Humana 2011 Annual Report Download - page 75

events of default, including financial covenants regarding the maintenance of a minimum level of net worth of
$6.0 billion at December 31, 2011 and a maximum leverage ratio of 3.0:1. We are in compliance with the
financial covenants, with actual net worth of $8.1 billion and actual leverage ratio of 0.6:1, as measured in
accordance with the new credit agreement as of December 31, 2011. In addition, the new credit agreement
includes an uncommitted $250 million incremental loan facility.
At December 31, 2011, we had no borrowings outstanding under the new credit agreement. We have
outstanding letters of credit of $14 million secured under the new credit agreement. No amounts have been drawn
on these letters of credit. Accordingly, as of December 31, 2011, we had $986 million of remaining borrowing
capacity under the new credit agreement, none of which would be restricted by our financial covenant
compliance requirement. We have other customary, arms-length relationships, including financial advisory and
banking, with some parties to the credit agreement.
Other Long-Term Borrowings
Other long-term borrowings of $36 million at December 31, 2011 represent junior subordinated debt. The
junior subordinated debt, which is due in 2037, may be called by us without penalty in 2012 and bears a fixed
annual interest rate of 8.02% payable quarterly until 2012, and then payable at a floating rate based on LIBOR
plus 310 basis points.
Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, and funds available under our
credit agreement or from other public or private financing sources, taken together, provide adequate resources to
fund ongoing operating and regulatory requirements, future expansion opportunities, and capital expenditures for
at least the next twelve months, as well as to refinance or repay debt and repurchase shares.
Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of
credit available to us in the future. Our investment-grade credit rating at December 31, 2011 was BBB according
to Standard & Poor’s Rating Services, or S&P, and Baa3 according to Moody’s Investors Services, Inc., or
Moody’s. A downgrade by S&P to BB+ or by Moody’s to Ba1 triggers an interest rate increase of 25 basis points
with respect to $750 million of our senior notes. Successive one notch downgrades increase the interest rate an
additional 25 basis points, or annual interest expense by $2 million, up to a maximum 100 basis points, or annual
interest expense by $8 million.
In addition, we operate as a holding company in a highly regulated industry. The parent company is
dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are
subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital
and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at
the parent company were $494 million at December 31, 2011 and $553 million at December 31, 2010. During
2011, our subsidiaries paid dividends of $1.1 billion to the parent compared to $747 million in 2010 and $774
million in 2009. Refer to our parent company financial statements and accompanying notes in Schedule I –
Parent Company Financial Information. As described in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations under the section titled “Health Insurance Reform,” in December
2011, the NAIC issued proposed guidance indicating the insurance industry premium-based assessment may
require accrual and associated subsidiary funding consideration in 2013 instead of 2014. This proposed NAIC
guidance is contradictory to final GAAP guidance issued by the FASB in July 2011, which indicates the
insurance industry premium-based assessment should be accrued beginning in 2014, the year in which it is
payable.
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash
transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments
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