Investments

3 Months Ended

Mar. 31, 2014

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 options contracts) to hedge risk associated with its fixed indexed annuity products’ contingent liabilities. The Company’s fixed indexed annuity product includes embedded derivative features that are discussed in “Note 1 — Basis of Presentation — Accounting Policy for Fixed Indexed Annuities”. 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 are no other embedded derivative features related to the Company’s insurance products.

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 (2)
March 31, 2014
Fixed maturity securities
U.S. Government and federally sponsored agency obligations (1):
Mortgage-backed securities	$	550,737	$	39,324	$	12,793	$	577,268	$	-
Other, including
U.S. Treasury securities		467,644		13,849		14,503		466,990		-
Municipal bonds		1,444,604		117,437		15,882		1,546,159		-
Foreign government bonds		50,623		5,397		157		55,863		-
Corporate bonds		2,572,505		229,135		17,002		2,784,638		-
Other mortgage-backed securities		944,863		29,098		6,437		967,524		2,866
Totals	$	6,030,976	$	434,240	$	66,774	$	6,398,442	$	2,866
Equity securities	$	85,428	$	11,261	$	2,500	$	94,189	$	-
December 31, 2013
Fixed maturity securities
U.S. Government and federally sponsored agency obligations (1):
Mortgage-backed securities	$	555,574	$	33,711	$	19,560	$	569,725	$	-
Other, including
U.S. Treasury securities		449,060		9,865		23,351		435,574		-
Municipal bonds		1,425,441		80,701		34,615		1,471,527		-
Foreign government bonds		50,641		4,700		390		54,951		-
Corporate bonds		2,457,727		188,832		32,150		2,614,409		-
Other mortgage-backed securities		845,762		26,477		8,852		863,387		2,812
Totals	$	5,784,205	$	344,286	$	118,918	$	6,009,573	$	2,812
Equity securities	$	84,754	$	10,723	$	3,619	$	91,858	$	-

(1) Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $343,090 and $336,193; Federal Home Loan Mortgage Corporation (“FHLMC”) of $434,214 and $427,172; and Government National Mortgage Association (“GNMA”) of $132,896 and $126,245 as of March 31, 2014 and December 31, 2013, 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.

Compared to December 31, 2013, the increase in net unrealized gains at March 31, 2014 was due to lower yields on U.S. Treasury securities and slightly narrower credit spreads across most asset classes in 2014, the combination of which resulted in an increase in net unrealized gains for the Company’s holdings of corporate, municipal, government, mortgage-backed and asset-backed securities.

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, 2014 and December 31, 2013, respectively. The Company views the decrease in value of all of the securities with unrealized losses at March 31, 2014 — 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 March 31, 2014.

	12 Months or Less					More than 12 Months					Total
				Gross					Gross					Gross
	Fair Value			Unrealized Losses		Fair Value			Unrealized Losses		Fair Value			Unrealized Losses
March 31, 2014
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	111,266		$	11,450	$	7,787		$	1,343	$	119,053		$	12,793
Other		179,661			12,184		17,164			2,319		196,825			14,503
Municipal bonds		211,712			9,707		59,942			6,175		271,654			15,882
Foreign government bonds		6,965			157		-			-		6,965			157
Corporate bonds		412,997			13,845		17,263			3,157		430,260			17,002
Other mortgage-backed securities		258,328			4,223		43,116			2,214		301,444			6,437
Total fixed maturity securities		1,180,929			51,566		145,272			15,208		1,326,201			66,774
Equity securities (1)		31,732			2,005		1,473			495		33,205			2,500
Combined totals	$	1,212,661		$	53,571	$	146,745		$	15,703	$	1,359,406		$	69,274
Number of positions with a gross unrealized loss		359					61					420
Fair value as a percentage of total fixed maturities and equity securities fair value		18.7	%				2.3	%				20.9	%
December 31, 2013
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	150,602		$	19,145	$	1,383		$	415	$	151,985		$	19,560
Other		249,765			22,479		4,450			872		254,215			23,351
Municipal bonds		375,523			26,529		42,899			8,086		418,422			34,615
Foreign government bonds		6,738			390		-			-		6,738			390
Corporate bonds		582,849			28,634		12,948			3,516		595,797			32,150
Other mortgage-backed securities		274,983			8,300		20,008			552		294,991			8,852
Total fixed maturity securities		1,640,460			105,477		81,688			13,441		1,722,148			118,918
Equity securities (1)		32,392			3,117		1,405			502		33,797			3,619
Combined totals	$	1,672,852		$	108,594	$	83,093		$	13,943	$	1,755,945		$	122,537
Number of positions with a gross unrealized loss		534					46					580
Fair value as a percentage of total fixed maturities and equity securities fair value		27.4	%				1.4	%				28.8	%

