Humana 2008 Annual Report Download - page 71

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Investment Securities
Investment securities totaled $5,215.4 million, or 40% of total assets at December 31, 2008, and $4,650.4
million, or 36% of total assets at December 31, 2007. Debt securities, detailed below, comprised over 99% of this
investment portfolio. The fair value of debt securities were as follows at December 31, 2008 and 2007:
December 31,
2008
Percentage
of Total
December 31,
2007
Percentage
of Total
(dollars in thousands)
U.S. Government and agency obligations .............. $1,883,378 36.2% $ 984,003 21.2%
Tax exempt municipal securities ..................... 1,689,462 32.5% 1,864,991 40.2%
Mortgage and asset-backed securities ................. 766,202 14.7% 910,662 19.6%
Corporate securities ............................... 841,397 16.2% 863,866 18.6%
Redeemable preferred stocks ........................ 19,702 0.4% 15,558 0.4%
Total debt securities ........................... $5,200,141 100.0% $4,639,080 100.0%
More than 98% of our debt securities were of investment-grade quality, with an average credit rating of
AA+ by S&P at December 31, 2008. Most of the debt securities that are below investment grade are rated at the
higher end (BB or better) of the non-investment grade spectrum. Our investment policy limits investments in a
single issuer and requires diversification among various asset types.
U.S. Government and agency obligations include $1,431.6 million at December 31, 2008 and $791.8 million
at December 31, 2007 of debt securities issued by agencies of the U.S. Government including Federal National
Mortgage Association, or Fannie Mae, and Federal Home Loan Mortgage Association, or Freddie Mac, whose
principal payment is guaranteed by the U.S. Government.
Tax exempt municipal securities included pre-refunded bonds of $694.8 million at December 31, 2008 and
$182.2 million at December 31, 2007. These pre-refunded bonds are secured by an escrow fund consisting of
U.S. government obligations sufficient to pay off all amounts outstanding at maturity. The ratings of these
pre-refunded bonds generally assume the rating of the government obligations (AAA by S&P) at the time the
fund is established. In addition, certain monoline insurers guarantee the timely repayment of bond principal and
interest when a bond issuer defaults and generally provide credit enhancement for bond issues related to our tax
exempt municipal securities. We have no direct exposure to these monoline insurers. We owned $452.4 million
and $662.4 million at December 31, 2008 and 2007, respectively of tax exempt securities guaranteed by
monoline insurers. The equivalent S&P credit rating of these tax-exempt securities without the guarantee from
the monoline insurer was AA-.
Our direct exposure to subprime mortgage lending is limited to investment in residential mortgage-backed
securities and asset-backed securities backed by home equity loans. The fair value of securities backed by Alt-A
and subprime loans was $7.6 million at December 31, 2008 and $22.0 million at December 31, 2007. There are
no collateralized debt obligations or structured investment vehicles in our investment portfolio.
The percentage of corporate securities associated with the financial services industry was 42.4% at
December 31, 2008 and 48.4% at December 31, 2007.
Duration is indicative of the relationship between changes in market value and changes in interest rates,
providing a general indication of the sensitivity of the fair values of our debt securities to changes in interest
rates. However, actual market values may differ significantly from estimates based on duration. The average
duration of our debt securities was approximately 4.2 years at December 31, 2008. Including cash equivalents,
the average duration was approximately 3.4 years. Based on the duration including cash equivalents, a 1%
increase in interest rates would generally decrease the fair value of our securities by approximately $229 million.
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