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Investments
 12 Months Ended
Dec. 31, 2012
Investments [Abstract]  
Investments

NOTE 2 - Investments

Net Investment Income

The components of net investment income for the following periods were:

 

                         
    Year Ended December 31,  
    2012     2011     2010  
       

Fixed maturities

   $ 297,042     $ 285,782     $ 266,894  

Equity securities

     2,814       1,685       4,070  

Short-term and other investments

     8,109       7,891       8,588  

Other invested asset

     5,892       -       -  
   

 

 

    

 

 

    

 

 

  

Total investment income

     313,857       295,358       279,552  

Investment expenses

     (7,854 )      (7,047 )      (7,498 ) 
   

 

 

    

 

 

    

 

 

  

Net investment income

   $ 306,003     $ 288,311     $ 272,054  
   

 

 

    

 

 

    

 

 

  

Realized Investment Gains (Losses)

Realized investment gains (losses) for the following periods were:

 

                         
    Year Ended December 31,  
    2012     2011     2010  

Fixed maturities

   $ 23,218     $ 37,466     $ 21,796  

Equity securities

     4,080       197       (220 ) 

Short-term and other investments

     -       -       2,193  
   

 

 

    

 

 

    

 

 

  

Realized investment gains

   $ 27,298     $ 37,663     $ 23,769  
   

 

 

    

 

 

    

 

 

  

The Company, from time to time, sells invested assets subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are generally due to issuer-specific events occurring subsequent to the balance sheet date that result in a change in the Company’s intent or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company’s investment strategy.

For the year ended December 31, 2012, the Company’s net realized investment gains of $27,298 included $39,941 of gross gains realized on security sales and calls partially offset by $12,643 of realized losses on securities that were disposed of during 2012. There were no other-than-temporary impairment write-downs on securities in the current period.

 

For the year ended December 31, 2011, the Company’s net realized investment gains of $37,663 included $39,709 of gross gains realized on security sales and calls partially offset by $1,974 of realized losses on securities that were disposed of during 2011 and $72 of other-than-temporary impairment write-downs on securities. In 2011, the other-than-temporary impairment write-downs were related primarily to further impairment on securities the Company had previously impaired.

For the year ended December 31, 2010, the Company’s net realized investment gains of $23,769 included $51,220 of gross gains realized on security sales and calls partially offset by $20,655 of realized losses on securities that were disposed of during 2010 and $6,796 of other-than-temporary impairment write-downs on securities. In the fourth quarter of 2010, losses of $15,152 were realized on security disposals, primarily related to commercial mortgage-backed securities risk reduction actions. In 2010, the other-than-temporary impairment write-downs were related primarily to securities that the Company intended to sell.

 

Fixed Maturities and Equity Securities

At December 31, 2012, the combined gross unrealized loss in the fixed maturities and equity securities portfolios was $11,180 (199 positions, the fair value of which represented 5.3% of total fixed maturities and equity securities fair value). The following table presents the fair value and gross unrealized losses of fixed maturity securities and equity securities in an unrealized loss position at December 31, 2012 and 2011, respectively. The Company views the decrease in value of all of the securities with unrealized losses at December 31, 2012 -- which was driven largely by spread widening, financial market illiquidity, market volatility and changes in interest rates from the date of acquisition -- as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of the amortized cost bases. In addition, management expects to recover the entire cost basis of the fixed maturity securities. For equity securities, the Company has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected within a reasonable period of time. Therefore, no impairment of these securities was recorded at December 31, 2012.

 

                                                             
    12 months or less   More than 12 months   Total
        Gross       Gross       Gross
        Unrealized       Unrealized       Unrealized
    Fair Value   Losses   Fair Value   Losses   Fair Value   Losses

December 31, 2012

                                                            

Fixed maturity securities

                                                            

U.S. government and federally sponsored agency obligations:

                                                            

Mortgage-backed securities

     $ 11,006       $ 124       $ 50       $ 1       $ 11,056       $ 125  

Other

       9,944         135         -         -         9,944         135  

Municipal bonds

       108,578         2,605         3,990         43         112,568         2,648  

Foreign government bonds

       -         -         -         -         -         -  

Corporate bonds

       56,481         875         26,725         4,075         83,206         4,950  

Other mortgage-backed securities

       58,218         621         25,014         1,411         83,232         2,032  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  

Total fixed maturity securities

       244,227         4,360         55,779         5,530         300,006         9,890  

Equity securities (1)

       19,344         1,288         9         2         19,353         1,290  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  

