maturities		—			(2,814	)		—			—			(5,941	)		—
Premiums less benefits		—			—			1,072			—			—			2,763
Gross transfers into Level 3		—			—			—			—			—			—
Gross transfers out of Level 3		(50,762	)		—			—			(50,762	)		—			—

Ending balance June 30, 2013	$	55,558		$	115,558		$	(100,963	)	$	55,558		$	115,558		$	(100,963	)

Within the net gain (loss) for derivatives included in net investment income were an unrealized gain of $28,651,000 and $2,048,000 relating to assets still held at June 30, 2013 and 2012, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies. The transfers into Level 3 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The transfers out of Level 3 were securities being priced by a 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.

10. DEFERRED POLICY ACQUISITION COSTS

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


							Accident			Property &
	Life			Annuity			& Health			Casualty			Total
Beginning balance 2013	$	653,416		$	406,540		$	49,206		$	138,513		$	1,247,675
Additions		49,227			25,896			5,440			103,960			184,523
Amortization		(34,912	)		(43,155	)		(7,413	)		(111,346	)		(196,826	)
Effect of change in unrealized gains on available-for-sale securities		4,732			35,864			—			—			40,596

Net change		19,047			18,605			(1,973	)		(7,386	)		28,293

Ending balance at June 30, 2013	$	672,463		$	425,145		$	47,233		$	131,127		$	1,275,968

Commissions comprise the majority of the additions to deferred policy acquisition costs for each year.

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 the “Policy and contract claims” in the consolidated statements of financial position and represents the amount estimated for claims that have been reported but not settled and claims incurred but not reported (“IBNR”). 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, reduced for 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.

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


	Six months ended June 30,
	2013			2012
Unpaid claims balance, beginning	$	1,168,047		$	1,180,259
Less reinsurance recoverables		256,885			235,174

Net beginning balance		911,162			945,085

Incurred related to
Current		492,192			553,846
Prior years		(18,633	)		(37,244	)

Total incurred claims		473,559			516,602

Paid claims related to
Current		262,490			268,889
Prior years		210,013			220,479

Total paid claims		472,503			489,368

Net balance		912,218			972,319
Plus reinsurance recoverables		241,079			233,344

Unpaid claims balance, ending	$	1,153,297		$	1,205,663

The net and gross reserve calculations have shown favorable development for the last several years 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 and CAE attributable to insured events of prior years decreased by approximately $18,633,000 during the first six months of 2013 and $37,244,000 during the same period in 2012.

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,
	2013						2012						2013						2012
	Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate
Income tax expense on pre-tax income	$	29,473			35.0	%	$	6,524			35.0	%	$	51,225			35.0	%	$	28,704			35.0	%
Tax-exempt investment income		(1,575	)		(1.9	)		(1,837	)		(9.9	)		(3,198	)		(2.2	)		(3,742	)		(4.6	)
Dividend exclusion		(1,621	)		(1.9	)		(1,483	)		(8.0	)		(3,092	)		(2.1	)		(2,952	)		(3.6	)
Miscellaneous tax credits, net		(1,929	)		(2.3	)		(2,352	)		(12.6	)		(3,890	)		(2.6	)		(4,463	)		(5.4	)
Other items, net		455			0.6			(3,236	)		(17.3	)		(4,925	)		(3.4	)		(2,948	)		(3.6	)

Effective tax	$	24,803			29.5	%	$	(2,384	)		(12.8	)%	$	36,120			24.7	%	$	14,599			17.8	%

American National made payments of $24,083,000 and $7,599,000 during the six months ended June 30, 2013 and 2012, respectively.

The tax effects of temporary differences that gave rise to the deferred tax assets and liabilities are shown below (in thousands):


	June 30,			December 31,
	2013			2012
DEFERRED TAX ASSETS
Investments, principally due to impairment losses	$	67,976		$	70,103
Investment in real estate and other invested assets principally due to investment valuation allowances		8,033			7,259
Policyholder funds, principally due to policy reserve discount		229,505			229,429
Policyholder funds, principally due to unearned premium reserve		33,395			30,337
Participating policyholders’ surplus		39,375			37,014
Pension		94,964			94,847
Commissions and other expenses		7,066			7,889
Tax carryforwards		14,779			23,041
Other assets		—			3,343

Gross deferred tax assets		495,093			503,262

DEFERRED TAX LIABILITIES
Available-for-sale securities, principally due to net unrealized gains		(245,760	)		(257,290	)
Investment in bonds, principally due to accrual of discount on bonds		(7,414	)		(9,415	)
Deferred policy acquisition costs, due to difference between GAAP and tax amortization methods		(338,640	)		(327,245	)
Property, plant and equipment, principally due to difference between GAAP and tax depreciation methods		(7,105	)		(1,462	)
Other liabilities		(2,675	)		—

Gross deferred tax liabilities		(601,594	)		(595,412	)

Total net deferred tax liability	$	(106,501	)	$	(92,150	)

Management believes that a sufficient level of taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of June 30, 2013 and December 31, 2012. However, if not utilized beforehand, approximately $14,779,000 in ordinary loss tax carryforwards will expire on December 31, 2033.

The statute of limitations for the examination of federal income tax returns by the IRS for years 2006 to 2011 either has been extended or has not expired. 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 was established, and no interest expense was incurred for 2013 or 2012, relating to uncertain tax positions. Management does not believe that there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of and changes in the accumulated other comprehensive income (loss) (“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		AOCI
Beginning balance 2012	$	274,837		$	(115,485	)	$	51	$	159,403
Unrealized holding gains (losses) arising during the period (net of tax expense $43,724)		81,202								81,202
Unrealized adjustment to DAC (net of tax benefit $7,602)		(14,496	)							(14,496	)
Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax benefit $1,546)		(2,871	)							(2,871	)
Foreign currency adjustment (net of tax expense $178)								330		330
Amounts reclassified from AOCI (net of tax benefit $2,297 and expense $2,581)		(4,098	)		4,793			—		695

Ending balance at June 30, 2012	$	334,574		$	(110,692	)	$	381	$	224,263

Beginning balance 2013	$	370,842		$	(129,003	)	$	171	$	242,010
Unrealized holding gains (losses) arising during the period (net of tax benefit $3,628)		(6,739	)							(6,739	)
Unrealized adjustment to DAC (net of tax expense $14,822)		25,774								25,774
Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax expense $87)		161								161
Foreign currency adjustment (net of tax expense $223)								414		414
Amounts reclassified from AOCI (net of tax benefit $7,902 and expense $3,097)		(14,374	)		5,751			—		(8,623	)

Ending balance at June 30, 2013	$	375,664		$	(123,252	)	$	585	$	252,997

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,			December 31,
	2013			2012
Common stock
Shares issued		30,832,449			30,832,449
Treasury shares		(3,938,905	)		(3,995,785	)

Outstanding shares		26,893,544			26,836,664
Restricted shares		(195,334	)		(185,334	)

Unrestricted outstanding shares		26,698,210			26,651,330

Stock-based compensation

American National has one 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. The Board Compensation Committee makes incentive awards under this plan to our executives after meeting established performance objectives. All awards are subject to review and approval by the committee and the Board of Directors, both at the time of setting applicable performance objectives and at the time of 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 are made to certain officers and directors as compensation and to align their interests with those of other shareholders.

