Investments

6 Months Ended

Jun. 30, 2015

Investments, Debt and Equity Securities [Abstract]

Note 2 - Investments

The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index options contracts) to economically hedge risk associated with its fixed indexed annuity product’s contingent liabilities. The Company’s fixed indexed annuity product includes embedded derivative features that are discussed in “Note 1 — Summary of Significant Accounting Policies — Policy Liabilities for Fixed Indexed Annuities” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Company's investment portfolio includes no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no other embedded derivative features related to the Company’s insurance products during the six months ended June 30, 2015 and 2014.

Fixed Maturities and Equity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and equity 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 were as follows:

	Amortized		Unrealized		Unrealized		Fair		OTTI in
	Cost/Cost		Gains		Losses		Value		AOCI (1)
June 30, 2015
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities	$	480,516	$	48,405	$	2,495	$	526,426	$	-
Other, including
U.S. Treasury securities		590,465		21,156		9,034		602,587		-
Municipal bonds		1,511,171		150,696		13,418		1,648,449		-
Foreign government bonds		59,500		7,190		-		66,690		-
Corporate bonds		2,470,966		186,773		15,471		2,642,268		-
Other mortgage-backed securities		1,392,398		24,761		6,521		1,410,638		(2,728)
Totals	$	6,505,016	$	438,981	$	46,939	$	6,897,058	$	(2,728)

Equity securities (3)	$	94,089	$	8,565	$	3,336	$	99,318	$	-

December 31, 2014
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities	$	484,561	$	52,555	$	1,390	$	535,726	$	-
Other, including
U.S. Treasury securities		512,596		28,652		3,049		538,199		-
Municipal bonds		1,462,717		189,533		4,428		1,647,822		-
Foreign government bonds		52,552		6,984		-		59,536		-
Corporate bonds		2,608,633		237,372		11,256		2,834,749		-
Other mortgage-backed securities		1,254,178		28,772		5,892		1,277,058		2,879
Totals	$	6,375,237	$	543,868	$	26,015	$	6,893,090	$	2,879

Equity securities (3)	$	99,904	$	14,159	$	3,408	$	110,655	$	-

(1)

Related to securities for which an unrealized loss was bifurcated to distinguish the credit related portion and the portion driven by other market factors. Represents the amount of other-than-temporary impairment losses in AOCI which was not included in earnings; amounts also include unrealized gains/(losses) on such impaired securities relating to changes in the fair value of those securities subsequent to the impairment measurement date.

(2)

Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $252,549 and $302,222; Federal Home Loan Mortgage Corporation (“FHLMC”) of $435,304 and $432,432; and Government National Mortgage Association (“GNMA”) of $136,356 and $137,867 as of June 30, 2015 and December 31, 2014, respectively.

(3)	Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Compared to December 31, 2014, the decrease in net unrealized gains at June 30, 2015 was due to higher yields on U.S. Treasury securities and wider credit spreads across most asset classes, the combination of which resulted in a decrease in net unrealized gains for virtually all classes of the Company’s fixed maturity securities holdings.

The following table presents the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized loss position at June 30, 2015 and December 31, 2014, respectively. The Company views the decrease in value of all of the securities with unrealized losses at June 30, 2015 — which was driven largely by changes in interest rates, spread widening, financial market illiquidity and/or market volatility 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, and the present value of future cash flows exceeds the amortized cost bases. In addition, management expects to recover the entire cost bases 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 June 30, 2015.

	12 Months or Less					More than 12 Months					Total
				Gross					Gross					Gross
	Fair Value			Unrealized Losses		Fair Value			Unrealized Losses		Fair Value			Unrealized Losses
June 30, 2015
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	56,123		$	2,287	$	1,545		$	208	$	57,668		$	2,495
Other		267,749			8,888		1,853			146		269,602			9,034
Municipal bonds		219,191			7,541		20,870			5,877		240,061			13,418
Foreign government bonds		-			-		-			-		-			-
Corporate bonds		454,925			11,940		39,875			3,531		494,800			15,471
Other mortgage-backed securities		471,024			5,929		79,074			592		550,098			6,521
Total fixed maturity securities		1,469,012			36,585		143,217			10,354		1,612,229			46,939
Equity securities (1)		33,888			2,559		6,699			777		40,587			3,336
Combined totals	$	1,502,900		$	39,144	$	149,916		$	11,131	$	1,652,816		$	50,275

Number of positions with a
gross unrealized loss		514					59					573
Fair value as a percentage of
total fixed maturities and
equity securities fair value		21.5	%				2.1	%				23.6	%

