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,
		2016			2015
Income tax (asset) liability
Current	$	(3,832	)	$	1,000
Deferred		205,699			201,208

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,
		2016		2015
Deferred tax assets
Unearned premium reserve reduction	$	18,253	$	17,402
Compensation accruals		15,893		13,737
Impaired securities		8,214		7,635
Other comprehensive income - net funded status of pension
and other postretirement benefit obligations		6,387		6,375
Discounting of unpaid claims and claim expense tax reserves		2,463		3,213
Postretirement benefits other than pensions		578		664
Other, net		-		1,189
Total gross deferred tax assets		51,788		50,215
Deferred tax liabilities
Other comprehensive income - net unrealized gains
on fixed maturities and equity securities		112,311		112,934
Deferred policy acquisition costs		91,028		85,341
Life insurance future policy benefit reserve		33,145		30,177
Investment related adjustments		15,762		18,709
Intangible assets		4,262		4,262
Other, net		979		-
Total gross deferred tax liabilities		257,487		251,423
Net deferred tax liability	$	205,699	$	201,208

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, 2016 and 2015.

At December 31, 2016, the Company did not have any loss carryforwards or credits.

The components of income tax expense were as follows:

		Year Ended December 31,
		2016		2015		2014

Current	$	26,359	$	29,885	$	32,295
Deferred		4,108		6,085		9,575
Total income tax expense	$	30,467	$	35,970	$	41,870

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,
		2016			2015			2014

Expected federal tax on income	$	39,981		$	45,308		$	51,140
Add (deduct) tax effects of:
Tax-exempt interest		(5,789	)		(6,678	)		(6,849	)
Dividend received deduction		(3,985	)		(3,564	)		(3,566	)
Other, net		260			904			1,145
Income tax expense provided on income	$	30,467		$	35,970		$	41,870

The Company’s federal income tax returns for years prior to 2013 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,
		2016			2015			2014

Balance as of the beginning of the year	$	1,039		$	656		$	641
Increases related to prior year tax positions		348			-			-
Decreases related to prior year tax positions		-			(15	)		(244	)
Increases related to current year tax positions		283			398			259
Settlements		-			-			-
Lapse of statue		(76	)		-			-
Balance as of the end of the year	$	1,594		$	1,039		$	656

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, 2016, 2015 and 2014.