Edgar Filing: AMERICAN NATIONAL INSURANCE CO /TX/

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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, 2012

¨	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, 2012, there were 26,836,664 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, 2012 and December 31, 2011			3

Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011			4

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011			5

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012 and 2011			5

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011			6

Notes to the Unaudited Consolidated Financial Statements			7

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			57

ITEM 4. CONTROLS AND PROCEDURES			57

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			58

ITEM 1A. RISK FACTORS			58

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			58

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			58

ITEM 4. MINE SAFETY DISCLOSURES			58

ITEM 5. OTHER INFORMATION			58

ITEM 6. EXHIBIT INDEX			59

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,
	2012			2011
				(As Adjusted)
ASSETS
Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair Value $9,903,566 and $9,857,691)	$	9,167,922		$	9,251,972
Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $4,199,573 and $4,135,610)		4,502,696			4,381,607
Equity securities, at fair value
(Cost $700,376 and $710,679)		1,057,182			1,006,080
Mortgage loans on real estate, net of allowance		3,060,898			2,925,482
Policy loans		392,822			393,195
Investment real estate, net of accumulated
depreciation of $213,650 and $202,180		490,305			470,222
Short-term investments		341,198			345,330
Other invested assets		120,141			109,514

Total investments		19,133,164			18,883,402

Cash and cash equivalents		150,746			102,114
Investments in unconsolidated affiliates		234,050			241,625
Accrued investment income		211,296			213,984
Reinsurance recoverables		388,808			405,033
Prepaid reinsurance premiums		64,730			68,785
Premiums due and other receivables		306,068			280,031
Deferred policy acquisition costs		1,293,295			1,320,693
Property and equipment, net		82,660			77,909
Current tax receivable		2,712			17,150
Other assets		137,161			131,403
Separate account assets		776,266			747,867

Total assets	$	22,780,956		$	22,489,996

LIABILITIES
Future policy benefits:
Life	$	2,627,688		$	2,599,224
Annuity		786,892			748,675
Accident and health		72,175			74,829
Policyholders’ account balances		11,577,734			11,506,504
Policy and contract claims		1,358,332			1,340,651
Unearned premium reserve		816,624			797,398
Other policyholder funds		280,756			288,910
Liability for retirement benefits		251,635			257,602
Current portion of long-term notes payable		47,707			46,387
Long-term notes payable		12,500			12,507
Deferred tax liabilities, net		49,426			21,851
Other liabilities		375,509			397,353
Separate account liabilities		776,266			747,867

Total liabilities		19,033,244			18,839,758

STOCKHOLDERS’ EQUITY
Common stock, $1.00 par value, - Authorized 50,000,000
Issued 30,832,449 and 30,832,449,
Outstanding 26,836,591 and 26,821,284 shares		30,832			30,832
Additional paid-in capital		7,914			—
Accumulated other comprehensive income		224,263			159,403
Retained earnings		3,569,937			3,545,546
Treasury stock, at cost		(98,287	)		(98,490	)

Total American National stockholders’ equity		3,734,659			3,637,291
Noncontrolling interest		13,053			12,947

Total stockholders’ equity		3,747,712			3,650,238

Total liabilities and stockholders’ equity	$	22,780,956		$	22,489,996

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,
	2012			2011			2012			2011
				(As Adjusted)						(As Adjusted)
PREMIUMS AND OTHER REVENUE
Premiums
Life	$	70,699		$	69,474		$	137,150		$	135,860
Annuity		34,723			32,110			63,135			51,600
Accident and health		54,712			58,384			111,766			117,028
Property and casualty		268,431			275,848			541,600			567,162
Other policy revenues		49,016			46,379			97,063			95,510
Net investment income		240,563			250,172			496,259			489,244
Realized investments gains (losses)		10,139			22,926			19,947			44,957
Other-than-temporary impairments		(5,261	)		—			(8,098	)		—
Other income		7,940			6,487			14,815			12,292

Total premiums and other revenues		730,962			761,780			1,473,637			1,513,653

BENEFITS, LOSSES AND EXPENSES
Policyholder Benefits
Life		76,799			79,854			160,622			156,541
Annuity		43,722			42,837			82,967			72,810
Claims incurred
Accident and health		36,475			39,466			81,150			81,073
Property and casualty		244,966			254,431			432,518			469,942
Interest credited to policyholders’ account balances		91,019			99,139			215,883			205,530
Commissions for acquiring and servicing policies		95,528			118,766			191,042			228,401
Other operating expenses		120,151			113,111			222,144			235,372
Change in deferred policy acquisition costs		3,662			(22,701	)		5,300			(34,158	)

Total benefits, losses and expenses		712,322			724,903			1,391,626			1,415,511

Income (loss) before federal income tax and equity in earnings/losses of unconsolidated affiliates		18,640			36,877			82,011			98,142

Less: Provision (benefit) for federal income taxes
Current		16,197			13,199			23,484			27,517
Deferred		(18,581	)		(8,807	)		(8,885	)		(6,740	)

Total provision (benefit) for federal income taxes		(2,384	)		4,392			14,599			20,777
Equity in earnings (losses) of unconsolidated affiliates, net of tax		314			(2,099	)		(1,567	)		(238	)

Net income (loss)		21,338			30,386			65,845			77,127
Less: Net income (loss) attributable to noncontrolling interest, net of tax		832			1,146			123			359

Net income (loss) attributable to American National Insurance Company and Subsidiaries	$	20,506		$	29,240		$	65,722		$	76,768

Amounts available to American National Insurance Company common stockholders
Earnings per share:
Basic	$	0.77		$	1.10		$	2.46		$	2.89
Diluted		0.76			1.09			2.45			2.88
Weighted average common shares outstanding		26,685,128			26,559,950			26,675,405			26,559,821
Weighted average common shares outstanding and dilutive potential common shares		26,854,595			26,706,145			26,848,258			26,701,024

