AMERICAN EQUITY INVESTMENT LIFE HOLDING CO – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 Management's discussion and analysis reviews our unaudited consolidated financial position at March 31, 2013, and the unaudited consolidated results of operations for the three month periods ended March 31, 2013 and 2012, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q, and the audited consolidated financial statements, notes thereto and selected consolidated financial data appearing in our Annual Report on Form 10-K for the year ended December 31, 2012. Cautionary Statement Regarding Forward-Looking Information All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission ("SEC"), press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend", and other similar expressions, constitute forward-looking statements. We caution that these statements may and often do vary from actual results and the differences between these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ materially from those expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things: •      general economic conditions and other factors, including prevailing 

interest rate levels and stock and credit market performance which may

affect (among other things) our ability to sell our products, our ability

to access capital resources and the costs associated therewith, the fair

value of our investments, which could result in impairments and other than

temporary impairments, and certain liabilities, and the lapse rate and

profitability of policies;

• customer response to new products and marketing initiatives;

• changes in Federal income tax laws and regulations which may affect the

relative income tax advantages of our products;

• increasing competition in the sale of annuities;

• regulatory changes or actions, including those relating to regulation of

       financial services affecting (among other things) bank sales and        underwriting of insurance products and regulation of the sale,        underwriting and pricing of products; and  

• the risk factors or uncertainties listed from time to time in our filings

with the SEC.

For a detailed discussion of these and other factors that might affect our performance, see Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

 We specialize in the sale of individual annuities (primarily deferred annuities) and, to a lesser extent, we also sell life insurance policies. Under U.S. generally accepted accounting principles ("GAAP"), premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender and other charges deducted from the account balances of policyholders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances), changes in fair value of embedded derivatives, amortization of deferred sales inducements and deferred policy acquisition costs, other operating costs and expenses and income taxes. Our business model contemplates continued growth in invested assets and operating income while maintaining a high quality investment portfolio that will not experience significant losses from impairments of invested assets. Growth in invested assets is predicated on a continuation of our high sales achievements of the last four years while at the same time maintaining a high level of retention of the funds received. The economic and personal investing environments continue to be conducive for high sales levels as retirees and others look to put their money in instruments that will protect their principal and provide them with consistent cash flow sources in their retirement years. We are committed to maintaining a high quality investment portfolio with limited exposure to below investment grade securities and other riskier assets.                                         31 --------------------------------------------------------------------------------

Annuity deposits by product type collected during the three months ended March 31, 2013 and 2012, were as follows:

                                         Three Months Ended                                               March 31, Product Type                              2013             2012                                        (Dollars in thousands) Fixed index annuities: Index strategies                   $     604,641$ 488,126 Fixed strategy                           243,129          289,354                                          847,770          777,480 Fixed rate annuities: Single-year rate guaranteed               19,910           34,487 Multi-year rate guaranteed                47,256          121,665 Single premium immediate annuities        14,980           45,813                                           82,146          201,965 Total before coinsurance ceded           929,916          979,445 Coinsurance ceded                         42,607           98,779 

Net after coinsurance ceded $ 887,309$ 880,666

   Annuity deposits before coinsurance ceded decreased 5% during the first quarter of 2013 compared to the same period in 2012. We attribute this in part to the low interest rate environment which appears to have made prospective policyholders less willing to commit funds to fixed index annuities. We attribute the continuing significant sales of our products to factors including the highly competitive rates of our products, our continued strong relationships with our national marketing organizations and field force of licensed, independent insurance agents, the increased attractiveness of safe money products in volatile markets, lower interest rates on competing products such as bank certificates of deposit and product enhancements including a new generation of guaranteed income withdrawal benefit riders. The extent to which this trend will be sustained in future periods is uncertain. Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholder, or the "investment spread." Our investment spread is summarized as follows:                                                   Three Months Ended                                                       March 31,                                                   2013         2012 Average yield on invested assets                  5.01%        5.61% Aggregate cost of money                           2.33%        2.68% Aggregate investment spread                       2.68%        2.93%  

Impact of: Investment yield - additional prepayment income 0.08% 0.07% Cost of money benefit of over hedging

             0.03%        0.01%   Our investment spread in the first quarter of 2013 and 2012 has been impacted by shortfalls in investment income from excess liquidity resulting from a lag in the reinvestment of proceeds of government agency bonds called for redemption. The callable government agency securities have been a cornerstone of our investment portfolio since our formation. Through the years they have provided very acceptable yields that met our spread requirements without any risk-based capital charges. We have been through several cycles of calls on these securities and each time we have reinvested a portion of the call redemption proceeds into new callable government agency securities. This kept cash balances low but perpetuated the call risk. However, in the current interest rate environment, we have been reluctant to reinvest the call redemption proceeds in government agency securities and only purchased $948.9 million in 2012 compared to $4.3 billion in calls. Consequently, we have been managing excess cash and other short-term investments throughout 2012 and into the first quarter of 2013. We ended the first quarter of 2013 with $1.3 billion in excess cash and other short-term investments compared to $2.2 billion at the end of 2012. Our progress in reducing the excess cash and other short-term investments is likely to be interrupted in the second quarter of 2013 as we had $678 million in government agency securities called in April. While high levels of excess cash and other short-term investments may persist for several more quarters, the average quarterly balances should decline in second half of 2013 due to reinvestment of year end cash and other short-term investments into longer term securities. Subsequent to the April calls there is no exposure to callable securities for the remainder of 2013. See Results of Operations - Net investment income for additional information regarding our excess liquidity. The cost of money for fixed index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies - Deferred Policy Acquisition Costs and Deferred Sales Inducements included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2012. With respect to our fixed index annuities, the cost of money includes the average crediting rate on amounts allocated to the fixed rate strategy, expenses we incur to fund the annual index credits and where applicable, minimum guaranteed interest credited. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of                                         32 --------------------------------------------------------------------------------   the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities and Financial Condition - Derivative Instruments included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2012. As reported in previous filings, in response to the continuing low interest rate environment, we implemented reductions of policyholder crediting rates for new annuities and existing annuities in the fourth quarter of 2011. Rates on new sales were reduced 0.40% - 0.50% beginning with applications received after October 7, 2011. Renewal rate adjustments began taking effect on November 15, 2011 and continued to take effect on the policy anniversary dates over the twelve months following that date. Rates on new sales were again reduced by approximately 0.25% beginning with applications received after December 5, 2012. 2013 and 2012 spread results reflect the benefit from these reductions; however, the reductions in cost of money were partially offset by continued lower yields available on investments including reinvestment of proceeds from calls of the callable bonds in our investment portfolio.We expect this low interest rate environment to extend at least through 2014 as the United States Federal Reserve has publicly stated their current policy of maintaining downward pressure on longer-term interest rates to support mortgage markets and help make broader financial conditions more accommodative. Our profitability depends in large part upon the amount of assets under our management, investment spreads we earn on our policyholder account balances, our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or impairment of investments, our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our fixed index annuities, our ability to manage the costs of acquiring new business (principally commissions to agents and bonuses credited to policyholders) and our ability to manage our operating expenses. Results of Operations for the Three Months Ended March 31, 2013 and 2012 Net income, in general, has been positively impacted by the growth in the volume of business in force and the investment spread earned on this business. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 13% to $28.1 billion during first quarter of 2013 compared to $24.8 billion for the same period in 2012. Our investment spread measured in dollars was $161.1 million during first quarter of 2013 compared to $154.9 million during the same period in 2012. As previously mentioned, our investment spread has been negatively impacted by both the extended low interest rate environment and our excess liquidity due to calls of our United States government agency securities (see Net investment income). Operating income (a non-GAAP financial measure) increased 12% to $33.5 million in the first quarter of 2013 compared to $29.8 million for the same period in 2012. In addition to net income, we have consistently utilized operating income, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate our financial performance. Operating income equals net income adjusted to eliminate the impact of net realized gains (losses) on investments including net other than temporary impairment ("OTTI") losses recognized in operations and fair value changes in derivatives and embedded derivatives. Because these items fluctuate from year to year in a manner unrelated to core operations, we believe measures excluding their impact are useful in analyzing operating trends. We believe the combined presentation and evaluation of operating income together with net income provides information that may enhance an investor's understanding of our underlying results and profitability. Operating income is not a substitute for net income determined in accordance with GAAP. The adjustments made to derive operating income are important to understanding our overall results from operations and, if evaluated without proper context, operating income possesses material limitations. As an example, we could produce a low level of net income in a given period, despite strong operating performance, if in that period we experience significant net realized losses from our investment portfolio. We could also produce a high level of net income in a given period, despite poor operating performance, if in that period we generate significant net realized gains from our investment portfolio. As an example of another limitation of operating income, it does not include the decrease in cash flows expected to be collected as a result of credit loss OTTI. Therefore, our management and board of directors also separately review net realized investment gains (losses) and analyses of our net investment income, including impacts related to OTTI write-downs, in connection with their review of our investment portfolio. In addition, our management and board of directors examine net income as part of their review of our overall financial results. The adjustments made to net income to arrive at operating income for the three months ended March 31, 2013 and 2012 are set forth in the table that follows:                                                                 Three Months Ended                                                                     March 31,                                                               2013               2012                                                               (Dollars in thousands) Reconciliation of net income to operating income: Net income                                              $       26,031

