Humana 2008 Annual Report Download - page 46

management company, these specialty acquisitions are anticipated to enhance our Commercial segment margins
and our ability to appeal to more customers seeking benefit providers who offer full-service solutions.
Recent Turmoil in the Financial Markets
Recently, the securities and credit markets have been experiencing severe volatility and disturbance,
increasing risk with respect to our financial assets. At December 31, 2008, cash, cash equivalents and our
investment securities totaled $7.2 billion, or 55.1% of total assets, with 27.4% of the $7.2 billion invested in cash
and cash equivalents. Investment securities consist primarily of debt securities of investment-grade quality with
an average credit rating by S&P of AA+ at December 31, 2008 and an average duration of approximately 4.2
years. Including cash and cash equivalents, the average duration of our investment portfolio was approximately
3.4 years. We had $7.6 million of mortgage-backed securities associated with Alt-A or subprime loans at
December 31, 2008 and no collateralized debt obligations.
Gross unrealized losses of $313.0 million at December 31, 2008 primarily were caused by an increase in
interest rates from a widening of credit spreads. All issuers of securities trading at an unrealized loss remain
current on all contractual payments, and we believe it is probable that we will be able to collect amounts due
according to the contractual terms of the debt securities. After taking into account these and other factors,
including severity, length of time of the decline, and our ability and intent to hold these securities until recovery
or maturity, we determined the unrealized losses on these investment securities were temporary and, as such, no
impairment was required.
During 2008, we recognized other-than-temporary impairments of $103.1 million of which $68.7 million
resulted from investments in Lehman Brothers Holdings Inc. (Lehman) or its subsidiaries. Lehman and certain of
its subsidiaries filed for bankruptcy protection in 2008. The other impairments primarily relate to declines in
values of securities, primarily associated with the financial services industry. Of the $103.1 million, $48.5
million was allocated to the Government segment and $54.6 million was allocated to the Commercial segment.
We continuously review our investment portfolios. Given current market conditions, there is a continuing
risk that further declines in fair value may occur and additional material realized losses from sales or other-than-
temporary impairments may be recorded in future periods.
In addition, during 2008 we terminated all interest-rate swap agreements outstanding associated with our
senior notes based on recent changes in the credit market environment. In exchange for terminating these
interest-rate swap agreements, we received cash of $93.0 million representing the fair value of the swap assets.
This transaction also fixes the interest rate on our senior notes to a weighted-average rate of 6.08%. We may
re-enter into swap agreements in the future depending on market conditions and other factors.
The availability of liquidity and credit capacity in general has been impacted by the current conditions in the
financial markets. We believe our cash balances, investment securities, operating cash flows, and funds available
under our credit agreement or from other public or private financing sources, taken together, provide adequate
resources to fund ongoing operating and regulatory requirements, future expansion opportunities, and capital
expenditures in the foreseeable future, as well as refinance debt as it matures. Our long-term debt, consisting
primarily of senior notes, of $1,937.0 million represented 30.3% of total capitalization at December 31, 2008.
The earliest maturity of our senior notes is in June 2016. We have available a 5-year, $1.0 billion unsecured
revolving credit agreement which expires in July 2011. As of December 31, 2008, there was $250 million in
borrowings outstanding under this credit agreement, primarily related to funding the acquisition of Cariten
described below.
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash
transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments
to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without
prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and
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