NOTE 7 - Income Taxes

The income tax assets and liabilities included in Other Assets and Other Liabilities, respectively, in the Consolidated Balance Sheets were as follows:

	December 31,
		2013		2012
Income tax (asset) liability
Current	$	(1,998)	$	4,575
Deferred		163,213		286,726

Deferred tax assets and liabilities are recognized for all future tax consequences attributable to “temporary differences” between the financial statement carrying value of existing assets and liabilities and their respective tax bases. There are no deferred tax liabilities that have not been recognized. The “temporary differences” that gave rise to the deferred tax balances were as follows:

	December 31,
		2013		2012
Deferred tax assets
Unearned premium reserve reduction	$	15,555	$	14,952
Compensation accruals		13,188		13,592
Other comprehensive income – net funded status of pension and other postretirement benefit obligations		6,376		8,352
Discounting of unpaid claims and claim expenses tax reserves		4,747		4,825
Postretirement benefits other than pensions		2,048		2,333
Impaired securities		1,800		1,268
Total gross deferred tax assets		43,714		45,322
Deferred tax liabilities
Other comprehensive income – net unrealized gains on fixed maturities and equity securities		81,497		228,159
Deferred policy acquisition costs		80,159		62,411
Life insurance future policy benefit reserve		21,792		18,620
Investment related adjustments		18,317		15,375
Intangible assets		4,262		4,262
Other, net		900		3,221
Total gross deferred tax liabilities		206,927		332,048
Net deferred tax liability	$	163,213	$	286,726

The Company evaluated sources and character of income, including historical earnings, loss carryback potential, taxable income from future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income from prudent and feasible tax-planning strategies. Although realization of deferred tax assets is not assured, the Company believes it is more likely than not that gross deferred tax assets will be fully realized and that a valuation allowance with respect to the realization of the total gross deferred tax assets was not necessary as of December 31, 2013 and 2012.

At December 31, 2013, the Company did not have any loss carryforwards or credits.

The components of income tax expense were as follows:

	Year Ended December 31,
	2013		2012		2011

Current	$	31,610	$	26,331	$	18,211
Deferred		11,563		18,976		6,201
Total income tax expense	$	43,173	$	45,307	$	24,412

Income tax expense for the following periods differed from the expected tax computed by applying the federal corporate tax rate of 35% to income before income taxes as follows:

	Year Ended December 31,
	2013		2012		2011

Expected federal tax on income	$	53,923	$	52,210	$	33,221
Add (deduct) tax effects of:
Tax-exempt interest		(6,829)		(6,836)		(7,072)
Dividend received deduction		(3,382)		(2,132)		(2,010)
Other, net		(539)		2,065		273
Income tax expense provided on income	$	43,173	$	45,307	$	24,412

The Company’s federal income tax returns for years prior to 2010 are no longer subject to examination by the Internal Revenue Service (“IRS”). In 2011, the IRS completed an examination of the federal returns through 2009 resulting in additional tax expense of $22.

The Company recognizes tax benefits from tax return positions only if it is more likely than not the position will be sustainable, upon examination, on its technical merits and any relevant administrative practices or precedents. As a result, the Company applies a more likely than not recognition threshold for all tax uncertainties.

The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based upon changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.

HMEC and its subsidiaries file a consolidated federal income tax return. The federal income tax sharing agreements between HMEC and its subsidiaries, as approved by the Board of Directors, provides that tax on income is charged to each subsidiary as if it were filing a separate tax return with the limitation that each subsidiary will receive the benefit of any losses or tax credits to the extent utilized in the consolidated tax return. Intercompany balances are settled quarterly with a final settlement after filing the consolidated federal income tax return with the IRS.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:

	Year Ended December 31,
	2013		2012		2011

Balance as of the beginning of the year	$	-	$	-	$	38
Additions based on tax positions related to the current year		641		-		-
Settlements in tax positions for prior years		-		-		(38)
Balance as of the end of the year	$	641	$	-	$	-

The Company’s effective tax rate would be affected to the extent there were unrecognized tax benefits that could be recognized. There are no positions for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increase within the next 12 months.

The Company classifies all tax related interest and penalties as income tax expense.

Interest and penalties were as follows:

	Year Ended December 31,
	2013		2012		2011
Interest and penalties expense (benefit), net of releases of previous provisions, recognized in the Consolidated Statements of Operations:
Gross	$	-	$	468	$	(279)
Net of tax		-		304		(181)

	December 31,
	2013		2012
Interest and penalties (asset) liability included in Other Assets or Other Liabilities in the Consolidated Balance Sheets	$	1	$	307