$ 10,471 Net realized (gains) losses and net OTTI losses on investments, net of offsets

                                     (2,804 )    

3,547

 Net effect of derivatives and embedded derivatives, net of offsets                                                      10,237            15,742 Operating income                                        $       33,464$     29,760                                           33

--------------------------------------------------------------------------------   Net realized gains/losses on investments and net impairment losses recognized in operations fluctuate from period to period based upon changes in the interest rate and economic environment and the timing of the sale of investments or the recognition of other than temporary impairments. The amounts disclosed in the reconciliation above are net of related adjustments in amortization of deferred sales inducements and deferred policy acquisition costs and income taxes. Amounts attributable to the fair value accounting for fixed index annuity derivatives and embedded derivatives fluctuate from year to year based upon changes in the fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in the interest rates used to discount the embedded derivative liability. The amounts disclosed in the reconciliation above are net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and income taxes. The significant changes in the impact from the item disclosed in the reconciliation above relate primarily to changes in the interest rates used to discount the embedded derivative liabilities. Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders) increased 11% to $21.5 million in the first quarter of 2013 compared to $19.4 million for the same period in 2012. These increases were primarily attributable to increases in the amounts of fees assessed for lifetime income benefit riders which were $10.0 million in the first quarter of 2013 compared to $7.7 million for the same period in 2012. The increases in these fees are attributable to a larger volume of business in force subject to the fee. The weighted average per policy fees assessed for lifetime income benefit riders was 0.53% and 0.51% for the three months ended March 31, 2013 and 2012, respectively. Fund values on policies with lifetime income benefit riders being assessed these fees increased from $1.5 billion during the three months ended March 31, 2012 to $1.9 billion during the three months ended March 31, 2013. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income benefit riders. Surrender charges decreased by $0.2 million for the three months ended March 31, 2013. This decrease was primarily attributable to reductions in withdrawals subject to a surrender charge. Withdrawals from annuity and single premium universal life policies subject to surrender charges were  in the first quarter of 2013 compared to $89.8 million for the same period in 2012. The lower amount of withdrawals was influenced by the continuing low interest rate environment. The average surrender charge collected on withdrawals subject to a surrender charge was 14.5% in the first quarter of 2013 compared to 12.9% for the same period in 2012. Net investment income increased 1% to $329.7 million in the first quarter of 2013 compared to $326.9 million for the same period in 2012. This increase was principally attributable to the growth in our annuity business and a corresponding increase in our invested assets. Average invested assets excluding derivative instruments (on an amortized cost basis) increased 13% to $26.4 billion for the first quarter of 2013 compared to $23.4 billion for the same period in 2012. The average yield earned on average invested assets was 5.01% for the first quarter of 2013 compared to 5.61% for the same period in 2012. The decrease in yield earned on average invested assets was attributable to lower yields on investments purchased in 2012 and the first quarter of 2013. In addition, net investment income and average yield were negatively impacted by a lag in reinvestment of proceeds from bonds called for redemption during the periods into new assets causing excess liquidity held in low yielding cash and other short-term investments. The average balance held in cash and short-term investments was $1.8 billion and $0.8 billion for the three months ended March 31, 2013 and 2012, respectively. The average yield on our cash and short-term investments during the first quarter of 2013 and 2012 was 0.33% and 0.11%, respectively. Additionally, net investment income and average yield was positively impacted by prepayment and fee income received resulting in additional net investment income of $5.0 million and $3.8 million for the three months ended March 31, 2013 and 2012, respectively. Change in fair value of derivatives (principally call options purchased to fund annual index credits on fixed index annuities) is affected by the performance of the indices upon which our options are based and the aggregate cost of options purchased. The components of change in fair value of derivatives are as follows:                                        Three Months Ended                                             March 31,                                        2013             2012                                      (Dollars in thousands) Call options: Gain (loss) on option expiration $     58,826$ (26,153 ) Change in unrealized gain/loss        285,828          267,673 2015 notes hedges                      28,098           16,751 Interest rate swaps                       733              890 Interest rate caps                        477                -                                  $    373,962$ 259,161   The differences between the change in fair value of derivatives between periods for call options are primarily due to the performance of the indices upon which our call options are based. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation (after applicable caps, participation rates and asset fees) for options expiring during the three months ended March 31, 2013 and 2012 is as follows:                                         34 --------------------------------------------------------------------------------

                                           Three Months Ended                                               March 31,                                          2013           2012 S&P 500 Index Point-to-point strategy               1.5% - 8.1%   0.0% - 7.0% Monthly average strategy              0.0% - 8.0%   0.0% - 10.2%