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,
	2012			2011			2012		2011
				(As Adjusted)					(As Adjusted)
Net income (loss)	$	21,338		$	30,386		$	65,845	$	77,127

Other comprehensive income (loss), net of tax
Change in net unrealized gain (loss) on securities		(16,794	)		13,837			59,737		39,714
Foreign currency transaction and translation adjustments		178			34			330		193
Defined benefit plan adjustment		2,125			(123	)		4,793		(188	)

Other comprehensive income (loss)		(14,491	)		13,748			64,860		39,719

Total comprehensive income (loss)		6,847			44,134			130,705		116,846
Less: comprehensive income attributable to noncontrolling interest		832			1,146			123		359

Total comprehensive income (loss) attributable to American
National Insurance Company and Subsidiaries	$	6,015		$	42,988		$	130,582	$	116,487

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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


	Six months ended June 30,
	2012			2011
				(As Adjusted)
Common Stock
Balance at beginning and end of the period	$	30,832		$	30,832

Additional Paid-In Capital
Balance as of January 1,		—			15,190
Issuance of treasury shares as restricted stock		(203	)		(4	)
Income tax effect from restricted stock arrangement		(534	)		(14	)
Amortization of restricted stock		8,651			2,146

Balance at end of period		7,914			17,318

Accumulated Other Comprehensive Income (Loss)
Balance as of January 1,		159,403			225,212
Other comprehensive income (loss)		64,860			39,719
Cumulative effect of accounting change - deferred policy acquisition costs		—			604

Balance at end of the period		224,263			265,535

Retained Earnings
Balance as of January 1,		3,545,546			3,459,911
Net income (loss) attributable to American National
Insurance Company and Subsidiaries		65,722			76,768
Cash dividends to common stockholders ($1.54 per share)		(41,331	)		(41,304	)
Cumulative effect of accounting change - deferred policy acquisition costs		—			(19,195	)

Balance at end of the period		3,569,937			3,476,180

Treasury Stock
Balance as of January 1,		(98,490	)		(98,494	)
Issuance of treasury shares as restricted stock		203			4

Balance at end of the period		(98,287	)		(98,490	)

Noncontrolling Interest
Balance as of January 1,		12,947			4,042
Contributions		—			26
Distributions		(17	)		(12,016	)
Gain (loss) attributable to noncontrolling interest		123			359

Balance at end of the period		13,053			(7,589	)

Total Stockholders’ Equity
Balance at end of the period	$	3,747,712		$	3,683,786

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,
	2012			2011
				(As Adjusted)
OPERATING ACTIVITIES
Net income (loss)	$	65,845		$	77,127
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized investments (gains) losses		(19,947	)		(44,957	)
Other-than-temporary impairments		8,098			—
Accretion (amortization) of discounts, premiums and loan origination fees		2,495			5,301
Net capitalized interest on policy loans and mortgage loans		(14,469	)		(14,066	)
Depreciation		18,555			20,653
Interest credited to policyholders’ account balances		215,883			205,530
Charges to policyholders’ account balances		(97,063	)		(95,510	)
Deferred federal income tax (benefit) expense		(8,885	)		(6,740	)
Deferral of policy acquisition costs		(197,789	)		(234,421	)
Amortization of deferred policy acquisition costs		203,089			200,263
Equity in (earnings) losses of unconsolidated affiliates		1,567			238
Changes in:
Policyholder liabilities		88,363			156,478
Reinsurance recoverables		16,225			(79,199	)
Premiums due and other receivables		(26,037	)		(23,043	)
Accrued investment income		2,688			(10,720	)
Current tax receivable/payable		14,438			(7,422	)
Liability for retirement benefits		1,407			983
Prepaid reinsurance premiums		4,055			105
Other, net		(29,680	)		11,129

Net cash provided by (used in) operating activities		248,838			161,729

INVESTING ACTIVITIES
Proceeds from sale/maturity/prepayment of:
Bonds - held-to-maturity		703,534			423,820
Bonds - available-for-sale		218,876			243,805
Equity securities		26,135			57,865
Investment real estate		—			90,084
Mortgage loans		109,951			214,513
Policy loans		33,875			24,649
Other invested assets		19,946			20,861
Disposals of property and equipment		98			597
Distributions from unconsolidated affiliates		18,960			8,142
Payment for the purchase/origination of:
Bonds - held-to-maturity		(610,789	)		(1,043,532	)
Bonds - available-for-sale		(285,136	)		(365,393	)
Equity securities		(15,807	)		(27,043	)
Investment real estate		(14,593	)		(6,567	)
Mortgage loans		(259,093	)		(285,974	)
Policy loans		(21,495	)		(19,536	)
Other invested assets		(22,418	)		(19,928	)
Additions to property and equipment		(12,218	)		(8,245	)
Contributions to unconsolidated affiliates		(14,423	)		(40,030	)
Change in short-term investments		4,132			10,613
Other, net		7,995			(11,465	)

Net cash provided by (used in) investing activities		(112,470	)		(732,764	)

FINANCING ACTIVITIES
Policyholders’ account deposits		608,843			1,311,544
Policyholders’ account withdrawals		(656,544	)		(720,846	)
Change in notes payable		1,313			(1,704	)
Dividends to stockholders		(41,331	)		(41,304	)
Proceeds from (payments to) noncontrolling interest		(17	)		10

Net cash provided by (used in) financing activities		(87,736	)		547,700

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		48,632			(23,335	)
Beginning of the year		102,114			101,449

End of year	$	150,746		$	78,114

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”) operate in the insurance industry. Operating on a multiple product line basis, American National offers a broad line of insurance coverage, including individual and group life insurance, health insurance, annuities, and property and casualty insurance. In addition, through non-insurance subsidiaries, American National invests in stocks and real estate. The majority of revenues are generated by the insurance business. Business is conducted in all states and the District of Columbia, as well as Puerto Rico, Guam and American Samoa. 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 the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for Form 10-Q. In addition to GAAP, specific SEC requirements applicable to insurance companies are applied to the consolidated financial statements.

