NOTE 10 - Statutory Information and Restrictions

The insurance departments of various states in which the insurance subsidiaries of HMEC are domiciled recognize as net income and surplus those amounts determined in conformity with statutory accounting principles prescribed or permitted by the insurance departments, which differ in certain respects from GAAP.

Reconciliations of statutory capital and surplus and net income, as determined using statutory accounting principles, to the amounts included in the accompanying consolidated financial statements are as follows:

		December 31,
		2016			2015

Statutory capital and surplus of insurance subsidiaries	$	912,336		$	883,870
Increase (decrease) due to:
Deferred policy acquisition costs		267,580			253,176
Difference in policyholder reserves		98,360			95,536
Goodwill		47,396			47,396
Investment fair value adjustments on fixed maturities		301,518			314,705
Difference in investment reserves		125,805			120,795
Federal income tax liability		(228,090	)		(224,492	)
Net funded status of pension and other postretirement benefit obligations		(18,250	)		(18,213	)
Non-admitted assets and other, net		22,888			21,691
Shareholders' equity of parent company and non-insurance subsidiaries		11,648			17,172
Parent company short-term and long-term debt		(247,209	)		(246,975	)
Shareholders' equity as reported herein	$	1,293,982		$	1,264,661

		Year Ended December 31,
		2016			2015			2014

Statutory net income of insurance subsidiaries	$	74,574		$	87,619		$	97,875
Net loss of non-insurance companies		(5,135	)		(4,474	)		(3,906	)
Interest expense		(11,808	)		(13,122	)		(14,198	)
Debt retirement costs		-			(2,338	)		-
Tax benefit of interest expense and other parent company current tax adjustments		5,637			6,829			6,371
Combined net income		63,268			74,514			86,142
Increase (decrease) due to:
Deferred policy acquisition costs		19,442			13,249			16,828
Policyholder benefits		14,919			14,065			15,284
Federal income tax expense		(5,312	)		(6,678	)		(10,548	)
Investment reserves		(1,320	)		7,339			3,574
Other adjustments, net		(7,232	)		(9,007	)		(7,037	)
Net income as reported herein	$	83,765		$	93,482		$	104,243

HMEC has principal insurance subsidiaries domiciled in Illinois and Texas. The statutory financial statements of these subsidiaries are prepared in accordance with accounting principles prescribed or permitted by the Illinois Department of Insurance and the Texas Department of Insurance, as applicable. Prescribed statutory accounting principles include a variety of publications of the National Association of Insurance Commissioners (the “NAIC”), as well as state laws, regulations and general administrative rules.

The NAIC has risk-based capital guidelines to evaluate the adequacy of statutory capital and surplus in relation to risks assumed in investments, reserving policies, and volume and types of insurance business written. At December 31, 2016 and 2015, the minimum statutory-basis capital and surplus required to be maintained by HMEC’s insurance subsidiaries was $148,583 and $139,949, respectively. At December 31, 2016 and 2015, statutory capital and surplus of each of the Company’s insurance subsidiaries was above required levels. The restricted net assets of HMEC’s insurance subsidiaries were $18,119 and $18,312 as of December 31, 2016 and 2015, respectively. The minimum statutory-basis capital and surplus amount at each date is the total estimated authorized control level risk-based capital for all of HMEC’s insurance subsidiaries combined. Authorized control level risk-based capital represents the minimum level of statutory-basis capital and surplus necessary before the insurance commissioner in the respective state of domicile is authorized to take whatever regulatory actions considered necessary to protect the best interests of the policyholders and creditors of the insurer. The amount of restricted net assets represents the combined fair value of securities on deposit with governmental agencies for the insurance subsidiaries as required by law in various states in which the insurance subsidiaries of HMEC conduct business.

HMEC relies largely on dividends from its insurance subsidiaries to meet its obligations for payment of principal and interest on debt, dividends to shareholders and parent company operating expenses, including tax payments pursuant to tax sharing agreements. Payments for share repurchase programs also have this dependency. HMEC’s insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. As a result, HMEC may not be able to receive dividends from such subsidiaries at times and in amounts necessary to pay desired dividends to shareholders. The aggregate amount of dividends that may be paid in 2017 from all of HMEC’s insurance subsidiaries without prior regulatory approval is approximately $91,000.

As disclosed in the reconciliation of the statutory capital and surplus of insurance subsidiaries to the consolidated GAAP shareholders’ equity, the insurance subsidiaries have statutory capital and surplus of $912,336 as of December 31, 2016, which is subject to regulatory restrictions. The parent company equity is not restricted. At December 31, 2016, HMEC had $4,069 of liquid assets, comprised of investments and cash, which could be used to fund debt interest, general corporate obligations, as well as dividend payments to shareholders. If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities.

At the time of this Annual Report on Form 10-K and during each of the years in the three year period ended December 31, 2016, the Company had no financial reinsurance agreements in effect.