Humana 2011 Annual Report Download - page 90

annual planning process. If these assumptions differ from actual, including the impact of the ultimate outcome of
the Health Insurance Reform Legislation the estimates underlying our goodwill impairment tests could be
adversely affected. Goodwill impairment tests completed in each of the last three years did not result in an
impairment loss. The fair value of our reporting units with significant goodwill exceeded carrying amounts by a
substantial margin. A 100 basis point increase in the discount rate would not have a significant impact on the
amount of margin for any of our reporting units with significant goodwill.
Beginning in 2012, we are allowed to first assess qualitative factors to determine whether it is necessary to
perform the two-step quantitative goodwill impairment test. Refer to Recently Issued Accounting
Pronouncements in Note 2 to the consolidated financial statements included in Item 8.-Financial Statements and
Supplementary Data.
Long-lived assets consist of property and equipment and other finite-lived intangible assets. These assets are
depreciated or amortized over their estimated useful life, and are subject to impairment reviews. We periodically
review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the
asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future
cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also
must estimate and make assumptions regarding the useful life we assign to our long-lived assets. If these
estimates or their related assumptions change in the future, we may be required to record impairment losses or
change the useful life, including accelerating depreciation or amortization for these assets. There were no
material impairment losses in the last three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and financial position are exposed to financial market risk, including those resulting from
changes in interest rates.
The level of our pretax earnings is subject to market risk due to changes in interest rates and the resulting
impact on investment income and interest expense. Prior to 2009, under interest rate swap agreements, we
exchanged the fixed interest rate under all of our senior notes for a variable interest rate based on LIBOR using
interest rate swap agreements. We terminated all of our interest rate swap agreements in 2008, fixing the average
interest rate under our senior notes at 6.08%. We may re-enter into interest rate swap agreements in the future
depending on market conditions and other factors. Amounts borrowed under the revolving credit portion of our
$1.0 billion unsecured revolving credit agreement bear interest at either LIBOR plus a spread or the base rate
plus a spread. There were no borrowings outstanding under our credit agreement at December 31, 2011 or
December 31, 2010.
Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our
significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality
with a weighted average S&P credit rating of AA- at December 31, 2011. Our net unrealized position improved
$328 million from a net unrealized gain position of $197 million at December 31, 2010 to a net unrealized gain
position of $525 million at December 31, 2011. At December 31, 2011, we had gross unrealized losses of $17
million on our investment portfolio primarily due to an increase in market interest rates and tighter liquidity
conditions in the current markets than when the securities were purchased, and as such, there were no material
other-than-temporary impairments during 2011. While we believe that these impairments are temporary and we
currently do not have the intent to sell such securities, given the current market conditions and the significant
judgments involved, there is a continuing risk that future declines in fair value may occur and material realized
losses from sales or other-than-temporary impairments may be recorded in future periods.
Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is
indicative of the relationship between changes in fair value and changes in interest rates, providing a general
indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates.
However, actual fair values may differ significantly from estimates based on duration. The average duration of
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