December 31, 2014
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	2		$	-	$	39,809		$	1,390	$	39,811		$	1,390
Other		10,317			34		117,615			3,015		127,932			3,049
Municipal bonds		31,821			200		59,715			4,228		91,536			4,428
Foreign government bonds		-			-		-			-		-			-
Corporate bonds		213,612			6,883		76,099			4,373		289,711			11,256
Other mortgage-backed securities		477,877			4,797		88,663			1,095		566,540			5,892
Total fixed maturity securities		733,629			11,914		381,901			14,101		1,115,530			26,015
Equity securities (1)		12,955			2,568		6,635			840		19,590			3,408
Combined totals	$	746,584		$	14,482	$	388,536		$	14,941	$	1,135,120		$	29,423

Number of positions with a
gross unrealized loss		234					112					346
Fair value as a percentage of
total fixed maturities and
equity securities fair value		10.7	%				5.5	%				16.2	%

(1)	Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Fixed maturities and equity securities with an investment grade rating represented 82% of the gross unrealized loss as of June 30, 2015. 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.

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 June 30, 2015 and 2014 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 (loss):

	Six Months Ended
	June 30,
	2015		2014
Cumulative credit loss (1)
Beginning of period	$	2,877	$	4,097
New credit losses		4,998		280
Losses related to securities sold or paid down during the period		-		-
End of period	$	7,875	$	4,377

(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 maturity securities portfolio 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.

	Percent of Total Fair Value						June 30, 2015
	June 30,			December 31,			Fair		Amortized
	2015			2014			Value		Cost
Estimated expected maturity:
Due in 1 year or less		3.1	%		4.0	%	$	211,874	$	199,830
Due after 1 year through 5 years		23.6			23.4			1,625,073		1,532,701
Due after 5 years through 10 years		39.1			40.1			2,698,675		2,545,277
Due after 10 years through 20 years		21.3			20.1			1,471,576		1,387,929
Due after 20 years		12.9			12.4			889,860		839,279
Total		100.0	%		100.0	%	$	6,897,058	$	6,505,016

Average option-adjusted duration, in years		5.9			5.8

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 period were:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Fixed maturity securities
Proceeds received	$	165,201	$	46,309	$	246,521	$	99,249
Gross gains realized		10,577		2,600		12,231		4,127
Gross losses realized		(1,282)		(303)		(1,745)		(978)

Equity securities
Proceeds received	$	6,840	$	4,843	$	20,809	$	8,491
Gross gains realized		596		995		5,198		1,474
Gross losses realized		(107)		(64)		(117)		(181)

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:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Net unrealized investment gains (losses)
on fixed maturity securities, net of tax
Beginning of period	$	381,244	$	238,854	$	336,604	$	146,489
Change in unrealized investment
gains and losses		(122,709)		80,577		(77,223)		173,802
Reclassification of net realized
investment (gains) losses
to net income		(3,708)		(1,640)		(4,554)		(2,500)
End of period	$	254,827	$	317,791	$	254,827	$	317,791

Net unrealized investment gains (losses)
on equity securities, net of tax
Beginning of period	$	3,384	$	5,695	$	6,988	$	4,618
Change in unrealized investment
gains and losses		(2,532)		2,865		(3,190)		4,178
Reclassification of net realized
investment (gains) losses
to net income		2,547		(605)		(399)		(841)
End of period	$	3,399	$	7,955	$	3,399	$	7,955

Offsetting of Assets and Liabilities

The Company’s derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been reached.

The following table presents the instruments that were subject to a master netting arrangement for the Company.

Net Amounts

of Assets/

Gross

Liabilities

Gross Amounts Not Offset

Amounts

Presented

in the Consolidated

Offset in the

in the

Balance Sheet

Consolidated

Cash

Gross

Balance

Financial

Collateral

Net

Amounts

Sheet

Instruments

Received

Amount

June 30, 2015

Asset derivatives:

Free-standing derivatives

1,946

2,117

(171)

December 31, 2014

Asset derivatives:

Free-standing derivatives

2,458

1,955

503

Deposits

At June 30, 2015 and December 31, 2014, securities with a fair value of $18,377 and $18,361, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at June 30, 2015 and December 31, 2014, securities with a fair value of $537,865 and $539,235, respectively, were on deposit with the Federal Home Loan Bank of Chicago (“FHLB”) as collateral for amounts subject to funding agreements which were equal to $500,000 at both of the respective dates. The deposited securities are included in fixed maturities on the Company’s Consolidated Balance Sheets.

- Definition

The entire disclosure for investments in certain debt and equity securities.

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