Humana 2012 Annual Report Download - page 86

Benefits expense associated with military services and provisions associated with future policy benefits
excluded from the previous table was as follows for the years ended December 31, 2012, 2011 and 2010:
2012 2011 2010
(in millions)
Military services ............................................ $ 908 $3,247 $3,059
Future policy benefits ........................................ 136 114 266
Total ................................................. $1,044 $3,361 $3,325
The declines in military services benefits payable and benefits expense in 2012 relate to the transition to the
new TRICARE South Region contract on April 1, 2012, which is accounted for as an administrative services only
contract as more fully described in Note 2 to the consolidated financial statements included in Item 8. – Financial
Statements and Supplementary Data. Our previous TRICARE contract that expired on March 31, 2012 contained
provisions where we shared the risk with the federal government for the cost of health benefits. Therefore, the
impact on our income from operations from changes in estimate for TRICARE benefits payable was reduced
substantially by the federal government’s share of the risk. The net change in income from operations as determined
retrospectively, after giving consideration to claim development occurring in the current period, was an increase of
approximately $2 million for 2011 and a decrease of approximately $14 million for 2010.
Future policy benefits payable of $1.9 billion and $1.7 billion at December 31, 2012 and 2011, 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 $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 KMG acquisition. 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.
Long-term care policies provide for long-duration coverage and, therefore, our actual experience will
emerge many years after assumptions have been established. The risk of a deviation of the actual interest rates,
morbidity rates, 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 2010, certain states
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