 

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

Fixed maturities and equity securities with an investment grade rating represented 95% of the gross unrealized loss as of March 31, 2014. 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, 2014 and 2013 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,
	2014		2013
Cumulative credit loss (1)
Beginning of period	$	4,097	$	2,877
New credit losses		-		-
Losses related to securities sold or paid down during the period		-		-
End of period	$	4,097	$	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, 2014
	March 31,		December 31,			Fair	Amortized
	2014		2013			Value	Cost
Estimated expected maturity:
Due in 1 year or less	4.3	%	4.1	%	$	278,051	$	262,082
Due after 1 year through 5 years	21.9		20.9			1,399,549		1,319,172
Due after 5 years through 10 years	39.5		38.4			2,524,744		2,379,748
Due after 10 years through 20 years	19.9		20.8			1,271,718		1,198,682
Due after 20 years	14.4		15.8			924,380		871,292
Total	100.0	%	100.0	%	$	6,398,442	$	6,030,976
Average option-adjusted duration, in years	6.1		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 period were:

	Three Months Ended
	March 31,
	2014		2013
Fixed maturity securities
Proceeds received	$	52,940	$	99,182
Gross gains realized		1,527		4,512
Gross losses realized		(675)		(10)
Equity securities
Proceeds received	$	3,648	$	4,834
Gross gains realized		479		568
Gross losses realized		(117)		(215)

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,
	2014		2013
Net unrealized investment gains (losses) on fixed maturity securities, net of tax
Beginning of period	$	146,489	$	423,004
Change in unrealized investment gains and losses		93,225		(6,909)
Reclassification of net realized investment (gains) losses to net income		(860)		(4,116)
End of period	$	238,854	$	411,979
Net unrealized investment gains (losses) on equity securities, net of tax
Beginning of period	$	4,618	$	720
Change in unrealized investment gains and losses		1,313		3,228
Reclassification of net realized investment (gains) losses to net income		(236)		(344)
End of period	$	5,695	$	3,604

Repurchase Agreements

The Company enters into repurchase agreements to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. These transactions are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.

As part of repurchase agreements, the Company transfers primarily U.S. government, government agency and corporate securities and receives cash. For the repurchase agreements, the Company receives cash in an amount equal to at least 95% of the fair value of the securities transferred, and the agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received from the repurchase program is typically invested in high quality floating rate fixed maturity securities. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed maturity, available-for-sale securities with the obligation to repurchase those securities recorded in Other Liabilities on the Company's Consolidated Balance Sheets. The fair value of the securities transferred was $50,616 and $24,791 as of March 31, 2014 and December 31, 2013, respectively. The obligation for securities sold under agreement to repurchase was $49,245 and $25,864, including accrued interest, as of March 31, 2014 and December 31, 2013, respectively.

Deposits

At March 31, 2014 and December 31, 2013, securities with a fair value of $17,962 and $17,967, 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, 2014 and December 31, 2013, securities with a fair value of $275,034 and $274,437, respectively, were on deposit with the Federal Home Loan Bank (”FHLB”)as collateral for amounts subject to funding agreements which were equal to $250,000 as of each of these dates. The deposited securities are included in fixed maturities on the Company’s Consolidated Balance Sheets.