SAR, RS and RSU information for the periods indicated is 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, 2012		108,951		$	111.31		185,334	$	109.13		127,059		$	75.06
Granted		—			—		10,000		80.05		71,084			80.05
Exercised		(1,233	)		68.57		—		—		(74,679	)		77.03
Forfeited		(334	)		96.53		—		—		(396	)		77.20
Expired		(13,733	)		107.79		—		—		—			—

Outstanding at June 30, 2013		93,651		$	112.44		195,334	$	107.64		123,068		$	76.73


	SAR			RS Shares		RS Units
Weighted-average contractual remaining life		2.60			4.60		2.30
Weighted-average exercise price	$	112.44		$	107.64	$	76.73
Exercisable shares		91,999			N/A		—
Weighted-average exercise price Exercisable shares	$	112.86			N/A		N/A
Compensation expense (credits)
Three months ended June 30, 2013		42,000			524,000		2,716,000
Three months ended June 30, 2012		(1,000	)		669,000		5,819,000
Six months ended June 30, 2013		73,000			1,029,000		8,283,000
Six months ended June 30, 2012		(3,000	)		1,339,000		7,312,000
Fair value of liability award
June 30, 2013		76,000			N/A		11,154,000
December 31, 2012		3,000			N/A		7,974,000

The SARs give the holder the right to cash compensation based on the difference between the price of a share of stock on the grant date and the price on the exercise date. The SARs vest at a rate of 20% per year for five years and expire five years after vesting.

Effective December 31, 2012, the settlement provision within outstanding RSU awards was modified to allow the recipient of the awards to settle the vested RSUs in either cash or American National’s common stock. This change in the settlement provision is expected to apply to all future issuance of RSU awards. Prior to the modification, vested RSUs were converted to American National’s common stock on a one-for-one basis. This modification changes the award classification from equity to liability award. At the date of modification, American National recorded a liability of $7,974,000 with a corresponding reduction in additional paid-in capital. The liability will be remeasured and adjusted for changes in the fair value each reporting period through the vesting date. RSUs generally vest after a three-year graded vesting requirement. Certain awards vest over a shorter period as a result of retirement provisions. The modification, which was applied consistently to all participants added an incremental cost of $1,623,000 and $3,031,000 during the three and six months ended June 30, 2013.

RS Awards entitle the participant to full dividend and voting rights. Each award 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 these awards feature a graded vesting schedule in the case of the retirement of an award holder. Restricted stock for 350,334 shares has been granted at an exercise price of zero, of which 195,334 shares are unvested.

Earnings (loss) per share

Basic earnings (losses) per share were calculated using a weighted average number of shares outstanding. The Restricted Stock awards and units resulted in diluted earnings per share as follows (in thousands, except share-related data):


	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Weighted average shares outstanding		26,779,969		26,685,128		26,777,029		26,675,405
Incremental shares from RS awards and RSUs		121,378		169,467		117,769		172,853

Total shares for diluted calculations		26,901,347		26,854,595		26,894,798		26,848,258
Net income (loss) attributable to American National Insurance Company	$	58,169	$	20,506	$	118,140	$	65,722
Basic earnings (loss) per share	$	2.17	$	0.77	$	4.41	$	2.46
Diluted earnings (loss) per share		2.16		0.76		4.39		2.45

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by statutory regulations. 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 statutory net gain from operations on an annual, non-cumulative basis, or 10% of statutory surplus. Additionally, insurance companies are not permitted to distribute the excess of stockholders’ equity, as determined on a GAAP basis, over that determined on a statutory basis. At June 30, 2013 and December 31, 2012, American National Insurance Company’s statutory capital and surplus was $2,366,474,000 and $2,260,268,000, respectively. Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to the parent company apply to American National’s insurance subsidiaries. Net assets of insurance subsidiaries were approximately $1,513,935,000 and $1,535,082,000 at June 30, 2013 and December 31, 2012, respectively.

Noncontrolling interests

American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company that is owned by its policyholders. American National has a management agreement that effectively gives it complete 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, 2013 and December 31, 2012.

American National Insurance Company and its subsidiaries exercise significant control or ownership of various joint ventures, resulting in their consolidation into American National’s consolidated financial statements. The interests of the joint ventures’ other partners are shown as noncontrolling interests, of $6,472,000 and $4,741,000 at June 30, 2013 and December 31, 2012, respectively.

15. SEGMENT INFORMATION

Management organizes the business into five operating segments:

•

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

•

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

•

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

•

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

•

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

The accounting policies of the segments are the same as those described in Note 2. All income and expense amounts specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Income 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 equity 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 within the respective operating segments.

The following summarizes results of operations by operating segments (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013		2012
Income (loss) from continuing operations before federal income taxes and equity in earnings/losses of unconsolidated affiliates
Life	$	8,411		$	19,258		$	14,415	$	26,813
Annuity		23,668			23,882			51,002		47,614
Health		9,680			6,260			8,994		4,810
Property and casualty		(4,345	)		(36,409	)		8,564		(11,848	)
Corporate and other		46,796			5,649			63,383		14,622

Total	$	84,210		$	18,640		$	146,358	$	82,011

16. COMMITMENTS AND CONTINGENCIES

Commitments

American National had aggregate commitments at June 30, 2013, to purchase, expand or improve real estate, to fund fixed interest into mortgage loans, and to purchase other invested assets of $378,298,000, of which $271,163,000 is expected to be funded in 2013. The remaining $107,135,000 will be funded in 2014 and beyond.

In September 2012, American National renewed an existing $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, 2013 and December 31, 2012, the outstanding letters of credit were $33,495,000 and $33,696,000, respectively, and there were no borrowings on this facility to meet liquidity requirements. This facility expires on September 30, 2013. American National expects it will be renewed on substantially equivalent terms upon expiration.

Guarantees

American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on the bank loan, American National would be obligated to pay off the loans. 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, 2013, was approximately $206,376,000, while the total cash values of the related life insurance policies was approximately $211,055,000.

Litigation

American National and certain subsidiaries, in common with the insurance industry in general, are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information presently available, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position, liquidity or results of operations; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. Such speculation warrants caution, as the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given lawsuit. These lawsuits are in various stages of development, and future facts and circumstances could result in management’s 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.

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 the significant related party transactions for the periods indicated is shown below (in thousands):


		Dollar Amount of Transactions				Amount due to/(from) American National
		Six months ended June 30,				June 30,			December 31,
Related Party	Financial Statement Line Impacted	2013		2012		2013			2012
Gal-Tex Hotel Corporation	Mortgage loan on real estate	$	564	$	264	$	8,326		$	8,890
Gal-Tex Hotel Corporation	Net investment income		314		174		50			54
Greer, Herz and Adams, LLP	Other operating expenses		4,872		3,760		(524	)		(268	)

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National held a first mortgage loan issued to Gal-Tex collateralized by hotel property in San Antonio, Texas. This loan was originated in 1999, has a current interest rate of 7.30%, and has a final maturity date of April 1, 2019. This loan is current as to principal and interest payments.

