Humana 2012 Annual Report Download - page 137

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future policy benefits payable include $1.1 billion at December 31, 2012 and $938 million at December 31,
2011 associated with a closed block of long-term care policies acquired in connection with the November 30,
2007 acquisition of KMG. These amounts include $119 million at December 31, 2012 and $47 million at
December 31, 2011 associated with amounts charged to accumulated other comprehensive income for an
additional liability that would exist on our closed-block of long-term care policies if unrealized gains on the sale
of the investments backing such products had been realized and the proceeds reinvested at then current yields.
Amounts charged to accumulated other comprehensive income are net of applicable deferred taxes.
During 2012, we recorded a change in estimate associated with future policy benefits payable for our long-
term care block resulting in additional benefits expense of $29 million and a corresponding increase in future
policy benefits payable. This change in estimate was based on current claim experience demonstrating an
increase in the length of the time policyholders already in payment status remained in such status. Future policy
benefits payable was increased to cover future payments to policyholders currently in payment status. During
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 2010 we
recorded $139 million of additional benefits 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.
Deferred acquisition costs included $62 million and $54 million associated with our individual commercial
medical policies at December 31, 2012 and December 31, 2011, respectively. Future policy benefits payable
associated with our individual commercial medical policies were $282 million at December 31, 2012 and $233
million at December 31, 2011. In light of the Health Insurance Reform Legislation, including mandating that
80% of premiums revenue be expended on medical costs for individual commercial medical policies beginning
in 2011, we completed a deferred acquisition cost recoverability analysis for our individual commercial medical
policies during 2010. Our recoverability test indicated that a substantial portion of unamortized deferred
acquisition costs associated with the individual commercial medical block of business were not recoverable from
future income. As a result, during 2010 we recorded a write-down of deferred acquisition costs of $147 million
with a corresponding charge to operating costs.
18. REINSURANCE
Certain blocks of insurance assumed in acquisitions, primarily life, long-term care, and annuities in run-off
status, are subject to reinsurance where some or all of the underwriting risk related to these policies has been
ceded to a third party. In addition, a large portion of our reinsurance takes the form of 100% coinsurance
agreements where, in addition to all of the underwriting risk, all administrative responsibilities, including
premium collections and claim payment, have also been ceded to a third party. We acquired these policies and
related reinsurance agreements with the purchase of stock of companies in which the policies were originally
written. We acquired these companies for business reasons unrelated to these particular policies, including the
companies’ other products and licenses necessary to fulfill strategic plans.
A reinsurance agreement between two entities transfers the underwriting risk of policyholder liabilities to a
reinsurer while the primary insurer retains the contractual relationship with the ultimate insured. As such, these
reinsurance agreements do not completely relieve us of our potential liability to the ultimate insured. However,
given the transfer of underwriting risk, our potential liability is limited to the credit exposure which exists should
the reinsurer be unable to meet its obligations assumed under these reinsurance agreements.
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