NOTE 2 - Investments

Net Investment Income

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


	Year Ended December 31,
	2011			2010			2009

Fixed maturities	$	285,782		$	266,894		$	240,429
Equity securities		1,685			4,070			5,569
Short-term and other investments		7,891			8,588			7,598

Total investment income		295,358			279,552			253,596
Investment expenses		(7,047	)		(7,498	)		(6,762	)

Net investment income	$	288,311		$	272,054		$	246,834

Realized Investment Gains (Losses)

Realized investment gains (losses) for the following periods were:


	Year Ended December 31,
	2011		2010			2009

Fixed maturities	$	37,466	$	21,796		$	38,707
Equity securities		197		(220	)		(11,197	)
Short-term and other investments		-		2,193			(1,200	)

Realized investment gains	$	37,663	$	23,769		$	26,310

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 generally due to 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, 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.

For the year ended December 31, 2010, the Company's net realized investment gains of $23,769 included $51,220 of gross gains realized on security sales and calls partially offset by $20,655 of realized losses on securities that were disposed of during 2010 and $6,796 of other-than-temporary impairment write-downs on securities. In the fourth quarter of 2010, losses of $15,152 were realized on security disposals, primarily related to commercial mortgage-backed securities risk reduction actions. In 2010, the other-than-temporary impairment write-downs were related primarily to securities that the Company intended to sell.

For the year ended December 31, 2009, the Company's net realized investment gains included a charge of $21,294 for other-than-temporary impairment write-downs on securities, primarily attributable to below investment grade perpetual preferred stocks, high-yield bonds and a single collateralized debt obligation security.

Fixed Maturities and Equity Securities

At December 31, 2011, the combined gross unrealized loss in the fixed maturities and equity securities portfolios was $33,379 (203 positions, the fair value of which represented 9.3% of total fixed maturities and equity securities fair value). Of the total gross unrealized loss at December 31, 2011, $12,491 related to commercial mortgage-backed securities. The following table presents the fair value and gross unrealized losses of fixed maturity securities and equity securities in an unrealized loss position at December 31, 2011 and 2010, respectively. The Company views the decrease in value of all of the securities with unrealized losses at December 31, 2011 – which was driven largely by spread widening, financial market illiquidity and changes in interest rates 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. In addition, management expects to recover the entire cost basis 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, 2011.


	12 months or less				More than 12 months				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2011
Fixed maturity securities
U.S. government and federally sponsored agency obligations
Mortgage-backed securities		$ 3,519		$ 133		$ 1,511		$ 11		$ 5,030		$ 144
Other		-		-		-		-		-		-
Municipal bonds		24,047		270		19,309		750		43,356		1,020
Foreign government bonds		-		-		-		-		-		-
Corporate bonds		273,209		9,752		26,977		6,346		300,186		16,098
Other mortgage-backed securities		115,986		3,222		36,944		12,569		152,930		15,791
Totals		$ 416,761		$13,377		$ 84,741		$19,676		$ 501,502		$33,053

Equity securities		$ -		$ -		$ 4,865		$ 326		$ 4,865		$ 326

December 31, 2010
Fixed maturity securities
U.S. government and federally sponsored agency obligations
Mortgage-backed securities		$ 42,374		$ 1,673		$ 1,907		$ 1		$ 44,281		$ 1,674
Other		312,750		21,465		-		-		312,750		21,465
Municipal bonds		445,018		15,883		48,362		6,636		493,380		22,519
Foreign government bonds		-		-		-		-		-		-
Corporate bonds		179,339		4,587		45,789		5,850		225,128		10,437
Other mortgage-backed securities		73,537		1,075		55,384		10,956		128,921		12,031
Totals		$1,053,018		$44,683		$151,442		$23,443		$1,204,460		$68,126

Equity securities		$ 938		$ 49		$ 5,822		$ 407		$ 6,760		$ 456

Fixed maturities and equity securities with an investment grade rating represented 58% of the gross unrealized loss as of December 31, 2011. The largest single unrealized loss was $3,344 on a security issued by JPMorgan Chase Bank which was purchased in 2007. The fixed maturities and equity securities portfolio included 41 securities that have been in an unrealized loss position for greater than 12 months, with an unrealized loss totaling $20,002. 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 expected cash flows.