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

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Set forth on the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three and six months ended June 30, 2013 and 2012 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 a guarantee 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 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013, and they include among others:

•

Economic 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;

•

Operational Risk Factors

•

differences between actual experience regarding mortality, morbidity, persistency, surrenders and investment returns, and our assumptions for 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;

•

Investment and Financial Market Risk Factors

•

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;

•

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, which could impact our Medicare Supplement business;

•

Litigation and Regulation Risk Factors

•

adverse determinations in litigation or regulatory proceedings and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses;

•

the effects of extensive government regulation;

•

changes in tax and securities 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 and adequacy 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.

We are a diversified insurance and financial services company, offering a broad spectrum of insurance products. Chartered in 1905, we are headquartered in Galveston, Texas. We operate in all 50 states, the District of Columbia, Guam, American Samoa and Puerto Rico.

General Trends

On July 25, 2013, American National’s Board of Directors authorized certain retirement benefit changes that will take effect December 31, 2013. The Company will shift its retirement benefits for non-bargaining employees and officers from defined benefit plans to contributory defined contribution plans. As of December 31, 2013, participation and benefit accruals under the Company’s affected defined benefit plans will be frozen, with no additional years of service credit or salary increase credit. Benefits earned by eligible employees prior to such date will not be affected.

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 in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. Actual results could differ from results reported using those estimates and assumptions.

Our accounting policies inherently require the use of judgments 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 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013. There were no material changes in accounting policies since December 31, 2012.

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,
	2013		2012		Change			2013		2012		Change
Premiums and other revenues
Premiums	$	422,850	$	428,565	$	(5,715	)	$	842,619	$	853,651	$	(11,032	)
Other policy revenues		49,937		49,016		921			99,935		97,063		2,872
Net investment income		246,786		240,563		6,223			498,152		496,259		1,893
Realized investment gains (losses), net		43,536		4,878		38,658			60,487		11,849		48,638
Other income		10,551		7,940		2,611			17,512		14,815		2,697

Total premiums and other revenues		773,660		730,962		42,698			1,518,705		1,473,637		45,068

Benefits, losses and expenses
Policyholder benefits		124,173		120,521		3,652			246,370		243,589		2,781
Claims incurred		241,645		281,441		(39,796	)		470,207		513,668		(43,461	)
Interest credited to policyholder’s account balances		99,770		91,019		8,751			210,876		215,883		(5,007	)
Commissions for acquiring and servicing policies		93,733		95,528		(1,795	)		178,856		191,042		(12,186	)
Other operating expenses		129,160		120,151		9,009			253,735		222,144		31,591
Change in deferred policy acquisition costs ⁽¹⁾		969		3,662		(2,693	)		12,303		5,300		7,003

Total benefits and expenses		689,450		712,322		(22,872	)		1,372,347		1,391,626		(19,279	)

Income (loss) before other items and federal income taxes	$	84,210	$	18,640	$	65,570		$	146,358	$	82,011	$	64,347

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

Consolidated earnings increased during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily as a result of decreased claims in our property and casualty segment coupled with an increase in realized investment gains. The increase in earnings was partially offset by an increase in other operating expenses in our life segment and a decrease in premiums in our property and casualty segment.

Results of Operations and Related Information by Segment

Life

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


	Three months ended June 30,									Six months ended June 30,
	2013			2012			Change			2013			2012			Change
Premiums and other revenues
Premiums	$	71,546		$	70,699		$	847		$	140,201		$	137,150		$	3,051
Other policy revenues		46,518			45,711			807			92,876			90,363			2,513
Net investment income		59,238			59,380			(142	)		116,187			118,285			(2,098	)
Other income		878			802			76			1,385			1,552			(167	)

Total premiums and other revenues		178,180			176,592			1,588			350,649			347,350			3,299

Benefits, losses and expenses
Policyholder benefits		81,573			76,799			4,774			163,075			160,622			2,453
Interest credited to policyholder’s account balances		14,310			14,063			247			27,097			28,984			(1,887	)
Commissions for acquiring and servicing policies		30,561			25,042			5,519			56,150			46,431			9,719
Other operating expenses		51,691			44,180			7,511			104,227			88,473			15,754
Change in deferred policy acquisition costs ⁽¹⁾		(8,366	)		(2,750	)		(5,616	)		(14,315	)		(3,973	)		(10,342	)

Total benefits and expenses		169,769			157,334			12,435			336,234			320,537			15,697

Income (loss) before other items and federal income taxes	$	8,411		$	19,258		$	(10,847	)	$	14,415		$	26,813		$	(12,398	)

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

Earnings decreased during the quarter and year-to-date ended June 30, 2013 primarily due to increased operating expenses and policyholder benefits, partially offset by increases in premiums and other policy revenues.

Premiums and other revenues

Revenues from traditional life insurance products include scheduled premium payments from policyholders on whole life and term life products. The change in these premiums is impacted primarily by policy persistency and new sales during the period. Premiums increased during 2013 compared to 2012 primarily resulting from increased sales of term products following the introduction of a new portfolio of term products during 2012.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies. These charges increased during 2013 compared to 2012 primarily due to the growing block of interest-sensitive life policies.

Benefits, losses and expenses

Policyholder benefits were increased during the quarter and year-to-date ended June 30, 2013 by $5.0 million for a block of limited pay contracts, which were evaluated as requiring additional reserves.

Commissions increased during 2013 compared to 2012 primarily due to increased sales of our term and equity-indexed universal life products.

Other operating expenses increased during 2013 compared to 2012 as a result of an increase in allocated share-based compensation costs under the stock and incentive plan, as well as increases in production bonuses and costs associated with the growth in our life insurance in-force during 2013.

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


	Three months ended June 30,								Six months ended June 30,
	2013			2012			Change		2013			2012			Change
Acquisition cost capitalized	$	23,319		$	22,640		$	679	$	49,227		$	40,315		$	8,912
Amortization of DAC		(14,953	)		(19,890	)		4,937		(34,912	)		(36,342	)		1,430

Change in DAC ⁽¹⁾	$	8,366		$	2,750		$	5,616	$	14,315		$	3,973		$	10,342

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

The change in DAC decreased expenses primarily as a result of an increase in acquisition costs capitalized during 2013 compared to 2012 due to an increase in commissions from higher production.

Policy in-force information

The following tables summarize the changes in the Life segment’s in-force amounts (in thousands) and number of policies in-force:


	June 30,		December 31,
	2013		2012		Change
Life insurance in-force
Traditional life	$	52,187,072	$	48,856,459	$	3,330,613
Interest-sensitive life		24,665,134		24,132,101		533,033

Total life insurance in-force	$	76,852,206	$	72,988,560	$	3,863,646

Number of policies in-force
Traditional life		2,037,579		2,122,666		(85,087	)
Interest-sensitive life		191,769		185,729		6,040

Total number of policies in-force		2,229,348		2,308,395		(79,047	)

There was an increase in total life insurance in-force amounts during 2013, while there was a decrease in the total number of policies. The increase in life insurance in-force amounts is believed to be attributed to the attractiveness of our new portfolio of products and ease of doing business. The decrease in our policy count during 2013 is attributable to unclaimed property settlements, surrenders and lapses, as well as new business activity generally being comprised of fewer but larger face-value policies.

