Humana 2003 Annual Report Download - page 76

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We reduce exposure to our own general business risks by insuring levels of coverage for losses in excess of our
retained limits with a number of third party insurance companies. We remain liable in the event these insurance
companies are unable to pay their portion of the losses. In an effort to minimize credit risk, we insure our risks
with a number of insurance companies having a long history of strong financial ratings.
We accrue for professional liability claims reported and outstanding and an estimate of claims incurred but
not reported (based on actuarial determinations using past experience, modified for current trends) and
corresponding loss adjustment expenses incurred to adjudicate such claims. We continually review these
estimated liabilities, and make necessary adjustments as warranted. Given the nature and degree of uncertainty
involved in projecting professional liability losses, the actual liability could differ significantly from the amounts
provided. We record provision for professional liability losses, including any necessary adjustments to the
estimated liability as well as the cost of third party insurance coverage, as an administrative expense. We record
estimated recoveries from third party insurers as a reduction of administrative expense. The recoverable
from third party insurers is included as an asset in the accompanying consolidated balance sheet, as discussed
in Note 9.
Stock-Based Compensation
We have stock-based employee compensation plans, which are described more fully in Note 10. We account
for our stock option plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations, or APB No. 25. No employee compensation cost is reflected in net income
related to fixed-based stock option awards because these options had an exercise price equal to the market value
of the underlying common stock on the date of grant. Generally, if a fixed-based stock option award is
subsequently modified, compensation expense, if any, is recorded for the amount that the market price of
Humana common stock exceeds the option’s exercise price on the date the option is modified. Compensation
expense is recorded for restricted stock grants over their vesting periods based on fair value, which is equal to the
market price of Humana common stock on the date of the grant. The effect on net income and earnings per share
if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, to our fixed-based stock option awards was as follows for the years
ended December 31, 2003, 2002 and 2001.
2003 2002 2001
(in thousands, except per share
results)
Net income, as reported ........................................... $228,934 $142,755 $117,171
Add: Stock-based employee compensation expense included in reported net
income, net of related tax ........................................ 3,872 5,798 6,141
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax ............... (8,875) (9,787) (9,885)
Adjusted net income .............................................. $223,931 $138,766 $113,427
Earnings per share:
Basic, as reported ............................................ $ 1.44 $ 0.87 $ 0.71
Basic, pro forma ............................................. $ 1.41 $ 0.85 $ 0.69
Diluted, as reported .......................................... $ 1.41 $ 0.85 $ 0.70
Diluted, pro forma ........................................... $ 1.38 $ 0.83 $ 0.68
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