Humana 2013 Annual Report Download - page 141

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In addition, we establish reserves for future policy benefits in recognition of the fact that some of the
premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. At
policy issuance, these reserves are recognized on a net level premium method based on interest rates, mortality,
morbidity, and maintenance expense assumptions. The assumptions used to determine the liability for future
policy benefits are established and locked in at the time each contract is issued and only change if our expected
future experience deteriorates 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 and maintenance costs (i.e. the
loss recognition date).
The table below presents deferred acquisition costs and future policy benefits payable associated with our
long-duration insurance products for the years ended December 31, 2013 and 2012.
2013 2012
Deferred
acquisition
costs
Future policy
benefits
payable
Deferred
acquisition
costs
Future policy
benefits
payable
(in millions)
Other long-term assets ............................. $166 $ 0 $149 $ 0
Trade accounts payable and accrued expenses ........... 0 (67) 0 (63)
Long-term liabilities ............................... 0 (2,207) 0 (1,858)
Total asset (liability) ........................... $166 $(2,274) $149 $(1,921)
In addition, future policy benefits payable include amounts of $215 million at December 31, 2013 and $220
million at December 31, 2012 which are subject to 100% coinsurance agreements as more fully described in Note 18.
Benefits expense associated with future policy benefits payable was $354 million in 2013, $136 million in
2012, and $114 million in 2011. Benefits expense for 2013 included net charges of $243 million associated with
our closed block of long-term care insurance policies discussed further below. Amortization of deferred
acquisition costs included in operating costs was $55 million in 2013, $44 million in 2012, and $34 million in
2011.
Future policy benefits payable include $1.4 billion at December 31, 2013 and $1.1 billion at December 31,
2012 associated with a non-strategic closed block of long-term care insurance policies acquired in connection
with the 2007 acquisition of KMG. Future policy benefits payable includes amounts charged to accumulated
other comprehensive income for an additional liability that would exist on our closed-block of long-term care
insurance policies if unrealized gains on the sale of the investments backing such products had been realized and
the proceeds reinvested at then current yields. There was no additional liability at December 31, 2013 and $119
million of additional liability at December 31, 2012. Amounts charged to accumulated other comprehensive
income are net of applicable deferred taxes.
Long-term care insurance policies provide nursing home and home health coverage for which premiums are
collected many years in advance of benefits paid, if any. Therefore, our actual claims experience will emerge
many years after assumptions have been established. The risk of a deviation of the actual interest, morbidity,
mortality, and maintenance expense assumptions from those assumed in our reserves are particularly significant
to our closed block of long-term care insurance policies. We monitor the loss experience of these long-term care
insurance 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 loss recognition date assumptions, future adjustments to reserves could be
required.
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