Annuity

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


	Three months ended June 30,							Six months ended June 30,
	2013		2012		Change			2013		2012		Change
Premiums and other revenues
Premiums	$	33,625	$	34,723	$	(1,098	)	$	66,321	$	63,135	$	3,186
Other policy revenues		3,419		3,305		114			7,059		6,700		359
Net investment income		151,163		138,460		12,703			315,208		304,697		10,511
Other income		95		52		43			145		93		52

Total premiums and other revenues		188,302		176,540		11,762			388,733		374,625		14,108

Benefits, losses and expenses
Policyholder benefits		42,600		43,722		(1,122	)		83,295		82,967		328
Interest credited to policyholder’s account balances		85,460		76,956		8,504			183,779		186,899		(3,120	)
Commissions for acquiring and servicing policies		11,194		15,880		(4,686	)		21,587		29,771		(8,184	)
Other operating expenses		17,544		12,812		4,732			31,811		20,567		11,244
Change in deferred policy acquisition costs ⁽¹⁾		7,836		3,288		4,548			17,259		6,807		10,452

Total benefits and expenses		164,634		152,658		11,976			337,731		327,011		10,720

Income (loss) before other items and federal income taxes	$	23,668	$	23,882	$	(214	)	$	51,002	$	47,614	$	3,388

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

Earnings increased during the year-to-date ended June 30, 2013 primarily due to increases in net investment income which outpaced the related change in interest credited to policyholders’ account balances. Earnings during the quarter remained relatively unchanged when comparing 2013 to 2012.

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,
	2013		2012		Change			2013		2012		Change
Fixed deferred annuity	$	63,158	$	170,270	$	(107,112	)	$	128,152	$	333,517	$	(205,365	)
Single premium immediate annuity		56,032		57,915		(1,883	)		112,785		103,926		8,859
Equity-indexed deferred annuity		42,301		35,545		6,756			79,493		58,043		21,450
Variable deferred annuity		34,902		24,936		9,966			64,068		51,318		12,750

Total premium and deposits		196,393		288,666		(92,273	)		384,498		546,804		(162,306	)
Less: Policy deposits		162,768		253,943		(91,175	)		318,177		483,669		(165,492	)

Total earned premiums	$	33,625	$	34,723	$	(1,098	)	$	66,321	$	63,135	$	3,186

We monitor account values and changes in those values as a key indicator of performance in our Annuity segment. Changes in account values are mainly the result of net inflows, surrenders, policy fees, interest credited and market value changes. Shown below are the changes in account values (in thousands):


	Six months ended June 30,
	2013			2012
Fixed deferred and equity-indexed annuity
Account value, beginning of period	$	9,803,197		$	9,824,416
Net inflows		136,213			252,601
Surrenders		(635,095	)		(397,144	)
Fees		(4,361	)		(4,347	)
Interest credited		180,614			184,652

Account value, end of period	$	9,480,568		$	9,860,178

Single premium immediate annuity
Reserve, beginning of period	$	1,075,638		$	978,722
Net inflows		34,452			32,979
Interest and mortality		19,517			21,071

Reserve, end of period	$	1,129,607		$	1,032,772

Variable deferred annuity
Account value, beginning of period	$	417,645		$	380,129
Net inflows		61,873			48,955
Surrenders		(60,070	)		(62,174	)
Fees		(2,573	)		(2,329	)
Change in market value and other		22,778			23,223

Account value, end of period	$	439,653		$	387,804

Fixed deferred annuity net inflows decreased during 2013 compared to 2012 primarily resulting from our management of these products to lower sales and to mitigate risks associated with investing in the persistently low interest rate environment.

An equity-indexed annuity allows a policyholder to participate in equity returns while also having certain downside protection from the guaranteed minimum returns defined in the product. Net inflows for this product increased during 2013 compared to 2012 primarily attributed to the current attractiveness of this product compared to fixed annuities.

Single premium immediate annuity (“SPIA”) net inflows increased during 2013 compared to 2012 driven primarily by customers entering the market for guaranteed monthly payouts on a portion of their retirement dollars.

Net investment income increased during the quarter and year-to-date ended June 30, 2013 compared to 2012 due to gains from equity options used to hedge risk relating to equity-indexed annuities.

Benefits, losses and expenses

Policyholder benefits consist of annuity payments and reserve increases for SPIA contracts, and are highly correlated to sales volume. Benefits decreased during the quarter ended June 30, 2013 and increased for the year-to-date ended June 30, 2013, compared to 2012, consistent with net inflows for the SPIA contracts during those periods.

Commissions decreased for 2013 compared to 2012 primarily due to reduced fixed deferred annuity production as well as decreases in commission rates on certain annuities.

Other operating expenses increased during 2013 compared to 2012 primarily due to increases in allocated share-based compensation costs and production bonuses. In addition, the year-to-date increase in other operating expenses includes the effect of the reduction in 2012 other operating expenses relating to final resolution of certain litigation being recorded as interest credited rather than operating expense.

The change in DAC represents acquisition costs capitalized less the amortization of existing DAC, which is calculated in proportion to gross profits. The following shows the components of the change in DAC (in thousands):


	Three months ended June 30,									Six months ended June 30,
	2013			2012			Change			2013			2012			Change
Acquisition cost capitalized	$	12,667		$	19,049		$	(6,382	)	$	25,896		$	36,617		$	(10,721	)
Amortization of DAC		(20,503	)		(22,337	)		1,834			(43,155	)		(43,424	)		269

Change in DAC ⁽¹⁾	$	(7,836	)	$	(3,288	)	$	(4,548	)	$	(17,259	)	$	(6,807	)	$	(10,452	)

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

The change in DAC increased expenses primarily due to less commissions being capitalized as a result of lower sales of new deferred annuity contracts.

An important measure of the Annuity segment is amortization of DAC as a percentage of gross profits. The amortization of DAC as a percentage of gross profits for the year-to-date ended June 30, 2013 and 2012 were 35.4% and 41.5%, respectively. The decrease in the ratio during 2013 was primarily driven by increased interest spreads.

Options and Derivatives

Shown below is the analysis of the impact to net investment income of the option return, along with the impact to interest credited of the equity-indexed annuity embedded derivative (in thousands):


	Three months ended June 30,								Six months ended June 30,
	2013		2012			Change			2013		2012		Change
Net investment income
Without option return	$	140,650	$	146,462		$	(5,812	)	$	280,828	$	293,198	$	(12,370	)
Option return		10,513		(8,002	)		18,515			34,380		11,499		22,881
Interest credited to policy account balances
Without embedded derivative		77,520		86,373			(8,853	)		155,420		177,831		(22,411	)
Equity-indexed annuity embedded derivative		7,940		(9,417	)		17,357			28,359		9,068		19,291

Net investment income without option return decreased during year-to-date ended June 30, 2013 primarily due to a decrease in account values of fixed deferred annuities. Interest credited to policyholders’ account balances without embedded derivative decreased during 2013 due to a decrease in crediting rates and certain non-recurring expenses relating to settled litigation benefitting contract holders being charged to interest credited during 2012. Without this charge, the decrease would have amounted to $16.4 million for the year-to-date ended June 30, 2013 compared to 2012.

