Humana 2002 Annual Report Download - page 74

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At December 31, 2002, we had approximately $108.8 million of capital losses to carryforward, primarily
related to the sale of our workers’ compensation business in 2000. These capital loss carryforwards, if unused to
offset future capital gains, will expire in 2005. A valuation allowance has been established for a portion of these
deferred tax assets. During 2002, the capital loss valuation allowance was increased by $24.5 million after we
reevaluated probable capital gain realization in the allowable carryforward period based upon our capital gain
experience beginning in 2000 and consideration of alternative tax planning strategies.
Based on our historical taxable income record and estimates of future capital gains and profitability, we
have concluded that future operating income and capital gains will be sufficient to give rise to tax expense and
capital gains to recover all deferred tax assets, net of the valuation allowance.
7. DEBT
The following table presents our short-term and long-term debt outstanding at December 31, 2002 and 2001:
December 31,
2002 2001
(in thousands)
Short-term debt:
Conduit commercial paper financing program ....................... $265,000 $263,000
Long-term debt:
Seniornotes .................................................. $334,368 $309,789
Other long-term borrowings ..................................... 5,545 5,700
Total long-term debt ....................................... $339,913 $315,489
Senior Notes
The $300 million 7¼% senior, unsecured notes are due August 1, 2006.
In order to hedge the risk of changes in the fair value of our $300 million 7¼% senior notes attributable to
fluctuations in interest rates, we entered into interest rate swap agreements. Interest rate swap agreements, which
are considered derivatives, are contracts that exchange interest payments on a specified principal amount, or
notional amount, for a specified period. Our interest rate swap agreements exchange the 7¼% fixed interest rate
under our senior notes for a variable interest rate, which was 3.06% at December 31, 2002. The $300 million
swap agreements mature on August 1, 2006, and have the same critical terms as our senior notes. Changes in the
fair value of the 7¼% senior notes and the swap agreements due to changing interest rates are assumed to offset
each other completely, resulting in no impact to earnings from hedge ineffectiveness.
Our swap agreements are recognized in our consolidated balance sheet at fair value with an equal and
offsetting adjustment to the carrying value of our senior notes. The fair value of our swap agreements are
estimated based on quoted market prices of comparable agreements and reflects the amounts we would receive
(or pay) to terminate the agreements at the reporting date. At December 31, 2002, the $34.9 million fair value of
our swap agreements is included in other long-term assets. Likewise, the carrying value of our senior notes has
been increased $34.9 million to its fair value. The counterparties to our swap agreements are major financial
institutions with which we also have other financial relationships.
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