NOTE 8 - 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,
		2015		2014
Income tax (asset) liability
Current	$	1,000	$	(1,195	)
Deferred		201,208		261,784

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,
		2015		2014
Deferred tax assets
Unearned premium reserve reduction	$	17,402	$	15,721
Compensation accruals		13,737		14,765
Impaired securities		7,635		3,327
Other comprehensive income - net funded status of pension
and other postretirement benefit obligations		6,375		7,009
Discounting of unpaid claims and claim expense tax reserves		3,213		4,090
Postretirement benefits other than pensions		664		870
Other, net		1,189		-
Total gross deferred tax assets		50,215		45,782
Deferred tax liabilities
Other comprehensive income - net unrealized gains
on fixed maturities and equity securities		112,934		185,011
Deferred policy acquisition costs		85,341		70,796
Life insurance future policy benefit reserve		30,177		25,914
Investment related adjustments		18,709		20,064
Intangible assets		4,262		4,262
Other, net		-		1,519
Total gross deferred tax liabilities		251,423		307,566
Net deferred tax liability	$	201,208	$	261,784

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, 2015 and 2014.

At December 31, 2015, the Company did not have any loss carryforwards or credits.

The components of income tax expense were as follows:

	Year Ended December 31,
		2015		2014		2013

Current	$	29,885	$	32,295	$	31,610
Deferred		6,085		9,575		11,563
Total income tax expense	$	35,970	$	41,870	$	43,173

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,
		2015			2014			2013
Expected federal tax on income	$	45,308		$	51,140		$	53,923
Add (deduct) tax effects of:
Tax-exempt interest		(6,678	)		(6,849	)		(6,829	)
Dividend received deduction		(3,564	)		(3,566	)		(3,382	)
Other, net		904			1,145			(539	)
Income tax expense provided on income	$	35,970		$	41,870		$	43,173

The Company’s federal income tax returns for years prior to 2012 are no longer subject to examination by the Internal Revenue Service (“IRS”).

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, provide 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 amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:

		Year Ended December 31,
		2015			2014			2013
Balance as of the beginning of the year	$	656		$	641		$	-
Additions based on tax positions related to the current year		398			259			641
Settlements in tax positions for prior years		(15	)		(244	)		-
Balance as of the end of the year	$	1,039		$	656		$	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 both immaterial in each of the years ended December 31, 2015, 2014 and 2013.