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Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2013
Summary of Significant Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | NOTE 1 - Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”), specifically Regulation S-X and the instructions to Form 10-K. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Horace Mann Educators Corporation and its wholly-owned subsidiaries (“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”). HMEC and its subsidiaries have common management, share office facilities and are parties to several intercompany service agreements for management, administrative, data processing, agent commissions, agency services, utilization of personnel and investment advisory services. Under these agreements, costs have been allocated among the companies in conformity with GAAP. In addition, certain of the subsidiaries have entered into intercompany reinsurance agreements. HMEC and its subsidiaries file a consolidated federal income tax return, and there are related tax sharing agreements. All significant intercompany balances and transactions have been eliminated in consolidation. The subsidiaries of HMEC market and underwrite personal lines of property and casualty (primarily personal lines automobile and homeowners) insurance, retirement annuities (primarily tax-qualified products) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds. The Company has evaluated subsequent events through the date these consolidated financial statements were issued. Investments The Company invests primarily in fixed maturity securities (“fixed maturities”). This category includes primarily bonds and notes, but also includes redeemable preferred stocks. These securities are classified as available for sale and carried at fair value. The net adjustment for unrealized gains and losses on all securities available for sale, carried at fair value, is recorded as a separate component of accumulated other comprehensive income within shareholders' equity, net of applicable deferred taxes and the related impact on deferred policy acquisition costs associated with interest-sensitive life and annuity contracts that would have occurred if the securities had been sold at their aggregate fair value and the proceeds reinvested at current yields. Equity securities are classified as available for sale and carried at fair value. This category includes nonredeemable preferred stocks and common stocks. Short-term and other investments are comprised of short-term fixed income securities, generally carried at cost which approximates fair value; policy loans, carried at unpaid principal balances; mortgage loans, carried at unpaid principal less a valuation allowance for estimated uncollectible amounts; certain alternative investments which are accounted for as equity method investments; and restricted Federal Home Loan Bank membership and activity stocks, carried at redemption value which approximates fair value. The Company invests in fixed maturity securities and alternative investment funds that could qualify as variable interest entities, including corporate securities, mortgage-backed securities and asset-backed securities. The Company is not the primary beneficiary of these securities as the Company does not have the power to direct the activities that most significantly impact the entities’ performance. Interest income is recognized as earned. Investment income reflects amortization of premiums and accrual of discounts on an effective-yield basis. Realized gains and losses arising from the disposal (recorded on a trade date basis) or impairment of securities are determined based upon specific identification of securities. The Company evaluates all investments in its portfolio for other-than-temporary declines in value as described in the following section. Other-than-temporary Impairment of Investments The Company's methodology of assessing other-than-temporary impairments is based on security-specific facts and circumstances as of the balance sheet date. Based on these facts, if (1) the Company has the intent to sell the fixed maturity security, (2) it is more likely than not the Company will be required to sell the fixed maturity security before the anticipated recovery of the amortized cost basis, or (3) management does not expect to recover the entire cost basis of the fixed maturity security, an other-than-temporary impairment is considered to have occurred. For equity securities, if (1) the Company does not have the ability and intent to hold the security for the recovery of cost or (2) recovery of cost is not expected within a reasonable period of time, an other-than-temporary impairment is considered to have occurred. Additionally, if events become known that call into question whether the security issuer has the ability to honor its contractual commitments, such security holding will be evaluated to determine whether or not such security has suffered an other-than-temporary decline in value. The Company reviews the fair value of all investments in its portfolio on a monthly basis to assess whether an other-than-temporary decline in value has occurred. These reviews, in conjunction with the Company's investment managers' monthly credit reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer, (2) the length of time and extent to which the fair value has been less than amortized cost for fixed maturity securities or cost for equity securities, (3) for fixed maturity securities, the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the