Humana 2011 Annual Report Download - page 83

Financial Condition and Results of Operations under the section titled “Military Services.” Therefore, the impact
on our income from operations from changes in estimate for TRICARE benefits payable is reduced substantially
by corresponding adjustments to revenues. The net change in income from operations as determined
retrospectively, after giving consideration to claim development occurring in the current period, was a decrease
of approximately $14 million for 2010 and an increase of approximately $9 million for 2009. The impact from
changes in estimates for 2011 is not yet determinable as the amount of prior period development recorded in
2012 will change as our December 31, 2011 benefits payable estimate develops throughout 2012.
Future policy benefits payable of $1.7 billion and $1.5 billion at December 31, 2011 and 2010, respectively,
represent liabilities for long-duration insurance policies including long-term care, life insurance, annuities, and
certain health and other supplemental policies sold to individuals for which 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.
Future policy benefits payable include $938 million at December 31, 2011 and $825 million at
December 31, 2010 associated with a closed block of long-term care policies acquired in connection with the
November 30, 2007 KMG acquisition. 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. During
the fourth quarter of 2010, certain states approved premium rate increases for a large portion of our long-term
care block that were significantly below our acquisition date assumptions. Based on these actions by the states,
combined with lower interest rates and higher actual expenses as compared to acquisition date assumptions, we
determined that our existing future policy benefits payable, together with the present value of future gross
premiums, associated with our long-term care policies were not adequate to provide for future policy benefits
under these policies; therefore we unlocked and modified our assumptions based on current expectations.
Accordingly, during the fourth quarter of 2010 we recorded $139 million of additional benefit expense, with a
corresponding increase in future policy benefits payable of $170 million partially offset by a related reinsurance
recoverable of $31 million included in other long-term assets. 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 to the consolidated financial statements
included in Item 8. – Financial Statements and Supplementary Data, and as such are offset by a related
reinsurance recoverable included in other long-term assets.
Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to
cancellation by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually.
Our military services contracts with the federal government and our contracts with various state Medicaid
programs generally are multi-year contracts subject to annual renewal provisions.
Our commercial contracts establish rates on a per member basis for each month of coverage. Our Medicare
and Medicaid contracts also establish monthly rates per member. However, our Medicare contracts also have
additional provisions as outlined in the following separate section.
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