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Investments | 3 Months Ended
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Mar. 31, 2016
Investments, Debt and Equity Securities [Abstract] |
Investments | Note 2 - Investments The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index call option contracts) to economically hedge risk associated with its fixed indexed annuity and indexed universal life products’ contingent liabilities. The Company’s fixed indexed annuity and indexed universal life products include embedded derivative features that are discussed in “Note 1 — Summary of Significant Accounting Policies — Investment Contract and Life Policy Reserves — Policy Liabilities for Fixed Indexed Annuities and Indexed Universal Life Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Company's investment portfolio included 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 three months ended March 31, 2016 and 2015. Fixed Maturities and Equity Securities The Company’s investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and also includes 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) |
March 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and federally sponsored agency obligations (2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  | $ | 441,038 |  | $ | 54,633 |  | $ | 471 |  | $ | 495,200 |  | $ | - |
Other, including |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 508,042 |  |  | 32,078 |  |  | - |  |  | 540,120 |  |  | - |
Municipal bonds |  |  | 1,536,111 |  |  | 198,416 |  |  | 7,199 |  |  | 1,727,328 |  |  | (2,724) |
Foreign government bonds |  |  | 67,422 |  |  | 6,665 |  |  | - |  |  | 74,087 |  |  | - |
Corporate bonds |  |  | 2,684,520 |  |  | 177,754 |  |  | 28,343 |  |  | 2,833,931 |  |  | - |
Other mortgage-backed securities |  |  | 1,554,168 |  |  | 20,255 |  |  | 28,587 |  |  | 1,545,836 |  |  | 1,264 |
Totals |  | $ | 6,791,301 |  | $ | 489,801 |  | $ | 64,600 |  | $ | 7,216,502 |  | $ | (1,460) |
Equity securities (3) |  | $ | 96,305 |  | $ | 10,837 |  | $ | 3,098 |  | $ | 104,044 |  | $ | - |
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and federally sponsored agency obligations (2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  | $ | 461,862 |  | $ | 44,413 |  | $ | 1,861 |  | $ | 504,414 |  | $ | - |
Other, including |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 532,373 |  |  | 21,153 |  |  | 7,415 |  |  | 546,111 |  |  | - |
Municipal bonds |  |  | 1,553,603 |  |  | 165,680 |  |  | 10,340 |  |  | 1,708,943 |  |  | (4,140) |
Foreign government bonds |  |  | 67,441 |  |  | 6,288 |  |  | 112 |  |  | 73,617 |  |  | - |
Corporate bonds |  |  | 2,687,376 |  |  | 140,873 |  |  | 48,834 |  |  | 2,779,415 |  |  | - |
Other mortgage-backed securities |  |  | 1,482,971 |  |  | 16,830 |  |  | 20,961 |  |  | 1,478,840 |  |  | 1,382 |
Totals |  | $ | 6,785,626 |  | $ | 395,237 |  | $ | 89,523 |  | $ | 7,091,340 |  | $ | (2,758) |
Equity securities (3) |  | $ | 95,722 |  | $ | 8,405 |  | $ | 4,330 |  | $ | 99,797 |  | $ | - |
| (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 $234,668 and $231,294; Federal Home Loan Mortgage Corporation (“FHLMC”) of $342,877 and $363,957; and Government National Mortgage Association (“GNMA”) of $126,252 and $130,940 as of March 31, 2016 and December 31, 2015, respectively.
| (3) | Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
Compared to December 31, 2015, the increase in net unrealized gains at March 31, 2016 was due to slightly tighter credit spreads across most asset classes and a decline in U.S. Treasury rates, which resulted in an increase 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 March 31, 2016 and December 31, 2015, respectively. The Company views the decrease in value of all of the securities with unrealized losses at March 31, 2016 — 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 management expects to recover the entire amortized 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.
