Humana 2007 Annual Report Download - page 92

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. DEBT
Long-term debt outstanding was as follows at December 31, 2007 and 2006:
2007 2006
(in thousands)
Long-term debt:
6.45% senior, unsecured notes due 2016, net of unamortized
discount of $1,282 at December 31, 2007 and $1,393 at
December 31, 2006 ................................ $ 498,718 $ 498,607
6.30% senior, unsecured notes due 2018, net of unamortized
discount of $608 at December 31, 2007 and $665 at
December 31, 2006 ................................ 299,392 299,335
Fair value of interest rate swap agreements ................ 51,105 18,093
Total senior notes ................................ 849,215 816,035
Credit agreement .................................... 800,000 450,000
Other long-term borrowings ........................... 38,608 3,065
Total long-term debt ............................. $1,687,823 $1,269,100
Senior Notes
We previously issued in the public debt capital markets, $300 million aggregate principal amount of 6.30%
senior unsecured notes that mature on August 1, 2018 and $500 million aggregate principal amount of 6.45%
senior unsecured notes that mature on June 1, 2016. We have entered into interest rate swap agreements to
exchange the fixed interest rate under these senior notes for a variable interest rate based on LIBOR.
Swap Agreements
In order to hedge the risk of changes in the fair value of all our senior notes attributable to fluctuations in
interest rates, we entered into interest rate swap agreements. Interest rate swap agreements, which are considered
derivatives, are contracts that exchange interest payments on a specified principal amount, or notional amount,
for a specified period. Our interest rate swap agreements, which have a notional amount of $800 million,
exchange the fixed interest rate under all our senior notes for a variable interest rate based on LIBOR. At
December 31, 2007, the weighted average effective interest rate for all of our senior notes was 5.9%.
The interest rate swap agreements, which have the same critical terms as our senior notes, are designated as
fair value hedges. Changes in the fair value of the senior notes and the swap agreements due to changing interest
rates are assumed to offset each other completely, resulting in no impact to earnings from hedge ineffectiveness.
Our swap agreements are recognized in our consolidated balance sheets at fair value with an equal and offsetting
adjustment to the carrying value of our senior notes. The fair value of our interest rate swap agreements are
estimated based on quoted market prices of comparable agreements, and reflect the amounts we would receive
(or pay) to terminate the agreements at the reporting date.
At December 31, 2007, the fair value of all our swap agreements was in our favor by $51.1 million and
included in other long-term assets. Likewise, the carrying values of all of our senior notes have been increased
$51.1 million to reflect their fair values. The counterparties to our swap agreements are major financial
institutions with which we also have other financial relationships.
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