Compared to December 31, 2010, the 2011 improvement in unrealized investment gains and losses was due to significantly lower yields on U.S. Treasury securities somewhat offset by widening credit spreads across virtually all asset classes, the combination of which caused an increase in values for the Company's holdings of municipal bonds, U.S. government and agency securities, investment grade corporate securities and agency mortgage-backed 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 as of December 31, 2011 and 2010 were as follows:


	Amortized		Unrealized		Unrealized		Fair		OTTI in
	Cost or Cost		Gains		Losses		Value		AOCI (2)
December 31, 2011
Fixed maturity securities
U.S. government and federally sponsored agency obligations (1)
Mortgage-backed securities		$ 532,554		$ 71,402		$ 144		$ 603,812		$ -
Other		560,036		43,705		-		603,741		-
Municipal bonds		1,291,281		122,857		1,020		1,413,118		-
Foreign government bonds		44,529		5,095		-		49,624		-
Corporate bonds		1,967,229		205,413		16,098		2,156,544		-
Other mortgage-backed securities		588,760		22,024		15,791		594,993		2,136
Totals		$4,984,389		$470,496		$33,053		$5,421,832		$2,136

Equity securities		$ 23,070		$ 4,030		$ 326		$ 26,774		$ -

December 31, 2010
Fixed maturity securities
U.S. government and federally sponsored agency obligations (1)
Mortgage-backed securities		$ 506,157		$ 29,771		$ 1,674		$ 534,254		$ -
Other		512,692		6,227		21,465		497,454		-
Municipal bonds		1,166,197		31,142		22,519		1,174,820		-
Foreign government bonds		42,982		2,554		-		45,536		-
Corporate bonds		1,790,159		152,866		10,437		1,932,588		-
Other mortgage-backed securities		515,046		27,870		12,031		530,885		1,401
Totals		$4,533,233		$250,430		$68,126		$4,715,537		$1,401

Equity securities		$ 20,765		$ 3,747		$ 456		$ 24,056		$ -

(1)

Fair value includes securities issued by Federal National Mortgage Association ("FNMA") of $547,521 and $431,635; Federal Home Loan Mortgage Corporation ("FHLMC") of $374,361 and $310,751; and Government National Mortgage Association ("GNMA") of $124,515 and $111,664 as of December 31, 2011 and 2010, 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 and losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.

The Company's investment portfolio includes no free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics).

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, 2011 and 2010 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,
	2011		2010
Cumulative credit loss (1)
Beginning of period		$4,518		$2,875
New credit losses		-		1,643
Losses related to securities sold or paid down during the period		(561)		-
End of period		$3,957		$4,518

(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. The definition, reporting and disclosure of "credit loss" was effective as of April 1, 2009.

Maturities/Sales of Fixed Maturity Securities

The following table presents the distribution of the Company's fixed maturities portfolio as of December 31, 2011 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, 2011
					Percent of
	Amortized		Fair		Total Fair
	Cost		Value		Value

Due in 1 year or less		$ 241,190		$ 262,357	4.8%
Due after 1 year through 5 years		968,938		1,053,974	19.4
Due after 5 years through 10 years		1,651,756		1,796,720	33.2
Due after 10 years through 20 years		1,100,182		1,196,737	22.1
Due after 20 years		1,022,323		1,112,044	20.5
Total		$4,984,389		$5,421,832	100.0%

The average option-adjusted duration for the Company's fixed maturity securities was 6.4 years at December 31, 2011.

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

		$000,000.0			$000,000.0			$000,000.0
	Year Ended December 31,
	2011			2010			2009

Proceeds	$	588,987		$	709,381		$	1,445,053
Gross gains realized		39,710			41,459			53,865
Gross losses realized		(2,047	)		(20,296	)		(8,648	)

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,
	2011			2010			2009
Net unrealized investment gains (losses) on fixed maturity securities, net of tax
Beginning of period	$	118,498		$	24,599		$	(196,687	)
Change in unrealized investment gains and losses		190,193			108,066			246,446
Reclassification of net realized investment (gains) losses to net income		(24,353	)		(14,167	)		(25,160	)

End of period	$	284,338		$	118,498		$	24,599


Net unrealized investment gains (losses) on equity securities, net of tax
Beginning of period	$	2,139		$	(1,189	)	$	(16,000	)
Change in unrealized investment gains and losses		397			3,185			7,534
Reclassification of net realized investment (gains) losses to net income		(128	)		143			7,277

End of period	$	2,408		$	2,139		$	(1,189	)

Securities Lending

The Company has a program in place whereby it may loan fixed income securities to third parties, primarily major brokerage firms; however, the Company's securities lending program is suspended as of December 31, 2011 and the time of this Annual Report on Form 10-K. During the years ended and as of December 31, 2011 and 2010, there were no fixed maturities on loan.

Investment in Entities Exceeding 10% of Shareholders' Equity

At December 31, 2011 and 2010, 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.

Deposits

At December 31, 2011, securities with a fair value of $18,779 were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business.