anticipated recovery in the amortized cost basis; and for equity securities, the Company’s ability and intent to hold the security for the recovery of cost or if recovery of cost is not expected within a reasonable period of time, (4) the stock price trend of the issuer, (5) the market leadership position of the issuer, (6) the debt ratings of the issuer, and (7) the cash flows and liquidity of the issuer or the underlying cash flows for asset-backed securities, are all considered in the impairment assessment. A write-down of an investment is recorded when a decline in the fair value of that investment is deemed to be other-than-temporary, with a realized investment loss charged to income for the period for all equity securities and for the credit-related loss portion associated with impaired fixed maturity securities. The amount of the total other-than-temporary impairment related to non-credit factors for fixed maturity securities is recognized in other comprehensive income, net of applicable taxes, unless the Company has the intent to sell the security or if it is more likely than not the Company will be required to sell the security before the anticipated recovery of the amortized cost basis. A decline in fair value below amortized cost is not assumed to be other-than-temporary for fixed maturity investments with unrealized losses due to spread widening, market illiquidity or changes in interest rates where there exists a reasonable expectation based on the Company’s consideration of all objective information available that the Company will recover the entire cost basis of the security and the Company does not have the intent to sell the investment before maturity or a market recovery is realized and it is more likely than not the Company will not be required to sell the investment. An other-than-temporary impairment loss will be recognized based upon all relevant facts and circumstances for each investment, as appropriate. Additional considerations for certain types of securities include the following: Corporate Fixed Maturity Securities Judgments regarding whether a corporate fixed maturity security is other-than-temporarily impaired include analyzing the issuer’s financial condition and whether there has been a decline in the issuer’s ability to service the specific security. The analysis of the security issuer is based on asset coverage, cash flow multiples or other industry standards. Several factors assessed include, but are not limited to, credit quality ratings, cash flow sustainability, liquidity, financial strength, industry and market position. Sources of information include, but are not limited to, management projections, independent consultants, external analysts’ research, peer analysis and the Company’s internal analysis. If the Company has concerns regarding the viability of the issuer or its ability to service the specific security after this assessment, a cash flow analysis is prepared to determine if the present value of future cash flows has declined below the amortized cost of the fixed maturity security. This analysis to determine an estimate of ultimate recovery value is combined with the estimated timing to recovery and any other applicable cash flows that are expected. If a cash flow analysis estimate is not feasible, then the market’s view of cash flows implied by the period end fair value, market discount rates and effective yield are the primary factors used to estimate a recovery value. Mortgage-Backed Securities Not Issued By the U.S. Government or Federally Sponsored Agencies The Company uses an estimate of future cash flows expected to be collected to evaluate its mortgage-backed securities for other-than-temporary impairment. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. Information includes, but is not limited to, debt-servicing, missed refinancing opportunities and geography. Loan level characteristics such as issuer, FICO score, payment terms, level of documentation, property or residency type, and economic outlook are also utilized in financial models, along with historical performance, to estimate or measure the loan’s propensity to default. Additionally, financial models take into account loan age, lease rollovers, rent volatilities, vacancy rates and exposure to refinancing as additional drivers of default. For transactions where loan level data is not available, financial models use a proxy based on the collateral characteristics. Loss severity is a function of multiple factors including, but not limited to, the unpaid balance, interest rate, mortgage insurance ratios, assessed property value at origination, change in property valuation and loan-to-value ratio at origination. Prepayment speeds, both actual and estimated, cost of capital rates and debt service ratios are also considered. The cash flows generated by the collateral securing these securities are then estimated with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to estimate the cash flows associated with the residential or commercial mortgage-backed security held by the Company. Municipal Bonds The Company’s municipal bond portfolio consists primarily of special revenue bonds, which present unique considerations in evaluating other-than-temporary impairments, but also includes general obligation bonds. The Company evaluates special revenue bonds for other-than-temporary impairment based on guarantees associated with the repayment from revenues generated by the specified revenue-generating activity associated with the purpose of