The interim consolidated financial statements and notes herein are unaudited. These interim consolidated financial statements reflect all adjustments, which are in the opinion of management, considered necessary for the fair presentation of the consolidated statements of financial position, operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods.

These 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, 2011. The consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

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. 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 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.

Effective January 1, 2012, American National adopted a new accounting standard that modified the accounting for deferred policy acquisition costs (“DAC”) associated with acquiring new and renewal insurance and annuity contracts. Previously, acquisition costs were deferred if the costs varied with and were related primarily to the acquisition of new and renewal insurance and annuity contracts. In accordance with the new standard of ASU No. 2010-26, DAC is limited to those costs that are related directly to the successful acquisition of insurance and annuity contracts, costs that result directly from and are essential to the contract acquisition and costs that would have not been incurred had the contract acquisition not occurred. In addition, advertising costs are included in DAC only if the capitalization criteria for direct-response advertising are met. Refer to Note 3 for discussion of the effects of this accounting change.

As of June 30, 2012 all other American National significant accounting policies and practices remain materially unchanged from those disclosed in Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Consolidated Financial Statements included in American National’s 2011 Annual Report on Form 10-K.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In October 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The new standard redefines the term “acquisition cost” and added the term “incremental direct cost of contract acquisition” to the master glossary. These changes limit the deferrable cost to those costs that are related directly to the successful acquisition of insurance contracts, and those that result directly from and are essential to the contract acquisition and costs that would have not been incurred had the contract acquisition not occurred. The new guidance also specifies that advertising costs should be deferred only if the capitalization criteria for direct-response advertising are met. ASU 2010-26 is effective for interim and annual periods, commencing after December 15, 2011. American National adopted this standard effective January 1, 2012, and applied the retrospective method of adoption to all prior periods presented in the consolidated financial statements. Accordingly, upon adoption, the DAC asset was reduced by approximately $34,260,000 as a result of acquisition costs previously deferred that are no longer eligible for deferral under the new guidance. The after-tax cumulative effect adjustment to the opening balance of stockholders’ equity was approximately $19,745,000.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. GAAP and IFRSs. ASU 2011-04 clarifies the intent of the FASB about the application of existing fair value measurement and disclosure requirements such as: (1) the application of the highest and best use and valuation premise concepts; (2) a requirement specific to measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity; and (3) a requirement to disclose unobservable inputs used in the fair value of an instrument categorized within Level 3 of the fair value hierarchy. The new guidance also prohibits the use of block premiums and discounts for all fair value measurement, regardless of hierarchy. In addition, ASU 2011-04 expands the disclosures about fair value measurements. ASU 2011-04 is effective for interim and annual periods, beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on the consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. ASU 2011-05 makes the presentation of other comprehensive income (“OCI”) more prominent by giving reporting entities two presentation options. Reporting entities can present the total net income and total OCI along with their respective components as one continuous statement or as two separate consecutive statements. The new guidance also eliminates the option to present OCI in the statement of changes in stockholders’ equity. In addition, the new guidance requires reporting entities to present reclassification adjustments from OCI to net income on the face of the financial statements. ASU 2011-05 is effective for interim and annual periods, beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on its consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. ASU 2011-08 allows an assessment of qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis to determining whether the two-step goodwill impairment test is necessary. ASU 2011-08 is effective for interim and annual periods beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on its consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. The guidance defers the application of the reclassification adjustment provisions in ASU 2011-05. ASU 2011-12 is effective for interim and annual periods beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on its consolidated financial statements.

Future Adoption of New Accounting Standards

In July 2011, the FASB issued ASU No. 2011-06, Fees Paid to the Federal Government by Health Insurers. ASU 2011-06 addresses questions about how health insurers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act, which imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The new guidance specifies that the liability for the fee should be estimated and 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. ASU 2011-06 is effective for calendar years beginning after December 31, 2013. American National’s adoption of this guidance on January 1, 2014 is not expected to have a material effect on its consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-10, Derecognition of in Substance Real Estate. The new guidance 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. ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. American National’s adoption of this guidance on January 1, 2013 is not expected to have a material effect on its consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The new guidance requires an entity to disclose both gross and net information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013 and the new disclosure requirements should be applied retrospectively for all periods presented. American National’s adoption of this guidance on January 1, 2013 is not expected to have a material effect on its consolidated financial statements.

4. INVESTMENTS IN SECURITIES

The cost or amortized cost and estimated fair value of investments in held-to-maturity and available-for-sale securities are shown below (in thousands):


	Six months ended June 30, 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 other U.S. government corporations and agencies	$	10,558	$	120	$	—		$	10,678
States of the U.S. and political subdivisions of the states		396,375		38,630		(40	)		434,965
Foreign governments		29,057		4,858		—			33,915
Corporate debt securities		8,028,635		670,711		(9,387	)		8,689,959
Residential mortgage-backed securities		628,211		51,083		(2,960	)		676,334
Commercial mortgage-backed securities		31,341		—		(19,910	)		11,431
Collateralized debt securities		5,395		350		(952	)		4,793
Other debt securities		38,350		3,141		—			41,491

Total bonds held-to-maturity		9,167,922		768,893		(33,249	)		9,903,566

Fixed maturity securities, bonds available-for-sale
U.S. treasury and other U.S. government corporations and agencies		14,358		1,210		(3	)		15,565
States of the U.S. and political subdivisions of the states		571,634		44,680		(168	)		616,146
Foreign governments		5,000		2,396		—			7,396
Corporate debt securities		3,417,664		264,647		(21,898	)		3,660,413
Residential mortgage-backed securities		160,483		10,432		(942	)		169,973
Collateralized debt securities		16,348		1,584		(115	)		17,817
Other debt securities		14,086		1,300		—			15,386

Total bonds available-for-sale		4,199,573		326,249		(23,126	)		4,502,696

Total fixed maturity securities		13,367,495		1,095,142		(56,375	)		14,406,262

Equity securities
Common stock		673,686		361,590		(13,675	)		1,021,601
Preferred stock		26,690		8,895		(4	)		35,581

