Humana 2011 Annual Report Download - page 134

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
17. EXPENSES ASSOCIATED WITH LONG-DURATION INSURANCE PRODUCTS
Premiums associated with our long-duration insurance products accounted for approximately 2% of our
consolidated premiums and services revenue for the year ended December 31, 2011. We use long-duration
accounting for products such as long-term care, life insurance, annuities, and certain health and other
supplemental policies sold to individuals because they are expected to remain in force for an extended period
beyond one year and because premium received in the earlier years is intended to pay anticipated benefits to be
incurred in future years.As a result, we defer policy acquisition costs, primarily consisting of commissions, and
amortize them over the estimated life of the policies in proportion to premiums earned.
In addition, we establish reserves for future policy benefits in recognition of the fact that some of the
premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These
reserves are recognized on a net level premium method based on interest rates, mortality, morbidity, withdrawal
and maintenance expense assumptions from published actuarial tables, modified based upon actual experience.
The assumptions used to determine the liability for future policy benefits are established and locked in at the time
each contract is acquired and would only change if our expected future experience deteriorated to the point that
the level of the liability, together with the present value of future gross premiums, are not adequate to provide for
future expected policy benefits. Long-term care policies provide for long-duration coverage and, therefore, our
actual claims experience will emerge many years after assumptions have been established. The risk of a deviation
of the actual morbidity and mortality rates from those assumed in our reserves are particularly significant to our
closed block of long-term care policies. We monitor the loss experience of these long-term care policies and,
when necessary, apply for premium rate increases through a regulatory filing and approval process in the
jurisdictions in which such products were sold. To the extent premium rate increases and/or loss experience vary
from our acquisition date assumptions, future adjustments to reserves could be required.
The table below presents deferred acquisition costs and future policy benefits payable associated with our
long-duration insurance products for the years ended December 31, 2011 and 2010.
2011 2010
Deferred
acquisition
costs
Future policy
benefits
payable
Deferred
acquisition
costs
Future policy
benefits
payable
(in millions)
Other long-term assets ............................. $114 $ 0 $74 $ 0
Trade accounts payable and accrued expenses ........... 0 (58) 0 (53)
Long-term liabilities ............................... 0 (1,663) 0 (1,493)
Total asset (liability) ........................... $114 $(1,721) $74 $(1,546)
In addition, future policy benefits payable include amounts of $224 million at December 31, 2011 and $229
million at December 31, 2010 which are subject to 100% coinsurance agreements as more fully described in
Note 18.
Benefit expense associated with future policy benefits payable was $127 million in 2011, $306 million in
2010, and $73 million in 2009. Benefit expense for 2010 included a net charge of $139 million associated with
our long-term care policies discussed further below. Amortization of deferred acquisition costs included in
operating costs was $34 million in 2011, $198 million in 2010, and $52 million in 2009. Amortization expense
for 2010 included a write-down of deferred acquisition costs of $147 million discussed further below.
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