the bonds. Judgments regarding whether a municipal bond is other-than-temporarily impaired include analyzing the issuer’s financial condition and whether there has been a decline in the overall financial condition of the issuer or its ability to service the specific security. Security credit ratings are reviewed with emphasis on the economy, finances, debt and management of the municipal issuer. Certain securities may be guaranteed by the mono-line credit insurers or other forms of guarantee. While not relied upon in the initial security purchase decision, insurance benefits are considered in the assessments for other-than-temporary impairment, including the credit worthiness of the guarantor. Municipalities possess unique powers, along with a special legal standing and protections, that enable them to act quickly to restore budgetary balance and fiscal integrity. These powers include the sovereign power to tax, access to one-time revenue sources, capacity to issue or restructure debt, and ability to shift spending to other authorities. State governments often provide secondary support to local governments in times of financial stress and the federal government has provided assistance to state governments during recessions. If the Company has concerns regarding the viability of the municipal issuer or its ability to service the specific security after this analysis, a cash flow analysis is prepared to determine a present value and whether it has declined below the amortized cost of the security. If a cash flow analysis is not feasible, then the market’s view of the period end fair value, market discount rates and effective yield are the primary factors used to estimate the present value. Credit Losses The Company estimates the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. Corporate fixed maturity security and municipal bond cash flow estimates are derived from scenario-based outcomes of expected restructurings or the disposition of assets using specific facts and other circumstances, including timing, security interests and loss severity and when not reasonably estimable, such securities are impaired to fair value as management’s best estimate of the present value of future cash flows. The cash flow estimates for mortgage-backed and other structured securities are based on security specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds, and structural support, including subordination and guarantees. Deferred Policy Acquisition Costs As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and as described in “Adopted Accounting Standards”, the Company has retrospectively applied to prior periods new accounting guidance regarding deferred policy acquisition costs adopted January 1, 2012. The Company’s deferred policy acquisition costs asset by segment was as follows:
|  | December 31, |
|  | 2013 |  | 2012 |
Annuity |  | $ | 170,749 |  | $ | 125,437 |
Life |  |  | 48,558 |  |  | 46,798 |
Property and casualty |  |  | 26,048 |  |  | 24,650 |
Total |  | $ | 245,355 |  | $ | 196,885 |
Policy acquisition costs, consisting of commissions, policy issuance and other costs which are incremental and directly related to the successful acquisition of new or renewal business, are capitalized and amortized on a basis consistent with the type of insurance coverage. For all investment (annuity) contracts, acquisition costs are amortized over 20 years in proportion to estimated gross profits. Capitalized acquisition costs for interest-sensitive life contracts also are amortized over 20 years in proportion to estimated gross profits. For other individual life contracts, acquisition costs are amortized in proportion to anticipated premiums over the terms of the insurance policies (10, 15, 20 or 30 years). For property and casualty policies, acquisition costs are amortized over the terms of the insurance policies (6 or 12 months). The Company periodically reviews the assumptions and estimates used in capitalizing policy acquisition costs and also periodically reviews its estimations of gross profits. The most significant assumptions that are involved in the estimation of annuity gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the impact of realized investment gains and losses. For the variable deposit portion of the annuity segment, the Company amortizes policy acquisition costs utilizing a future financial market performance assumption of a 10% reversion to the mean approach with a 200 basis point corridor around the mean during the reversion period, representing a cap and a floor on the Company’s long-term assumption. The Company’s practice with regard to returns on Separate Accounts assumes that long-term appreciation in the financial market is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are experienced. The Company monitors these fluctuations and only changes the assumption when its long-term expectation changes. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to current period amortization expense for the period in which the adjustment is made. The Company recorded the following adjustments to amortization expense as a result of evaluating actual experience and prospective assumptions, sometimes referred to as “unlocking”:
|  | Year Ended December 31, |
|  | 2013 |  | 2012 |  | 2011 |
Increase (decrease) to amortization: |  |  |  |  |  |  |  |  |  |
Annuity |  | $ | (3,700) |  | $ | (3,836) |  | $ | 2,466 |
Life |  |  | 126 |  |  | 751 |  |  | 1,159 |
Total |  | $ | (3,574) |  | $ | (3,085) |  | $ | 3,625 |