The option return, as well as the related equity-indexed annuity embedded derivative, increased during 2013 compared to 2012 primarily as a result of a larger number of options held during 2013, in addition to the change in the S&P 500 Index during the respective periods. Option returns correlate to the 2.4% and 12.6% return of the S&P 500 Index during the quarter and year-to-date ended June 30, 2013, compared to (3.3)% and 8.3% for the same periods in 2012.

Health

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


	Three months ended June 30,							Six months ended June 30,
	2013		2012		Change			2013		2012		Change
Premiums and other revenues
Premiums	$	53,532	$	54,712	$	(1,180	)	$	106,261	$	111,766	$	(5,505	)
Net investment income		2,839		2,960		(121	)		5,704		5,934		(230	)
Other income		4,610		4,034		576			8,816		7,860		956

Total premiums and other revenues		60,981		61,706		(725	)		120,781		125,560		(4,779	)

Benefits, losses and expenses
Claims incurred		33,006		36,475		(3,469	)		71,974		81,150		(9,176	)
Commissions for acquiring and servicing policies		6,680		6,657		23			13,252		12,916		336
Other operating expenses		11,191		11,237		(46	)		24,588		23,055		1,533
Change in deferred policy acquisition costs ⁽¹⁾		424		1,077		(653	)		1,973		3,629		(1,656	)

Total benefits and expenses		51,301		55,446		(4,145	)		111,787		120,750		(8,963	)

Income (loss) before other items and federal income taxes	$	9,680	$	6,260	$	3,420		$	8,994	$	4,810	$	4,184

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

Earnings increased during the quarter and year-to-date ended June 30, 2013 compared to the same periods in 2012 driven primarily by a decrease in claims incurred, partially offset by a decrease in premiums.

Premiums and other revenues

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


	Three months ended June 30,										Six months ended June 30,
	2013					2012					2013					2012
	dollars		percentage			dollars		percentage			dollars		percentage			dollars		percentage
Medicare Supplement	$	22,457		41.9	%	$	24,107		44.1	%	$	45,917		43.2	%	$	47,622		42.6	%
Medical expense		7,486		14.0			8,633		15.8			15,705		14.8			19,470		17.4
Group health		10,198		19.1			9,482		17.3			18,265		17.2			19,527		17.5
MGU		5,241		9.8			4,385		8.0			9,928		9.3			8,610		7.7
Credit accident and health		3,725		6.9			4,117		7.5			7,717		7.3			8,647		7.7
All other		4,425		8.3			3,988		7.3			8,729		8.2			7,890		7.1

Total	$	53,532		100.0	%	$	54,712		100.0	%	$	106,261		100.0	%	$	111,766		100.0	%

Earned premiums decreased during the quarter and year-to-date ended June 30, 2013 compared to the same periods in 2012 primarily resulting from the run-off of our closed block of medical expense insurance plans, which will continue decreasing. Also, decreases during the periods were noted in the Medicare Supplement line. These decreases were partially offset by the increase in MGU.

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


	June 30, 2013					December 31, 2012
	number		percentage			number		percentage
Medicare Supplement		40,002		6.4	%		41,562		6.7	%
Medical expense		5,126		0.8			5,745		0.9
Group health		20,978		3.4			19,868		3.2
MGU		220,265		35.2			197,050		31.6
Credit accident and health		235,175		37.6			253,710		40.7
All other		103,392		16.5			105,499		16.9

Total		624,938		100.0	%		623,434		100.0	%

Our total in-force policies increased during the year-to-date ended June 30, 2013 compared to year end 2012. Increases in the MGU line were partially offset by decreases in the credit accident and health, and other lines. The MGU line increased due to increased production by existing MGU’s, and the addition of new MGUs.

Benefits, losses and expenses

Claims incurred decreased during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily as the result of the continued decline in the closed medical expense block and a decrease in group claim submissions.

Other operating expenses increased during the year-to-date ended June 30, 2013 compared to 2012 due primarily to an accrual on the MGU line for an anticipated payment to a state insurance guaranty pool during the first quarter of 2013.

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,
	2013			2012			Change			2013			2012			Change
Acquisition cost capitalized	$	2,865		$	2,937		$	(72	)	$	5,440		$	5,471		$	(31	)
Amortization of DAC		(3,289	)		(4,014	)		725			(7,413	)		(9,100	)		1,687

Change in DAC⁽¹⁾	$	(424	)	$	(1,077	)	$	653		$	(1,973	)	$	(3,629	)	$	1,656

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

The amortization of DAC had a smaller impact during the quarter and year-to-date ended June 30, 2013 compared to the same periods in 2012 due to reduced amortization on the declining aggregate health block of business.

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,
	2013			2012			Change			2013			2012			Change
Premiums and other revenues
Net premiums written	$	282,543		$	278,777		$	3,766		$	550,760		$	560,026		$	(9,266	)

Net premiums earned	$	264,147		$	268,431		$	(4,284	)	$	529,836		$	541,600		$	(11,764	)
Net investment income		16,818			17,781			(963	)		33,118			35,480			(2,362	)
Other income		2,397			1,737			660			2,650			3,446			(796	)

Total premiums and other revenues		283,362			287,949			(4,587	)		565,604			580,526			(14,922	)

Benefits, losses and expenses
Claims incurred		208,639			244,966			(36,327	)		398,233			432,518			(34,285	)
Commissions for acquiring and servicing policies		45,110			47,949			(2,839	)		87,657			101,924			(14,267	)
Other operating expenses		32,883			29,396			3,487			63,764			59,095			4,669
Change in deferred policy acquisition costs ⁽¹⁾		1,075			2,047			(972	)		7,386			(1,163	)		8,549

Total benefits and expenses		287,707			324,358			(36,651	)		557,040			592,374			(35,334	)

Income (loss) before other items and federal income taxes	$	(4,345	)	$	(36,409	)	$	32,064		$	8,564		$	(11,848	)	$	20,412

Loss ratio		79.0	%		91.3	%		(12.3	)		75.2	%		79.9	%		(4.7	)
Underwriting expense ratio		29.9			29.6			0.3			30.0			29.5			0.5

Combined ratio		108.9	%		120.9	%		(12.0	)		105.2	%		109.4	%		(4.2	)

Impact of catastrophe events on combined ratio		16.7			24.2			(7.5	)		12.5			14.3			(1.8	)

Combined ratio without impact of catastrophe events		92.2	%		96.7	%		(4.5	)%		92.7	%		95.1	%		(2.4	)

Gross catastrophe losses	$	47,076		$	67,771		$	(20,695	)	$	73,873		$	81,741		$	(7,868	)
Net catastrophe losses		43,254			63,765			(20,511	)		64,942			77,002			(12,060	)

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

Results improved during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily due to a significant decrease in claims incurred.

