NOTE 2 - Investments

The Company's investment portfolio included no free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no embedded derivative features related to the Company’s insurance products for the three years ended December 31, 2013.

Net Investment Income

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

	Year Ended December 31,
	2013		2012		2011

Fixed maturities	$	304,024	$	297,042	$	285,782
Equity securities		3,698		2,814		1,685
Short-term and other investments		8,242		8,109		7,891
Other invested assets (equity method investments)		5,902		5,892		-
Total investment income		321,866		313,857		295,358
Investment expenses		(8,256)		(7,854)		(7,047)
Net investment income	$	313,610	$	306,003	$	288,311

Realized Investment Gains (Losses)

Net realized investment gains (losses) for the following periods were:

	Year Ended December 31,
	2013			2012			2011

Fixed maturities		$	18,480		$	23,218		$	37,466
Equity securities			3,765			4,080			197
Short-term and other investments			-			-			-
Net realized investment gains		$	22,245		$	27,298		$	37,663

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

For the year ended December 31, 2013, the Company’s net realized investment gains of $22,245 included $29,511 of gross gains realized on security sales and calls partially offset by $5,734 of realized losses on securities that were disposed of during 2013 and $1,532 of other-than-temporary impairment write-downs on securities in the current period.

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

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

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 or Cost			Gains			Losses			Value			AOCI (2)
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		$	-

December 31, 2012
Fixed maturity securities
U.S. Government and federally sponsored agency obligations (1):
Mortgage-backed securities		$	547,040		$	72,644		$	125		$	619,559		$	-
Other, including
U.S. Treasury securities			371,706			37,857			135			409,428			-
Municipal bonds			1,402,424			186,261			2,648			1,586,037			-
Foreign government bonds			48,476			9,393			-			57,869			-
Corporate bonds			2,258,554			313,430			4,950			2,567,034			-
Other mortgage-backed securities			683,257			41,080			2,032			722,305			3,214
Totals		$	5,311,457		$	660,665		$	9,890		$	5,962,232		$	3,214

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

(1)

Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $336,193 and $375,111; Federal Home Loan Mortgage Corporation (“FHLMC”) of $427,172 and $418,174; and Government National Mortgage Association (“GNMA”) of $126,245 and $136,998 as of December 31, 2013 and 2012, 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, 2012, the reduction in net unrealized investment gains at December 31, 2013 was due to higher yields on U.S. Treasury securities and slightly narrower credit spreads across most asset classes, the combination of which resulted in a decrease in net unrealized gains for the Company’s holdings of corporate securities, municipal securities, mortgage-backed and asset-backed securities and governmental securities.

The following table presents the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized loss position at December 31, 2013 and 2012, respectively. The Company views the decrease in value of all of the securities with unrealized losses at December 31, 2013 — 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 December 31, 2013.

	12 months or less							More than 12 months							Total
					Gross							Gross							Gross
					Unrealized							Unrealized							Unrealized
	Fair Value				Losses			Fair Value				Losses			Fair Value				Losses
December 31, 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	%

December 31, 2012
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities		$	11,006			$	124		$	50			$	1		$	11,056			$	125
Other			9,944				135			-				-			9,944				135
Municipal bonds			108,578				2,605			3,990				43			112,568				2,648
Foreign government bonds			-				-			-				-			-				-
Corporate bonds			56,481				875			26,725				4,075			83,206				4,950
Other mortgage-backed securities			58,218				621			25,014				1,411			83,232				2,032
Total fixed
maturity securities			244,227				4,360			55,779				5,530			300,006				9,890
Equity securities (1)			19,344				1,288			9				2			19,353				1,290
Combined totals		$	263,571			$	5,648		$	55,788			$	5,532		$	319,359			$	11,180

Number of positions with a
gross unrealized loss			156							43							199
Fair value as a percentage of
total fixed maturities and
equity securities fair value			4.4	%						0.9	%						5.3	%

(1)

Includes nonredeemable (perpetual) preferred stocks and common stocks.

Fixed maturities and equity securities with an investment grade rating represented 95% of the gross unrealized loss as of December 31, 2013. 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 December 31, 2013 and 2012 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of the other-than-temporary impairment losses were recognized in other comprehensive income:

	Year Ended December 31,
		2013		2012
Cumulative credit loss (1)
Beginning of period		$	2,877	$	3,957
New credit losses (2)			1,220		-
Losses related to securities sold or paid down during the period			-		(1,080)
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.

(2)

For 2013, the other-than-temporary impairment loss was recorded on a Detroit general obligation bond.

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.

	December 31, 2013
							Percent of
	Amortized			Fair			Total Fair
	Cost			Value			Value
Estimated expected maturity:
Due in 1 year or less		$	234,952		$	244,106		4.1	%
Due after 1 year through 5 years			1,206,390			1,253,394		20.9
Due after 5 years through 10 years			2,227,741			2,314,540		38.4
Due after 10 years through 20 years			1,202,062			1,248,897		20.8
Due after 20 years			913,060			948,636		15.8
Total		$	5,784,205		$	6,009,573		100.0	%

Average option-adjusted duration, in years			6.3

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

		Year Ended December 31,
		2013		2012		2011
Fixed maturity securities
Proceeds received	$	298,045	$	576,708	$	587,909
Gross gains realized		17,177		32,532		39,463
Gross losses realized		(4,945)		(11,971)		(2,047)

Equity securities
Proceeds received	$	18,643	$	6,057	$	1,078
Gross gains realized		4,368		231		247
Gross losses realized		(616)		(438)		-

Unrealized Gains and Losses on Fixed Maturities and Equity Securities

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

		Year Ended December 31,
		2013		2012		2011
Net unrealized investment gains (losses) on
fixed maturity securities, net of tax
Beginning of period	$	423,004	$	284,338	$	118,498
Change in unrealized investment gains and losses		(264,503)		153,758		190,193
Reclassification of net realized investment (gains)
losses to net income		(12,012)		(15,092)		(24,353)
End of period	$	146,489	$	423,004	$	284,338

Net unrealized investment gains (losses) on equity securities,
net of tax
Beginning of period	$	720	$	2,408	$	2,139
Change in unrealized investment gains and losses		6,345		964		397
Reclassification of net realized investment (gains)
losses to net income		(2,447)		(2,652)		(128)
End of period	$	4,618	$	720	$	2,408

Investment in Entities Exceeding 10% of Shareholders' Equity

At December 31, 2013 and 2012, there were no investments which exceeded 10% of total shareholders' equity in entities other than obligations of the U.S. Government and federally sponsored government agencies and authorities.

Repurchase Agreements

Beginning in 2013, 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 $24,791 and $0 as of December 31, 2013 and 2012, respectively. The obligation for securities sold under agreement to repurchase was $25,864 and $0, including accrued interest, as of December 31, 2013 and 2012, respectively.

Deposits

At December 31, 2013 and 2012, securities with a fair value of $17,967 and $18,565, 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 December 31, 2013, securities with a fair value of $274,437 were on deposit with the Federal Home Loan Bank as collateral for amounts subject to funding agreements which were equal to $250,000. The deposited securities are included in fixed maturities on the Company’s Consolidated Balance Sheets.