Deferred policy acquisition costs (“DAC”) for interest-sensitive life and investment contracts are adjusted for the impact on estimated future gross profits as if net unrealized investment gains and losses had been realized at the balance sheet date. This adjustment reduced the deferred policy acquisition costs asset by $24,997 and $58,808 at December 31, 2013 and 2012, respectively. The after-tax impact of this adjustment is included in accumulated other comprehensive income (net unrealized gains and losses on fixed maturities and equity securities) within shareholders' equity. DAC is reviewed for recoverability from future income, including investment income, and costs which are deemed unrecoverable are expensed in the period in which the determination is made. No such costs were deemed unrecoverable during the years ended December 31, 2013, 2012 and 2011. This accounting policy description reflects the adoption, effective January 1, 2012 with retrospective application, of accounting guidance that was issued to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. See also “Note 1 -- Summary of Significant Accounting Policies -- Adopted Accounting Standards -- Costs Associated with Acquiring or Renewing Insurance Contracts”. Goodwill and Value of Acquired Insurance In Force When the Company was acquired in 1989, intangible assets were recorded in the application of purchase accounting to recognize the value of acquired insurance in force and goodwill. In addition, goodwill was recorded in 1994 related to the purchase of Horace Mann Property & Casualty Insurance Company. The value of acquired insurance in force was fully amortized prior to December 9, 2009. Goodwill represents the excess of the amounts paid to acquire a business over the fair value of its net assets at the date of acquisition. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined as an operating segment or a business unit one level below an operating segment, if separate financial information is prepared and regularly reviewed by management at that level. The Company’s reporting units, for which goodwill has been allocated, are equivalent to the Company’s operating segments. Effective January 1, 2012, the goodwill impairment test, as defined in the accounting guidance, allows an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of confirming and measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss would be recognized in an amount equal to that excess. The allocation of goodwill by reporting unit is as follows:
Annuity |  | $ | 28,025 |
Life |  |  | 9,911 |
Property and casualty |  |  | 9,460 |
Total |  | $ | 47,396 |
In the fourth quarter of 2013, the Company changed the date of its annual impairment test to October 1. The change was made to mitigate resource constraints in connection with year-end financial reporting and more closely coincides the impairment testing date with the internal long-range planning and forecasting process. The Company has determined that this change in accounting principle is preferable under the circumstances and does not result in any delay, acceleration or avoidance of an impairment charge. The Company completed its annual goodwill assessment for the individual reporting units as of October 1, 2013 and did not utilize the option to perform an initial assessment of qualitative factors. The first step of the Company’s analysis indicated that fair value exceeded carrying value for all reporting units. The process of evaluating goodwill for impairment required management to make multiple judgments and assumptions to determine the fair value of each reporting unit, including discounted cash flow calculations, the level of the Company’s own share price and assumptions that market participants would make in valuing each reporting unit. Fair value estimates were based primarily on an in-depth analysis of historical experience, projected future cash flows and relevant discount rates, which considered market participant inputs and the relative risk associated with the projected cash flows. Other assumptions included levels of economic capital, future business growth, earnings projections and assets under management for each reporting unit. Estimates of fair value are subject to assumptions that are sensitive to change and represent the Company’s reasonable expectation regarding future developments. The Company also considered other valuation techniques such as peer company price-to-earnings and price-to-book multiples. As part of the Company’s October 1, 2013 goodwill analysis, the Company compared the fair value of the aggregated reporting units to the market capitalization of the Company. The difference between the aggregated fair value of the reporting units and the market capitalization of the Company was attributed to several factors, most notably market sentiment, trading volume and transaction premium. The amount of the transaction premium was determined to be reasonable based on insurance industry and Company-specific facts and circumstances. There were no other events or material changes in circumstances during 2013 that indicated that a material change in the fair value of the Company’s reporting units had occurred. In the Company’s annual goodwill assessment for the individual reporting units as of December 31, 2012, the first step of the analysis indicated that fair value exceeded carrying value for all reporting units other than the life unit. For the life reporting unit, in the first step of the analysis, the Company determined that the reporting unit’s fair value was less than its carrying value, primarily