Humana 2011 Annual Report Download - page 43

Historically, rating agencies take action to lower ratings due to, among other things, perceived concerns
about liquidity or solvency, the competitive environment in the insurance industry, the inherent uncertainty in
determining reserves for future claims, the outcome of pending litigation and regulatory investigations, and
possible changes in the methodology or criteria applied by the rating agencies. In addition, rating agencies have
come under recent regulatory and public scrutiny over the ratings assigned to various fixed-income products. As
a result, rating agencies may (i) become more conservative in their methodology and criteria, (ii) increase the
frequency or scope of their credit reviews, (iii) request additional information from the companies that they rate,
or (iv) adjust upward the capital and other requirements employed in the rating agency models for maintenance
of certain ratings levels.
We believe that some of our customers place importance on our credit ratings, and we may lose customers
and compete less successfully if our ratings were to be downgraded. In addition, our credit ratings affect our
ability to obtain investment capital on favorable terms. If our credit ratings were to be lowered, our cost of
borrowing likely would increase, our sales and earnings could decrease, and our results of operations, financial
position, and cash flows may be materially adversely affected.
Changes in economic conditions may adversely affect our results of operations, financial position, and
cash flows.
The U.S. economy continues to experience a period of slow economic growth and high unemployment. We
have closely monitored the impact that this volatile economy is having on our operations. Workforce reductions
have caused corresponding membership losses in our fully-insured commercial group business. Continued
weakness in the U.S. economy, and any continued high unemployment, may materially adversely affect our
medical membership, results of operations, financial position, and cash flows.
Additionally, the continued weakness of the U.S. economy has adversely affected the budget of individual
states and of the federal government. This could result in attempts to reduce payments in our federal and state
government health care coverage programs, including the Medicare, military services, and Medicaid programs,
and could result in an increase in taxes and assessments on our activities. Although we could attempt to mitigate
or cover our exposure from such increased costs through, among other things, increases in premiums, there can
be no assurance that we will be able to mitigate or cover all of such costs which may have a material adverse
effect on our results of operations, financial position, and cash flows.
In addition, general inflationary pressures may affect the costs of medical and other care, increasing the
costs of claims expenses submitted to us.
The securities and credit markets may experience volatility and disruption, which may adversely affect
our business.
Volatility or disruption in the securities and credit markets could impact our investment portfolio. We evaluate
our investment securities for impairment on a quarterly basis. This review is subjective and requires a high degree of
judgment. For the purpose of determining gross realized gains and losses, the cost of investment securities sold is based
upon specific identification. For debt securities held, we recognize an impairment loss in income when the fair value of
the debt security is less than the carrying value and we have the intent to sell the debt security or it is more likely than
not that we will be required to sell the debt security before recovery of our amortized cost basis, or if a credit loss has
occurred. When we do not intend to sell a security in an unrealized loss position, potential other-than-temporary
impairments are considered using variety of factors, including the length of time and extent to which the fair value has
been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the
issuer or underlying collateral of a security; payment structure of the security; changes in credit rating of the security by
the rating agencies; the volatility of the fair value changes; and changes in fair value of the security after the balance
sheet date. For debt securities, we take into account expectations of relevant market and economic data. We
continuously review our investment portfolios and there is a continuing risk that declines in fair value may occur and
additional material realized losses from sales or other-than- temporary impairments may be recorded in future periods.
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