Humana 2004 Annual Report Download - page 118

Humana Inc.
SCHEDULE I—PARENT COMPANY FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Parent company financial information has been derived from our consolidated financial statements and
excludes the accounts of all operating subsidiaries. This information should be read in conjunction with our
consolidated financial statements.
2. TRANSACTIONS WITH SUBSIDIARIES
Management Fee
Through intercompany service agreements approved, if required, by state regulatory authorities, Humana
Inc., our parent company, charges a management fee for reimbursement of certain centralized services provided
to its subsidiaries including information systems, disbursement, investment and cash administration, marketing,
legal, finance, and medical and executive management oversight.
Dividends
Cash dividends received from subsidiaries and included as a component of net cash provided by operating
activities were $126.0 million in 2004, $131.0 million in 2003 and $198.0 million in 2002.
Guarantee
Through indemnity agreements approved by state regulatory authorities, certain of our regulated
subsidiaries generally are guaranteed by 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
has also guaranteed the obligations of our TRICARE subsidiaries.
Notes Receivables from Operating Subsidiaries
We funded certain subsidiaries with surplus note agreements. These notes are generally non-interest bearing
and may not be entered into or repaid without the prior approval of the applicable Departments of Insurance.
Notes Payable to Operating Subsidiaries
We borrowed funds from certain subsidiaries with notes generally collateralized by real estate. These notes,
which have various payment and maturity terms, bear interest ranging from 3.33% to 6.65% and are payable
between 2005 and 2009. We recorded interest expense of $1.7 million, $3.9 million and $4.2 million related to
these notes for the years ended December 31, 2004, 2003 and 2002, respectively.
3. 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.
As of December 31, 2004, we maintained aggregate statutory capital and surplus of $1,185.5 million in our
state regulated health insurance subsidiaries. Each of these subsidiaries was in compliance with applicable
statutory requirements which aggregated $717.2 million. Although the minimum required levels of equity are
largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary
significantly at the state level. Certain states rely on risk-based capital requirements, or RBC, to define the
required levels of equity. RBC is a model developed by the National Association of Insurance Commissioners to
monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and
surplus and signals regulatory measures should actual surplus fall below these recommended levels. If RBC were
adopted by all states at December 31, 2004, each of our subsidiaries would be in compliance and we would have
$405.6 million of aggregate capital and surplus above any of the levels that require corrective action under RBC.
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