driven by unrealized investment gains combined with a decrease in anticipated net investment income assuming an extended low interest rate environment. In the second step of the analysis, it was determined that the implied fair value for the life reporting unit’s goodwill was greater than its carrying value; therefore, goodwill was not impaired and no write-down was required. However, the implied fair value exceeded carrying value for the life reporting unit by a limited margin. Any amount of goodwill determined to be impaired will be recorded as an expense in the period in which the impairment determination is made. During each year from 2011 through 2013, the Company completed the required annual testing; no impairment charges were necessary as a result of such assessments. The assessment of goodwill recoverability requires significant judgment and is subject to inherent uncertainty. The use of different assumptions, within a reasonable range, could cause the fair value to be below carrying value. Subsequent goodwill assessments could result in impairment, particularly for any reporting unit with at-risk goodwill, due to the impact of a volatile financial market on earnings, discount rate assumptions, liquidity and market capitalization. Property and Equipment Property and equipment are carried at cost less accumulated depreciation, which is calculated on the straight-line method based on the estimated useful lives of the assets. The estimated life for real estate is identified by specific property and ranges from 20 to 45 years. The estimated useful lives of leasehold improvements and other property and equipment, including capitalized software, generally range from 2 to 10 years. The following amounts are included in Other Assets in the Consolidated Balance Sheets:
|  | December 31, |
|  | 2013 |  | 2012 |
Property and equipment |  | $ | 108,394 |  | $ | 108,502 |
Less: accumulated depreciation |  |  | 73,459 |  |  | 71,508 |
Total |  | $ | 34,935 |  | $ | 36,994 |
Separate Account (Variable Annuity) Assets and Liabilities Separate Account assets represent variable annuity contractholder funds invested in various mutual funds. Separate Account assets are recorded at fair value primarily based on market quotations of the underlying securities. Separate Account liabilities are equal to the estimated fair value of Separate Account assets. The investment income, gains and losses of these accounts accrue directly to the contractholders and are not included in the operations of the Company. The activity of the Separate Accounts is not reflected in the Consolidated Statements of Operations except for (1) contract charges earned, (2) the activity related to contract guarantees, which are benefits on existing variable annuity contracts, and (3) the impact of financial market performance on the amortization of deferred policy acquisition costs. The Company’s contract charges earned include fees charged to the Separate Accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Future Policy Benefits, Interest-sensitive Life Contract Liabilities and Annuity Contract Liabilities Liabilities for future benefits on life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force. Liabilities for future policy benefits on certain life insurance policies are computed using the net level premium method including assumptions as to investment yields, mortality, persistency, expenses and other assumptions based on the Company’s experience, including a provision for adverse deviation. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. If experience is less favorable than the assumptions, additional liabilities may be established, resulting in a charge to income for that period. At December 31, 2013, reserve investment yield assumptions ranged from 4% to 8%. Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. The liability also includes provisions for the unearned portion of certain policy charges. A guaranteed minimum death benefit (“GMDB”) generally provides an additional benefit if the contractholder dies and the variable annuity contract value is less than a contractually defined amount. The Company has estimated and recorded a GMDB reserve on variable annuity contracts in accordance with accounting guidance. Contractually defined amounts vary from contract to contract based on the date the contract was entered into as well as the GMDB feature elected by the contractholder. The Company regularly monitors the GMDB reserve considering fluctuations in the financial market. The Company has a relatively low exposure to GMDB risk as shown below.
|  | December 31, |
|  | 2013 |  |  | 2012 |
GMDB reserve |  | $ | 209 |  |  | $ | 392 |
Aggregate in-the-money death benefits under the GMDB provision |  |  | 30,422 |  |  |  | 41,990 |
Variable annuity contract value distribution based on GMDB feature: |  |  |  |  |  |  |  |
No guarantee |  |  | 30 | % |  |  | 31 | %
Return of premium guarantee |  |  | 64 | % |  |  | 63 | %
Guarantee of premium roll-up at an annual rate of 3% or 5% |  |  | 6 | % |  |  | 6 | %
Total |  |  | 100 | % |  |  | 100 | %