|  | 12 Months or Less |  | More than 12 Months |  | Total |
|  |  |  |  | Gross |  |  |  |  | Gross |  |  |  |  | Gross |
|  |  |  |  | Unrealized |  |  |  |  | Unrealized |  |  |  |  | Unrealized |
|  | Fair Value |  |  | Losses |  | Fair Value |  |  | Losses |  | Fair Value |  |  | Losses |
March 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and federally sponsored agency obligations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  | $ | 3,919 |  |  | $ | 188 |  | $ | 2,918 |  |  | $ | 283 |  | $ | 6,837 |  |  | $ | 471 |
Other |  |  | 10,000 |  |  |  | - |  |  | - |  |  |  | - |  |  | 10,000 |  |  |  | - |
Municipal bonds |  |  | 37,752 |  |  |  | 4,056 |  |  | 12,324 |  |  |  | 3,143 |  |  | 50,076 |  |  |  | 7,199 |
Foreign government bonds |  |  | - |  |  |  | - |  |  | - |  |  |  | - |  |  | - |  |  |  | - |
Corporate bonds |  |  | 435,489 |  |  |  | 16,822 |  |  | 64,934 |  |  |  | 11,521 |  |  | 500,423 |  |  |  | 28,343 |
Other mortgage-backed securities |  |  | 884,292 |  |  |  | 24,692 |  |  | 174,345 |  |  |  | 3,895 |  |  | 1,058,637 |  |  |  | 28,587 |
Total fixed maturity securities |  |  | 1,371,452 |  |  |  | 45,758 |  |  | 254,521 |  |  |  | 18,842 |  |  | 1,625,973 |  |  |  | 64,600 |
Equity securities (1) |  |  | 11,789 |  |  |  | 1,875 |  |  | 9,325 |  |  |  | 1,223 |  |  | 21,114 |  |  |  | 3,098 |
Combined totals |  | $ | 1,383,241 |  |  | $ | 47,633 |  | $ | 263,846 |  |  | $ | 20,065 |  | $ | 1,647,087 |  |  | $ | 67,698 |
Number of positions with a gross unrealized loss |  |  | 421 |  |  |  |  |  |  | 93 |  |  |  |  |  |  | 514 |  |  |  |  |
Fair value as a percentage of total fixed maturities and equity securities fair value |  |  | 18.9 | % |  |  |  |  |  | 3.6 | % |  |  |  |  |  | 22.5 | % |  |  |  |
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and federally sponsored agency obligations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  | $ | 48,097 |  |  | $ | 1,748 |  | $ | 1,595 |  |  | $ | 113 |  | $ | 49,692 |  |  | $ | 1,861 |
Other |  |  | 248,478 |  |  |  | 7,338 |  |  | 1,921 |  |  |  | 77 |  |  | 250,399 |  |  |  | 7,415 |
Municipal bonds |  |  | 168,939 |  |  |  | 5,382 |  |  | 21,717 |  |  |  | 4,958 |  |  | 190,656 |  |  |  | 10,340 |
Foreign government bonds |  |  | 11,867 |  |  |  | 112 |  |  | - |  |  |  | - |  |  | 11,867 |  |  |  | 112 |
Corporate bonds |  |  | 858,647 |  |  |  | 37,244 |  |  | 50,340 |  |  |  | 11,590 |  |  | 908,987 |  |  |  | 48,834 |
Other mortgage-backed securities |  |  | 929,268 |  |  |  | 19,165 |  |  | 140,561 |  |  |  | 1,796 |  |  | 1,069,829 |  |  |  | 20,961 |
Total fixed maturity securities |  |  | 2,265,296 |  |  |  | 70,989 |  |  | 216,134 |  |  |  | 18,534 |  |  | 2,481,430 |  |  |  | 89,523 |
Equity securities (1) |  |  | 38,764 |  |  |  | 3,022 |  |  | 8,379 |  |  |  | 1,308 |  |  | 47,143 |  |  |  | 4,330 |
Combined totals |  | $ | 2,304,060 |  |  | $ | 74,011 |  | $ | 224,513 |  |  | $ | 19,842 |  | $ | 2,528,573 |  |  | $ | 93,853 |
Number of positions with a gross unrealized loss |  |  | 684 |  |  |  |  |  |  | 78 |  |  |  |  |  |  | 762 |  |  |  |  |
Fair value as a percentage of total fixed maturities and equity securities fair value |  |  | 32.0 | % |  |  |  |  |  | 3.1 | % |  |  |  |  |  | 35.1 | % |  |  |  |
| (1) | Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
Fixed maturities and equity securities with an investment grade rating represented 66% of the gross unrealized loss as of March 31, 2016. 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 March 31, 2016 and 2015 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):
|  | Three Months Ended |
