Humana 2006 Annual Report Download - page 78

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Medicare and TRICARE contracts, the valuation and related impairment recognition of investment securities,
and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates
are based on knowledge of current events and anticipated future events, and accordingly, actual results may
ultimately differ materially from those estimates.
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 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 cost, 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 sheets, 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 sheets 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.
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