Total equity securities		700,376		370,485		(13,679	)		1,057,182

Total investments in securities	$	14,067,871	$	1,465,627	$	(70,054	)	$	15,463,444


	Year ended December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and other U.S. government corporations and agencies	$	13,704	$	193	$	—		$	13,897
States of the U.S. and political subdivisions of the states		405,526		32,272		(6	)		437,792
Foreign governments		29,044		4,978		—			34,022
Corporate debt securities		8,011,901		564,159		(25,316	)		8,550,744
Residential mortgage-backed securities		714,659		50,774		(3,986	)		761,447
Commercial mortgage-backed securities		31,341		—		(20,158	)		11,183
Collateralized debt securities		7,134		—		(1,018	)		6,116
Other debt securities		38,663		3,827		—			42,490

Total bonds held-to-maturity		9,251,972		656,203		(50,484	)		9,857,691

Fixed maturity securities, bonds available-for-sale
U.S. treasury and other U.S. government corporations and agencies		11,930		1,156		—			13,086
States of the U.S. and political subdivisions of the states		579,008		39,930		(90	)		618,848
Foreign governments		5,000		2,435		—			7,435
Corporate debt securities		3,316,083		221,079		(32,016	)		3,505,146
Residential mortgage-backed securities		191,832		11,898		(1,009	)		202,721
Collateralized debt securities		17,636		1,611		(170	)		19,077
Other debt securities		14,121		1,173		—			15,294

Total bonds available-for-sale		4,135,610		279,282		(33,285	)		4,381,607

Total fixed maturity securities		13,387,582		935,485		(83,769	)		14,239,298

Equity securities
Common stock		679,724		305,269		(16,086	)		968,907
Preferred stock		30,955		7,688		(1,470	)		37,173

Total equity securities		710,679		312,957		(17,556	)		1,006,080

Total investments in securities	$	14,098,261	$	1,248,442	$	(101,325	)	$	15,245,378

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


	June 30, 2012
	Bonds Held-to-Maturity				Bonds Available-for-Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	944,866	$	964,745	$	339,961	$	345,689
Due after one year through five years		3,015,376		3,253,358		1,735,317		1,859,897
Due after five years through ten years		4,379,652		4,783,535		1,677,288		1,807,512
Due after ten years		822,178		897,444		442,007		485,442
Without single maturity date		5,850		4,484		5,000		4,156

Total	$	9,167,922	$	9,903,566	$	4,199,573	$	4,502,696

Available-for-sale securities are sold throughout the year for various reasons. All gains and losses were determined using specific identification of the securities sold. Proceeds from the sales of these securities, with the realized gains and losses, are shown below (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Proceeds from sales of available-for-sale securities	$	5,632		$	45,738		$	38,305		$	99,350
Gross realized gains		947			6,808			12,027			20,977
Gross realized losses		(11	)		(31	)		(170	)		(840	)

There were no securities transferred from held-to-maturity to available-for-sale during the six months ended June 30, 2012 and 2011.

Net unrealized gains (losses) on securities

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


	Six months ended June 30,
	2012			2011
Bonds available-for-sale	$	57,126		$	61,855
Equity securities		61,405			24,473

Net unrealized gains (losses) on securities during the year		118,531			86,328
Adjustments for:
Deferred policy acquisition costs		(22,098	)		(21,221	)
Participating policyholders’ interest		(4,417	)		(4,055	)
Deferred federal income tax benefit (expense)		(32,279	)		(21,338	)

Net unrealized gains (losses) on securities, net of tax	$	59,737		$	39,714

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):


	Six months ended June 30, 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
States of the U.S. and political subdivisions of the states	$	38	$	2,794	$	2	$	80	$	40	$	2,874
Corporate debt securities		4,849		258,102		4,538		29,035		9,387		287,137
Residential mortgage-backed securities		54		7,995		2,906		32,105		2,960		40,100
Commercial mortgage-backed securities		—		—		19,910		11,431		19,910		11,431
Collateralized debt securities		—		—		952		1,935		952		1,935

Total bonds held-to-maturity		4,941		268,891		28,308		74,586		33,249		343,477

Fixed maturity securities, bonds available-for-sale
U.S. treasury and other U.S. government corporations and agencies		3		7,105		—		—		3		7,105
States of the U.S. and political subdivisions of the states		164		14,588		4		1,194		168		15,782
Corporate debt securities		2,583		121,721		19,315		88,976		21,898		210,697
Residential mortgage-backed securities		175		12,234		767		12,752		942		24,986
Collateralized debt securities		6		236		109		2,175		115		2,411

Total bonds available-for-sale		2,931		155,884		20,195		105,097		23,126		260,981

Total fixed maturity securities		7,872		424,775		48,503		179,683		56,375		604,458

Equity securities
Common stock		13,675		99,684		—		—		13,675		99,684
Preferred stock		4		1,000		—		—		4		1,000

Total equity securities		13,679		100,684		—		—		13,679		100,684

Total investments in securities	$	21,551	$	525,459	$	48,503	$	179,683	$	70,054	$	705,142


	Year ended December 31, 2011
	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
States of the U.S. and political subdivisions of the states	$	—	$	—	$	6	$	264	$	6	$	264
Corporate debt securities		20,204		680,202		5,112		39,280		25,316		719,482
Residential mortgage-backed securities		227		19,398		3,759		32,653		3,986		52,051
Commercial mortgage-backed securities		—		—		20,158		11,183		20,158		11,183
Collateralized debt securities		8		1,605		1,010		4,511		1,018		6,116

Total bonds held-to-maturity		20,439		701,205		30,045		87,891		50,484		789,096

Fixed maturity securities, bonds available-for-sale
States of the U.S. and political subdivisions of the states		10		762		80		1,971		90		2,733
Corporate debt securities		12,142		396,761		19,874		85,623		32,016		482,384
Residential mortgage-backed securities		202		25,943		807		9,047		1,009		34,990
Collateralized debt securities		6		704		164		2,770		170		3,474

