Edgar Filing: AMERICAN NATIONAL INSURANCE CO /TX/

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 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	)		(2,881	)		—			—			(2,881	)
Settlements or maturities		(165	)		(2,082	)		—			(2,247	)		(343	)		(4,703	)		—			(5,046	)
Premiums less benefits		—			—			(2,957	)		(2,957	)		—			—			149			149
Gross transfers into Level 3		41,729			—			—			41,729			41,729			—			—			41,729

Ending balance, 2012	$	141,026		$	77,136		$	(72,194	)	$	145,968		$	141,026		$	77,136		$	(72,194	)	$	145,968

Within the net gain (loss) for derivatives included in net investment income were an unrealized gain of $2,098,000 and an unrealized loss of $12,613,000 relating to assets still held at June 30, 2012 and December 31, 2011, respectively.

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.

There were no transfers between Level 1 and Level 2 fair value hierarchies.

10. DEFERRED POLICY ACQUISITION COSTS

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


							Accident			Property &
	Life			Annuity			& Health			Casualty			Total
Balance at December 31, 2011 (As Adjusted)	$	651,579		$	463,030		$	55,100		$	150,984		$	1,320,693

Additions		40,315			36,617			5,471			115,386			197,789
Amortization		(36,342	)		(43,424	)		(9,100	)		(114,223	)		(203,089	)
Effect of change in unrealized gains on available-for-sale securities		(3,296	)		(18,802	)		—			—			(22,098	)

Net change		677			(25,609	)		(3,629	)		1,163			(27,398	)

Balance at June 30, 2012	$	652,256		$	437,421		$	51,471		$	152,147		$	1,293,295

Commissions comprise the majority of the additions to DAC during the period. Effective January 1, 2012, American National retrospectively adopted a new accounting standard that modified the accounting for DAC. Refer to Notes 2 and 3 for additional discussion. All amounts for the value of business acquired resulting from the acquisition of life insurance portfolios have been accounted for in accordance with the relevant accounting literature and are immaterial in all periods presented.

11. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES

The liability for unpaid claims and claim adjustment expenses (“CAE”) for accident and health, and property and casualty insurance is included in the liability for 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. Liability for unpaid claims and CAE 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 changes in such estimated liability are included in the consolidated results of operations in the period in which the changes occur.

Activities in the liability for unpaid claims and CAE (“claims”) included in policy and contract claims in the consolidated statements of financial position are shown below (in thousands):


	2012			2011
Unpaid claims balance, beginning	$	1,180,259		$	1,210,126
Less reinsurance recoverables		235,174			222,635

Net beginning balance		945,085			987,491

Incurred related to:
Current		553,846			603,646
Prior years		(37,244	)		(48,483	)

Total incurred claims		516,602			555,163

Paid claims related to:
Current		268,889			333,886
Prior years		220,479			223,244

Total paid claims		489,368			557,130

Net balance		972,319			985,524
Plus reinsurance recoverables		233,344			285,887

Unpaid claims balance, ending	$	1,205,663		$	1,271,411

The potential uncertainty caused by volatility in loss development profiles is adjusted through the selection of loss development factor patterns for each line of insurance. 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 $37,244,000 during the first six months of 2012 and $48,483,000 during the same period in 2011.

12. NOTES PAYABLE

American National’s real estate holding subsidiaries are partners in certain joint ventures determined to be VIEs that are consolidated in American National’s consolidated financial statements. The real estate owned through the respective ventures secures notes payable, and American National’s liability for these notes is limited to the amount of its investment in the respective ventures, which totaled $17,950,000 and $17,959,000 at June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, the current portion and the long-term portion of the notes payable to third-party lenders associated with these consolidated VIEs were $47,707,000 and $12,500,000, respectively. At December 31, 2011, the current portion and long-term portion of the notes payable to third-party lenders associated with these consolidated VIEs were $46,387,000 and $12,507,000, respectively. The average interest rate on the current portion of the notes payable was 2.86% during the six months ended June 30, 2012. The long-term portion of the notes payable have interest rates equivalent to adjusted LIBOR plus 1.00% and 2.50% margins. The average interest rate on the long-term portion of the notes payable was 4.63% and 3.15% during the six months ended June 30, 2012 and 2011, respectively. The long-term notes payable will mature in 2016 and 2049.

13. FEDERAL INCOME TAXES

The federal income tax provisions vary from the amounts computed when applying the statutory federal income tax rate. A reconciliation of the effective tax rate to the statutory federal income tax rate is shown below (in thousands, except percentages):


	Three months ended June 30,												Six months ended June 30,
	2012						2011						2012						2011
	Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate
							(As Adjusted)												(As Adjusted)
Income tax expense on pre-tax income	$	6,524			35.0	%	$	12,907			35.0	%	$	28,704			35.0	%	$	34,350			35.0	%
Tax-exempt investment income		(1,837	)		(9.9	)		(2,024	)		(5.5	)		(3,742	)		(4.6	)		(4,067	)		(4.1	)
Dividend exclusion		(1,483	)		(8.0	)		(1,440	)		(3.9	)		(2,952	)		(3.6	)		(2,704	)		(2.8	)
Miscellaneous tax credits, net		(2,352	)		(12.6	)		(2,129	)		(5.8	)		(4,463	)		(5.4	)		(4,129	)		(4.2	)
Other items, net		(3,236	)		(17.3	)		(2,922	)		(7.9	)		(2,948	)		(3.6	)		(2,673	)		(2.7	)

Total	$	(2,384	)		(12.8	)%	$	4,392			11.9	%	$	14,599			17.8	%	$	20,777			21.2	%

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


	June 30, 2012			December 31, 2011
				(As Adjusted)
DEFERRED TAX ASSETS:
Investments, principally due to impairment losses	$	86,736		$	87,518
Investment in real estate and other invested assets principally due to investment valuation allowances		6,886			8,620
Policyholder funds, principally due to policy reserve discount		234,512			235,827
Policyholder funds, principally due to unearned premium reserve		32,512			31,230
Non-qualified pension		28,377			28,503
Participating policyholders’ surplus		34,448			33,677
Pension		61,527			63,597
Commissions and other expenses		7,217			8,165
Tax carryforwards		36,654			32,220
Other assets		7,001			79

Gross deferred tax assets		535,870			529,436

DEFERRED TAX LIABILITIES:
Available-for-sale securities, principally due to net unrealized gains		(230,621	)		(189,194	)
Investment in bonds, principally due to accrual of discount on bonds		(12,935	)		(11,774	)
Deferred policy acquisition costs, due to difference between GAAP and tax amortization methods		(341,740	)		(350,319	)

Gross deferred tax liabilities		(585,296	)		(551,287	)

Total net deferred tax liability	$	(49,426	)	$	(21,851	)

Management believes that a sufficient level of taxable income will be achieved to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of June 30, 2012 and December 31, 2011. However, if not utilized beforehand, approximately $36,654,000 in ordinary loss tax carryforwards will expire at the end of tax year 2032.

American National recognizes, when applicable, interest and penalties related to uncertain tax positions. Interest and penalties are included in the “Other operating expenses” line in the consolidated statements of operations. No interest expense was incurred for the six months ended June 30, 2012 and for the year ended December 31, 2011. In addition, no provision for penalties was established for uncertain tax positions. Management does not believe that there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

The statute of limitations for the examination of federal income tax returns by the Internal Revenue Service (“IRS”) for years 2006 to 2010 either has been extended or has not expired. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld.

A total of $7,599,000 and $34,441,000 was paid to the IRS during the six months ended June 30, 2012 and 2011, respectively.