Monthly point-to-point strategy 0.0% - 11.4% 0.0% -3.3% Fixed income (bond index) strategies 0.1% - 8.0% 4.0% - 10.0%

   The change in fair value of derivatives is also influenced by the aggregate costs of options purchased. The aggregate cost of options has increased primarily due to an increased amount of fixed index annuities in force. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2012. Concurrently with the issuance of the 2015 notes, we entered into hedge transactions (the "2015 notes hedges") to provide the cash needed to meet our cash obligations in excess of the principal amount of the 2015 notes upon conversion of the 2015 notes. The fair value of the 2015 notes hedges changes based upon changes in the price of our common stock, interest rates, stock price volatility, dividend yield and the time to expiration of the 2015 notes hedges. Similarly, the fair value of the conversion option obligation to the holders of the 2015 notes changes based upon these same factors and the conversion option obligation is accounted for as an embedded derivative liability with changes in fair value reported in the Change in fair value of embedded derivatives. The amount for the change in fair value of the 2015 notes hedges equals the amount for the change in the related embedded derivative liabilities and there is an offsetting expense in the change in fair value of embedded derivatives. See Note 9 to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of the 2015 notes hedges. Net realized gains (losses) on investments, excluding OTTI losses include gains and losses on the sale of securities and impairment losses on mortgage loans on real estate which fluctuate from year to year due to changes in the interest rate and economic environment and the timing of the sale of investments, as well as gains (losses) recognized on real estate owned due to any sales and impairments on long-lived assets. The components of net realized gains (losses) on investments are set forth in the table that follows:                                                    Three Months Ended                                                        March 31,                                                    2013            2012                                                  (Dollars in thousands) Available for sale fixed maturity securities: Gross realized gains                          $     13,015$  1,018 Gross realized losses                               (2,187 )        (296 )                                                     10,828           722 Equity securities: Gross realized gains                                     -           562 Other investments: Gain on sale of real estate                            589         1,445 Loss on sale of real estate                           (466 )           - Impairment losses on real estate                         -          (974 )                                                        123           471 Mortgage loans on real estate: Increase in allowance for credit losses               (366 )      (7,831 )                                               $     10,585$ (6,076 )   See Financial Condition - Investments for additional discussion of allowance for credit losses on mortgage loans on real estate. Net OTTI losses recognized in operations increased to $3.2 million in the first quarter of 2013 compared to $2.9 million for the same period in 2012. See Financial Condition - Investments and note 3 to our consolidated financial statements for additional discussion of write downs of securities for other than temporary impairments.                                         35 --------------------------------------------------------------------------------   Interest sensitive and index product benefits increased to $225.8 million in the first quarter of 2013 compared to $139.1 million for the same period in 2012. The components of interest credited to account balances are summarized as follows:                                                                  Three Months Ended                                                                      March 31,                                                                2013                2012                                                                (Dollars in thousands) Index credits on index policies                         $      135,341$     50,658 Interest credited (including changes in minimum guaranteed interest for fixed index annuities)                  79,618      

80,512

 Living income benefit rider                                     10,850               7,953                                                         $      225,809$    139,123   The amount of index credits were attributable to changes in the appreciation of the underlying indices (see discussion above under Change in fair value of derivatives) and the amount of funds allocated by policyholders to the respective index options. Total proceeds received upon expiration of the call options purchased to fund the annual index credits was $135.2 million for the three months ended March 31, 2013, compared to $50.9 million for the same period in 2012. The decrease in interest credited was due to a decrease in the average rate credited to the amount of annuity liabilities outstanding receiving a fixed rate of interest. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 13% to $28.1 billion in the first quarter of 2013 compared to $24.8 billion during the same period in 2012. The increases in benefits recognized for living income benefit rider were due to increases in the number of policies with lifetime income benefit riders and correlates to the increase in fees discussed in Annuity product charges. Amortization of deferred sales inducements increased 73% to $28.8 million in the first quarter of 2013 compared to $16.7 million for the same period in 2012. In general, amortization of deferred sales inducements has been increasing each period due to growth in our annuity business and the deferral of sales inducements incurred with respect to sales of premium bonus annuity products. Bonus products represented 98% of our net annuity deposits during the three months ended March 31, 2013 compared to 96% during the same period in 2012. The anticipated increase in amortization from these factors has been affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business, amortization associated with net realized gains (losses) on investments and net OTTI losses recognized in operations. Fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options) because the purchased call options are one-year options while the options valued in the fair value of embedded derivatives cover the expected lives of the contracts which typically exceeds ten years. Amortization of deferred sales inducements is summarized as follows:                                                                 Three Months Ended                                                                     March 31,                                                                2013             2012                                                               (Dollars in thousands)

Amortization of deferred sales inducements before gross profit adjustments

$      36,278$    33,468 Gross profit adjustments: Fair value accounting for derivatives and embedded derivatives                                                     (8,771 )    

(15,420 ) Net realized gains (losses) on investments and net OTTI losses

   recognized in operations                                       1,324      

(1,338 ) Amortization of deferred sales inducements after gross profit adjustments

$      28,831

$ 16,710

   Change in fair value of embedded derivatives primarily relates to fixed index annuity embedded derivatives and resulted from (i) changes in the expected index credits on the next policy anniversary dates, which are related to the change in fair value of the call options acquired to fund these index credits discussed above in change in fair value of derivatives; (ii) changes in discount rates used in estimating our liability for policy growth; and (iii) the growth in the host component of the policy liability. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2012. The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives during the first quarter of 2013 was an increase in the discount rate used in estimating our liability for policy growth offset by increases in the expected index credits that resulted from increases in the fair value of the call options acquired to fund these index credits. The changes for the three months ended March 31, 2013 and 2012 also include increases of $28.1 million and $16.8 million, respectively, in the fair value of the 2015 notes embedded conversion derivative. As discussed previously, these amounts were offset by comparable increases in the fair value of the 2015 notes hedges.                                          36

--------------------------------------------------------------------------------   Interest expense on subordinated debentures decreased 16% to $3.0 million in the first quarter of 2013 compared $3.6 million for the same period in 2012. The decrease is attributable to a decrease in the weighted average interest rates on outstanding subordinated debentures which were 4.80% and 5.10% for the three months ended March 31, 2013 and 2012, respectively, and due to the redemption of $22 million principal amount of our 8% Convertible Junior Subordinated Debentures in July 2012. The weighted average interest rate fluctuates from period to period because $169.6 million principal amount of the subordinated debentures has floating rates of interest based upon the three month London Interbank Offered Rate plus an applicable margin. See Financial Condition - Liabilities included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2012. Amortization of deferred policy acquisition costs increased 35% to $46.2 million in the first quarter of 2013 compared to $34.3 million for the same period in 2012. In general, amortization of deferred policy acquisition costs has been increasing each period due to the growth in our annuity business and the deferral of policy acquisition costs incurred with respect to sales of annuity products. The anticipated increase in amortization from these factors has been affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business, amortization associated with net realized losses on investments and net OTTI losses recognized in operations. As discussed above, fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. Amortization of deferred policy acquisition costs is summarized as follows:                                                                 Three Months Ended                                                                     March 31,                                                                2013             2012                                                               (Dollars in thousands)