Unpaid Claims and Claim Expenses Liabilities for property and casualty unpaid claims and claim expenses include provisions for payments to be made on reported claims, claims incurred but not yet reported and associated settlement expenses. All of the Company's reserves for property and casualty unpaid claims and claim expenses are carried at the full value of estimated liabilities and are not discounted for interest expected to be earned on reserves. Estimated amounts of salvage and subrogation on unpaid property and casualty claims are deducted from the liability for unpaid claims. Due to the nature of the Company's personal lines business, the Company has no exposure to losses related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under homeowners insurance policies for environmentally related items such as mold. Other Policyholder Funds Other Policyholder Funds includes supplementary contracts without life contingencies, dividend accumulations, and amounts payable under Federal Home Loan Bank funding agreements. Amounts received and repaid under the funding agreements are classified in the financing activities section of the Company’s Consolidated Statement of Cash Flows combined with annuity contract deposits and disbursements, respectively. Federal Home Loan Bank Funding Agreements In 2013, one of the Company's subsidiaries, Horace Mann Life Insurance Company (“HMLIC”), became a member of the Federal Home Loan Bank of Chicago ("FHLB"), which provides HMLIC with access to collateralized borrowings and other FHLB products. As membership requires the ownership of member stock, on June 4, 2013, HMLIC purchased common stock to meet the membership requirement. Any borrowing from the FHLB requires the purchase of FHLB activity-based common stock in an amount equal to 5.0% of the borrowing, or a lower percentage -- such as 2.0% based on the Reduced Capitalization Advance Program. HMEC's Board of Directors has authorized a maximum of $250,000 from the FHLB under advances and funding agreements combined. On December 27, 2013, the Company received $250,000 under funding agreements with $125,000 maturing on December 28, 2015 and $125,000 maturing on December 15, 2023. Interest on the funding agreements accrues at an annual weighted average rate of 0.24% as of December 31, 2013. Insurance Premiums and Contract Charges Earned Property and casualty insurance premiums are recognized as revenue ratably over the related contract periods in proportion to the risks insured. The unexpired portions of these property and casualty premiums are recorded as unearned premiums, using the monthly pro rata method. Premiums and contract charges for interest-sensitive life and investment (annuity) contracts consist of charges for the cost of insurance, policy administration and withdrawals. Premiums for long-term traditional life policies are recognized as revenues when due over the premium-paying period. Annuity and interest-sensitive life contract deposits represent funds deposited by policyholders and are not included in the Company's premiums or contract charges earned. Stock Based Compensation The Company grants stock options to executive officers, other employees and directors. The exercise price of the option is equal to the fair market value of the Company's common stock on the date of grant. Additional information regarding the Company's stock-based compensation plans is contained in “Note 6 -- Shareholders' Equity and Stock Options”. The Company recognizes compensation cost for share-based compensation plans based on the fair value at the grant dates. For the years ended December 31, 2013, 2012 and 2011, the Company recognized $1,419, $2,476 and $1,451, respectively, in expense as a result of the vesting of stock options during the respective periods. In 2013, 2012 and 2011, the Company granted stock options as quantified in the table below, which also provides the weighted average grant date fair value for options granted in each year. The fair value of options granted was estimated on the respective dates of grant using the Black-Scholes option pricing model with the weighted-average assumptions shown in the following table.
|  | Year Ended December 31, |
|  | 2013 |  |  | 2012 |  |  | 2011 |
Number of options granted |  |  | 245,424 |  |  |  | 296,188 |  |  |  | 313,000 |
Weighted average grant date fair value of options granted |  | $ | 8.25 |  |  | $ | 6.02 |  |  | $ | 6.20 |
Weighted average assumptions: |  |  |  |  |  |  |  |  |  |  |  |
Risk-free interest rate |  |  | 1.0 | % |  |  | 1.0 | % |  |  | 2.2 | %
Expected dividend yield |  |  | 2.7 | % |  |  | 2.2 | % |  |  | 2.2 | %
Expected life, in years |  |  | 5.8 |  |  |  | 5.8 |  |  |  | 5.8 |
Expected volatility (based on historical volatility) |  |  | 54.5 | % |  |  | 45.1 | % |  |  | 45.0 | %
The weighted average fair value of nonvested options outstanding on December 31, 2013 was $6.88. Total unrecognized compensation expense relating to the nonvested options outstanding as of December 31, 2013 was approximately $2,448. This amount will be recognized as expense over the remainder of the vesting period, which is scheduled to be 2014 through 2017. Expense is reflected on a straight-line basis over the vesting period for the entire award. Income Taxes The Company uses the asset and liability method for calculating deferred federal income taxes. Income tax provisions are generally based on income reported for financial statement purposes. The provisions for federal income taxes for the years ended December 31, 2013, 2012 and 2011 included amounts currently payable and deferred income taxes resulting from the cumulative differences in the Company's assets and liabilities, determined on a tax return versus financial statement basis. Deferred tax assets and liabilities include provisions for unrealized investment gains and losses as well as the net funded status of pension and other postretirement benefit obligations with the changes for each period included in the respective components of accumulated other comprehensive income (loss) within shareholders' equity. Earnings Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding plus the weighted average number of fully vested restricted stock units and common stock units payable as shares of HMEC common stock. Diluted earnings per share is computed based on the weighted average number of common shares and common stock equivalents outstanding, to the extent dilutive. The Company’s common stock equivalents relate to outstanding common stock options, deferred compensation common stock units and incentive compensation restricted common stock units. The computations of net income per share on both basic and diluted bases, including reconciliations of the numerators and denominators, were as follows:
|  | Year Ended December 31, |
|  | 2013 |  | 2012 |  | 2011 |
Basic: |  |  |  |  |  |  |  |  |  |
Net income for the period |  | $ | 110,893 |  | $ | 103,866 |  | $ | 70,506 |
Weighted average number of common shares |  |  |  |  |  |  |  |  |  |
during the period (in thousands) |  |  | 40,377 |  |  | 39,514 |  |  | 39,866 |
Net income per share - basic |  | $ | 2.75 |  | $ | 2.63 |  | $ | 1.77 |
Diluted: |  |  |  |  |  |  |  |  |  |
Net income for the period |  | $ | 110,893 |  | $ | 103,866 |  | $ | 70,506 |
Weighted average number of common shares |  |  |  |  |  |  |  |  |  |
during the period (in thousands) |  |  | 40,377 |  |  | 39,514 |  |  | 39,866 |
Weighted average number of common equivalent |  |  |  |  |  |  |  |  |  |
shares to reflect the dilutive effect of common |  |  |  |  |  |  |  |  |  |
stock equivalent securities (in thousands): |  |  |  |  |  |  |  |  |  |
Stock options |  |  | 211 |  |  | 222 |  |  | 206 |
Common stock units related to deferred |  |  |  |  |  |  |  |  |  |
compensation for Directors |  |  | - |  |  | 112 |  |  | 114 |
Common stock units related to deferred |  |  |  |  |  |  |  |  |  |
compensation for Employees |  |  | 112 |  |  | 116 |  |  | 115 |
Restricted common stock units related to |  |  |  |  |  |  |  |  |  |
incentive compensation |  |  | 933 |  |  | 1,424 |  |  | 1,136 |
Total common and common equivalent shares adjusted |  |  |  |  |  |  |  |  |  |
to calculate diluted earnings per share (in thousands) |  |  | 41,633 |  |  | 41,388 |  |  | 41,437 |
Net income per share - diluted |  | $ | 2.66 |  | $ | 2.51 |  | $ | 1.70 |
Options to purchase 243,727 shares of common stock at $20.60 to $30.24 per share were granted in 2013 but were not included in the computation of 2013 diluted earnings per share because of their anti-dilutive effect as a result of the options' exercise price being greater than the average market price of the common shares during 2013 and/or the unrecognized compensation cost having an anti-dilutive effect. The options, which expire in 2020, were still outstanding at December 31, 2013. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) Comprehensive income (loss) represents the change in shareholders’ equity during a reporting period from transactions and other events and circumstances from non-shareholder sources. For the Company, comprehensive income (loss) is equal to net income plus or minus the after-tax change in net unrealized gains and losses on fixed maturities and equity securities and the after-tax change in net funded status of pension and other postretirement benefit obligations for the period as shown in the Consolidated Statements of Changes in Shareholders' Equity. Accumulated other comprehensive income (loss) represents the accumulated change in shareholders’ equity from these transactions and other events and circumstances from non-shareholder sources as shown in the Consolidated Balance Sheets. In the Consolidated Balance Sheets, the Company recognizes the funded status of defined benefit pension plans and other postretirement benefit plans as a component of accumulated other comprehensive income (loss), net of tax. Comprehensive Income (Loss) The components of comprehensive income (loss) were as follows:
|  | Year Ended December 31, |
|  | 2013 |  | 2012 |  | 2011 |
Net income |  | $ | 110,893 |  | $ | 103,866 |  | $ | 70,506 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |
Change in net unrealized gains and losses on fixed |  |  |  |  |  |  |  |  |  |
maturities and equity securities |  |  |  |  |  |  |  |  |  |
Net unrealized holding gains and losses on fixed |  |  |  |  |  |  |  |  |  |
maturities and equity securities arising during the period |  |  | (375,184) |  |  | 204,460 |  |  | 281,202 |
Less: reclassification adjustment for net gains |  |  |  |  |  |  |  |  |  |
included in income before income tax |  |  | 22,245 |  |  | 27,298 |  |  | 37,663 |
Total, before tax |  |  | (397,429) |  |  | 177,162 |  |  | 243,539 |
Income tax expense (benefit) |  |  | (149,019) |  |  | 62,984 |  |  | 86,585 |
Total, net of tax |  |  | (248,410) |  |  | 114,178 |  |  | 156,954 |
Change in net funded status of pension and other postretirement benefit obligations |  |  |  |  |  |  |  |  |  |
Before tax |  |  | 5,645 |  |  | 1,276 |  |  | (4,801) |
Income tax expense (benefit) |  |  | 2,110 |  |  | 345 |  |  | (1,714) |
Total, net of tax |  |  | 3,535 |  |  | 931 |  |  | (3,087) |
Total comprehensive income (loss) |  | $ | (133,982) |  | $ | 218,975 |  | $ | 224,373 |
Accumulated Other Comprehensive Income (Loss) Reflecting accounting guidance adopted prospectively effective January 1, 2013, the following table reconciles the components of accumulated other comprehensive income (loss) for the period indicated.
