Humana 2003 Annual Report Download - page 55

Off-Balance Sheet Arrangements
Our 5-year and 7-year airplane operating leases provide for a residual value payment of no more than
$9.2 million at the end of the lease terms, which expire December 29, 2004 for the 5-year lease and January 1,
2010 for the 7-year lease. We have the right to exercise a purchase option with respect to the leased airplanes or
the airplanes can be sold to a third party. If we decide not to exercise our purchase option at the end of the lease,
we must pay the lessor a maximum amount of $4.4 million related to the 5-year lease and $4.8 million related to
the 7-year lease. The amount will be reduced by the net sales proceeds of the airplanes to a third party. After
considering the current fair value of the airplanes, we recorded a $1.5 million provision during 2003 for the
exposure from the residual value guarantee. During 2003, we terminated two 5-year airplane leases early. The
impact of these transactions was not material.
Indemnifications and Guarantees
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated
subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for
(1), member coverage for which premium payment has been made prior to insolvency; (2), benefits for members
then hospitalized until discharged; and (3), payment to providers for services rendered prior to insolvency. Our
parent also has guaranteed the obligations of our TRICARE subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to
indemnify a third party to such arrangement from any losses incurred relating to the services they perform on
behalf of us, or for losses arising from certain events as defined within the particular contract, which may
include, for example, litigation or claims relating to past performance. Such indemnification obligations may not
be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been
immaterial.
Other Liquidity Factors
Our investment-grade credit rating at December 31, 2003 was Baa3 according to Moody’s Investors
Services, Inc., or Moody’s, and BBB, according to Standard & Poor’s Corporation, or S&P. A downgrade to Ba2
or lower by Moody’s and BB or lower by S&P would give the counterparties of three of our interest rate swap
agreements with a $300 million notional amount, the right, but not the obligation, to cancel the interest rate swap
agreement. If cancelled, we would pay or receive an amount based on the fair market value of the swap
agreement. Assuming these swap agreements had been cancelled on December 31, 2003, we would have received
$8.7 million. Other than the swap agreements, adverse changes in our credit ratings will not create, increase, or
accelerate any liabilities. Adverse changes in our credit rating will increase the rate of interest we pay and may
impact the amount of credit available to us in the future.
Related Parties
No related party transactions had a material effect on our financial position, results of operations, or cash
flows. Certain immaterial related party transactions are discussed in our Proxy Statement for the meeting to be
held April 22, 2004—see “Certain Transactions with Management and Others.”
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash
transfers to Humana Inc., our parent company, require minimum levels of equity as well as limit investments to
approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without
prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and
statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if
approval is not required.
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