Total bonds available-for-sale		12,360		424,170		20,925		99,411		33,285		523,581

Total fixed maturity securities		32,799		1,125,375		50,970		187,302		83,769		1,312,677

Equity securities
Common stock		16,086		98,731		—		—		16,086		98,731
Preferred stock		1,470		6,481		—		—		1,470		6,481

Total equity securities		17,556		105,212		—		—		17,556		105,212

Total investments in securities	$	50,355	$	1,230,587	$	50,970	$	187,302	$	101,325	$	1,417,889

For all investment securities with an unrealized loss, including those in an unrealized loss position for 12 months or more, American National performs a quarterly analysis to determine if an other-than-temporary impairment (“OTTI”) loss should be recorded. As of June 30, 2012, the available-for-sale securities with unrealized losses were not deemed to be other-than-temporarily impaired. Even though the duration of the unrealized losses on some of the securities exceeds one year, American National has no intent to sell and it is not more-likely-than-not that American National will be required to sell these securities prior to recovery, and recovery is expected in a reasonable period of time.

Credit Risk Management

Management believes American National’s bond portfolio is diversified and of investment grade. The bond portfolio distributed by credit quality rating, using both S&P and Moody’s ratings, is shown below:


	June 30, 2012			December 31, 2011
AAA		7.2	%		8.1	%
AA		10.2			10.5
A		38.7			38.3
BBB		39.9			38.6
BB and below		4.0			4.5

Total		100.0	%		100.0	%

American National’s equity securities by market sector distribution are shown below:


	June 30, 2012			December 31, 2011
Consumer goods		22.2	%		21.5	%
Financials		17.8			17.2
Information technology		17.4			16.9
Energy and utilities		15.6			17.3
Healthcare		11.8			11.7
Industrials		9.0			9.0
Communications		3.6			4.2
Materials		2.5			2.1
Other		0.1			0.1

Total		100.0	%		100.0	%

5. MORTGAGE LOANS

American National makes commercial mortgage loans in areas that offer the potential for property value appreciation. Generally, mortgage loans are secured by first liens on income-producing real estate. American National attempts to maintain a diversified portfolio of mortgage loans by considering the property-type as well as the geographic distribution of the property, which is the underlying mortgage collateral. Mortgage loans by property-type distribution are as follows:


	June 30, 2012			December 31, 2011
Office buildings		31.7	%		30.2	%
Industrial		25.1			24.6
Shopping centers		18.0			19.1
Hotels and motels		13.4			13.4
Other		11.8			12.7

Total		100.0	%		100.0	%

Mortgage loans by geographic distribution are as follows:


	June 30, 2012			December 31, 2011
South Atlantic		22.7	%		22.9	%
West South Central		22.6			23.1
East North Central		18.4			18.8
Pacific		11.8			11.4
Mountain		7.2			6.7
East South Central		6.7			5.7
Middle Atlantic		5.1			5.4
West North Central		2.7			2.9
New England		2.2			2.5
Other		0.6			0.6

Total		100.0	%		100.0	%

During the six months ended June 30, 2012 American National sold no loans. During the year ended December 31, 2011, American National sold one industrial loan with a recorded investment of $27,532,000 and realized a gain of $4,968,000. During the six months ended June 30, 2012 American National foreclosed on three loans with a recorded investment of $16,523,000. There were no foreclosures during the year ended December 31, 2011.

Credit Quality

The amounts of commercial mortgage loans placed on nonaccrual status and classified as non-performing are shown in the table below (in thousands):


	June 30, 2012		December 31, 2011
Commercial mortgages
Office	$	—	$	8,436
Retail		493		23,997

Total	$	493	$	32,433

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 in the table below (in thousands):


	June 30, 2012
	30-59 Days		60-89 Days		Greater Than		Total Past				Total
	Past Due		Past Due		90 Days		Due		Current		Mortgage Loans
Commerical mortgages
Office	$	—	$	—	$	6,213	$	6,213	$	969,941	$	976,154
Industrial		—		—		—		—		769,391		769,391
Retail		—		—		493		493		552,443		552,936
Other		—		—		—		—		774,783		774,783

Total	$	—	$	—	$	6,706	$	6,706	$	3,066,558		3,073,264

Allowance for loan losses												12,366

Mortgage loans on real estate, net of allowance											$	3,060,898


	December 31, 2011
	30-59 Days		60-89 Days		Greater Than		Total Past				Total
	Past Due		Past Due		90 Days		Due		Current		Mortgage Loans
Commerical mortgages
Office	$	—	$	—	$	8,436	$	8,436	$	879,923	$	888,359
Industrial		—		—		—		—		721,704		721,704
Retail		13,140		—		10,857		23,997		537,665		561,662
Other		—		—		—		—		765,078		765,078

Total	$	13,140	$	—	$	19,293	$	32,433	$	2,904,370		2,936,803

Allowance for loan losses												11,321

Mortgage loans on real estate, net of allowance											$	2,925,482

The amounts shown above are net of unamortized discounts of $8,633,000 and $10,189,000 and unamortized origination fees of $12,953,000 and $12,683,000 at June 30, 2012 and December 31, 2011, respectively. No other 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 allowance for credit losses and unpaid principal balance in commercial mortgage loans are shown in the table below (in thousands):


	Collectively		Individually
	Evaluated		Evaluated
	for Impairment		for Impairment			Total
Allowance for credit losses
December 31, 2011	$	10,828		493		$	11,321
Write down		—		(2,277	)		(2,277	)
Change in allowance		1,045		2,277			3,322

June 30, 2012	$	11,873	$	493		$	12,366

Unpaid principal balance
June 30, 2012	$	2,988,842	$	106,008		$	3,094,850

December 31, 2011	$	2,725,930	$	233,745		$	2,959,675

The detail of loans individually evaluated for impairment with and without an allowance recorded by collateral property-type is shown in the tables below (in thousands):


