Humana 2011 Annual Report Download - page 98

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
current assets. Investment securities available for our long-term insurance products and professional liability
funding requirements, as well as restricted statutory deposits and venture capital investments, are classified as
long-term assets. For the purpose of determining gross realized gains and losses, which are included as a
component of investment income in the consolidated statements of comprehensive income, the cost of
investment securities sold is based upon specific identification. Unrealized holding gains and losses, net of
applicable deferred taxes, are included as a component of stockholders’ equity and comprehensive income until
realized from a sale or other-than-temporary impairment.
Under the other-than-temporary impairment model for debt securities held, we recognize an impairment loss
in income in an amount equal to the full difference between the amortized cost basis and the fair value when we
have the intent to sell the debt security or it is more likely than not we will be required to sell the debt security
before recovery of our amortized cost basis. However, if we do not intend to sell the debt security, we evaluate
the expected cash flows to be received as compared to amortized cost and determine if a credit loss has occurred.
In the event of a credit loss, only the amount of the impairment associated with the credit loss is recognized
currently in income with the remainder of the loss recognized in other comprehensive income.
When we do not intend to sell a security in an unrealized loss position, potential other-than-temporary
impairment is considered using a 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. For example, with respect to mortgage and asset-backed securities, such data includes
underlying loan level data and structural features such as seniority and other forms of credit enhancements.
A decline in fair value is considered other-than-temporary when we do not expect to recover the entire amortized
cost basis of the security. We estimate the amount of the credit loss component of a debt security as the
difference between the amortized cost and the present value of the expected cash flows of the security. The
present value is determined using the best estimate of future cash flows discounted at the implicit interest rate at
the date of purchase.
We participated in a securities lending program to optimize investment income. The program was
terminated in the fourth quarter of 2011. We loaned certain investment securities for short periods of time in
exchange for collateral initially equal to at least 102% of the fair value of the investment securities on loan. The
fair value of the loaned investment securities was monitored on a daily basis, with additional collateral obtained
or refunded as the fair value of the loaned investment securities fluctuated. The collateral, which may have been
in the form of cash or U.S. Government securities, was deposited by the borrower with an independent lending
agent. Any cash collateral was recorded on our consolidated balance sheets in other current assets, along with a
liability to reflect our obligation to return the collateral included with trade accounts payable and accrued
expenses. The cash collateral was invested by the lending agent according to our investment guidelines, primarily
in money market funds, certificates of deposit, and short-term corporate and asset-backed securities, and
accounted for consistent with our investment securities. Collateral received in the form of securities was not
recorded in our consolidated balance sheets because, absent default by the borrower, we did not have the right to
sell, pledge or otherwise reinvest securities collateral. Loaned securities continued to be carried as investment
securities on the consolidated balance sheets. Earnings on the invested cash collateral, net of expense, associated
with the securities lending payable were recorded as investment income.
Receivables and 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.
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