Combined totals

     $ 263,571       $ 5,648       $ 55,788       $ 5,532       $ 319,359       $ 11,180  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  
             

Number of positions with a gross unrealized loss

       156                   43                   199            

Fair value as a percentage of total fixed maturities and equity securities fair value

       4.4 %                 0.9 %                 5.3 %          
             

December 31, 2011

                                                            

Fixed maturity securities

                                                            

U.S. government and federally sponsored agency obligations:

                                                            

Mortgage-backed securities

     $ 3,519       $ 133       $ 1,511       $ 11       $ 5,030       $ 144  

Other

       -         -         -         -         -         -  

Municipal bonds

       24,047         270         19,309         750         43,356         1,020  

Foreign government bonds

       -         -         -         -         -         -  

Corporate bonds

       273,209         9,752         26,977         6,346         300,186         16,098  

Other mortgage-backed securities

       115,986         3,222         36,944         12,569         152,930         15,791  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  

Total fixed maturity securities

       416,761         13,377         84,741         19,676         501,502         33,053  

Equity securities (1)

       -         -         4,865         326         4,865         326  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  

Combined totals

     $ 416,761       $ 13,377       $ 89,606       $ 20,002       $ 506,367       $ 33,379  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  
             

Number of positions with a gross unrealized loss

       159                   44                   203            

Fair value as a percentage of total fixed maturities and equity securities fair value

       7.7 %                 1.6 %                 9.3 %          

 

 

(1) Includes nonredeemable (perpetual) preferred stocks and common stocks.

 

Fixed maturities and equity securities with an investment grade rating represented 74% of the gross unrealized loss as of December 31, 2012. The largest single unrealized loss was $2,505 on a floating-rate corporate bond rated BBB issued by a large U.S. financial institution, which was purchased in 2007. The fixed maturities and equity securities portfolio included 43 securities that have been in an unrealized loss position for greater than 12 months, with an unrealized loss totaling $5,532. With respect to fixed income securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.

Compared to December 31, 2011, the 2012 improvement in unrealized investment gains and losses was due to slightly lower yields on U.S. Treasury securities and narrowing credit spreads across virtually all asset classes, the combination of which resulted in an increase in net unrealized gains for the Company’s holdings of corporate securities, municipal securities, commercial and residential mortgage-backed securities and asset-backed securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment (“OTTI”) included in accumulated other comprehensive income (loss) (“AOCI”) of all fixed maturities and equity securities in the portfolio as of December 31, 2012 and 2011 were as follows:

 

                                                   
    Amortized   Unrealized   Unrealized   Fair   OTTI in
    Cost or Cost   Gains   Losses   Value   AOCI (2)

December 31, 2012

                                                  

Fixed maturity securities

                                                  

U.S. government and federally sponsored agency obligations (1):

                                                  

Mortgage-backed securities

     $ 547,040       $ 72,644       $ 125       $ 619,559       $ -  

Other, including

                                                  

U.S. Treasury securities

       371,706         37,857         135         409,428         -  

Municipal bonds

       1,402,424         186,261         2,648         1,586,037         -  

Foreign government bonds

       48,476         9,393         -         57,869         -  

Corporate bonds

       2,258,554         313,430         4,950         2,567,034         -  

Other mortgage-backed securities

       683,257         41,080         2,032         722,305         3,214  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  

Totals

     $ 5,311,457       $ 660,665       $ 9,890       $ 5,962,232       $ 3,214  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  
           

Equity securities

     $ 52,396       $ 2,397       $ 1,290       $ 53,503       $ -  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  
           

December 31, 2011

                                                  

Fixed maturity securities

                                                  

U.S. government and federally sponsored agency obligations (1):

                                                  

Mortgage-backed securities

     $ 532,554       $ 71,402       $ 144       $ 603,812       $ -  

Other, including

                                                  

U.S. Treasury securities

       560,036         43,705         -         603,741         -  

Municipal bonds

       1,291,281         122,857         1,020         1,413,118         -  

Foreign government bonds

       44,529         5,095         -         49,624         -  

Corporate bonds

       1,967,229         205,413         16,098         2,156,544         -  

Other mortgage-backed securities

       588,760         22,024         15,791         594,993         2,136  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  

Totals

     $ 4,984,389       $ 470,496       $ 33,053       $ 5,421,832       $ 2,136  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  
           

Equity securities

     $ 23,070       $ 4,030       $ 326       $ 26,774       $ -  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

  

 

 

(1)

Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $375,111 and $547,521; Federal Home Loan Mortgage Corporation (“FHLMC”) of $418,174 and $374,361; and Government National Mortgage Association (“GNMA”) of $136,998 and $124,515 as of December 31, 2012 and 2011, respectively.