Amortization of deferred policy acquisition costs before gross profit adjustments

$      55,930$    55,639 Gross profit adjustments: Fair value accounting for derivatives and embedded derivatives                                                    (11,469 )    

(19,243 ) Net realized gains (losses) on investments and net OTTI losses

   recognized in operations                                       1,769      

(2,112 ) Amortization of deferred policy acquisition costs after gross profit adjustments

$      46,230

$ 34,284

   Other operating costs and expenses decreased 10% to $19.5 million in the first quarter of 2013 compared to $21.7 million for the same period in 2012. The decrease was primarily due to decreases of $1.5 million in various state taxes, assessments and fees that vary period to period based in part on the amount of annuity deposits we collect and the amount and timing of assessments and fees we are charged by states in which we do business. Income tax expense increased to $13.5 million in the first quarter of 2013 compared to $5.7 million for the same period in 2012. The change in income tax expense was primarily due to changes in income before income taxes. Income tax expense and the resulting effective tax rate are based upon two components of income before income taxes ("pretax income") that are taxed at different tax rates. Life insurance income is generally taxed at an effective rate of approximately 35.6% reflecting the absence of state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income for the parent company and other non-life insurance subsidiaries is generally taxed at an effective tax rate of 41.5% reflecting the combined federal / state income tax rates. The effective tax rates resulting from the combination of the income tax provisions for the life / non-life sources of income (loss) vary from period to period based primarily on the relative size of pretax income (loss) from the two sources. The effective tax rate for the three months ended March 31, 2013 and 2012 was 34.1% and 35.1%, respectively. The decrease in the effective tax rate in 2013 is due to sources of net investment income that are exempt from Federal income tax. Financial Condition Investments Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash obligations to policyholders and others and maximize current income and total investment return through active investment management. Consistent with this strategy, our investments principally consist of fixed maturity securities and mortgage loans on real estate. Insurance statutes regulate the type of investments that our life subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations and our business and investment strategy, we generally seek to invest in United States government and government-sponsored agency securities, corporate securities and United States municipalities, states and territories securities rated investment grade by established nationally recognized statistical rating organizations ("NRSRO's") or in securities of comparable investment quality, if not rated, and commercial mortgage loans on real estate.                                         37 --------------------------------------------------------------------------------

The composition of our investment portfolio is summarized as follows:

                                            March 31, 2013               December 31, 2012                                         Carrying                       Carrying                                          Amount         Percent         Amount         Percent                                                        (Dollars in thousands) Fixed maturity securities: United States Government full faith and credit                           $      4,616             - %   $      5,154             - %  sponsored agencies                                1,857,377           6.4 %      1,772,025           6.5 % United States municipalities, states and territories                         3,657,164          12.5 %      3,578,323          13.0 % Foreign government obligations            100,460           0.3 %        105,259           0.4 % Corporate securities                   15,627,095          53.4 %     14,542,860          52.8 % Residential mortgage backed securities                              2,668,454           9.1 %      2,888,113          10.5 % Commercial mortgage backed securities                                748,601           2.6 %        357,982           1.3 % Other asset backed securities           1,021,580           3.5 %        998,508           3.6 % 

Total fixed maturity securities 25,685,347 87.8 % 24,248,224 88.1 % Equity securities

                          55,215           0.2 %         53,422           0.2 % Mortgage loans on real estate           2,591,897           8.9 %      2,623,940           9.5 % Derivative instruments                    719,683           2.4 %        415,258           1.5 % Other investments                         193,714           0.7 %        196,366           0.7 %                                      $ 29,245,856         100.0 %   $ 27,537,210         100.0 %   During the three months ended March 31, 2013 and 2012, we received $0.3 billion and $1.9 billion, respectively, in redemption proceeds related to calls of our callable United States Government sponsored agency securities and public and private corporate bonds, of which $1.1 billion during the three months ended March 31, 2012, were classified as held for investment. The proceeds from these redemptions that have been reinvested have primarily been in United States government sponsored agencies, corporate securities, commercial mortgage backed securities and other asset backed securities classified as available for sale. At March 31, 2013, 31% of our fixed income securities have call features and 0.3% ($0.1 billion) were subject to call redemption. Another 8% ($1.8 billion) will become subject to call redemption during the next twelve months, of which $522.3 million are short-term U.S. Government agency securities with a book yield of 0.76%. Fixed Maturity Securities Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or impairments while earning a sufficient and stable return on our investments. Historically, we have had a high percentage of our fixed maturity securities in U.S. Government sponsored agency securities (for the most part Federal Home Loan Mortgage Corporation and Federal National Mortgage Association). While U.S. Government sponsored agency securities are of high credit quality, the call features have resulted in our excess cash position. These calls resulted from the low interest rate and tight agency spread environment. Since 2007, when we had almost 80% of our fixed maturity portfolio invested in callable agencies, we have reallocated a significant portion of our fixed maturities from the callable agency securities to other highly rated, long-term securities. The largest portion of our fixed maturity securities are now in investment grade (NAIC designation 1 or 2) publicly traded or privately placed corporate securities. We have also built a portfolio of residential mortgage backed securities ("RMBS") that provide our investment portfolio a source of regular cash flow and higher yielding assets than our agency securities. Beginning in 2009, we have acquired a portfolio of taxable bonds issued by municipalities, states and territories of the United States that provide us with attractive yields while consistent with our aversion to credit risk. Beginning in 2012, we have increased our position in other asset backed securities as well as establishing a position in commercial mortgage backed securities. A summary of our fixed maturity securities by NRSRO ratings is as follows:                                         March 31, 2013                     December 31, 2012                                                    Percent of                          Percent of                                   Carrying       Fixed Maturity       Carrying       Fixed Maturity Rating Agency Rating               Amount          Securities          Amount          Securities                                                       (Dollars in thousands) Aaa/Aa/A                       $ 15,468,699             60.2 %     $ 14,613,775             60.3 % Baa                               8,713,460             33.9 %        8,190,220             33.8 % Total investment grade           24,182,159             94.1 %       22,803,995             94.1 % Ba                                  430,094              1.7 %          365,102              1.5 % B                                   104,973              0.4 %           79,789              0.3 % Caa and lower                       803,058              3.1 %          862,650              3.5 % In or near default                  165,063              0.7 %          136,688              0.6 % Total below investment grade      1,503,188              5.9 %        1,444,229              5.9 %                                $ 25,685,347            100.0 %     $ 24,248,224            100.0 %                                           38