14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in the accumulated balances of each component of other comprehensive income (loss), and the related tax effects thereon, are shown below (in thousands):


	Net Unrealized Gains/(Losses) on Securities			Defined Benefit Pension Plan Adjustments			Foreign Currency Transaction and Translation Adjustments		Accumulated Other Comprehensive Income
Balance at December 31, 2010	$	290,489		$	(65,533	)	$	256	$	225,212

Unrealized holding gains (losses) arising during the period (net of tax $37,399)		69,455								69,455
Reclassification adjustment for (gains) losses realized in net income/loss (net of tax $7,214)		(13,312	)							(13,312	)
Unrealized adjustment to deferred policy acquisition costs (net of tax benefit $7,428)		(13,793	)							(13,793	)
Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax $1,419)		(2,636	)							(2,636	)
Cumulative effect of accounting change - deferred policy acquisition costs (net of tax $325)		604								604

Amortization of prior service cost and actuarial (gain) loss included in net periodic pension cost (net of tax $101)					(188	)				(188	)

Foreign exchange adjustment (net of tax $104)								193		193

Balance at June 30, 2011	$	330,807		$	(65,721	)	$	449	$	265,535

Balance at December 31, 2011	$	274,837		$	(115,485	)	$	51	$	159,403

Unrealized holding gains (losses) arising during the period (net of tax $43,724)		81,202								81,202
Reclassification adjustment for (gains) losses realized in net income/loss (net of tax $2,297)		(4,098	)							(4,098	)
Unrealized adjustment to deferred policy acquisition costs (net of tax $7,602)		(14,496	)							(14,496	)
Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax $1,546)		(2,871	)							(2,871	)

Amortization of prior service cost and actuarial (gain) loss included in net periodic pension cost (net of tax $2,581)					4,793					4,793

Foreign exchange adjustment (net of tax $178)								330		330

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

15. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS

American National has one class of common stock with a par value of $1.00 per share and 50,000,000 authorized shares. The amounts outstanding at the dates indicated are shown below:


	June 30,			December 31,
	2012			2011
Common stock
Shares issued		30,832,449			30,832,449
Treasury shares		(3,995,858	)		(4,011,165	)

Outstanding shares		26,836,591			26,821,284
Restricted shares		(261,334	)		(261,334	)

Unrestricted outstanding shares		26,575,257			26,559,950

Stock-based compensation

American National has one stock-based compensation plan, which allows for grants of Non-Qualified Stock Options, Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, Restricted Stock Units (“RSU”), Performance Awards, Incentive Awards or any combination of these. The number of shares available for grants under the plan cannot exceed 2,900,000 shares, and no more than 200,000 shares may be granted to any one individual in any calendar year.

RS Awards entitle the participant to full dividend and voting rights. Unvested shares are restricted as to disposition, and are subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years, and feature a graded vesting schedule in the case of the retirement of an award holder. Restricted stock has been granted, with a total of 340,334 shares granted at an exercise price of zero, of which 261,334 shares are unvested. The compensation expense recorded for the three and six months ended June 30, 2012 was $669,000 and $1,339,000, respectively. The compensation expense recorded for the three and six months ended June 30, 2011 was $670,000 and $1,333,000, respectively

The SARs give the holder the right to cash compensation based on the difference between the price of a share of stock on grant date and the price on the exercise date. The SARs vest at a rate of 20% per year for 5 years and expire 5 years after the vesting period. American National uses the Black-Scholes option pricing model to calculate the fair value and compensation expense for SARs. The fair value of the SARs was $7,000 and $10,000 at June 30, 2012 and December 31, 2011, respectively. A credit to compensation expense was recorded totaling $1,000 and $3,000 for the three and six months ended June 30, 2012, respectively. Compensation income was recorded totaling $0 and $4,000 for the three and six months ended June 30, 2011, respectively.

RSUs are awarded as part of American National’s incentive compensation plan. In 2011, RSUs were also awarded as part of the Board of Directors compensation. The RSUs are converted to American National’s common stock on a one-for-one basis, generally after a two-year cliff or three-year graded vesting requirement, depending on the terms of the grant. These awards result in compensation expense to American National over the vesting period or a shorter period as a result of retirement provisions. Compensation expense was recorded totaling $5,819,000 and $7,312,000 for the three and six months ended June 30, 2012, respectively, which includes expenses related to the retirement provisions. Compensation expense was recorded totaling $523,000 and $813,000 for the three and six months ended June 30, 2011, respectively.

SAR, RS and RSU information for the periods indicated is shown below:


	SAR Shares			SAR Weighted- Average Grant Date Fair Value		RS Shares		RS Weighted- Average Grant Date Fair Value		RS Units			RSU Weighted- Average Grant Date Fair Value
Outstanding at December 31, 2011		126,769		$	110.08		261,334	$	102.98		69,566		$	83.56

Granted		—			—		—		—		75,355			71.69
Exercised		(200	)		—		—		—		(17,297	)		94.56
Forfeited		(3,309	)		114.04		—		—		(399	)		74.85
Expired		(10,542	)		104.08		—		—		—			—

Outstanding at June 30, 2012		112,718		$	110.59		261,334	$	102.98		127,225		$	75.06

The weighted-average contractual remaining life for the 112,718 SAR shares outstanding as of June 30, 2012, is 1.4 years. The weighted-average exercise price, which is the same with the weighted-average grant date fair value above, for these shares, is $110.59 per share. Of the shares outstanding, 95,934 are exercisable at a weighted-average exercise price of $110.50 per share.

The weighted-average contractual remaining life for the 261,334 RS shares outstanding as of June 30, 2012, is 4.9 years. The weighted-average price at the date of grant for these shares is $102.98 per share. None of the shares outstanding were exercisable.

The weighted-average contractual remaining life for the 127,225 RSUs authorized as of June 30, 2012, is 2.2 years. The weighted-average price at the date of grant for these units is $75.06 per share. None of the authorized units were exercisable.

Earnings (loss) per share

Basic earnings (losses) per share were calculated using a weighted-average number of shares outstanding. The Restricted Stock resulted in diluted earnings per share as follows:


	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
			(As Adjusted)				(As Adjusted)
Weighted average shares outstanding		26,685,128		26,559,950		26,675,405		26,559,821
Incremental shares from restricted stock		169,467		146,195		172,853		141,203

Total shares for diluted calculations		26,854,595		26,706,145		26,848,258		26,701,024

Net income (loss) attributable to American National Insurance Company and Subsidiaries	$	20,506,000	$	29,240,000	$	65,722,000	$	76,768,000

Basic earnings (loss) per share	$	0.77	$	1.10	$	2.46	$	2.89
Diluted earnings (loss) per share		0.76		1.09		2.45		2.88

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by statutory regulations. The restrictions require life insurance companies to maintain minimum amounts of capital and surplus, and in the absence of special approval, limit the payment of dividends to the greater of statutory net gain from operations on an annual, non-cumulative basis, or 10% of statutory surplus. Additionally, insurance companies are not permitted to distribute the excess of stockholders’ equity, as determined on a GAAP basis over that determined on a statutory basis. At June 30, 2012 and December 31, 2011, American National Insurance Company’s statutory capital and surplus was $2,116,214,000 and $2,000,551,000, respectively.

The same restrictions on amounts that can transfer in the form of dividends, loans, or advances to the parent company apply to American National’s insurance subsidiaries. Dividends received by the parent company from its insurance subsidiaries amounted to zero for the six months ended June 30, 2012 and 2011.

At June 30, 2012, approximately $1,469,022,000 of American National’s consolidated stockholders’ equity represents net assets of its insurance subsidiaries, compared to approximately $1,436,489,000 at December 31, 2011. Any transfer of these net assets to American National Insurance Company would be subject to statutory restrictions and approval.

Noncontrolling interests

American National County Mutual Insurance Company (County Mutual) is a mutual insurance company that is owned by its policyholders. County Mutual has a management agreement that effectively gives complete control of County Mutual to American National. As a result, County Mutual is included in the consolidated financial statements of American National. The interests that the policyholders of County Mutual have in the financial position of County Mutual are reflected as noncontrolling interest totaling $6,750,000 at June 30, 2012 and December 31, 2011.

American National’s wholly-owned subsidiary, ANTAC, Inc., is a partner in various joint ventures. ANTAC exercises significant control or ownership of certain of these joint ventures, resulting in their consolidation into the American National’s consolidated financial statements. As a result of the consolidation, the interest of the other partners of the joint ventures is shown as noncontrolling interests. Noncontrolling interests were a net liability of $6,303,000 and $6,197,000 at June 30, 2012 and December 31, 2011, respectively.

16. SEGMENT INFORMATION

American National is engaged principally in the insurance business. Management organizes the business into five operating segments which are discussed in Note 18, Segment Information, of the notes to the consolidated financial statements in our 2011 Annual Report on Form 10-K filed with the SEC on March 6, 2012:

•

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

•

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

•

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

•

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

•

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

The accounting policies of the segments are the same as those referred to in Note 2. Many of the principal factors that drive the profitability of each operating segment are separate and distinct. All income and expense amounts specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Income and expenses not specifically attributable to policy transactions are allocated to each segment as follows:

•

Recurring income from bonds and mortgage loans is allocated based on the funds accumulated by each line of business at the average yield available from these assets.

•

Net investment income from all other assets is allocated to the insurance segments in accordance with the amount of equity allocated to each segment, with the remainder recorded in the Corporate and Other business segment.

•

Expenses are allocated based upon various factors, including premium and commission ratios within the respective operating segments.