|  | Unrealized |  |  |  |  |
|  | Gains and |  |  |  |  |
|  | Losses on |  |  |  |  |
|  | Fixed Maturities |  |  |  |  |
|  | and Equity |  | Defined |  |  |
|  | Securities (1)(2) |  | Benefit Plans (1) |  | Total (1) |
Beginning balance, January 1, 2013 |  |  | $ | 382,400 |  |  |  | $ | (15,311) |  |  |  | $ | 367,089 |  |
Other comprehensive income (loss) before reclassifications |  |  |  | (233,951) |  |  |  |  | 3,535 |  |  |  |  | (230,416) |  |
Amounts reclassified from accumulated |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
other comprehensive income |  |  |  | (14,459) |  |  |  |  | - |  |  |  |  | (14,459) |  |
Net current-period other comprehensive income (loss) |  |  |  | (248,410) |  |  |  |  | 3,535 |  |  |  |  | (244,875) |  |
Ending balance, December 31, 2013 |  |  | $ | 133,990 |  |  |  | $ | (11,776) |  |  |  | $ | 122,214 |  |
| (1) | All amounts are net of tax.
| (2) | The $22,245 pretax amount reclassified from accumulated other comprehensive income is included in net realized investment gains and losses and the $7,786 related tax expense (benefit) is included in income tax expense in the Consolidated Statement of Operations for the year ended December 31, 2013.
Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is located in “Note 2 -- Investments -- Unrealized Gains and Losses on Fixed Maturities and Equity Securities”. Statements of Cash Flows For purposes of the Consolidated Statements of Cash Flows, cash constitutes cash on deposit at banks. Adopted Accounting Standards Comprehensive Income Effective January 1, 2013, the Company prospectively adopted accounting guidance to improve the disclosure of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, the reclassifications are required to be cross-referenced to other disclosures that provide additional detail about those amounts. As shown in “Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)” above, certain disclosures in the Company’s Notes to Consolidated Financial Statements have been expanded to address additional information required by this guidance. The adoption of this accounting guidance did not have an effect on the results of operations or financial position of the Company. Balance Sheet Offsetting Effective January 1, 2013, the Company adopted accounting guidance to address disclosures about offsetting assets and liabilities. The guidance clarifies which instruments and transactions are subject to the offsetting disclosure requirements. The instruments and transactions include bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. The adoption of this accounting guidance did not have an effect on the results of operations or financial position of the Company. Costs Associated with Acquiring or Renewing Insurance Contracts Effective January 1, 2012, the Company adopted accounting guidance which was issued to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The guidance allows an insurance entity to capitalize only incremental and certain direct costs related to the successful acquisition of new or renewal insurance contracts. Management elected retrospective application of the new guidance resulting in a downward adjustment to the deferred policy acquisition costs asset with a corresponding decrease to beginning shareholders’ equity, net of applicable deferred taxes. The adoption of this accounting guidance reduces expense deferrals and amortization, with a minimal net effect on the Company’s results of operations.

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