Humana 2012 Annual Report Download - page 78

The terms of the credit agreement include standard provisions related to conditions of borrowing, including
a customary material adverse effect clause which could limit our ability to borrow additional funds. In addition,
the credit agreement contains customary restrictive and financial covenants as well as customary events of
default, including financial covenants regarding the maintenance of a minimum level of net worth of $6.6 billion
at December 31, 2012 and a maximum leverage ratio of 3.0:1. We are in compliance with the financial
covenants, with actual net worth of $8.8 billion and actual leverage ratio of 1.1:1, as measured in accordance
with the credit agreement as of December 31, 2012. In addition, the credit agreement includes an uncommitted
$250 million incremental loan facility.
At December 31, 2012, we had no borrowings outstanding under the credit agreement. We have outstanding
letters of credit of $5 million secured under the credit agreement. No amounts have been drawn on these letters of
credit. Accordingly, as of December 31, 2012, we had $995 million of remaining borrowing capacity under the
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
In March 2012, we called, without penalty, junior subordinated debt of $36 million. Prior to repayment, the
junior subordinated debt bore 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, acquisitions, 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, 2012 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. Humana Inc., our 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 $346 million at December 31, 2012 and $494 million at December 31,
2011. Our subsidiaries paid dividends to the parent of $1.2 billion in 2012, $1.1 billion in 2011, and $747 million
in 2010. 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,” the NAIC is continuing
discussions regarding the accounting for the insurance industry premium-based assessment required by the
Health Insurance Reform Legislation and may require accrual and associated subsidiary funding consideration
for the first two years of the assessment in 2014 followed by annual accruals thereafter. The NAIC guidance is
contradictory to final GAAP guidance issued by the FASB in July 2011, which requires annual accrual of the
insurance industry premium-based assessment in the year in which it is payable.
68