Humana 2005 Annual Report Download - page 74

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, money market funds, commercial paper, other money
market instruments, and certain U.S. Government securities with an original maturity of three months or less.
Carrying value approximates fair value due to the short-term maturity of the investments.
Investment Securities
Investment securities, which consist primarily of debt securities, have been categorized as available for sale
and, as a result, are stated at fair value. Fair value of publicly traded debt and equity securities are based on
quoted market prices. Non-traded debt securities are priced independently by a third party. Fair value of venture
capital debt securities that are privately held are estimated using a variety of valuation methodologies where an
observable quoted market price does not exist. Such methodologies include reviewing the value ascribed to the
most recent financing, comparing the security with securities of publicly traded companies in a similar line of
business, and reviewing the underlying financial performance including estimating discounted cash flows.
Investment securities available for current operations are classified as current assets. Investment securities
available for our professional liability and long-term insurance product funding requirements, as well as
restricted statutory deposits and venture capital investments, are classified as long-term assets. Unrealized
holding gains and losses, net of applicable deferred taxes, are included as a component of stockholders’ equity
and comprehensive income until realized from a sale or impairment.
For the purpose of determining gross realized gains and losses, which are included as a component of
investment and other income in the consolidated statements of income, the cost of investment securities sold is
based upon specific identification. We regularly evaluate our investment securities for impairment. We consider
factors affecting the issuer, factors affecting the industry the issuer operates within, and general debt and equity
market trends. We consider the length of time an investment’s fair value has been below carrying value, the
severity of the decline, the near term prospects for recovery to carrying value, and our intent and ability to hold
the investment until maturity or market recovery is realized. If and when a determination is made that a decline in
fair value below the cost basis is other than temporary, the related investment is written down to its estimated fair
value through a charge to earnings.
We participate in a securities lending program to maximize investment income. We loan certain investment
securities for short periods of time in exchange for collateral initially equal to at least 102% of the fair value of
the investment securities on loan. The fair value of the loaned investment securities is monitored on a daily basis,
with additional collateral obtained or refunded as the fair value of the loaned investment securities fluctuates.
The collateral, which may be in the form of cash or U.S. Government securities, is deposited by the borrower
with an independent lending agent. Any cash collateral is invested by the lending agent according to our
investment guidelines, primarily in cash equivalents or other liquid investments. Cash collateral is recorded on
our consolidated balance sheet, along with a liability to reflect our obligation to return the collateral. Collateral
received in the form of securities is not recorded in our consolidated balance sheet because we do not have the
right to sell, pledge or otherwise reinvest securities collateral. Loaned securities continue to be carried as
investment securities on the consolidated balance sheets. Revenue, net of related expense, is recorded as
investment income.
Receivables and Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to
cancellation by the employer group on 30-day written notice. Our TRICARE contract with the federal
government and our contracts with various state Medicaid programs generally are multi-year contracts subject to
annual renewal provisions. Our Medicare Advantage contracts with the federal government renew annually.
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