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


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
				(As Adjusted)						(As Adjusted)
Income (loss) from continuing operations before federal income taxes, and equity in earnings/losses of unconsolidated affiliates:
Life	$	19,258		$	10,947		$	26,813		$	30,295
Annuity		23,882			26,216			47,614			31,649
Health		6,260			5,061			4,810			8,049
Property and casualty		(36,409	)		(43,088	)		(11,848	)		(30,831	)
Corporate and other		5,649			37,741			14,622			58,980

Total	$	18,640		$	36,877		$	82,011		$	98,142

17. COMMITMENTS AND CONTINGENCIES

Commitments

In the ordinary course of operations, American National had commitments outstanding at June 30, 2012, to purchase, expand or improve real estate, to fund mortgage loans, and to purchase other invested assets aggregating to $219,809,000, of which $175,719,000 is expected to be funded in 2012. The remaining balance of $44,090,000 will be funded in 2013 and beyond. As of June 30, 2012, all of the mortgage loan commitments have fixed interest rates.

In September 2011, American National renewed a previous $100,000,000 short-term variable rate borrowing facility containing a $55,000,000 sub feature for the issuance of letters of credit. Borrowings under the facility are at the discretion of the lender and would be used only for funding American National’s working capital requirements. The combination of borrowings and outstanding letters of credit cannot exceed $100,000,000 at any time. As of June 30, 2012 and December 31, 2011, the outstanding letters of credit were $31,039,000 and $31,716,000, respectively, and there were no borrowings on this facility to meet liquidity requirements. This facility expires on September 30, 2012. American National expects it will be renewed on substantially equivalent terms upon expiration.

Guarantees

In the normal course of business, American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on the bank loan, American National would be obligated to pay off the loans. As the cash values of the life insurance policies always equals or exceeds the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of June 30, 2012, was approximately $206,513,000, while the total cash values of the related life insurance policies was approximately $211,360,000.

Litigation

American National and certain subsidiaries are defendants in various lawsuits concerning alleged failure to honor certain loan commitments, alleged breach of certain agency and real estate contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and other litigation arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We have provided accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position or results of operations. However, these lawsuits are in various stages of development, and future facts and circumstances could result in management’s changing its conclusions.

In addition, it should be noted that the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continue to create the potential for an unpredictable judgment in any given lawsuit. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than management can anticipate, the resulting liability could have a material impact on the consolidated financial results.

18. RELATED PARTY TRANSACTIONS

American National has entered into recurring transactions and agreements with certain related parties as a part of its ongoing operations. These include mortgage loans, management contracts, agency commission contracts, marketing agreements, accident and health insurance contracts and legal services. The impact on the consolidated financial statements of the significant related party transactions for the periods indicated is shown below (in thousands):


		Dollar Amount of Transactions				Amount due to/(from)
		Six months ended June 30,				American National
Related Party	Financial Statement Line Impacted	2012		2011		June 30, 2012			December 31, 2011
Gal-Tex Hotel Corporation	Mortgage loans on real estate	$	264	$	488	$	9,433		$	9,957
Gal-Tex Hotel Corporation	Net investment income		174		390		57			60
Greer, Herz and Adams, LLP	Other operating costs and expenses		3,760		2,026		(333	)		(198	)

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): The Moody Foundation and the Libbie Shearn Moody Trust own 34.0% and 50.2%, respectively, of Gal-Tex Hotel Corporation. The Moody Foundation and the Libbie Shearn Moody Trust also own approximately 22.9% and 37.1%, respectively, of American National. American National held a first mortgage loan issued to Gal-Tex secured by hotel property in San Antonio, Texas. This loan was originated in 1999, had a balance of $9,433,000 as of June 30, 2012, has a current interest rate of 7.30%, and has a final maturity date of April 1, 2019. This loan is current as to principal and interest payments.

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

ITEM 2.

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

Set forth on the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the six months ended June 30, 2012 and 2011 of American National Insurance Company and its subsidiaries (referred to in this document as “we”, “our”, “us”, or the “Company”). This information should be read in conjunction with our consolidated financial statements included in Item 1, Financial Statements (unaudited), of this Form 10-Q.

INDEX



Forward-Looking Statements			37

Overview			38

General Trends			38

Critical Accounting Estimates			38

Recently Issued Accounting Pronouncements			38

Consolidated Results of Operations			39

Life			40

Annuity			42

Health			45

Property and Casualty			47

Corporate and Other			51

Investments			51

Liquidity			54

Capital Resources			55

Contractual Obligations			55

Off-Balance Sheet Arrangements			55

Related Party Transactions			56

Forward-Looking Statements

Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to changes and uncertainties, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:

•

general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets;

•

differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes;

•

the effect of increased claims activity from natural or man-made catastrophes, pandemic disease, or other events resulting in catastrophic loss of life or property;

•

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

•

inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset;

•

investment losses and defaults;

•

competition in our product lines;

•

attraction and retention of qualified employees and agents;

•

ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks;

•

the availability, affordability and adequacy of reinsurance protection;

•

the effects of emerging claim and coverage issues;

•

the cyclical nature of the insurance business;

•

the effects of inflation on claim payments in our property and casualty and health lines;

•

interest rate fluctuations;

•

changes in our experiences related to deferred policy acquisition costs;

•

the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us;

•

rating agencies’ actions;

•

domestic or international military actions;

•

the effects of extensive government regulation of the insurance industry;

•

changes in tax and securities law;

•

changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;

•

regulatory or legislative changes or developments;

•

the effects of unanticipated events on our disaster recovery and business continuity planning;

•

failures or limitations of our computer, data security and administration systems;

•

risks of employee error or misconduct;

•

the introduction of alternative healthcare solutions; and

•

changes in assumptions for retirement expense.

We describe these risks and uncertainties in greater detail in Item IA, Risk Factors, in our 2011 Annual Report on Form 10-K filed with the SEC on March 6, 2012. It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. Additionally, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable events.

Overview

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

General Trends

There were no material changes to the general trends we are experiencing, as discussed in the MD&A included in our 2011 Annual Report on Form 10-K filed with the SEC on March 6, 2012.

Critical Accounting Estimates

The unaudited interim consolidated financial statements have been prepared in conformity with GAAP. In addition to GAAP, insurance companies have to apply specific SEC regulations when preparing the consolidated financial statements. The preparation of the consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. Actual results could differ from results reported using those estimates and assumptions.

Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity, persistency, expenses, interest rates, and property and casualty loss frequency, severity, claim reporting and settlement patterns. Due to the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could vary from those reported in the consolidated financial statements.

For a discussion of our critical accounting estimates, see the MD&A in our 2011 Annual Report on Form 10-K filed with the SEC on March 6, 2012. Effective January 1, 2012, we retrospectively adopted a new accounting policy on the capitalization of deferred policy acquisition costs (“DAC”). Upon adoption of this change in accounting policy, prior period amounts have been adjusted and are indicated “As Adjusted” where applicable. Refer to Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Unaudited Consolidated Financial Statements for additional information. There were no other material changes in accounting policies since December 31, 2011.

Recently Issued Accounting Pronouncements

Refer to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements.

Consolidated Results of Operations

The following is a discussion of our consolidated results of operations. For discussions of our segment results, see the “Results of Operations and Related Information by Segment” section. The following table sets forth the consolidated results of operations (in thousands):


	Three months ended June 30,								Six months ended June 30,
	2012		2011			Change			2012		2011			Change
			(As Adjusted)								(As Adjusted)
Premiums and other revenues
Premiums	$	428,565	$	435,816		$	(7,251	)	$	853,651	$	871,650		$	(17,999	)
Other policy revenues		49,016		46,379			2,637			97,063		95,510			1,553
Net investment income		240,563		250,172			(9,609	)		496,259		489,244			7,015
Realized investments gains (losses), net		4,878		22,926			(18,048	)		11,849		44,957			(33,108	)
Other income		7,940		6,487			1,453			14,815		12,292			2,523

Total premiums and other revenues		730,962		761,780			(30,818	)		1,473,637		1,513,653			(40,016	)

Benefits, losses and expenses
Policyholder benefits		120,521		122,691			(2,170	)		243,589		229,351			14,238
Claims incurred		281,441		293,897			(12,456	)		513,668		551,015			(37,347	)
Interest credited to policyholders’ account balances		91,019		99,139			(8,120	)		215,883		205,530			10,353
Commissions for acquiring and servicing policies		95,528		118,766			(23,238	)		191,042		228,401			(37,359	)
Other operating expenses		120,151		113,111			7,040			222,144		235,372			(13,228	)
Change in deferred policy acquisition costs ⁽¹⁾		3,662		(22,701	)		26,363			5,300		(34,158	)		39,458

Total benefits and expenses		712,322		724,903			(12,581	)		1,391,626		1,415,511			(23,885	)

Income (loss) before other items and federal income taxes	$	18,640	$	36,877		$	(18,237	)	$	82,011	$	98,142		$	(16,131	)

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

Consolidated earnings decreased during the three and six months ending June 30, 2012 compared to the same periods in 2011 primarily as a result of decreases in realized investments gains. The decrease for the six months ended June 30, 2012 was partially offset by an increase in our annuity segment profitability from lower expenses and in our property and casualty segment from lower claims incurred.