Premiums and other revenues

Net premiums written increased during the quarter ended June 30, 2013 compared to 2012 primarily due to increases in our homeowner, agribusiness and other commercial business. Net premiums written decreased during the year-to-date ended June 30, 2013 compared to 2012 primarily as a result of changes in credit-related property products. Net premiums earned decreased during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily due to decreases in premiums from our personal auto business.

Benefits, losses and expenses

Claims incurred decreased during the quarter and year-to-date ended June 30, 2013 compared to 2012 as a result of decreases in catastrophe losses as well as a decline in non-catastrophe weather-related losses due primarily to reduced loss frequency. These lower catastrophe losses, together with improved rate adequacy and improved claims frequency, caused the decrease in the loss ratio. The combined ratio, excluding net catastrophe, impact decreased due to improved rate adequacy and lower non-catastrophe weather-related losses.

Commissions decreased during 2013 compared to 2012 primarily due to a shift from commission to non-commission credit-related property products, which also have lower premiums.

The change in DAC during the year-to-date ended June 30, 2013 increased expenses compared to 2012 while its impact on expenses for the quarter remained relatively unchanged. The higher expense is attributable to capitalized costs on credit-related property products written in prior years being amortized while newer credit-related property products sold with lower revenue and without commissions resulted in lower cost being capitalized in the current period.

For the quarter ended June 30, 2013, the net adverse prior year loss and claims and adjustment expenses (“CAE”) development was $3.1 million, compared to $9.4 million favorable development for the quarter ended June 30, 2012. This adverse development was primarily in our agribusiness and other commercial product lines, due to a slower release of prior year IBNR reserves than corresponding case activity. For the year-to-date ended June 30, 2013, the net favorable prior year loss and CAE development was $17.4 million, compared to $26.2 million favorable development for the year-to-date ended June 30, 2012. This favorable development is primarily in our personal auto lines, which are demonstrating favorable loss emergence compared to what was implied by our historical development patterns.

Products

Our Property and Casualty segment consists of: (i) Personal, which we market primarily to individuals, represents 59.4% of net premiums written, (ii) Commercial, which focuses primarily on agricultural and other commercial markets, represents 32.9% of net premiums written, and (iii) Credit-related property insurance products, which are marketed to and through financial institutions and retailers, represent 7.7% 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,
	2013			2012			Change			2013			2012			Change
Net premiums written
Auto	$	100,390		$	103,672		$	(3,282	)	$	203,997		$	212,011		$	(8,014	)
Homeowner		57,435			54,903			2,532			104,146			100,165			3,981
Other Personal		9,651			9,282			369			19,156			18,647			509

Total net premiums written		167,476			167,857			(381	)		327,299			330,823			(3,524	)

Net premiums earned
Auto		100,824			105,585			(4,760	)		201,233			212,787			(11,553	)
Homeowner		49,890			49,974			(84	)		101,401			102,157			(756	)
Other Personal		8,970			8,723			247			17,872			17,665			207

Total net premiums earned	$	159,684		$	164,282		$	(4,597	)	$	320,506		$	332,609		$	(12,102	)

Loss ratio
Auto		75.4	%		82.5	%		(7.1	)		78.6	%		76.8	%		1.8
Homeowner		127.8			163.8			(36.0	)		105.6			122.9			(17.3	)
Other Personal		57.2			66.0			(8.8	)		52.0			50.2			1.8
Personal line loss ratio		90.8	%		106.3	%		(15.5	)		85.7	%		89.5	%		(3.8	)
Combined Ratio
Auto		98.0	%		104.0	%		(6.0	)		101.2	%		97.9	%		3.3
Homeowner		152.5			188.8			(36.3	)		130.2			147.3			(17.1	)
Other Personal		79.8			89.5			(9.7	)		74.5			73.3			1.2
Personal line combined ratio		114.0	%		129.0	%		(15.0	)		108.9	%		111.8	%		(2.9	)

Personal Automobile: Net premiums written and earned decreased in our personal automobile line during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily due to a decline in policies in-force. The loss and combined ratios decreased during the quarter ended June 30, 2013 compared to 2012 due to lower catastrophe losses and favorable prior year development.

Homeowners: Net premiums written increased during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily due to higher premium rates for policies sold in 2013. Net premiums earned remained relatively unchanged for the quarter and year-to-date ended June 30, 2013 compared to 2012. The loss and combined ratios decreased significantly during 2013 compared to 2012 due to a decline in catastrophe losses as well as decline in non-catastrophe weather-related losses and improved rate adequacy.

Other Personal: These products include watercraft, rental-owner and umbrella coverages for individuals seeking to protect their personal property and liability not covered within their homeowner and auto policies. Net premiums written and earned remained substantially unchanged during 2013 compared to 2012. Premiums for these products generally trend with the homeowners and personal automobile lines as policies are typically sold in conjunction with one another.

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,
	2013			2012			Change			2013			2012			Change
Net premiums written
Other Commercial	$	40,728		$	39,105		$	1,623		$	78,321		$	76,080		$	2,241
Agribusiness		29,977			28,143			1,834			55,679			52,623			3,056
Auto		23,239			23,186			53			47,164			47,576			(412	)

Total net premiums written		93,944			90,434			3,510			181,164			176,279			4,885

Net premiums earned
Other Commercial		31,443			30,946			497			62,232			61,211			1,021
Agribusiness		27,193			26,139			1,054			53,686			52,219			1,467
Auto		19,363			20,029			(666	)		38,545			39,853			(1,308	)

Total net premiums earned	$	77,999		$	77,114		$	885		$	154,463		$	153,283		$	1,180

Loss ratio
Other Commercial		84.7	%		75.2	%		9.5			66.9	%		82.5	%		(15.6	)
Agribusiness		62.0			120.6			(58.6	)		79.2			93.2			(14.0	)
Auto		72.5			54.4			18.1			71.5			62.5			9.0
Commercial line loss ratio		73.7	%		85.2	%		(11.5	)		72.3	%		81.0	%		(8.7	)
Combined ratio
Other Commercial		113.7	%		103.9	%		9.8			96.0	%		111.4	%		(15.4	)
Agribusiness		100.1			157.9			(57.8	)		115.8			129.3			(13.5	)
Auto		96.9			77.0			19.9			96.0			86.0			10.0
Commercial line combined ratio		104.8	%		115.2	%		(10.4	)		102.9	%		110.9	%		(8.0	)

Other Commercial: Net premiums written and earned increased during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily due to an increase in workers’ compensation premiums. The loss and combined ratios increased during the quarter ended June 30, 2013 compared to 2012 primarily due to prior year workers’ compensation claims development. The loss and combined ratios decreased during the year-to-date ended June 30, 2013 compared to 2012 primarily due to the frequency and severity of workers’ compensation claims during the period.

Agribusiness Product: Our agribusiness 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 quarter and year-to-date ended June 30, 2013 compared to 2012 primarily as a result of increased business in several states in the northeast. The loss and combined ratios decreased during the quarter ended June 30, 2013 compared to 2012, primarily due to a combination of rate and underwriting actions.

Commercial Auto: Net premiums written and earned remained relatively unchanged during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily as a result of lower new business writings in our small commercial business as well as improved selective underwritings.

