Humana 2002 Annual Report Download - page 50

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period. This evaluation measures parallel shifts in interest rates and may not account for certain unpredictable
events that may effect interest income, including, among others, unexpected changes of cash flow into and out of
the portfolio, shifts in the asset mix between tax and tax-exempt securities, and spread changes specific to
various investment categories. In the past ten years, annual changes in 3 month LIBOR rates have exceeded
300 basis points twice, have not changed between 200 and 300 basis points and have changed between 100 and
200 basis points once. LIBOR was 1.38% at December 31, 2002. Our model assumed the maximum possible
reduction in LIBOR could not exceed 138 basis points.
Increase (decrease) in pretax
earnings given an interest rate
decrease of X basis points
Increase (decrease) in pretax
earnings given an interest rate
increase of X basis points
(300) (200) (100) 100 200 300
(in thousands)
2002
Fixed income portfolio .................... $(21,793) $(15,708) $(8,848) $ 9,228 $17,253 $ 24,876
Debt .................................. 4,019 4,019 4,019 (4,019) (8,038) (12,057)
Total .............................. $(17,774) $(11,689) $(4,829) $ 5,210 $ 9,215 $ 12,819
2001
Fixed income portfolio .................... $(15,216) $(11,578) $(5,496) $ 5,528 $11,102 $ 16,655
Debt .................................. 7,238 7,238 3,822 (3,822) (7,645) (11,467)
Total .............................. $ (7,978) $ (4,340) $(1,674) $ 1,706 $ 3,457 $ 5,188
The following table presents the hypothetical change in fair market values of the publicly-traded equity
securities we held at December 31, 2002 and 2001, which are sensitive to changes in stock market values. These
publicly-traded equity securities are held for purposes other than trading.
Decrease in valuation of
security given an X%
decrease in each equity
security’s value
Fair
Value at
Dec. 31,
Increase in valuation of
security given an X%
increase in each equity
security’s value
(30%) (20%) (10%) 10% 20% 30%
(in thousands)
2002
Publicly-traded equity securities ......... $(2,640) $(1,760) $ (880) $ 8,800 $ 880 $1,760 $2,640
2001
Publicly-traded equity securities ......... $(4,830) $(3,220) $(1,610) $16,101 $1,610 $3,220 $4,830
Annual changes in equity valuations (based upon the Standard & Poor’s 500 stock index) over the past
10 years which were in excess of 30% occurred five times, between 20% and 30% occurred three times and
between 10% and 20% also occurred two times.
Government Contracts
Our Medicare+Choice contracts with the federal government are renewed for a one-year term each
December 31 unless terminated 90 days prior thereto. Legislative proposals are being considered which may
revise the Medicare+Choice program’s current reimbursement rates. We are unable to predict the outcome of
these proposals or the impact they may have on our financial position, results of operations, or cash flows.
We currently are in negotiations with the Department of Defense to extend our TRICARE contracts that
expire on April 30, 2003 for Regions 2 and 5 and June 30, 2003 for Regions 3 and 4. We believe we will be able
to successfully extend our TRICARE contracts under substantially the same terms for one additional year plus a
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