In the Consolidated Results of Operations above and in the segment discussions that follow, certain amounts in the prior year have been reclassified to conform to the current year presentation. Included in these reclassifications is the effect of the retrospective adoption of a new accounting standard relating to DAC, which decreased reported income before other items and federal income taxes for the three and six months ended June 30, 2011 by $1.2 million and $2.7 million, respectively.

Results of Operations and Related Information by Segment

Life

The Life segment includes traditional life insurance products such as whole life and term life, and interest-sensitive life insurance products such as fixed, variable and indexed universal life. We market these products on a nationwide basis through employee agents, multiple-line agents, independent agents, brokers and direct marketing channels. Life segment financial results for the periods indicated were as follows (in thousands):


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012			2011			Change
				(As Adjusted)									(As Adjusted)
Premiums and other revenues:
Premiums	$	70,699		$	69,474		$	1,225		$	137,150		$	135,860		$	1,290
Other policy revenues		45,711			42,068			3,643			90,363			86,911			3,452
Net investment income		59,380			60,411			(1,031	)		118,285			119,493			(1,208	)
Other income		802			898			(96	)		1,552			1,698			(146	)

Total premiums and other revenues		176,592			172,851			3,741			347,350			343,962			3,388

Benefits, losses and expenses:
Policyholder benefits		76,799			79,854			(3,055	)		160,622			156,541			4,081
Interest credited to policyholders’ account balances		14,063			15,080			(1,017	)		28,984			30,136			(1,152	)
Commissions for acquiring and servicing policies		25,042			22,921			2,121			46,431			43,783			2,648
Other operating expenses		44,180			46,176			(1,996	)		88,473			86,610			1,863
Change in deferred policy acquisition costs ⁽¹⁾		(2,750	)		(2,127	)		(623	)		(3,973	)		(3,403	)		(570	)

Total benefits and expenses		157,334			161,904			(4,570	)		320,537			313,667			6,870

Income before other items and federal income taxes	$	19,258		$	10,947		$	8,311		$	26,813		$	30,295		$	(3,482	)

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

Earnings increased for the three months ended June 30, 2012, primarily due to an increase in other policy revenues coupled with a decrease in policyholder benefits. Earnings decreased for the six months ended June 30, 2012, primarily due to increases in policyholder benefits during the first quarter which more than offset the decrease in policyholder benefits in the second quarter. Commissions for acquiring and servicing policies during the six-month period also increased partially offset by an increase in other policy revenues.

Premiums and other revenues

Revenues from traditional life insurance products include scheduled premium payments from policyholders on whole life and term life products. These premiums are in exchange for financial protection from a specific insurable event, such as death or disability. The change in these premiums is impacted by new sales during the period and the persistency of in-force policies. Premiums increased slightly during the three and six months ended June 30, 2012 compared to the same periods in 2011.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies. The increases during the three and six months ended June 30, 2012 were primarily driven by increases in mortality charges and related fees due to growth in our universal life block of business.

Benefits, losses and expenses

Benefits decreased for the three months ended June 30, 2012 primarily resulting from lower mortality costs net of reinsurance. During the six months ended June 30, 2012 benefits increased primarily due to higher net mortality costs during the first quarter which more than offset the lower mortality costs in the second quarter. Each of these changes is considered part of normal volatility associated with the business.

Commissions increased for the three and six months ended June 30, 2012 primarily due to increases in new business.

Other operating expenses during 2011 benefitted from a reduction of an accrual for litigation contingencies during 2011. Without this reduction, other operating expenses would have decreased slightly for the three and six months ended June 30, 2012.

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


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012			2011			Change
	(As Adjusted)									(As Adjusted)
Acquisition cost capitalized	$	22,640		$	18,686		$	3,954		$	40,315		$	37,543		$	2,772
Amortization of DAC		(19,890	)		(16,559	)		(3,331	)		(36,342	)		(34,140	)		(2,202	)

Change in deferred policy acquisition costs (1)	$	2,750		$	2,127		$	623		$	3,973		$	3,403		$	570

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

Acquisition costs capitalized increased slightly during the three and six months ended June 30, 2012 compared to the same periods in 2011 primarily as a result of a small increase in commissions.

Policy In-Force Information

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


	Six months ended June 30,
	2012		2011		Change
Life insurance in-force:
Traditional life	$	46,968,459	$	46,519,820	$	448,639
Interest-sensitive life		23,790,770		23,685,084		105,686

Total life insurance in-force	$	70,759,229	$	70,204,904	$	554,325

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


	Six months ended June 30,
	2012		2011		Change
Number of policies in-force
Traditional life		2,163,246		2,234,613		(71,367	)
Interest-sensitive life		181,581		176,775		4,806

Total number of policies		2,344,827		2,411,388		(66,561	)

Our new business activity during the first six months of 2012 was comprised of fewer, but larger face-value policies.

Annuity

We develop, sell and support a variety of immediate and deferred annuities, including fixed, equity-indexed and variable products. We sell these products through independent agents, brokers, financial institutions, multiple-line and employee agents. Annuity segment financial results for the periods indicated were as follows (in thousands):


	Three months ended June 30,								Six months ended June 30,
	2012		2011			Change			2012		2011			Change
	(As Adjusted)								(As Adjusted)
Premiums and other revenues:
Premiums	$	34,723	$	32,110		$	2,613		$	63,135	$	51,600		$	11,535
Other policy revenues		3,305		4,311			(1,006	)		6,700		8,599			(1,899	)
Net investment income		138,460		144,439			(5,979	)		304,697		292,324			12,373
Other income		52		(43	)		95			93		121			(28	)

Total premiums and other revenues		176,540		180,817			(4,277	)		374,625		352,644			21,981

Benefits, losses and expenses:
Policyholder benefits		43,722		42,837			885			82,967		72,810			10,157
Interest credited to policyholders’ account balances		76,956		84,059			(7,103	)		186,899		175,394			11,505
Commissions for acquiring and servicing policies		15,880		29,576			(13,696	)		29,771		59,549			(29,778	)
Other operating expenses		12,812		13,485			(673	)		20,567		41,016			(20,449	)
Change in deferred policy acquisition costs		3,288		(15,356	)		18,644			6,807		(27,774	)		34,581

Total benefits, losses and expenses		152,658		154,601			(1,943	)		327,011		320,995			6,016

Income before other items and federal income taxes	$	23,882	$	26,216		$	(2,334	)	$	47,614	$	31,649		$	15,965

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

Earnings were relatively flat for the three months ended June 30, 2012 compared to 2011. Earnings increased for the six months ended June 30, 2012 compared to 2011 primarily due to a decrease in other operating expenses. Other operating expenses were higher during 2011 primarily as a result of the settlement of litigation in 2011 for $12.0 million.

Premiums and other revenues

Annuity premium and deposit amounts received are shown in the table below (in thousands):


	Three months ended June 30,							Six months ended June 30,
	2012		2011		Change			2012		2011		Change
Fixed deferred annuity	$	170,270	$	483,259	$	(312,989	)	$	333,517	$	1,031,605	$	(698,088	)
Single premium immediate annuity		57,915		42,959		14,956			103,926		76,653		27,273
Equity-indexed deferred annuity		35,545		48,797		(13,252	)		58,043		82,607		(24,564	)
Variable deferred annuity		24,936		19,835		5,101			51,318		46,114		5,204

Total		288,666		594,850		(306,184	)		546,804		1,236,979		(690,175	)
Less: policy deposits		253,943		562,740		(308,797	)		483,669		1,185,379		(701,710	)

Total earned premiums	$	34,723	$	32,110	$	2,613		$	63,135	$	51,600	$	11,535

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


	Six months ended June 30,
	2012			2011
Fixed deferred and equity-indexed annuity
Account value, beginning of period	$	9,824,416		$	9,006,692
Net inflows		252,601			964,434
Surrenders		(397,144	)		(459,683	)
Fees		(4,347	)		(6,109	)
Interest credited		184,652			175,929

Account value, end of period	$	9,860,178		$	9,681,263

Single premium immediate annuity
Reserve, beginning of period	$	978,722		$	903,126
Net inflows		32,979			19,400
Interest and mortality		21,071			21,284

Reserve, end of period	$	1,032,772		$	943,810

Variable deferred annuity
Account value, beginning of period	$	380,129		$	415,757
Net inflows		48,955			43,411
Surrenders		(62,174	)		(60,562	)
Fees		(2,329	)		(2,463	)
Change in market value and other		23,223			16,171

Account value, end of period	$	387,804		$	412,314

Fixed deferred annuity net inflows decreased significantly for the six months ended June 30, 2012. We are managing these products to lower sales during 2012, thereby mitigating risks associated with investing in the persistently low interest rate environment.

