Humana 2010 Annual Report Download - page 128

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
associated with our individual major medical policies were $179.8 million at December 31, 2010 and $128.3
million at December 31, 2009. In light of the Health Insurance Reform Legislation, including mandating that
80% of premium revenues be expended on medical costs for individual major medical policies beginning in
2011, we completed a deferred acquisition cost recoverability analysis for our individual major medical policies
during 2010. Our recoverability test indicated that a substantial portion of unamortized deferred acquisition costs
associated with the individual major medical block of business were not recoverable from future income. As a
result, during 2010 we recorded a write-down of deferred acquisition costs of $147.5 million with a
corresponding charge to selling, general and administrative expense.
19. REINSURANCE
Certain blocks of insurance assumed in acquisitions, primarily life, long-term care, and annuities in run-off
status, are subject to reinsurance where some or all of the underwriting risk related to these policies has been
ceded to a third party. In addition, a large portion of our reinsurance takes the form of 100% coinsurance
agreements where, in addition to all of the underwriting risk, all administrative responsibilities, including
premium collections and claim payment, have also been ceded to a third party. We acquired these policies and
related reinsurance agreements with the purchase of stock of companies in which the policies were originally
written. We acquired these companies for business reasons unrelated to these particular policies, including the
companies’ other products and licenses necessary to fulfill strategic plans.
A reinsurance agreement between two entities transfers the underwriting risk of policyholder liabilities to a
reinsurer while the primary insurer retains the contractual relationship with the ultimate insured. As such, these
reinsurance agreements do not completely relieve us of our potential liability to the ultimate insured. However,
given the transfer of underwriting risk, our potential liability is limited to the credit exposure which exists should
the reinsurer be unable to meet its obligations assumed under these reinsurance agreements.
Reinsurance recoverables represent the portion of future policy benefits payable that are covered by
reinsurance. Amounts recoverable from reinsurers are estimated in a manner consistent with the methods used to
determine future policy benefits payable as detailed in Note 2. Reinsurance recoverables, included in other long-
term assets, were $420.7 million at December 31, 2010 and $378.3 million at December 31, 2009. The
percentage of these reinsurance recoverables resulting from 100% coinsurance agreements was 52% at
December 31, 2010 and 59% at December 31, 2009. Premiums ceded were $33.7 million in 2010, $33.0 million
in 2009 and $34.2 million in 2008.
We evaluate the financial condition of these reinsurers on a regular basis. These reinsurers are well-known
and well-established, as evidenced by the strong financial ratings at December 31, 2010 presented below:
Reinsurer
Total
Recoverable
A.M. Best Rating
at December 31, 2010
(in thousands)
Protective Life Insurance Company ...... $200,833 A+ (superior)
All others .......................... 219,863 A++ to B++ (superior to good)
$420,696
The all other category represents approximately 20 reinsurers with individual balances less than $60 million.
Two of these reinsurers have placed $26.2 million of cash and securities in trusts, an amount at least equal to the
recoverable from the reinsurer.
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