Humana 2002 Annual Report Download - page 64

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, money market funds, commercial paper, and certain
U.S. Government securities with an original maturity of three months or less. Carrying value approximates fair
value due to the short-term maturity of the investments.
Investment Securities
Investment securities, which consist primarily of debt and equity securities, have been categorized as
available for sale and, as a result, are stated at fair value. Fair value of publicly traded debt and equity securities
are based on quoted market prices. Non traded debt securities are priced independently by a third party vendor.
Fair value of strategic venture capital debt securities that are privately held, or where an observable quoted
market price does not exist, are estimated using a variety of valuation methodologies. Such methodologies
include reviewing the value ascribed to the most recent financing, comparing the security with securities of
publicly traded companies in a similar line of business, and reviewing the underlying financial performance
including estimating discounted cash flows. Investment securities available for current operations are classified
as current assets. Investment securities available for our capital spending, professional liability and long-term
insurance product requirements, as well as strategic venture capital investments are classified as long-term assets.
Unrealized holding gains and losses, net of applicable deferred taxes, are included as a component of
stockholders’ equity until realized.
For the purpose of determining gross realized gains and losses, the cost of investment securities sold is
based upon specific identification. We regularly evaluate our investment securities for impairment. We consider
factors affecting the investee, factors affecting the industry the investee operates within, and general debt and
equity market trends. We consider the length of time an investment’s fair value has been below carrying value,
the near term prospects for recovery to carrying value, and our intent and ability to hold the investment until
maturity or market recovery is realized. If and when a determination is made that a decline in fair value below
the cost basis is other than temporary, the related investment is written down to its estimated fair value through
earnings.
We participate in a securities lending program to maximize investment income. We loan certain investment
securities for short periods of time in exchange for collateral, consisting of cash or U.S. Government securities,
equal to at least 102% of the fair value of the investment securities on loan. The fair value of the loaned
investment securities is monitored on a daily basis, with additional collateral obtained or refunded as the fair
value of the loaned investment securities fluctuates. The collateral is deposited by the borrower with an
independent lending agent, and retained and invested by the lending agent according to our investment guidelines
to generate additional investment income. Loaned securities continue to be carried as investment securities on the
consolidated balance sheets.
Premiums Receivable and Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to
cancellation by the employer group’s written notice. Our TRICARE contracts with the federal government and
our contracts with various state Medicaid programs are generally multi-year contracts subject to annual renewal
provisions. Our Medicare+Choice contracts with the federal government renew annually. We bill and collect
premium and administrative fee remittances from employer groups and some individual Medicare+Choice
members monthly. We receive monthly premiums and administrative fees from the federal government and
various states according to government specified reimbursement rates and various contractual terms.
Premium revenues are recognized as income in the period members are entitled to receive services, and are
net of estimated uncollectible amounts and retroactive membership adjustments. Retroactive membership
58