Equity-indexed annuities allow policyholders to participate in equity returns while also having certain downside protection from the guaranteed minimum returns defined in the product. Deposits for this product decreased during the six months ended June 30, 2012. This decrease was primarily attributed to lower indexed crediting terms resulting from lower fixed investment yields in 2012.

Single premium immediate annuities (“SPIA”) increased for the six months ended June 30, 2012. This was driven primarily by new retirees entering the market for guaranteed monthly payouts on a portion of their retirement dollars.

Net investment income decreased for the three months ended June 30, 2012 compared to 2011 primarily as a result of $8.1 million realized losses from marking our option portfolio to fair value during the second quarter. Net investment income increased for the six-month period primarily due to an increase in the assets attributable to annuity account balances.

Benefits, losses and expenses

Policyholder benefits consist of annuity payments and reserve increases for SPIA contracts. Benefits increased for the six months ended June 30, 2012 compared to 2011 due to an increase in reserves associated with SPIA production.

Commissions decreased for the three and six months ended June 30, 2012 compared to 2011 primarily due to reduced annuity production during the periods.

Other operating expenses decreased during the six months ended June 30, 2012 compared to 2011 primarily as a result of a litigation accrual related to the settlement of certain litigation during 2011. Additionally, a decrease in producer compensation linked to annuity production reduced other operating expenses further.

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


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012			2011			Change
	(As Adjusted)									(As Adjusted)
Acquisition cost capitalized	$	19,049		$	34,927		$	(15,878	)	$	36,617		$	69,948		$	(33,331	)
Amortization of DAC		(22,337	)		(19,571	)		(2,766	)		(43,424	)		(42,174	)		(1,250	)

Change in deferred policy acquisition costs (1)	$	(3,288	)	$	15,356		$	(18,644	)	$	(6,807	)	$	27,774		$	(34,581	)

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

The decrease in acquisition costs capitalized during the three and six months ended June 30, 2012 compared to 2011 was the result of lower commissions incurred with the decrease in annuity production.

An important measure of the Annuity segment is amortization of DAC as a percentage of gross profits. The amortization of DAC as a percentage of gross profits for the six months ended June 30, 2012 and 2011 was 39.0%, and 40.4%, respectively. The slight improvement in the ratio was primarily driven by a decrease in surrenders during the six months ended June 30, 2012 compared to 2011.

Options and derivatives

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


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012		2011		Change
Net investment income
Without option return	$	146,608		$	146,257		$	351		$	293,198	$	287,027	$	6,171
Option return		(8,148	)		(1,818	)		(6,330	)		11,499		5,297		6,202

Interest credited to policy account balances
Without embedded derivative		86,373			87,055			(682	)		177,831		171,786		6,045
Equity-indexed annuity embedded derivative		(9,417	)		(2,996	)		(6,421	)		9,068		3,608		5,460

Net investment income without option return, as well as the related interest credited without equity-indexed return, increased during the three and six months ended June 30, 2012 compared to 2011. The increases were primarily due to increases in aggregate annuity account values.

The option return, as well as the related equity-indexed-annuity embedded derivative return, during the three and six months ended June 30, 2012 changed as a result of the change in the S&P 500 Index during the respective periods. These option returns correlate to the (3.3)% and 8.3% three and six month changes for the periods ending June 30, 2012 for the S&P 500 Index, compared to (0.4)% and 5.0% for the same periods ended June 30, 2011, respectively.

Health

The Health segment primarily focuses on supplemental and limited benefit coverage products including Medicare Supplement insurance as well as hospital surgical and cancer policies. For the first six months of 2012, premium volume was concentrated in our Medicare Supplement (42.6%) and group (17.4%) lines. Our other health products include credit accident and health policies, stop loss, and dental coverages. Health products are distributed through our network of independent agents and Managing General Underwriters (“MGU”). Health segment results for the periods indicated were as follows (in thousands):


	Three months ended June 30,							Six months ended June 30,
	2012		2011		Change			2012		2011		Change
			(As Adjusted)							(As Adjusted)
Premiums and other revenues:
Premiums	$	54,712	$	58,384	$	(3,672	)	$	111,766	$	117,028	$	(5,262	)
Net investment income		2,960		3,425		(465	)		5,934		6,841		(907	)
Other income		4,034		3,603		431			7,860		6,520		1,340

Total premiums and other revenues		61,706		65,412		(3,706	)		125,560		130,389		(4,829	)

Benefits, losses and expenses:
Claims incurred		36,475		39,466		(2,991	)		81,150		81,073		77
Commissions for acquiring and servicing policies		6,657		7,100		(443	)		12,916		13,566		(650	)
Other operating expenses		11,237		12,419		(1,182	)		23,055		23,994		(939	)
Change in deferred policy acquisition costs		1,077		1,366		(289	)		3,629		3,707		(78	)

Total benefits and expenses		55,446		60,351		(4,905	)		120,750		122,340		(1,590	)

Income (loss) before other items and federal income taxes	$	6,260	$	5,061	$	1,199		$	4,810	$	8,049	$	(3,239	)

Earnings increased for the three months ended June 30, 2012, driven primarily by a decrease in claims and operating expenses, partially offset by a decrease in premiums. Earnings decreased for the six months ended June 30, 2012, driven primarily by a decrease in premiums.

Premiums and other revenues

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


	Three months ended June 30,										Six months ended June 30,
	2012					2011					2012					2011
	dollars		percentage			dollars		percentage			dollars		percentage			dollars		percentage
Medicare Supplement	$	24,107		44.1	%	$	25,231		43.2	%	$	47,622		42.6	%	$	51,331		43.9	%
Group		8,633		15.8			8,619		14.8			19,470		17.4			15,715		13.4
Medical expense		9,482		17.3			11,955		20.4			19,527		17.5			25,239		21.6
MGU		4,385		8.0			3,485		6.0			8,610		7.7			6,473		5.5
Credit accident and health		4,117		7.5			5,015		8.6			8,647		7.7			10,157		8.7
All other		3,988		7.3			4,079		7.0			7,890		7.1			8,113		6.9

Total	$	54,712		100.0	%	$	58,384		100.0	%	$	111,766		100.0	%	$	117,028		100.0	%

Earned premiums decreased during the three and six months ended June 30, 2012, primarily as a result of the run-off of the closed block of our medical expense insurance plans, which will continue decreasing, and also due to Medicare Supplement sales declines due to aggressive pricing by a large competitor. These decreases were partially offset by an increase in sales of our group and MGU lines.

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


	June 30,
	2012					2011
	number		percentage			number		percentage
Medicare Supplement		41,430		6.8	%		43,783		7.0	%
Group		20,060		3.3			19,935		3.2
Medical expense		7,230		1.3			9,040		1.5
MGU		174,517		29.0			119,264		19.1
Credit accident and health		251,959		41.8			283,533		45.6
All other		107,238		17.8			146,773		23.6

Total		602,434		100.0	%		622,328		100.0	%

Our total in-force policies decreased during the six months ended June 30, 2012 compared to 2011. The increase in the MGU and group lines were more than offset by decreases in the credit accident and health, Medicare Supplement, medical expense and other lines.

Benefits, losses and expenses

Claims incurred decreased during the three months ended June 30, 2012 compared to the same period in 2011, while claims incurred during the six months ended June 30, 2012 were substantially unchanged. The three month decrease was primarily due to decreases in claims in our medical expense insurance plans and Medicare Supplement line. Somewhat offsetting this decrease were increases in claims in our MGU line due to an increase in the size of the MGU block of business.