Credit-related property products

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


	Three months ended June 30,									Six months ended June 30,
	2013			2012			Change			2013			2012			Change
Net premiums written	$	21,123		$	20,486		$	637		$	42,297		$	52,924		$	(10,627	)
Net premiums earned		26,464			27,035			(571	)		54,867			55,708			(841	)
Loss ratio		23.5	%		17.1	%		6.4	%		21.8	%		19.0	%		2.8	%
Combined ratio		75.6	%		79.2	%		(3.6	)%		87.1	%		88.1	%		(1.0	)%

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. The primary distribution channel for credit-related property insurance is general agents who market to sellers of covered products and financial institutions.

Net premiums written and earned remained relatively unchanged for the quarter ended June 30, 2013 compared to 2012. Net premiums written decreased during the year-to-date ended June 30, 2013 compared to 2012 as sales and premiums shifted from Guaranteed Auto Protection (“GAP”) Insurance to GAP Waiver, a lower premium debt protection product. Net premiums earned remained relatively unchanged for the year-to-date ended June 30, 2013.

Corporate and Other

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


	Three months ended June 30,							Six months ended June 30,
	2013		2012		Change			2013		2012		Change
Premiums and other revenues
Net investment income	$	16,728	$	21,982	$	(5,254	)	$	27,935	$	31,863	$	(3,928	)
Realized investment gains, net of OTTI		43,536		4,878		38,658			60,487		11,849		48,638
Other income		2,571		1,315		1,256			4,516		1,864		2,652

Total premiums and other revenues		62,835		28,175		34,660			92,938		45,576		47,362

Benefits, losses and expenses
Commissions		188		—		188			210		—		210
Other operating expenses		15,851		22,526		(6,675	)		29,345		30,954		(1,609	)

Total benefits and expenses		16,039		22,526		(6,487	)		29,555		30,954		(1,399	)

Income (loss) before other items and federal income taxes	$	46,796	$	5,649	$	41,147		$	63,383	$	14,622	$	48,761

Earnings increased during the quarter and year-to-date ended June 30, 2013 compared to 2012 primarily due to increases in realized gains, driven by sales of investment real estate properties in addition to an increase on gains from sales of equity securities.

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 by the state insurance departments where we or our insurance subsidiaries are domiciled. Investment activities, including the setting of investment policies and defining an acceptable risk appetite, are subject to review and approval by our Board of Directors, which is assisted by our Finance Committee and Management Risk Committee.

Our insurance and annuity products are primarily supported by investment-grade bonds, and to a lesser extent collateralized mortgage obligations and commercial mortgage loans. 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 have not been part of our investment portfolio, and we do not anticipate investing in them in the future. We invest in real estate and equity securities based on a risk and reward analysis where we believe there are opportunities for enhanced returns.

Composition of Invested Assets

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, 2013				December 31, 2012
	Amount		Percent		Amount		Percent
Bonds held-to-maturity, at amortized cost	$	8,941,077		46.7	$	9,009,282		46.8
Bonds available-for-sale, at fair value		4,559,914		23.8		4,665,576		24.3
Equity securities, at fair value		1,228,603		6.4		1,075,439		5.6
Mortgage loans on real estate, net of allowance		3,240,456		17.0		3,143,011		16.2
Policy loans		393,272		2.1		395,333		2.1
Investment real estate, net of accumulated depreciation		437,748		2.3		511,233		2.7
Short-term investments		171,785		0.9		313,086		1.6
Other invested assets		156,837		0.8		125,104		0.7

Total investments	$	19,129,692		100.0	$	19,238,064		100.0

The decrease in our total investments as of June 30, 2013 as compared to December 31, 2012 was primarily a result of decreases in bonds, short-term investments and investment real estate, which were offset by increases in equity securities and mortgage loans. The decrease in bonds was primarily due to fair value decreases in corporate debt securities, while the decrease in investment real estate was due to disposition of certain real estate properties. The increase in equity securities is primarily attributed to a 12.6% increase in the S&P 500 year-to-date. The decrease in short-term investments is attributed to the exchange of short-term investment into long-term investments.

Each component of our invested assets and its related revenues are described further in the Notes to the Unaudited Consolidated Financial Statements. Additionally, Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Consolidated Financial Statements within our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 8, 2013 contains a detailed description of the Company’s methodology for evaluating other-than-temporary impairment losses on its investments.

Bonds—We allocate most of our fixed maturity securities to support our insurance business. At June 30, 2013, our fixed maturity securities had an estimated fair market value of $13.9 billion, which was $0.6 billion, or 4.9%, above amortized cost. At December 31, 2012, our fixed maturity securities had an estimated fair value of $14.5 billion, which was $1.2 billion, or 8.9%, above amortized cost.

Fixed maturity securities’ estimated fair value, due in one year or less, decreased to $1.5 billion as of June 30, 2013 from $1.7 billion as of December 31, 2012, primarily as a result of long-term bonds maturing during the period.

The following table identifies the total bonds by credit quality rating, using both Standard & Poor’s and Moody’s ratings (in thousands, except percentages):


	June 30, 2013						December 31, 2012
	Amortized		Estimated		% of Fair		Amortized		Estimated		% of Fair
	Cost		Fair Value		Value		Cost		Fair Value		Value
AAA	$	660,401	$	700,364		5.0	$	731,004	$	796,658		5.5
AA		1,437,313		1,490,967		10.7		1,412,669		1,536,119		10.6
A		5,446,019		5,722,214		41.0		5,044,344		5,549,050		38.2
BBB		5,254,457		5,500,380		39.4		5,538,870		6,004,743		41.4
BB and below		503,488		534,962		3.9		598,862		619,757		4.3

Total	$	13,301,678	$	13,948,887		100.0	$	13,325,749	$	14,506,327		100.0

We expect the exposure to below investment grade securities to decrease as these bonds approach maturity. We do not own direct investments in sovereign debt issued by Greece, Ireland, Italy, Portugal or Spain.

Equity Securities—Our equity portfolio consists of companies publicly traded on U.S. national stock exchanges; the cost and estimated value of the equity securities are as follows (in thousands):


	June 30, 2013
			Unrealized		Unrealized					% of Fair
	Cost		Gains		Losses			Fair Value		Value
Common stock	$	696,900	$	497,164	$	(8,419	)	$	1,185,645		96.5
Preferred stock		27,690		15,361		(93	)		42,958		3.5

Total	$	724,590	$	512,525	$	(8,512	)	$	1,228,603		100.0


	December 31, 2012
			Unrealized		Unrealized					% of Fair
	Cost		Gains		Losses			Fair Value		Value
Common stock	$	660,889	$	383,634	$	(6,739	)	$	1,037,784		96.5
Preferred stock		27,690		9,995		(30	)		37,655		3.5

Total	$	688,579	$	393,629	$	(6,769	)	$	1,075,439		100.0

Mortgage Loans—We invest in commercial mortgage loans that are diversified by property-type and geography to support our insurance business. 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 held-for-investment 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 yields on the principal funded for mortgage loans were 5.0% and 5.5% at June 30, 2013 and December 31, 2012, respectively. It is likely that the weighted average coupon yield on funded mortgage loans will decline as loans mature and new loans are originated with lower rates in the current interest rate environment.