	Six months ended June 30, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With an allowance recorded
Retail	$	—	$	493	$	493	$	—	$	—

Without an allowance recorded
Office	$	45,226	$	45,226	$	—	$	45,358	$	1,482
Retail		14,949		14,949		—		15,224		446
Other		45,340		45,340		—		45,354		1,520

Total without an allowance recorded	$	105,515	$	105,515	$	—	$	105,936	$	3,448


	Year ended December 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With an allowance recorded
Retail	$	—	$	493	$	493	$	—	$	—

Without an allowance recorded
Office	$	48,833	$	48,833	$	—	$	49,088	$	3,506
Industrial		57,261		57,261		—		57,514		3,628
Retail		15,477		15,477		—		15,535		1,514
Other		111,681		111,681		—		111,407		7,546

Total without an allowance recorded	$	233,252	$	233,252	$	—	$	233,544	$	16,194

Troubled Debt Restructurings

American National has a high quality, well performing, mortgage loan portfolio. For a very small portion of the portfolio, classified as troubled debt restructurings, American National has granted concessions related to the borrowers’ ability to pay the loan. The types of concessions granted 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 granted 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.

At June 30, 2012 and December 31, 2011, three loans which were part of the mortgage loan portfolio had been modified in troubled debt restructurings. The outstanding recorded investment was $45,366,000 both before and after the modification. There are no commitments to lend additional funds to debtors whose loans have been modified in troubled debt restructurings and there have been no defaults on modified loans during the preceding twelve months.

6. INVESTMENT REAL ESTATE

Investment real estate by property-type distribution is as follows:


	June 30, 2012			December 31, 2011
Shopping centers		42.4	%		41.1	%
Office buildings		22.8			22.0
Industrial		15.4			16.3
Hotels and motels		1.9			2.1
Other		17.5			18.5

Total		100.0	%		100.0	%

Investment real estate by geographic distribution is as follows:


	June 30, 2012			December 31, 2011
West South Central		63.4	%		66.1	%
South Atlantic		11.8			11.6
East North Central		6.8			5.2
Mountain		6.6			6.9
East South Central		5.7			5.2
West North Central		3.4			2.7
Pacific		2.3			2.3

Total		100.0	%		100.0	%

In the normal course of investment activities, American National and its wholly-owned subsidiaries enter into real estate partnership and joint venture agreements. Generally, opportunities are presented by a sponsor, with the significant activities being conducted on behalf of the sponsor. American National participates in the design of these entities, 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. Financial or other support was not provided to investees designated as VIEs in the form of liquidity arrangements, guarantees, or other commitments by third parties that may affect the fair value or risk of American National’s variable interest in the investees designated as VIEs as of June 30, 2012 and December 31, 2011.

The total assets and liabilities relating to VIEs in which American National is the primary beneficiary and which are consolidated in its financial statements for the periods indicated are as follows (in thousands):


	June 30, 2012		December 31, 2011
Investment real estate	$	158,795	$	154,878
Short-term investments		1,302		3,364
Cash and cash equivalents		2,919		5,777
Accrued investment income		2,139		2,299
Other receivables		12,017		11,816
Other assets		3,791		3,870

Total assets of consolidated VIEs	$	180,963	$	182,004

Notes payable	$	60,207	$	58,894
Other liabilities		3,506		5,354

Total liabilities of consolidated VIEs	$	63,713	$	64,248

For other real estate partnerships and joint ventures in which American National is a partner, the major decisions that most significantly impact the economic activities of the partnership and joint venture require unanimous consent of all partners. American National is not the primary beneficiary and these entities were not consolidated. The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which American National holds significant variable interests but is not the primary beneficiary and which have not been consolidated (in thousands):


	June 30, 2012				December 31, 2011
	Carrying Amount		Maximum Exposure to Loss		Carrying Amount		Maximum Exposure to Loss
Investment in unconsolidated affiliates	$	70,073	$	70,073	$	85,509	$	85,509

7. DERIVATIVE INSTRUMENTS

American National purchases derivative contracts (equity-indexed options) that serve as economic hedges against fluctuations in the equity markets to which equity-indexed annuity products are exposed. Equity-indexed annuities include a fixed host annuity contract and an equity-indexed embedded derivative. These derivative instruments are not designated as accounting hedges. The following tables detail the volume, estimated fair value and the gains or losses on derivative instruments (in thousands):


		June 30, 2012							December 31, 2011
Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Statements of Financial Position	Number of Instruments		Notional Amounts		Estimated Fair Value			Number of Instruments		Notional Amounts		Estimated Fair Value
Equity-indexed options	Other invested assets		349	$	822,100	$	77,136			332	$	791,900	$	65,188
Equity-indexed annuity embedded derivative	Future policy benefits - Annuity		18,404		688,500		(72,194	)		16,727		661,300		(63,275	)


		Gains (Losses) Recognized in Income on Derivatives
		Three months ended June 30,						Six months ended June 30,
Derivatives Not Designated as Hedging Instruments	Location Reported in the Consolidated Statements of Operations	2012			2011			2012			2011
Equity-indexed options	Net investment income	$	(8,148	)	$	(1,818	)	$	11,499		$	5,297
Equity-indexed annuity embedded derivative	Interest credited to policyholders’ account balances		9,417			2,996			(9,068	)		(3,608	)

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,
	2012			2011			2012			2011
Bonds	$	172,005		$	174,379		$	345,868		$	344,399
Equity securities		7,626			7,491			13,986			13,407
Mortgage loans		51,700			54,976			102,490			102,707
Real estate		31,775			31,850			48,992			54,575
Options		(8,148	)		(1,818	)		11,499			5,297
Other invested assets		12,401			10,040			21,466			20,314

		267,359			276,918			544,301			540,699
Investment expenses		(26,796	)		(26,746	)		(48,042	)		(51,455	)