|  | March 31, |
|  | 2016 |  | 2015 |
Cumulative credit loss (1) |  |  |  |  |  |  |
Beginning of period |  | $ | 7,844 |  | $ | 2,877 |
New credit losses |  |  | 1,824 |  |  | - |
Losses related to securities sold or paid down during the period |  |  | - |  |  | - |
End of period |  | $ | 9,668 |  | $ | 2,877 |
| (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 |  | March 31, 2016 |
|  | March 31, |  |  | December 31, |  | Fair |  | Amortized |
|  | 2016 |  |  | 2015 |  | Value |  | Cost |
Estimated expected maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Due in 1 year or less |  |  | 3.6 | % |  |  | 3.1 | % | $ | 260,299 |  | $ | 244,935 |
Due after 1 year through 5 years |  |  | 26.3 |  |  |  | 24.2 |  |  | 1,900,899 |  |  | 1,788,903 |
Due after 5 years through 10 years |  |  | 37.9 |  |  |  | 39.6 |  |  | 2,728,632 |  |  | 2,567,871 |
Due after 10 years through 20 years |  |  | 20.4 |  |  |  | 20.9 |  |  | 1,474,836 |  |  | 1,387,922 |
Due after 20 years |  |  | 11.8 |  |  |  | 12.2 |  |  | 851,836 |  |  | 801,670 |
Total |  |  | 100.0 | % |  |  | 100.0 | % | $ | 7,216,502 |  | $ | 6,791,301 |
Average option-adjusted duration, in years |  |  | 5.7 |  |  |  | 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 |
|  | March 31, |
|  | 2016 |  | 2015 |
Fixed maturity securities |  |  |  |  |  |  |
Proceeds received |  | $ | 82,090 |  | $ | 81,320 |
Gross gains realized |  |  | 2,476 |  |  | 1,654 |
Gross losses realized |  |  | (492) |  |  | (463) |
Equity securities |  |  |  |  |  |  |
Proceeds received |  | $ | 6,147 |  | $ | 13,969 |
Gross gains realized |  |  | 520 |  |  | 4,602 |
Gross losses realized |  |  | (646) |  |  | (10) |
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 |
|  | March 31, |
|  | 2016 |  | 2015 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax |  |  |  |  |  |  |
Beginning of period |  | $ | 198,714 |  | $ | 336,604 |
Change in unrealized investment gains and losses |  |  | 78,341 |  |  | 45,486 |
Reclassification of net realized investment (gains) losses to net income |  |  | (674) |  |  | (846) |
End of period |  | $ | 276,381 |  | $ | 381,244 |
Net unrealized investment gains (losses) on equity securities, net of tax |  |  |  |  |  |  |
Beginning of period |  | $ | 2,649 |  | $ | 6,988 |
Change in unrealized investment gains and losses |  |  | 2,188 |  |  | (658) |
Reclassification of net realized investment (gains) losses to net income |  |  | 193 |  |  | (2,946) |
End of period |  | $ | 5,030 |  | $ | 3,384 |
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 Sheets |  |  |
|  |  |  | Consolidated |  | Consolidated |  |  |  | Cash |  |  |
|  | Gross |  | Balance |  | Balance |  | Financial |  | Collateral |  | Net |
|  | Amounts |  | Sheets |  | Sheets |  | Instruments |  | Received |  | Amount |
March 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Free-standing derivatives |  | $ | 3,140 |  |  | - |  | $ | 3,140 |  |  | - |  | $ | 2,197 |  | $ | 943 |
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Free-standing derivatives |  |  | 2,501 |  |  | - |  |  | 2,501 |  |  | - |  |  | 2,617 |  |  | (116) |
Deposits At March 31, 2016 and December 31, 2015, securities with a fair value of $18,392 and $18,312, 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 March 31, 2016 and December 31, 2015, securities with a fair value of $621,373 and $621,077, 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 $575,000 at both of the respective dates. The deposited securities are included in Fixed Maturities on the Company’s Consolidated Balance Sheets.

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