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 and the number of years since policy origination. As of June 30, 2013, we had $393.3 million in policy loans with a loan to surrender value of 58.8%, and at December 31, 2012, we had $395.3 million in policy loans with a loan to surrender value of 59.5%. 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 with positive cash flows or where appreciation in value is expected. Real estate may be owned directly by our insurance companies, non-insurance affiliates or joint ventures. 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 at least A2/P2 by Standard & Poor’s and Moody’s, respectively. The amount fluctuates depending on the available long-term investment opportunities and our liquidity needs, including mortgage investment-funding commitments.

Net Investment Income and Realized Gains (Losses)

Net investment income during the quarter and year-to-date ended June 30, 2013 increased $6.2 million and $1.9 million, respectively, compared to the same periods during 2012. The increase was due primarily to the $18.6 million and $23.3 million increases in option income during the quarter and year-to-date, respectively, resulting from increases in the underlying equity markets index. These increases were partially offset by decreases in net investment income from bonds and real estate. Net investment income from bonds decreased as a result of bonds with lower interest yields making up a larger percentage of our portfolio as older bonds purchased when interest rates were higher matured. Net investment income from real estate decreased due primarily to the disposal of income producing real estate properties.

Interest income on mortgage loans is accrued on the principal amount of the loan based on the contractual interest rate. Accretion of discounts is recorded using the effective yield method. Interest income, accretion of discounts and prepayment fees are reported in net investment income. Interest is not accrued on loans generally more than 90 days past due or when the collection of interest is not considered probable. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in net investment income in the period received.

Realized gains for the quarter and year-to-date ended June 30, 2013 increased $35.0 million and $43.7 million, respectively, as compared to the same periods 2012, primarily as a result of realized gains on sales of investment real estate and equity securities.

Net Unrealized Gains and Losses

The net unrealized gains on available-for-sale securities at June 30, 2013 and December 31, 2012 were $703.3 and $736.0 million, respectively; a net decrease of $32.7 million for the year-to-date ended June 30, 2013. Unrealized gains or losses on available-for-sale securities have no impact on earnings. Rather, they are recognized as other comprehensive income or loss, which directly impacts equity. The gross unrealized gains of available-for-sale securities increased $8.2 million to $765.5 million for the year-to-date ended June 30, 2013 primarily resulting from increases in equity securities. The gross unrealized losses of available-for-sale securities increased to $62.2 million from $21.4 million. The $40.8 million increase in gross unrealized losses during the year-to-date ended June 30, 2013 primarily resulted from corporate debt securities.

The gross unrealized gains on held-to-maturity securities decreased $299.7 million to $539.8 million during the year-to-date ended June 30, 2013 primarily related to corporate debt securities. The gross unrealized losses on held-to-maturity securities increased $83.9 million to $91.9 million during 2013 primarily related to corporate debt securities.

The fair value of our investment securities is affected by fixed maturity securities approaching maturity and for all investments by various factors, including volatility of financial markets, changes in interest rates and fluctuations in credit spread. We have the ability and intent to hold those securities in unrealized loss positions until a market price recovery or maturity. Further, it is unlikely that we will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time.

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 and investment income. The primary use of cash has been and is expected to continue to be payment of policyholder benefits and claims incurred. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management 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.

Current continued low-interest rate environments are expected to curtail our appetite to sell the volume of annuity contracts we sold in previous years and to require us to consider higher than historical contributions to our defined benefit plans covering our employees. There are no other known trends or uncertainties regarding product pricing, changes in product lines or rising costs, that would have a significant impact to cash flows from operations. Additionally, we have paid dividends to stockholders for over 100 consecutive years and expect to continue this trend. No unusually large capital expenditures are expected in the next 12-24 months.

The funds received as premium payments and deposits are 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. Historically we have not had to liquidate invested assets in order to cover cash flow needs. Additionally, our portfolio of highly liquid available-for-sale investment securities are available to meet future liquidity needs as necessary.

Our cash, cash equivalents and short-term investment position was $285.7 million and $616.1 million at June 30, 2013 and December 31, 2012, respectively. The $330.4 million decrease relates primarily to increased opportunity in long-term investments during the quarter.

A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flow from operations. Further information regarding additional sources or uses of cash is described in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

Capital Resources

Our capital resources are summarized below (in thousands):


	June 30,		December 31,
	2013		2012
American National stockholders’ equity, excluding accumulated other comprehensive income (loss), net of tax (“AOCI”)	$	3,666,631	$	3,585,826
AOCI		252,997		242,010

Total American National stockholders’ equity	$	3,919,628	$	3,827,836

We have notes payable that are not part of our capital resources relating to amounts borrowed by real estate joint ventures that we consolidate into our financial statements. The lenders for the notes payable have no recourse against us in the event of default by the joint ventures. Therefore, the only amount of liability we have for these notes payable is limited to our investment in the respective ventures, which totaled $12.7 million and $18.1 million at June 30, 2013 and December 31, 2012, respectively.

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


	Six months ended
	June 30, 2013
Net income	$	118,140
Increase (decrease) in unrealized gains		4,822
Minimum pension liability adjustment		5,751
Dividends to shareholders		(41,418	)
Other		4,497

Total	$	91,792

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. Risk-based capital (“RBC”) is a standard calculation using formulas and instructions from the National Association of Insurance Commissioners (“NAIC”). State laws specify regulatory actions if an insurer’s ratio of statutory capital and surplus to RBC falls below certain levels. The RBC formula for life insurance companies establishes capital requirements for asset, interest rate, market, insurance and business risks. The RBC formula for property and casualty insurance companies establishes capital requirements for asset and underwriting risks including reserve risk.

The achievement of long-term growth will require growth in American National Insurance Company’s statutory capital and surplus. Our subsidiaries may obtain additional statutory capital through various sources, such as retained statutory earnings or equity contributions from us. As of December 31, 2012, the levels of our and our insurance subsidiaries’ capital and surplus exceeded the minimum RBC requirements.

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, 2012. 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 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 total amount involved in these arrangements, both individually and in the aggregate, is 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 in Item 1.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks have not changed materially from those disclosed in our 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013.

ITEM 4.

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 (Exchange Act)) that are designed to ensure 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 Corporate Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Corporate Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2013. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Corporate Chief Financial Officer concluded that, as of June 30, 2013, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

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 year-to-date ended June 30, 2013 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 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS


Exhibit Number		Basic Documents

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

3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit No. 3.2 to the registrant’s Current Report on Form 8-K filed May 2, 2012).

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

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

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

101		The following unaudited financial information from American National Insurance Company’s Quarterly Report on Form 10-Q for three and six months ended June 30, 2013 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 Stockholders’ 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/ Robert L. Moody
	Name: Robert L. Moody
	Title: Chairman of the Board,
		Chief Executive Officer

By:	/s/ John J. Dunn, Jr.
	Name: John J. Dunn, Jr.,
	Title: Executive Vice President,
		Corporate Chief Financial Officer

Date: August 6, 2013