(2)

Represents the amount of other-than-temporary impairment losses in AOCI which, beginning April 1, 2009, was not included in earnings under current accounting guidance. Amounts also include unrealized gains/(losses) on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.

 

The Company’s investment portfolio includes no free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics).

Credit Losses

The following table summarizes the cumulative amounts related to the Company’s credit loss component of the other-than-temporary impairment losses on fixed maturity securities held as of December 31, 2012 and 2011 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of the other-than-temporary impairment losses were recognized in other comprehensive income:

 

                     
    Year Ended December 31,
   

  2012  

  

  2011  

Cumulative credit loss (1)

                    

Beginning of period

     $ 3,957       $ 4,518  

New credit losses

       -         -  

Losses related to securities sold or paid down during the period

       (1,080 )       (561 )
     

 

 

      

 

 

  

End of period

     $ 2,877       $ 3,957  
     

 

 

      

 

 

  

 

 

(1)

The cumulative credit loss amounts exclude other-than-temporary impairment losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before the recovery of the amortized cost basis.

Maturities/Sales of Fixed Maturities and Equity Securities

The following table presents the distribution of the Company’s fixed maturities portfolio as of December 31, 2012 by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.

 

                               
    December 31, 2012
            Percent of
    Amortized   Fair   Total Fair
    Cost   Value   Value

Estimated expected maturity:

                              

Due in 1 year or less

     $ 228,109       $ 256,057         4.3 %

Due after 1 year through 5 years

       1,104,146         1,239,429         20.8  

Due after 5 years through 10 years

       2,037,645         2,287,304         38.4  

Due after 10 years through 20 years

       993,533         1,115,264         18.7  

Due after 20 years

       948,024         1,064,178         17.8  
     

 

 

      

 

 

      

 

 

  

Total

     $ 5,311,457       $ 5,962,232         100.0 %
     

 

 

      

 

 

      

 

 

  
       

Average option-adjusted duration, in years

       6.3                      

 

Proceeds received from sales of fixed maturities and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each year were:

 

                               
    Year Ended December 31,
    2012   2011   2010

Fixed maturity securities

                              

Proceeds received

     $ 576,708       $ 587,909       $ 673,882  

Gross gains realized

       32,532         39,463         39,939  

Gross losses realized

       (11,971 )       (2,047 )       (18,495 )
       

Equity securities

                              

Proceeds received

     $ 6,057       $ 1,078       $ 35,499  

Gross gains realized

       231         247         1,520  

Gross losses realized

       (438 )       -         (1,801 )

Unrealized Gains and Losses on Fixed Maturities and Equity Securities

Net unrealized gains and losses are computed as the difference between fair value and amortized cost for fixed maturities or cost for equity securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated other comprehensive income (loss), before the impact on deferred policy acquisition costs:

 

                               
    Year Ended December 31,
    2012   2011   2010

Net unrealized investment gains (losses) on
fixed maturity securities, net of tax

                              

Beginning of period

     $ 284,338       $ 118,498       $ 24,599  

Change in unrealized investment gains and losses

       153,758         190,193         108,066  

Reclassification of net realized investment (gains) losses to net income

       (15,092 )       (24,353 )       (14,167 )
     

 

 

      

 

 

      

 

 

  

End of period

     $ 423,004       $ 284,338       $ 118,498  
     

 

 

      

 

 

      

 

 

  
       

Net unrealized investment gains (losses) on equity securities, net of tax

                             

Beginning of period

     $ 2,408       $ 2,139       $ (1,189 )

Change in unrealized investment gains and losses

       964         397         3,185  

Reclassification of net realized investment (gains) losses to net income

       (2,652 )       (128 )       143  
     

 

 

      

 

 

      

 

 

  

End of period

     $ 720       $ 2,408       $ 2,139  
     

 

 

      

 

 

      

 

 

  

Securities Lending

The Company has a program in place whereby it may loan fixed income securities to third parties, primarily major brokerage firms; however, the Company’s securities lending program was suspended as of December 31, 2012. During the years ended and as of December 31, 2012 and 2011, there were no fixed income securities on loan.

Investment in Entities Exceeding 10% of Shareholders’ Equity

At December 31, 2012 and 2011, there were no investments which exceeded 10% of total shareholders’ equity in entities other than obligations of the U.S. Government and federally sponsored government agencies and authorities.

 

Deposits

At December 31, 2012 and 2011, securities with a fair value of $18,565 and $18,779, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business.