--------------------------------------------------------------------------------   The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. Typically, if a security has been rated by an NRSRO, the SVO utilizes that rating and assigns an NAIC designation based upon the following system: NAIC Designation   NRSRO Equivalent Rating        1                  Aaa/Aa/A        2                     Baa        3                     Ba        4                      B        5                Caa and lower        6             In or near default   Since 2009, the NAIC has utilized a process to assess non-agency RMBS that does not rely on NRSRO ratings. The NAIC retained the services of PIMCO Advisory to model each non-agency RMBS owned by U.S. insurers at year-end 2012 and 2011. PIMCO Advisory has provided 5 prices for each security for life insurance companies to utilize in determining the NAIC designation for each RMBS based on each insurer's statutory book value price. This process is used to determine the level of RBC requirements for non-agency RMBS. In 2010, the NAIC retained the services of BlackRock Solutions to model each non-agency CMBS to determined the level of RBC requirements for non-agency CMBS in a manner similar to that utilized by PIMCO Advisory for RMBS.  A summary of our fixed maturity securities by NAIC designation is as follows:                                            March 31, 2013                                                 December 31, 2012                                                                         Percent                                                          Percent                                                                        of Total                                                         of Total                      Amortized                          Carrying       Carrying       Amortized                          Carrying       Carrying

NAIC Designation Cost Fair Value Amount Amount

           Cost          Fair Value         Amount         Amount                                 (Dollars in thousands)                                           (Dollars in thousands)        1           $ 14,659,495$ 16,121,041$ 16,121,041

62.8 % $ 13,737,381$ 15,250,560$ 15,250,560 62.9 %

       2              8,457,623        9,087,432        9,087,432         

35.4 %      7,838,186        8,533,121        8,533,121          35.2 %        3                419,163          408,178          422,134           1.6 %        398,294          387,222          401,789           1.7 %        4                 50,789           53,006           53,006           0.2 %         53,879           56,151           56,151           0.2 %        5                      -                -                -             - %              -                -                -             - %        6                  2,238            1,734            1,734             - %          5,375            6,603            6,603             - %                    $ 23,589,308$ 25,671,391$ 25,685,347         100.0 %   $ 22,033,115$ 24,233,657$ 24,248,224         100.0 %                                           39

--------------------------------------------------------------------------------   A summary of our RMBS by collateral type and split by NAIC designation, as well as a separate summary of securities for which we have recognized OTTI and those which we have not recognized any OTTI is as follows as of March 31, 2013:                                  Principal     Amortized Collateral Type                     Amount        Cost        Fair Value                                          (Dollars in thousands) OTTI has not been recognized Government agency              $   932,891$   902,583$   986,934 Prime                              771,283        733,472        785,450 Alt-A                               39,149         39,645         40,070                                $ 1,743,323$ 1,675,700$ 1,812,454 OTTI has been recognized Prime                          $   569,382$   494,102$   517,473 Alt-A                              403,365        318,633        338,527                                $   972,747$   812,735$   856,000 Total by collateral type Government agency              $   932,891$   902,583$   986,934 Prime                            1,340,665      1,227,574      1,302,923 Alt-A                              442,514        358,278        378,597                                $ 2,716,070$ 2,488,435$ 2,668,454 Total by NAIC designation 1                              $ 2,304,669$ 2,119,514$ 2,287,198 2                                  333,818        301,506        312,413 3                                   43,642         38,352         39,077 4                                   30,454         26,825         28,042 6                                    3,487          2,238          1,724                                $ 2,716,070$ 2,488,435$ 2,668,454

The amortized cost and fair value of fixed maturity securities at March 31, 2013, by contractual maturity, are presented in Note 3 to our consolidated financial statements in this form 10-Q, which is incorporated by reference in this Item 2.

                                       40 --------------------------------------------------------------------------------

Unrealized Losses The amortized cost and fair value of fixed maturity securities and equity securities that were in an unrealized loss position were as follows:

                                      Number of       Amortized      Unrealized                                       Securities        Cost           Losses        Fair Value                                                                (Dollars in thousands) March 31, 2013 Fixed maturity securities, available for sale: United States Government sponsored agencies                                      6     $   878,611$    (3,887 )$   874,724United States municipalities, states and territories                              15          63,646            (836 )        62,810 Foreign government obligations                1          14,486            (216 )        14,270 Corporate securities: Finance, insurance and real estate           28         461,864         (13,610 )       448,254 Manufacturing, construction and mining                                       47         649,947         (15,573 )       634,374 Utilities and related sectors                30         416,627         (14,403 )       402,224 Wholesale/retail trade                       10         107,370          (1,779 )       105,591 Services, media and other                    17         376,148          (5,222 )       370,926 Residential mortgage backed securities                                   22         160,927          (6,010 )       154,917 Commercial mortgage backed securities                                   23         219,285          (3,136 )       216,149 Other asset backed securities                11         197,293          (5,798 )       191,495                                             210     $ 3,546,204$   (70,470 )$ 3,475,734 Fixed maturity securities, held for investment: Corporate security: Insurance                                     1     $    76,129$   (13,956 )$    62,173  December 31, 2012 Fixed maturity securities, available for sale: United States Government sponsored agencies                                      6     $   977,196$    (3,468 )$   973,728United States municipalities, states and territories                               8          24,518            (125 )        24,393 Corporate securities: Finance, insurance and real estate           19         276,235         (12,564 )       263,671 Manufacturing, construction and mining                                       34         453,679          (5,584 )       448,095 Utilities and related sectors                20         269,667          (9,399 )       260,268 Wholesale/retail trade                       11         113,032            (992 )       112,040 Services, media and other                    19         267,506          (3,085 )       264,421 Residential mortgage backed securities                                   56         508,576         (27,728 )       480,848 Commercial mortgage backed securities                                   12         163,565          (1,983 )       161,582 Other asset backed securities                11         174,342          (2,973 )       171,369                                             196     $ 3,228,316$   (67,901 )$ 3,160,415 Fixed maturity securities, held for investment: Corporate security: Insurance                                     1     $    76,088$   (14,567 )$    61,521  Equity securities, available for sale: Finance, insurance and real estate            1     $    10,125     $    

(1,403 ) $ 8,722

   Unrealized losses increased $0.6 million from $83.8 million at December 31, 2012 to $84.4 million at March 31, 2013. Unrealized losses increased due to a rise in ten-year treasury yields during the three months ended March 31, 2013.                                         41 --------------------------------------------------------------------------------

The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:

