Table of Contents

 

 

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

or

 

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

Commission File No. 001- 34280

 

 

 

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:

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨		Smaller reporting company		¨

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.

 

 

 

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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

 

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		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.

 

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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

 

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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.

 

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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.

 

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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.

 

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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

 

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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.

 

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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
				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	)

 

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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

 

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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.

 

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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.

 

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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

 

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		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	)

 

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		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.

 

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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.

 

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

 

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		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