Humana 2004 Annual Report Download - page 50

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.
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 26, 2005—see “Certain Transactions with Management and Others.”
Market Risk-Sensitive Financial Instruments and Positions
The level of our pretax earnings is subject to risk due to changes in investment income from our fixed
income portfolio which is partially offset by both our debt position and the short-term duration of the fixed
income investment portfolio.
We evaluated the impact on our investment income and debt expense resulting from a hypothetical change
in interest rates of 100, 200 and 300 basis points over the next twelve-month period, as reflected in the following
table. The modeling technique used to calculate the pro forma net change in pretax earnings considered the cash
flows related to fixed income investments and debt, which are subject to interest rate changes during a
prospective twelve-month period. This evaluation measures parallel shifts in interest rates and may not account
for certain unpredictable events that may effect interest income, including, among others, unexpected changes of
cash flow into and out of the portfolio, shifts in the asset mix between taxable and tax-exempt securities, and
spread changes specific to various investment categories. In the past ten years, changes in 3 month LIBOR rates
during the year have exceeded 300 basis points twice, have not changed between 200 and 300 basis points, have
changed between 100 and 200 basis points once and have changed by less than 100 basis points seven times.
LIBOR was 2.56% at December 31, 2004. Our model assumed the maximum possible reduction in LIBOR could
not exceed 256 basis points.
Increase (decrease) in pretax
earnings given an interest rate
decrease of X basis points
Increase (decrease) in pretax
earnings given an interest rate
increase of X basis points
(300) (200) (100) 100 200 300
(in thousands)
2004
Fixed income portfolio ................... $(20,530) $(18,258) $(8,974) $ 9,212 $ 18,439 $ 27,299
Debt .................................. 14,200 14,200 7,100 (7,100) (14,200) (21,300)
Total ............................. $ (6,330) $ (4,058) $(1,874) $ 2,112 $ 4,239 $ 5,999
2003
Fixed income portfolio ................... $(13,105) $(11,977) $(9,757) $ 9,169 $ 18,068 $ 26,844
Debt .................................. 5,567 5,567 5,567 (5,567) (11,134) (16,700)
Total ............................. $ (7,538) $ (6,410) $(4,190) $ 3,602 $ 6,934 $ 10,144
Government Contracts
Our HMO, PPO and Fee-For-Service products covered under the Medicare Advantage contracts with the
federal government are renewed for a one-year term each December 31 unless notice of termination is received at
least 90 days prior thereto. No termination notices were received in connection with our currently existing
contracts. In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act, or MMA,
was signed into law. We believe MMA offers new opportunities in our Medicare programs, including our HMO,
PPO, and Private Fee-For-Service products. We have made additional investments in the Medicare Advantage
program to enhance our ability to participate in these expanded programs.
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