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


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012			2011			Change
				(As Adjusted)									(As Adjusted)
Acquisition cost capitalized	$	2,937		$	3,703		$	(766	)	$	5,471		$	6,702		$	(1,231	)
Amortization of DAC		(4,014	)		(5,069	)		1,055			(9,100	)		(10,409	)		1,309

Change in deferred policy acquisition costs (1)	$	(1,077	)	$	(1,366	)	$	289		$	(3,629	)	$	(3,707	)	$	78

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

Property and Casualty

Property and Casualty business is written through our Multiple-Line and Credit Insurance Division agents. Property and Casualty segment results for the periods indicated were as follows (in thousands, except percentages):


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012			2011			Change
	(As Adjusted)									(As Adjusted)
Premiums and other revenues:
Net premiums written	$	278,777		$	294,526		$	(15,749	)	$	560,026		$	584,787		$	(24,761	)

Net premiums earned		268,431			275,848			(7,417	)		541,600			567,162			(25,562	)
Net investment income		17,781			18,312			(531	)		35,480			36,378			(898	)
Other income		1,737			922			815			3,446			2,278			1,168

Total premiums and other revenues		287,949			295,082			(7,133	)		580,526			605,818			(25,292	)

Benefits, losses and expenses:
Claims incurred		244,966			254,431			(9,465	)		432,518			469,942			(37,424	)
Commissions for acquiring and servicing policies		47,949			59,169			(11,220	)		101,924			111,503			(9,579	)
Other operating expenses		29,396			31,154			(1,758	)		59,095			61,892			(2,797	)
Change in deferred policy acquisition costs ⁽¹⁾		2,047			(6,584	)		8,631			(1,163	)		(6,688	)		5,525

Total benefits and expenses		324,358			338,170			(13,812	)		592,374			636,649			(44,275	)

Income before other items and federal income taxes	$	(36,409	)	$	(43,088	)	$	6,679		$	(11,848	)	$	(30,831	)	$	18,983

Loss and claim adjustment expense ratio		91.3	%		92.2	%		(0.9	)		79.9	%		82.9	%		(3.0	)
Underwriting expense ratio		29.6			30.4			(0.8	)		29.5			29.4			0.1

Combined ratio		120.9	%		122.6	%		(1.7	)		109.4	%		112.3	%		(2.9	)

Impact of catastrophe events on combined ratio		24.2			27.0			(2.8	)		14.3			18.2			(3.9	)

Combined ratio without impact of catastrophe events		96.7	%		95.6	%		1.1			95.1	%		94.1	%		1.0

Gross catastrophe losses	$	67,771		$	152,918		$	(85,147	)	$	81,741		$	189,954		$	(108,213	)
Net catastrophe losses		63,765			62,802			963			77,002			90,830			(13,828	)

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

The Property and Casualty segment results improved during the three and six months ended June 30, 2012, primarily due to a significant decrease in claims incurred and to a lesser extent a reduction in operating expenses.

Premiums and other revenues

Net premiums written and earned decreased during the three and six months ended June 30, 2012 primarily as a result of decreases in policies in force due to risk mitigation actions and a reduction in new business sales.

Benefits, losses and expenses

Claims incurred decreased during the three and six months ended June 30, 2012 as a result of a decrease in catastrophic related losses during the six-month period. The loss ratio improved as a result of improved rate adequacy and this favorable experience. Commissions decreased primarily due to a shift from commission to non-commission products in our Credit Insurance Division.

Gross catastrophe losses decreased for the three and six months ended June 30, 2012 compared to the same periods in 2011. Net catastrophe losses also decreased for the six month period from the same period in 2011. Net catastrophe losses were relatively flat for the three month period.

There were three significant catastrophe losses in June 2012, a wind storm in the mid-Atlantic region, a Colorado hail event, and Colorado wildfires. These events accounted for over 44.8% of the gross and net year-to-date catastrophe losses. April 2011 recorded more tornadoes than any month in U.S. history. One of these tornadoes impacted primarily Alabama in late April, while another impacted primarily Joplin, Missouri in May. These two storms alone accounted for $119.6 million in gross catastrophe losses and $28.6 million in net catastrophe losses.

The combined ratio, excluding net catastrophe losses, increased slightly for the three and six months ending June 30, 2012, compared with the same periods in 2011, which is primarily driven by an increase in 2012 claim severity.

For the three and six months ended June 30, 2012, the net favorable prior year loss and CAE development was $9.4 million and $26.2 million, compared to $2.5 million and $27.9 million favorable development for the three and six months ended June 30, 2011. This favorable development is primarily in our workers’ compensation, personal auto liability and commercial liability lines, which are demonstrating better than expected loss emergence compared to what was implied by our historical development patterns.

Products

Our Property and Casualty segment consists of three product lines: (i) Personal Lines, which we market primarily to individuals, represent 59.1% of net premiums written, (ii) Commercial Lines, which focus primarily on businesses engaged in agricultural and other targeted markets, represent 31.5% of net premiums written, and (iii) Credit-related property insurance products which are marketed to financial institutions and retailers and represent 9.4% of net premiums written. We frequently sell both personal and commercial lines products to the same individuals.

Personal Lines

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


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012			2011			Change
Net premiums written
Auto	$	103,672		$	110,962		$	(7,290	)	$	212,011		$	228,410		$	(16,399	)
Homeowner		54,903			52,077			2,826			100,165			100,001			164
Other Personal		9,282			8,731			551			18,647			18,024			623

Total net premiums written	$	167,857		$	171,770		$	(3,913	)	$	330,823		$	346,435		$	(15,612	)

Net premiums earned
Auto	$	105,585		$	117,269		$	(11,684	)	$	212,787		$	234,812		$	(22,025	)
Homeowner		49,974			48,026			1,948			102,157			103,500			(1,343	)
Other Personal		8,723			8,550			173			17,665			17,855			(190	)

Total net premiums earned	$	164,282		$	173,845		$	(9,563	)	$	332,609		$	356,167		$	(23,558	)

Loss ratio
Auto		82.5	%		78.3	%		4.2			76.8	%		72.9	%		3.9
Homeowner		163.8			188.8			(25.0	)		122.9			138.9			(16.0	)
Other Personal		66.0			88.6			(22.6	)		50.2			83.5			(33.3	)

Personal lines loss ratio		106.3	%		109.3	%		(3.0	)		89.5	%		92.6	%		(3.1	)

Combined Ratio
Auto		104.0	%		99.9	%		4.1			97.9	%		94.2	%		3.7
Homeowner		188.8			217.2			(28.4	)		147.3			165.4			(18.1	)
Other Personal		89.5			97.6			(8.1	)		73.3			90.5			(17.2	)

Personal lines combined ratio		129.0	%		132.2	%		(3.2	)		111.8	%		114.7	%		(2.9	)

Personal Automobile: Net premiums written and earned decreased in our personal automobile line during the three and six months ended June 30, 2012. This was primarily due to a decline in policies in-force resulting from a combination of the decreases in cross-sold personal auto with homeowner policies in-force noted below and lower new business sales.

Homeowners: Net premiums written and earned increased during the three months ended June 30, 2012 compared to 2011 due to lower reinsurance reinstatement premiums. Net premiums written remained relatively flat for the six month period while the net premiums earned decreased primarily due to fewer policies in-force. The decrease in homeowner policies in-force was primarily driven by improved rate adequacy and our catastrophe risk mitigation actions.

The loss and combined ratios improved during the three and six months ended June 30, 2012 due primarily to improved catastrophe experience and improved rate adequacy.

Other Personal: This product line is comprised primarily of watercraft, rental-owner and umbrella coverages for individuals seeking to protect their personal property not covered within their homeowner and auto policies. Net premiums written and earned remained substantially unchanged during the three and six months ended June 30, 2012. The loss and combined ratios improved during the three and six months ended June 30, 2012. As this is currently our smallest line of business in our Personal Products line, minor fluctuations in results can more easily cause volatility in these ratios.

Commercial Lines

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


	Three months ended June 30,									Six months ended June 30,
	2012			2011			Change			2012			2011			Change
Net premiums written
Other Commercial	$	39,105		$	38,312		$	793		$	76,080		$	74,170		$	1,910
Agribusiness		28,143			25,755			2,388			52,623			50,056			2,567
Auto		23,186			24,221			(1,035	)		47,576			50,159			(2,583	)

Total net premiums written	$	90,434		$	88,288		$	2,146		$	176,279		$	174,385		$	1,894

Net premiums earned
Other Commercial	$	30,946		$	29,789		$	1,157		$	61,211		$	59,763		$	1,448
Agribusiness		26,139			23,671			2,468			52,219			49,807			2,412
Auto		20,029			20,739			(710	)		39,853			42,873			(3,020	)

Total net premiums earned	$	77,114		$	74,199		$	2,915		$	153,283		$	152,443		$	840

Loss ratio
Other Commercial		75.2	%		52.2	%		23.0			82.5	%		57.6	%		24.9
Agribusiness		120.6			137.0			(16.4	)		93.2			143.9			(50.7	)
Auto		54.4			54.2			0.2			62.5			54.5			8.0

Commercial lines loss ratio		85.2	%		79.8	%		5.4			81.0	%		84.9	%		(3.9	)

Combined ratio
Other Commercial		103.9	%		81.5	%		22.4			111.4	%		86.4	%		25.0
Agribusiness		157.9			177.4			(19.5	)		129.3			181.0			(51.7	)
Auto		77.0			77.2			(0.2	)		86.0			77.6			8.4

Commercial lines combined ratio		115.2	%		110.9	%		4.3			110.9	%		114.8	%		(3.9	)

Other Commercial: The loss and combined ratios increased during the three and six months ended June 30, 2012, primarily as a result of an increase in the frequency and severity of workers’ compensation claims.