Total	$	240,563		$	250,172		$	496,259		$	489,244

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


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Bonds	$	9,610		$	2,784		$	13,420		$	13,107
Equity securities		2,859			6,278			10,214			18,814
Mortgage loans		(2,233	)		1,450			(3,322	)		—
Real estate		—			12,491			(252	)		13,113
Other invested assets		(97	)		(77	)		(113	)		(77	)

Total	$	10,139		$	22,926		$	19,947		$	44,957

The OTTI, which are not included in the realized investments gains (losses) above, are shown below (in thousands):


	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012			2011
Equity securities	$	(5,261	)	$	—	$	(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, 2012				December 31, 2011
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and other U.S. government corporations and agencies	$	10,558	$	10,678	$	13,704	$	13,897
States of the U.S. and political subdivisions of the states		396,375		434,965		405,526		437,792
Foreign governments		29,057		33,915		29,044		34,022
Corporate debt securities		8,028,635		8,689,959		8,011,901		8,550,744
Residential mortgage-backed securities		628,211		676,334		714,659		761,447
Commercial mortgage-backed securities		31,341		11,431		31,341		11,183
Collateralized debt securities		5,395		4,793		7,134		6,116
Other debt securities		38,350		41,491		38,663		42,490

Total bonds held-to-maturity		9,167,922		9,903,566		9,251,972		9,857,691

Fixed maturity securities, bonds available-for-sale
U.S. treasury and other U.S. government corporations and agencies		15,565		15,565		13,086		13,086
States of the U.S. and political subdivisions of the states		616,146		616,146		618,848		618,848
Foreign governments		7,396		7,396		7,435		7,435
Corporate debt securities		3,660,413		3,660,413		3,505,146		3,505,146
Residential mortgage-backed securities		169,973		169,973		202,721		202,721
Collateralized debt securities		17,817		17,817		19,077		19,077
Other debt securities		15,386		15,386		15,294		15,294

Total bonds available-for-sale		4,502,696		4,502,696		4,381,607		4,381,607

Total fixed maturity securities		13,670,618		14,406,262		13,633,579		14,239,298

Equity securities
Common stock		1,021,601		1,021,601		968,907		968,907
Preferred stock		35,581		35,581		37,173		37,173

Total equity securities		1,057,182		1,057,182		1,006,080		1,006,080

Options		77,136		77,136		65,188		65,188
Mortgage loans on real estate, net of allowance		3,060,898		3,290,881		2,925,482		3,178,205
Policy loans		392,822		392,822		393,195		393,195
Short-term investments		341,198		341,198		345,330		345,330
Separate account assets		776,266		776,266		747,867		747,867

Total financial assets	$	19,376,120	$	20,341,747	$	19,116,721	$	19,975,163

Financial liabilities
Investment contracts	$	10,036,650	$	10,036,650	$	9,993,804	$	9,993,804
Embedded derivative liability for equity-indexed annuities		72,194		72,194		63,275		63,275
Notes payable		60,207		60,207		58,894		58,894
Separate account liabilities		776,266		776,266		747,867		747,867

Total financial liabilities	$	10,945,317	$	10,945,317	$	10,863,840	$	10,863,840

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. An asset or liability’s classification 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. American National defines active markets based on average trading volume for equity securities. The size of the bid/ask spread is used as an indicator of market activity for fixed maturity securities.

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.

American National has evaluated the types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, each financial instrument was classified into Level 1, 2, or 3 measurements.

Fixed Maturity Securities and Equity Options

American National utilizes a pricing service to estimate fair value measurements for approximately 99.0% of fixed maturity securities. 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, the pricing service uses an option adjusted spread model 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 by the pricing service and the techniques applied by the pricing service to produce quotes that represent the fair value of a specific security. The review of the pricing services methodology confirms the service is utilizing information from organized transactions or a technique that represents a market participant’s assumptions. American National does not adjust quotes received by 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.

The fair value estimates of most fixed maturity investments including municipal bonds are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturity securities provided by the pricing service are disclosed as Level 2 measurements.

Additionally, American National holds a small amount of fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these fixed maturity 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 private placement debt also includes significant non-observable inputs, the internally determined credit rating of the security, and an externally provided credit spread, and these securities are classified as Level 3 measurements.

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, American National receives prices 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, American National receives an estimate of fair value from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. These estimates for equity securities are disclosed as Level 2 measurements.

Mortgage Loans

The fair value of mortgage loans is estimated using discounted cash flow analyses. Fair value is calculated 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 annuities is measured at fair value. The embedded derivative liability is recalculated each reporting period using equity option pricing models. To validate the assumptions used to price the embedded derivative, 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 annuities. 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 annuity embedded derivatives, all other things being equal. At June 30, 2012, the implied volatility used to estimate embedded derivative value ranges from 15.1% to 32.3%.

Other Financial Instruments

For other financial instruments discussed below, American National believes that their carrying value approximates fair value. This assumption is supported by the qualitative information discussed below. These financial instruments are classified as level 3 measurements.

Policy loans – The carrying value of policy loans is equivalent to 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, 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 quantitative disclosures regarding fair value hierarchy measurements of the financial instruments are shown below (in thousands):


	Fair Value Measurement as of June 30, 2012 Using:
	Total Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and other U.S. government corporations and agencies	$	10,678	$	—	$	10,678	$	—
States of the U.S. and political subdivisions of the states		434,965		—		434,965		—
Foreign governments		33,915		—		33,915		—
Corporate debt securities		8,689,959		—		8,619,621		70,338
Residential mortgage-backed securities		676,334		—		676,331		3
Commercial mortgage-backed securities		11,431		—		—		11,431
Collateralized debt securities		4,793		—		—		4,793
Other debt securities		41,491		—		34,951		6,540