                     Carrying Value of                       Securities with                       Gross                       Gross Unrealized     Percent of     Unrealized    Percent of NAIC Designation           Losses             Total         Losses         Total                                         (Dollars in thousands)  March 31, 2013         1           $         2,112,016         59.5 %   $  (32,975 )        39.1 %         2                     1,231,296         34.7 %      (30,732 )        36.4 %         3                       193,041          5.4 %      (19,915 )        23.6 %         4                        13,786          0.4 %         (290 )         0.3 %         5                             -            - %            -             - %         6                         1,724            - %         (514 )         0.6 %                     $         3,551,863        100.0 %   $  (84,426 )       100.0 % December 31, 2012         1           $         1,992,406         61.5 %   $  (38,125 )        46.2 %         2                     1,071,009         33.1 %      (23,969 )        29.1 %         3                       157,464          4.9 %      (19,410 )        23.5 %         4                        13,812          0.4 %         (299 )         0.4 %         5                             -            - %            -             - %         6                         1,812          0.1 %         (665 )         0.8 %                     $         3,236,503        100.0 %   $  (82,468 )       100.0 %   Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 211 and 198 securities, respectively) have been in a continuous unrealized loss position at March 31, 2013 and December 31, 2012, along with a description of the factors causing the unrealized losses is presented in Note 3 to our consolidated financial statements in this Form 10-Q, which is incorporated by reference in the Item 2.                                         42 --------------------------------------------------------------------------------   The amortized cost and fair value of fixed maturity securities and equity securities in an unrealized loss position and the number of months in a continuous unrealized loss position (fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher considered investment grade) were as follows:                                                                                           Gross                                         Number of       Amortized                      Unrealized                                         Securities        Cost         Fair Value        Losses                                                                  (Dollars in thousands) March 31, 2013 Fixed maturity securities: Investment grade: Less than six months                          161     $ 3,086,927$ 3,040,238$   (46,689 ) Six months or more and less than twelve months                                  11         152,550         147,226          (5,324 ) Twelve months or greater                       12         131,409         121,666          (9,743 ) Total investment grade                        184       3,370,886       3,309,130         (61,756 ) Below investment grade: Less than six months                            6          22,037          21,867            (170 ) Six months or more and less than twelve months                                   4          19,730          19,151            (579 ) Twelve months or greater                       17         209,680         187,759         (21,921 ) Total below investment grade                   27         251,447         228,777         (22,670 )                                               211     $ 3,622,333$ 3,537,907$   (84,426 ) December 31, 2012 Fixed maturity securities: Investment grade: Less than six months                          106     $ 2,464,476$ 2,440,131$   (24,345 ) Six months or more and less than twelve months                                   4          40,054          39,151            (903 ) Twelve months or greater                       14         165,718         155,618         (10,100 ) Total investment grade                        124       2,670,248       2,634,900         (35,348 ) Below investment grade: Less than six months                           23         110,435         108,531          (1,904 ) Six months or more and less than twelve months                                   9         135,915         129,086          (6,829 ) Twelve months or greater                       41         387,806         349,419         (38,387 ) Total below investment grade                   73         634,156         587,036         (47,120 ) Equity securities: Less then six months                            -               -               -               - Six months or more and less than twelve months                                   1          10,125           8,722          (1,403 ) Twelve months or greater                        -               -               -               - Total equity securities                         1          10,125           8,722          (1,403 )                                               198     $ 3,314,529$ 3,230,658$   (83,871 )                                           43

--------------------------------------------------------------------------------   The amortized cost and fair value of fixed maturity securities (excluding United States Government and United States Government sponsored agency securities) segregated by investment grade (NRSRO rating of BBB/Baa or higher) and below investment grade and equity securities that had unrealized losses greater than 20% and the number of months in a continuous unrealized loss position were as follows:                                                                                          Gross                                         Number of       Amortized         Fair        Unrealized                                         Securities        Cost           Value          Losses                                                                  (Dollars in thousands) March 31, 2013 Investment grade: Less than six months                            -     $         -     $        -     $         - Six months or more and less than twelve months                                   -               -              -               - Twelve months or greater                        1          20,000         15,288          (4,712 ) Total investment grade                          1          20,000         15,288          (4,712 ) Below investment grade: Less than six months                            -               -              -               - Six months or more and less than twelve months                                   -               -              -               - Twelve months or greater                        -               -              -               - Total below investment grade                    -               -              -               -                                                 1     $    20,000$   15,288$    (4,712 )  December 31, 2012 Investment grade: Less than six months                            -     $         -     $        -     $         - Six months or more and less than twelve months                                   1          20,000         15,379          (4,621 ) Twelve months or greater                        -               -              -               - Total investment grade                          1          20,000         15,379          (4,621 ) Below investment grade: Less than six months                            1           1,416          1,131            (285 ) Six months or more and less than twelve months                                   -               -              -               - Twelve months or greater                        3           9,324          7,148          (2,176 ) Total below investment grade                    4          10,740          8,279          (2,461 )                                                 5     $    30,740$   23,658$    (7,082 )                                           44

--------------------------------------------------------------------------------   The amortized cost and fair value of fixed maturity securities, by contractual maturity, that were in an unrealized loss position are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives, and are shown below as a separate line.                                         Available for sale                Held for investment                                      Amortized                         Amortized                                        Cost         Fair Value           Cost            Fair Value                                                          (Dollars in thousands) March 31, 2013 Due in one year or less            $         -     $         -     $          -        $          - Due after one year through five years                                   24,139          23,532                -                   - Due after five years through ten years                                  984,293         972,723                -                   - Due after ten years through twenty years                         1,334,845       1,314,224                -                   - Due after twenty years                 625,422         602,694           76,129              62,173                                      2,968,699       2,913,173           76,129              62,173 Residential mortgage backed securities                             160,927         154,917                -                   - Commercial mortgage backed securities                             219,285         216,149                -                   - Other asset backed securities          197,293         191,495                -                   -                                    $ 3,546,204$ 3,475,734$     76,129$     62,173  December 31, 2012 Due in one year or less            $         -     $         -     $          -        $          - Due after one year through five years                                   22,160          21,059                -                   - Due after five years through ten years                                  623,802         617,848                -                   - Due after ten years through twenty years                         1,319,250       1,302,283                -                   - Due after twenty years                 416,621         405,426           76,088              61,521                                      2,381,833       2,346,616           76,088              61,521 Residential mortgage backed securities                             508,576         480,848                -                   - Commercial mortgage backed securities                             163,565         161,582                -                   - Other asset backed securities          174,342         171,369                -                   -                                    $ 3,228,316$ 3,160,415$     76,088$     61,521   International Exposure We hold fixed maturity securities with international exposure. As of March 31, 2013, 15% of the carrying value of our fixed maturity securities was comprised of corporate debt securities of issuers based outside of the United States and debt securities of foreign governments. All of these securities are denominated in U.S. dollars and all are investment grade (NAIC designation of either 1 or 2), except for twelve securities with a total fair value of $74.5 million which are all NAIC 3 and one security (fair value of $2.3 million) which has an NAIC 4 designation. Our investment professionals analyze each holding for credit risk by economic and other factors of each country and industry. The following table presents our international exposure in our fixed maturity portfolio by country or region:                                           March 31, 2013                                                                    Percent                                                                    of Total                                                   Carrying         Carrying                          Amortized Cost      Amount/Fair Value      Amount                                  (Dollars in thousands) GIIPS (1)               $        209,302    $           223,192      0.9% Asia/Pacific                     172,580                184,119      0.7% Non-GIIPS Europe               1,561,897              1,683,615      6.6% Latin America                    203,496                215,219      0.8% Non-U.S. North America           673,326                740,490      2.9% Australia & New Zealand          341,006                367,790      1.4% Other                            336,066                376,593      1.5%                         $      3,497,673    $         3,791,018     14.8%   

(1) Greece, Ireland, Italy, Portugal and Spain continue to cause credit risk as economic conditions in these countries continue to be volatile, especially within the financial and banking sectors. All of our exposure in GIIPS are corporate securities with issuers domiciled in these countries. None of our foreign government obligations were held in any of these countries.