Agribusiness Product: Our agribusiness product allows policyholders to customize and combine their coverage for residences and household contents, farm buildings and building contents, personal property and liability. Net premiums written and earned increased during the three and six months ended June 30, 2012, primarily as a result of lower reinsurance reinstatement premiums.

The loss and combined ratios improved significantly during the three and six months ended June 30, 2012, primarily as the result of a reduction in net catastrophe losses during the six month period.

Commercial Automobile: Net premiums written and earned decreased during the three and six months ended June 30, 2012 compared to 2011 primarily as a result of lower new business writings in our small commercial business as well as improved selective underwritings.

Credit Products

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


	Three months ended June 30,						Change		Six months ended June 30,						Change
	2012			2011			Change		2012			2011			Change
Net premiums written	$	20,486		$	34,468		$	(13,982)	$	52,924		$	63,967		$	(11,043)
Net premiums earned		27,035			27,804			(769)		55,708			58,552			(2,844)

Loss ratio		17.1	%		18.5	%		(1.4)		19.0	%		18.4	%		0.6
Combined ratio		79.2			93.1			(13.9)		88.1			91.5			(3.4)

Credit-related property insurance products are offered on automobiles, furniture and appliances in connection with the financing of those items. These policies pay an amount if the insured property is lost or damaged and is not directly related to an event affecting the consumer’s ability to pay the debt. The primary distribution channel for credit-related property insurance is general agents who market to auto dealers, furniture stores and financial institutions.

Net premiums written and earned decreased for the three and six months ended June 30, 2012 compared to 2011. The primary driver for the decrease in premiums is the continued shift from the shorter duration Collateral Protection products, to the longer duration GAP products. Shorter duration products generally earn the entire premium within 12 months of the effective date, while longer duration products may take up to 84 months before they are fully earned. The loss ratios remained substantially unchanged. The combined ratio improved significantly during the three-month period due to the shift from commission insurance products to non-commission GAP waiver products.

Corporate and Other

Our Corporate and Other segment primarily includes the capital not allocated to support our insurance business segments. Our corporate investments include publicly traded equities, real estate, commercial mortgage loans, high-yield bonds, venture capital partnerships, mineral interests and tax-advantaged instruments. Corporate and Other segment financial results for the periods indicated were as follows (in thousands):


	Three months ended June 30,				Change			Six months ended June 30,				Change
	2012		2011		Change			2012		2011		Change
Premiums and other revenues:
Net investment income	$	21,982	$	23,585	$	(1,603	)	$	31,863	$	34,208	$	(2,345	)
Realized investments gains, net		4,878		22,926		(18,048	)		11,849		44,957		(33,108	)
Other Income		1,315		1,107		208			1,864		1,675		189

Total premiums and other revenues		28,175		47,618		(19,443	)		45,576		80,840		(35,264	)

Benefits, losses and expenses:
Other operating expenses		22,526		9,877		12,649			30,954		21,860		9,094

Total benefits, losses and expenses		22,526		9,877		12,649			30,954		21,860		9,094

Income before other items and federal income taxes	$	5,649	$	37,741	$	(32,092	)	$	14,622	$	58,980	$	(44,358	)

Earnings for the three and six months ended June 30, 2012 decreased compared to the same periods in 2011 substantially due to the decrease in realized gains, most notably as a result of a $13.1 million gain in 2011 from the sale of investment real estate with no such sales in 2012. During 2012 we also recorded other-than-temporary impairments related to equity investments of $5.3 million and $8.1 million for the three and six months ended June 30, 2012, respectively. Additionally, other operating costs increased in both periods as a result of an increase in expenses for our share-based compensation under the stock and incentive plan.

Investments

General

We manage our investment portfolio to optimize the rate of return that is commensurate with sound and prudent underwriting practices and to maintain a well-diversified portfolio. Our investment operations are governed by various regulatory authorities, primarily the state insurance departments where we or our insurance subsidiaries are domiciled. Investment activities, including the setting of investment policies and defining acceptable risk levels, are subject to review and approval by our Board of Directors, which is assisted by our Finance Committee.

Our insurance and annuity products are primarily supported by investment-grade bonds, and to a lesser extent collateralized mortgage obligations and commercial mortgage loans. We purchase fixed maturity securities and designate them as either held-to-maturity or available-for-sale as necessary to manage our estimated future cash flow needs. We also monitor the composition of our fixed maturity securities between held-to-maturity and available-for-sale securities and adjust the mix within the portfolio as investments mature or with the purchase of new investments.

We invest in commercial mortgage loans when the yield and credit risk compare favorably with fixed maturity securities, which are primarily investment-grade bonds. Investments in individual residential mortgage loans have not been part of our investment portfolio, and we do not anticipate investing in them in the future. We invest in real estate and equity securities based on a risk and reward analysis where we believe there are opportunities for enhanced returns.

Composition of Invested Assets

The following summarizes the carrying values of our invested assets by asset class (other than investments in unconsolidated affiliates) (in thousands, except percentages):


	June 30, 2012					December 31, 2011
	Amount		Percent			Amount		Percent
Bonds held-to-maturity, at amortized cost	$	9,167,922		47.9	%	$	9,251,972		49.0	%
Bonds available-for-sale, at fair value		4,502,696		23.5			4,381,607		23.2
Equity securities, at fair value		1,057,182		5.5			1,006,080		5.3
Mortgage loans on real estate, net of allowance		3,060,898		16.0			2,925,482		15.5
Policy loans		392,822		2.1			393,195		2.1
Investment real estate, net of accumulated depreciation		490,305		2.6			470,222		2.5
Short-term investments		341,198		1.8			345,330		1.8
Other invested assets		120,141		0.6			109,514		0.6

Total Investments	$	19,133,164		100.0	%	$	18,883,402		100.0	%

Each of the components of our invested assets is described further in the Notes to the Unaudited Consolidated Financial Statements. Additionally, Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Consolidated Financial Statements within our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 6, 2012 contains a detailed description of the Company’s methodology for evaluating other-than-temporary impairment losses on its investments.

Investments to Support Our Insurance Business

Bonds- We allocate most of our fixed maturity securities to support our insurance business.

At June 30, 2012, our fixed maturity securities had an estimated fair market value of $14.4 billion, which was $1.0 billion, or 7.8%, above amortized cost. At December 31, 2011, our fixed maturity securities had an estimated fair value of $14.2 billion, which was $851.7 million, or 6.4%, above amortized cost.

Fixed maturity securities’ estimated fair value, due in one year or less, increased to $1.3 billion as of June 30, 2012 from $961.2 million as of December 31, 2011, primarily as a result of approaching maturity dates of long-term bonds.

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


	June 30, 2012							December 31, 2011
	Amortized		Estimated		% of Fair			Amortized		Estimated		% of Fair
	Cost		Fair Value		Value			Cost		Fair Value		Value
AAA	$	949,754	$	1,030,760		7.2	%	$	1,074,744	$	1,153,696		8.1	%
AA		1,357,841		1,473,816		10.2			1,391,092		1,490,600		10.5
A		5,104,537		5,579,019		38.7			5,058,242		5,448,851		38.3
BBB		5,375,065		5,743,950		39.9			5,204,214		5,499,958		38.6
BB and below		580,298		578,717		4.0			659,290		646,193		4.5

Total	$	13,367,495	$	14,406,262		100.0	%	$	13,387,582	$	14,239,298		100.0	%

The slight shifts in our credit quality diversification, including exposure to below investment grade securities, at June 30, 2012 compared to December 31, 2011, was primarily the result of purchases of AAA through BBB bonds, and maturities of bonds rated AAA through BB and below as we continue to manage a diverse portfolio. At 4.0% of our total bond portfolio, the exposure to below investment grade securities is acceptable to management, and we expect this portion of our bond portfolio to decrease as these bonds approach maturity.

Mortgage Loans- We invest in commercial mortgage loans that are diversified by property-type and geography. We do not make individual residential mortgage loans. Therefore, we have no direct exposure to sub-prime or Alt A mortgage loans in the mortgage loan portfolio. Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. Mortgage loans are used to support our insurance liabilities. Mortgage loans held-for-investment are carried at outstanding principal balances, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of allowances.