Total bonds held-to-maturity		9,903,566		—		9,810,461		93,105

Fixed maturity securities, bonds available-for-sale
U.S. treasury and other U.S. government corporations and agencies		15,565		—		15,565		—
States of the U.S. and political subdivisions of the states		616,146		—		613,621		2,525
Foreign governments		7,396		—		7,396		—
Corporate debt securities		3,660,413		—		3,615,024		45,389
Residential mortgage-backed securities		169,973		—		169,966		7
Collateralized debt securities		17,817		—		17,817		—
Other debt securities		15,386		—		15,386		—

Total bonds available-for-sale		4,502,696		—		4,454,775		47,921

Total fixed maturity securities		14,406,262		—		14,265,236		141,026

Equity securities
Common stock		1,021,601		1,021,601		—		—
Preferred stock		35,581		35,581		—		—

Total equity securities		1,057,182		1,057,182		—		—

Options		77,136		—		—		77,136
Mortgage loans on real estate		3,290,881		—		3,290,881		—
Policy loans		392,822		—		—		392,822
Short-term investments		341,198		—		341,198		—
Separate account assets		776,266		—		776,266		—

Total financial assets	$	20,341,747	$	1,057,182	$	18,673,581	$	610,984

Financial liabilities
Investment contracts	$	10,036,650	$	—	$	—	$	10,036,650
Embedded derivative liability for equity-indexed annuities		72,194		—		—		72,194
Notes payable		60,207		—		—		60,207
Separate account liabilities		776,266		—		776,266		—

Total financial liabilities	$	10,945,317	$	—	$	776,266	$	10,169,051


	Fair Value Measurement as of December 31, 2011 Using:
	Total Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Fixed maturity securities, bonds held-to-maturity
U.S. treasury and other U.S. government corporations and agencies	$	13,897	$	—	$	13,897	$	—
States of the U.S. and political subdivisions of the states		437,792		—		437,792		—
Foreign governments		34,022		—		34,022		—
Corporate debt securities		8,550,744		—		8,492,957		57,787
Residential mortgage-backed securities		761,447		—		759,773		1,674
Commercial mortgage-backed securities		11,183		—		—		11,183
Collateralized debt securities		6,116		—		—		6,116
Other debt securities		42,490		—		35,147		7,343

Total bonds held-to-maturity		9,857,691		—		9,773,588		84,103

Fixed maturity securities, bonds available-for-sale
U.S. treasury and other U.S. government corporations and agencies		13,086		—		13,086		—
States of the U.S. and political subdivisions of the states		618,848		—		616,323		2,525
Foreign governments		7,435		—		7,435		—
Corporate debt securities		3,505,146		—		3,492,113		13,033
Residential mortgage-backed securities		202,721		—		202,715		6
Collateralized debt securities		19,077		—		18,826		251
Other debt securities		15,294		—		15,294		—

Total bonds available-for-sale		4,381,607		—		4,365,792		15,815

Total fixed maturity securities		14,239,298		—		14,139,380		99,918

Equity securities
Common stock		968,907		968,907		—		—
Preferred stock		37,173		37,173		—		—

Total equity securities		1,006,080		1,006,080		—		—

Options		65,188		—		—		65,188
Mortgage loans on real estate		3,178,205		—		3,178,205		—
Policy loans		393,195		—		—		393,195
Short-term investments		345,330		—		345,330		—
Separate account assets		747,867		—		747,867		—

Total financial assets	$	19,975,163	$	1,006,080	$	18,410,782	$	558,301

Financial liabilities
Investment contracts	$	9,993,804	$	—	$	—	$	9,993,804
Embedded derivative liability for equity-indexed annuities		63,275		—		—		63,275
Notes payable		58,894		—		—		58,894
Separate account liabilities		747,867		—		747,867		—

Total financial liabilities	$	10,863,840	$	—	$	747,867	$	10,115,973

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):


	Three months ended June 30												Six months ended June 30
				Equity-			Embedded									Equity-			Embedded
	Investment			Indexed			Derivative						Investment			Indexed			Derivative
	Securities			Options			Liability			Total			Securities			Options			Liability			Total
Beginning balance, 2011	$	77,709		$	72,969		$	(66,180	)	$	84,498		$	90,477		$	66,716		$	(59,644	)	$	97,549
Total realized and unrealized investment gains/losses
Included in other comprehensive income		428			—			—			428			(258	)		—			—			(258	)
Net fair value change included in realized gains/losses		17			—			—			17			168			—			—			168
Net gain (loss) for derivatives included in net investment income		—			(1,818	)		—			(1,818	)		—			5,297			—			5,297
Net change included in interest credited		—			—			2,996			2,996			—			—			(3,608	)		(3,608	)
Purchases, sales and settlements or maturities
Purchases		(1	)		5,216			—			5,215			12			8,876			—			8,888
Sales		—			—			—			—			(10,181	)		—			—			(10,181	)
Settlements or maturities		(1,262	)		(4,842	)		—			(6,104	)		(3,332	)		(9,364	)		—			(12,696	)
Premiums less benefits		—			—			(1,841	)		(1,841	)		—			—			(1,773	)		(1,773	)
Gross transfers into Level 3		(5	)		—			—			(5	)		—			—			—			—

Ending balance, 2011	$	76,886		$	71,525		$	(65,025	)	$	83,386		$	76,886		$	71,525		$	(65,025	)	$	83,386

Beginning balance, 2012	$	100,917		$	84,706		$	(78,654	)	$	106,969		$	99,918		$	65,188		$	(63,275	)	$	101,831
Total realized and unrealized investment gains/losses
Included in other comprehensive income		(1,580	)		—			—			(1,580	)		2,098			—			—			2,098
Net fair value change included											—
in realized gains/losses		(1	)		—			—			(1	)		(18	)		—			—			(18	)
Net gain (loss) for derivatives included in net investment income		—			(9,628	)		—			(9,628	)		—			8,170			—			8,170
Net change included in interest credited		—			—			9,417			9,417			—			—			(9,068	)		(9,068	)
Purchases, sales and settlements or maturities
Purchases		505			4,140			—			4,645			523			8,481			—			9,004
Sales		(379	)		—			—			(379	)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company