Humana 2009 Annual Report Download - page 77

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liquidity conditions in the current markets than when the securities were purchased, and as such, there were no
material other-than-temporary impairments during 2009. While we believe that these impairments are temporary
and we currently do not have the intent to sell such securities, given the current market conditions and the
significant judgments involved, 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.
Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is
indicative of the relationship between changes in fair value and changes in interest rates, providing a general
indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates.
However, actual fair values may differ significantly from estimates based on duration. The average duration of
our investment portfolio, including cash and cash equivalents, was approximately 3.8 years as of December 31,
2009. Based on the duration including cash equivalents, a 1% increase in interest rates would generally decrease
the fair value of our securities by approximately $340 million.
We have also evaluated the impact on our investment income and interest expense resulting from a
hypothetical change in interest rates of 100, 200 and 300 basis points over the next twelve-month period, as
reflected in the following table. The evaluation was based on our investment portfolio and our outstanding
indebtedness as of December 31, 2009 and 2008. Our investment portfolio consists of cash, cash equivalents and
investment securities. The modeling technique used to calculate the pro forma net change in pretax earnings
considered the cash flows related to fixed income investments and debt, which are subject to interest rate changes
during a prospective twelve-month period. This evaluation measures parallel shifts in interest rates and may not
account for certain unpredictable events that may effect interest income, including unexpected changes of cash
flows into and out of the portfolio, changes in the asset allocation, including shifts between taxable and
tax-exempt securities, and spread changes specific to various investment categories. In the past ten years,
changes in 3 month LIBOR rates during the year have exceeded 300 basis points twice, have not changed
between 200 and 300 basis points, have changed between 100 and 200 basis points four times and have changed
by less than 100 basis points four times.
Increase (decrease) in
pretax earnings given an
interest rate decrease of
X basis points
Increase (decrease) in
pretax earnings given an
interest rate increase of
X basis points
(300) (200) (100) 100 200 300
(in thousands)
As of December 31, 2009
Investment income ..................... $(24,993) $(17,443) $(15,075) $36,729 $68,447 $101,142
Interest expense(a) ..................... — — — — — —
Pretax ............................ $(24,993) $(17,443) $(15,075) $36,729 $68,447 $101,142
As of December 31, 2008
Investment income ..................... $(23,748) $(17,588) $(15,483) $25,773 $47,625 $ 70,225
Interest expense ........................ 2,128 2,128 2,128 (2,128) (4,256) (6,384)
Pretax ............................ $(21,620) $(15,460) $(13,355) $23,645 $43,369 $ 63,841
(a) There were no borrowings outstanding under the credit agreement at December 31, 2009.
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