                                       45 --------------------------------------------------------------------------------   Watch List At each balance sheet date, we identify invested assets which have characteristics (i.e. significant unrealized losses compared to amortized cost and industry trends) creating uncertainty as to our future assessment of an other than temporary impairment. As part of this assessment, we review not only a change in current price relative to its amortized cost but the issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength. Specifically for corporate issues we evaluate the financial stability and quality of asset coverage for the securities relative to the term to maturity for the issues we own. A security which has a 25% or greater change in market price relative to its amortized cost and a possibility of a loss of principal will be included on a list which is referred to as our watch list. We exclude from this list securities with unrealized losses which are related to market movements in interest rates and which have no factors indicating that such unrealized losses may be other than temporary as we do not intend to sell these securities and it is more likely than not we will not have to sell these securities before a recovery is realized. In addition, we exclude our RMBS as we monitor all of our RMBS on a quarterly basis for changes in default rates, loss severities and expected cash flows for the purpose of assessing potential other than temporary impairments and related credit losses to be recognized in operations. At March 31, 2013, the amortized cost and fair value of securities on the watch list are as follows:                                                                                                            Months                                                                                            Months in     Unrealized                                                                                           Continuous       Losses                            Number of      Amortized      Unrealized                       Unrealized      Greater General Description        Securities        Cost          Losses         Fair Value     Loss Position    Than 20%                                                     (Dollars in thousands) Investment grade Corporate fixed maturity securities: Finance                            3     $   49,505$    (5,924 )$     43,581        19 - 28        0 - 17 Industrial                         3         28,879          (4,840 )         24,039        5 - 31           - Industrial                         1          9,372             101            9,473           -             -                                    7     $   87,756$   (10,663 )$     77,093 Below investment grade Corporate fixed maturity securities: Industrial                         1         20,609          (2,153 )         18,456          22             -                                    8     $  108,365         (12,816 )   $     95,549   A majority of the investment grade securities on the watch list have Eurozone exposure that has contributed to their depressed fair values. Our analysis of all of the securities on the watch list that we have determined are temporarily impaired and their credit performance at March 31, 2013 is as follows: Finance: The decline in value of these securities which are rated investment grade is due to the continued wide spreads as a result of the ongoing concerns relating to capital, asset quality and earnings stability due to the financial events of the past three years and the ongoing events in the Eurozone, specifically the sovereign debt crisis. While these issuers have had their financial position and profitability weakened by the credit and liquidity crisis, we have determined that these securities were not other than temporarily impaired due to our evaluation of the operating performance and the credit worthiness of each individual issuer. Industrial: The decline in value of these securities relates to ongoing operational issues or recent corporate actions. These issues have caused the price for these securities to decline; however, the companies have strong liquidity and ample time to strengthen their credit profile. We have determined that these securities were not other than temporarily impaired due to the issuers' very strong market positions, restructuring actions that are expected to favorable impact future profitability and a history of strong reliable operating performance, improving economic conditions and rising security prices. Other Than Temporary Impairments We have a policy and process in place to identify securities in our investment portfolio for which we should recognize impairments. See Critical Accounting Policies-Evaluation of Other Than Temporary Impairments included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2012. We recognized other than temporary impairments and additional credit losses on a number of securities for which we have previously recognized OTTI. A summary of OTTI is presented in Note 3 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2. Several factors led us to believe that full recovery of amortized cost will not be expected. A discussion of these factors and our policy and process in place to identify securities that could potential have impairment that is other than temporary is in Note 3 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.                                         46 --------------------------------------------------------------------------------   Mortgage Loans on Real Estate Our commercial mortgage loan portfolio consists of mortgage loans collateralized by the related properties and diversified as to property type, location, and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. Our commercial mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts net of valuation allowances. At March 31, 2013 and December 31, 2012 the largest principal amount outstanding for any single mortgage loan was $14.8 million and $15.0 million, respectively, and the average loan size was $2.5 million and $2.4 million as of March 31, 2013 and December 31, 2012. respectively. We have the contractual ability to pursue full personal recourse on 11.6% of the loans and partial personal recourse on 34.3% of the loans. In addition, the average loan to value ratio for the overall portfolio was 56.1% and 53.5% at March 31, 2013 and December 31, 2012, respectively, based upon the underwriting and appraisal at the time the loan was made. This loan to value is indicative of our conservative underwriting policies and practices for making commercial mortgage loans and may not be indicative of collateral values at the current reporting date. Our current practice is to only obtain market value appraisals of the underlying collateral at the inception of the loan unless we identify indicators of impairment in our ongoing analysis of the portfolio, in which case, we either calculate a value of the collateral using a capitalization method or obtain a current appraisal of the underlying collateral. The commercial mortgage loan portfolio is summarized by geographic region and property type in Note 4 - Mortgage Loans on Real Estate in our Consolidated Financial Statements. In the normal course of business, we commit to fund commercial mortgage loans up to 90 days in advance. At March 31, 2013, we had commitments to fund commercial mortgage loans totaling $73.0 million, with fixed interest rates ranging from 3.85% to 4.60%. During 2012 and 2013, the commercial mortgage loan industry has been very competitive. This competition has resulted in a number of borrowers refinancing with other lenders. For the three months ended March 31, 2013, we received $105.2 million in cash for loans being paid in full compared to $78.6 million for the three months ended March 31, 2012. Some of the loans being paid off have either reached their maturity or are nearing maturity; however, some borrowers are paying the prepayment fee and refinancing at a lower rate. See Note 4 to our unaudited consolidated financial statements for a presentation of our specific and general loan loss allowances, foreclosure activity and troubled debt restructure analysis. We recorded impairment losses of $1.1 million on one mortgage loan with outstanding principal due totaling $3.5 million during the three months ended March 31, 2013. We recorded impairment losses of $6.8 million on twelve mortgage loans with outstanding principal due totaling $37.5 million during the same period in 2012. In 2012, we initiated a process by which we evaluate the credit quality of each of our commercial mortgage loans. This process utilizes each loan's debt service coverage ratio as a primary metric. A summary of our portfolio by debt service coverage ratio follows:                                          March 31, 2013                 December 31, 2012                                                     Percent of                       Percent of                                                       Total                            Total                                     Principal       Principal        Principal       Principal                                    Outstanding     Outstanding      Outstanding     Outstanding                                                      (Dollars in thousands) Debt Service Coverage Ratio: Greater than or equal to 1.5     $   1,530,027           58.3 %   $   1,517,840           57.1 % Greater than or equal to 1.2 and less than 1.5                          589,978           22.4 %         604,512           22.7 % Greater than or equal to 1.0 and less than 1.2                          246,114            9.4 %         262,165            9.9 % Less than 1.0                          259,618            9.9 %         274,366           10.3 %                                  $   2,625,737          100.0 %   $   2,658,883          100.0 %   At March 31, 2013, we have six mortgages that are in the process of being satisfied by our taking ownership of the real estate serving as collateral. These loans have an outstanding principal balance of $19.4 million and we have recorded specific loan loss allowances totaling $7.5 million, all of which were recognized in periods prior to the first quarter of 2013. We also have eleven commercial mortgage loans at March 31, 2013 with an outstanding principal balance of $28.3 million that have been given "workout" terms which generally allow for interest only payments or the capitalization of interest for a specified period of time and we have recorded specific loan loss allowances on four of these loans (principal balance of $8.9 million) of $3.2 million. At March 31, 2013, we had no commercial mortgage loans that were delinquent (60 days or more past due at the reporting date). The total outstanding principal balance of these seventeen loans is $47.7 million, which represents less than 2% of our total mortgage loan portfolio.                                         47 --------------------------------------------------------------------------------   Mortgage loans summarized in the following table represent all loans that we are either not currently collecting or those we feel it is probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower to alleviate short-term cash flow issues, loans delinquent for 60 days or more at the reporting date, loans we have determined to be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).                                                  March 31, 2013     December 31, 2012                                                         (Dollars in thousands) Mortgage loans with allowances                  $       44,299     $        

