Humana 2007 Annual Report Download - page 77

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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 actively traded debt and equity securities are based on
quoted market prices. Fair value of inactively traded debt securities are based on quoted market prices of
identical or similar securities or based on observable inputs like interest rates. Fair value of privately held debt
securities, including venture capital investments are estimated using a variety of valuation methodologies where
an observable quoted market 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 long-term insurance product and professional liability 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 other than temporary 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.
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 Medicare contracts with CMS renew annually.
Our military services contracts with the federal government and our contracts with various state Medicaid
programs generally are multi-year contracts subject to annual renewal provisions.
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