Humana 2006 Annual Report Download - page 62

(2) We lease facilities, computer hardware, and other equipment under long-term operating leases that are
noncancelable and expire on various dates through 2017. We sublease facilities or partial facilities to third
party tenants for space not used in our operations which partially mitigates our operating lease
commitments. An operating lease, accounted for under the provisions of SFAS No. 13, Accounting for
Leases, is a type of off-balance sheet arrangement. Assuming we acquired the asset, rather than leased such
asset, we would have recognized a liability for the financing of these assets. See also Note 14 to the
consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data.
(3) Purchase and other obligations include agreements to purchase services, primarily information technology
related services, or to make improvements to real estate, in each case that are enforceable and legally
binding on us and that specify all significant terms, including: fixed or minimum levels of service to be
purchased; fixed, minimum or variable price provisions; and the appropriate timing of the transaction.
Purchase obligations exclude agreements that are cancelable without penalty.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that
generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of
December 31, 2006, we are not involved in any SPE transactions.
Guarantees and Indemnifications
Our operating lease of an airplane, which expires January 1, 2010, provides for a residual value payment of
no more than $4.8 million at the end of the lease term. At the end of the term, we have the right to exercise a
purchase option for $8.9 million or the airplane can be sold to a third party. The residual value payment will be
reduced by the net sales proceeds in excess of $4.2 million from the sale of the airplane to a third party.
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.
Related Parties
No related party transactions had a material effect on our financial position, results of operations, or cash
flows. Certain related party transactions not having a material effect are discussed in our Proxy Statement for the
meeting to be held April 26, 2007—see “Certain Transactions with Management and Others.”
Government Contracts
Our Medicare business, which accounted for approximately 55% of our total premiums and ASO fees for
the year ended December 31, 2006, primarily consisted of products covered under the Medicare Advantage and
stand-alone PDP contracts with the federal government. These contracts are renewed generally for a one-year
term each December 31 unless CMS notifies Humana of its decision not to renew by May 1 of the contract year,
or Humana notifies CMS of its decision not to renew by the first Monday in June of the contract year. All
material contracts between Humana and CMS relating to our Medicare business have been renewed for 2007.
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