The weighted average coupon yield on the principal funded for mortgage loans was 5.7% and 6.0% for the six months ended June 30, 2012 and year ended December 31, 2011, respectively. It is likely that the weighted average coupon yield on funded mortgage loans will decline as loans mature and new loans are originated with lower rates in the current interest rate environment.

Equity Securities- As of June 30, 2012, our equity securities were invested 96.6% in publicly traded (on a national U.S. stock exchange) common stock and 3.4% was invested in publicly traded preferred stock. As of December 31, 2011, 96.3% of our equity securities were invested in publicly traded common stock, and the remaining 3.7% were invested in publicly traded preferred stock. The increase in the fair value of our equity securities during the first six months of 2012 primarily reflects market value increases within the portfolio.

We carry our equity portfolio at fair value based on quoted estimated fair value prices obtained from external pricing services. The cost and estimated market value of the equity portfolio are as follows (in thousands):


	Six months ended June 30, 2012
			Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Common stock	$	673,686	$	361,590	$	(13,675	)	$	1,021,601
Preferred stock		26,690		8,895		(4	)		35,581

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


	Year ended December 31, 2011
			Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Common stock	$	679,724	$	305,269	$	(16,086	)	$	968,907
Preferred stock		30,955		7,688		(1,470	)		37,173

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

Investment Real Estate- We invest in commercial real estate with positive cash flows or where appreciation in value is expected. Real estate may be owned directly by our insurance companies, non-insurance affiliates or joint ventures. The carrying value of real estate is stated at cost, less accumulated depreciation and valuation allowances, if any. Depreciation is provided over the estimated useful lives of the properties.

Short-Term Investments- Short-term investments are composed primarily of commercial paper rated A2/P2 or better by Standard & Poor’s and Moody’s, respectively. The amount fluctuates depending on the available long-term investment opportunities and our liquidity needs, including investment-funding commitments.

Policy Loans- For certain life insurance products, we allow policyholders to borrow funds using their policy’s cash value as collateral. The maximum amount of the policy loan depends upon the policy’s surrender value and the number of years since policy origination. As of June 30, 2012 we had $392.8 million in policy loans with a loan to surrender value of 59.4%, and at December 31, 2011, we had $393.2 million in policy loans with a loan to surrender value of 59.2%. Interest rates on policy loans primarily range from 3.0 % to 12.0% per annum. Policy loans may be repaid at any time by the policyholder and have priority to any claims on the policy. If the policyholder fails to repay the policy loan, funds are withdrawn from the policy’s benefits.

Net Investment Income

Net investment income from bonds and mortgage loans used to support our insurance products increased $1.3 million over the period as assets increased with annuity sales and growth in policyholder’s account balances. Net investment income in other asset classes (equities, real estate, options and other) increased $5.7 million primarily in response to investment decisions based on valuations and financial markets movement.

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

Unrealized Gains and Losses

The net change in unrealized gains (losses) on available-for-sale securities, as presented in the stockholders’ equity section of the consolidated statements of financial position, was an increase of $59.7 million for the six months ended June 30, 2012. Total unrealized gains and losses of available-for-sale securities at June 30, 2012 and December 31, 2011 were $659.9 million and $541.4 million, respectively.

Liquidity

Our liquidity requirements have been and are expected to continue to be met by funds from operations, resulting from premiums received from our customers. The primary use of cash has been and is expected to continue to be policy benefits and claims incurred during the regular course of business. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management considers our current liquidity position to be sufficient to meet anticipated demands over the next twelve months. Our contractual obligations are not expected to have a significant impact to cash flow from operations.

There are no known trends or uncertainties regarding product pricing, changes in product lines or rising costs, which would have a significant impact to cash flows from operations. Continued low-interest rate environments are expected to require higher than historical contributions to our defined benefit plans in the near future. Management does not expect these demands to have a significant impact to our cash flows from operations. Additionally, we have paid dividends to stockholders for over 100 consecutive years and expect to continue this trend. No significant capital expenditures are expected in the near future.

Further information regarding additional sources or uses of cash is described in Note 17, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

To ensure we will be able to continue to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed maturity securities and commercial mortgages. Funds are invested with the intent that income from the investments and proceeds from the maturities will meet our ongoing cash flow needs. We historically have not had to liquidate invested assets in order to cover cash flow needs; however, our portfolio of highly liquid available-for-sale fixed maturity and equity securities are available to meet future liquidity needs as necessary.

Capital Resources

Our capital resources consisted of American National stockholders’ equity, summarized as follows (in thousands):


	June 30, 2012		December 31, 2011
American National stockholders’ equity, excluding accumulated other comprehensive income (loss), net of tax (“AOCI”)	$	3,510,396	$	3,477,888
AOCI		224,263		159,403

Total American National stockholders’ equity	$	3,734,659	$	3,637,291

We have notes payable in our consolidated statements of financial position that are not part of our capital resources. These notes payable represent amounts borrowed by real estate joint ventures that we consolidate into our financial statements. The lenders for the notes payable have no recourse against us in the event of default by the joint ventures. Therefore, the only amount of liability we have for these notes payable is limited to our investment in the respective venture, which totaled $18.0 million at June 30, 2012 and December 31, 2011. We believe the quality of the underlying real estate would provide high quality collateral for additional borrowing by the real estate joint ventures.

Total stockholders’ equity in the first six months of 2012 increased primarily due to the $65.7 million net income earned during the period and $59.7 million unrealized gains on available-for-sale securities, offset by $41.3 million in dividends paid to stockholders.

Statutory Surplus and Risk-based Capital

Statutory surplus represents the capital of our insurance companies reported in accordance with accounting practices prescribed or permitted by the applicable state insurance departments. Risk-based capital (“RBC”) is a minimum capital requirement calculated using formulas and instructions from the National Association of Insurance Commissioners (“NAIC”). State laws specify regulatory actions if an insurer’s ratio of statutory surplus to RBC, a measure of an insurer’s solvency, falls below certain levels. The RBC formula for life companies establishes minimum capital requirements for asset, interest rate, market, insurance and business risks. The RBC formula for property and casualty companies establishes minimum capital requirements for asset and underwriting risks including reserve risk.

The achievement of long-term growth will require growth in American National Insurance Company and our insurance subsidiaries’ statutory capital. Our subsidiaries may obtain additional statutory capital through various sources, such as retained statutory earnings or equity contributions from us. As of December 31, 2011, the levels of our and our insurance subsidiaries’ capital exceeded the NAIC’s minimum RBC requirements.

Contractual Obligations

Our future cash payments associated with claims and claims adjustment expenses, life, annuity and disability obligations, contractual obligations pursuant to operating leases for office space and equipment, and notes payable have not materially changed since December 31, 2011. We expect to have the capacity to repay or refinance these obligations as they come due.

Off-Balance Sheet Arrangements

We have off-balance sheet arrangements relating to third-party marketing operation bank loans discussed within Note 17, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements. We could be exposed to a liability for these loans, which are supported by the cash value of the underlying insurance contracts. However, since the cash value of the life insurance policies is designed to always equal or exceed the balance of the loans, management does not foresee any loss related to these arrangements.

Related-Party Transactions

We have various agency, consulting and service arrangements with individuals and corporations that are considered to be related parties. Each of these arrangements has been reviewed and approved by our Audit Committee. The total amount involved in these arrangements, both individually and in the aggregate, is not material to any segment or to our overall operations. For additional details see Note 18, Related Party Transactions, of the Notes to the Unaudited Consolidated Financial Statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks have not changed materially from those disclosed in our 2011 Annual Report on Form 10-K filed with the SEC on March 6, 2012.

ITEM 4.

CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Corporate Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Corporate Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2012. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Corporate Chief Financial Officer concluded that, as of June 30, 2012, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Management has monitored the internal controls over financial reporting, including any material changes to the internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Information required for Item 1 is incorporated by reference to the discussion under the heading “Litigation” in Note 17, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

ITEM 1A.

RISK FACTORS

There have been no material changes with respect to the risk factors as previously disclosed in our 2011 Annual Report on Form 10-K filed with the SEC on March 6, 2012.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS


Exhibit Number		Basic Documents

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

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

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

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

32.1		Certification of the principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from American National Insurance Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Financial Position (unaudited) at June 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income (loss) (unaudited) for the three and six months ended June 30, 2012 and 2011; (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2012 and 2011; (v) Consolidated Statements of Cash Flows (unaudited) for the three and six months ended June 30, 2012 and 2011, and (vi) related Notes to the Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

By:

/s/ Robert L. Moody

Name: Robert L. Moody

Title: Chairman of the Board & Chief Executive Officer

By:

/s/ John J. Dunn, Jr.

Name: John J. Dunn, Jr.,

Title: Corporate Chief Financial Officer

Date: August 7, 2012