53,110

 Mortgage loans with no allowance for losses             22,632              

27,765

 Allowance for probable loan losses                     (22,631 )             (23,134 ) Net carrying value of impaired mortgage loans   $       44,300     $        

57,741

   Derivative Instruments Our derivative instruments primarily consist of call options purchased to provide the income needed to fund the annual index credits on our fixed index annuity products. The fair value of the call options is based upon the amount of cash that would be required to settle the call options obtained from the counterparties adjusted for the nonperformance risk of the counterparty. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options. We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. A presentation of our derivative instruments along with a discussion of the business strategy involved with our derivatives is included in Note 5 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2. Liquidity and Capital Resources Our insurance subsidiaries continue to have adequate cash flows from annuity deposits and investment income to meet their policyholder and other obligations. Net cash flows from annuity deposits and funds returned to policyholders as surrenders, withdrawals and death claims were $531.4 million in the three months ended March 31, 2013 compared to $515.4 million for the three months ended March 31, 2012, with the increase attributable to a $6.6 million increase in net annuity deposits after coinsurance and a $9.4 million (after coinsurance) decrease in funds returned to policyholders. We continue to invest the net proceeds from policyholder transactions and investment activities in high quality fixed maturity securities and fixed rate commercial mortgage loans. As discussed above under Overview, we have been through several cycles of calls of our United States Government callable agency securities that has resulted in excess cash and other short-term investments beginning in 2010. We reduced the average balance for excess cash and other short-term investments to $1.8 billion during the three months ended March 31, 2013 from $2.7 billion during the three months ended December 31, 2012. The average balance during the three months ended March 31, 2012 was $759 million. The growth of this balance in 2012 was primarily attributable to calls of U.S. Government agency securities. At March 31, 2013, we held $1.3 billion in excess cash and other short-term investments compared to $2.2 billion at December 31, 2012. At March 31, 2013, 31% of our fixed income securities have call features and 0.3% ($0.1 billion) were subject to call redemption. Another 8% ($1.8 billion) will become subject to call redemption during the next twelve months, of which $522.3 million are short-term U.S. Government agency securities with a book yield of 0.76%. We, as the parent company, are a legal entity separate and distinct from our subsidiaries, and have no business operations. We need liquidity primarily to service our debt, including the convertible senior notes and subordinated debentures issued to subsidiary trusts, pay operating expenses and pay dividends to stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible payments from our subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our subsidiaries. These sources provide adequate cash flow to us to meet our current and reasonably foreseeable future obligations and we expect they will be adequate to fund our parent company cash flow requirements for the rest of 2013. The ability of our life insurance subsidiaries to pay dividends or distributions, including surplus note payments, will be limited by applicable laws and regulations of the states in which our life insurance subsidiaries are domiciled, which subject our life insurance subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay. Currently, American Equity Life may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life's net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life's statutory capital and surplus at the preceding December 31. For 2013, up to $99.2 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of statutory earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities in the life subsidiary's state of domicile. American Equity Life had $710.4 million of statutory earned surplus at December 31, 2012. The maximum distribution permitted by law or contract is not necessarily indicative of an insurer's actual ability to pay such distributions, which may be constrained by business and regulatory considerations, such as the impact of such distributions on surplus, which could affect the insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends or make other distributions.                                         48

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   Further, state insurance laws and regulations require that the statutory surplus of our life subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for their financial needs. Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from A.M. Best. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for our insurance subsidiaries which, in turn, could negatively affect the cash available to us from insurance subsidiaries. As of March 31, 2013, we estimate American Equity Life has sufficient statutory capital and surplus, combined with capital available to the holding company, to meet this rating objective. However, this capital may not be sufficient if significant future losses are incurred or A.M. Best modifies its rating criteria and, given the current market conditions, access to additional capital could be limited. The transfer of funds by American Equity Life is also restricted by a covenant in our line of credit agreement which requires American Equity Life to maintain a minimum risk-based capital ratio of 275% and a minimum level of statutory surplus equal to the sum of 1) 80% of statutory surplus at December 31, 2010, 2) 50% of the statutory net income for each fiscal quarter ending after December 31, 2010, and 3) 50% of all capital contributed to American Equity Life after September 30, 2010. American Equity Life's risk-based capital ratio was 332% at December 31, 2012. Under this agreement we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35 and a minimum cash coverage ratio of 1.0. Cash and cash equivalents of the parent holding company at March 31, 2013, was $22.6 million. In addition, we have a $160 million line of credit, with no borrowings outstanding, available through January 2014 for general corporate purposes of the parent company and its subsidiaries. We also have the ability to issue equity, debt or other types of securities through one or more methods of distribution under a currently effective shelf registration statement on Form S-3. The terms of any offering would be established at the time of the offering, subject to market conditions. On March 25, 2013, notice of mandatory redemption was issued for our 2024 notes. $25.8 million principal amount of the convertible notes exercised their conversion rights prior to the April 30, 2013 mandatory redemption date. The holders of these notes will receive the principal amount of their notes in cash and the conversion premium in shares of our common stock. The final number of shares to be issued will be determined based upon the "ten day average closing price" for our common stock on the ten consecutive trading days beginning on the second trading day following the day the notes were submitted for conversion. The balance of the convertible notes ($2.5 million principal amount) will be redeemed for cash. Cash needed to redeem the outstanding notes will be a mix of current cash and cash equivalents of the parent holding company and a draw of funds on our $160 million line of credit. New Accounting Pronouncements See   Note 1 - Significant Accounting Policies   to the Consolidated Financial Statements, which is incorporated by reference in this Item 2, for new accounting pronouncement disclosures that supplements the disclosure in Note 1 - Significant Accounting Policies to the Consolidated Financial Statements of our 2012 Annual Report on Form 10-K.