Humana 2013 Annual Report Download - page 96

The recoverability of our non-agency residential and commercial mortgage-backed securities is supported
by factors such as seniority, underlying collateral characteristics and credit enhancements. These residential and
commercial mortgage-backed securities at December 31, 2013 primarily were composed of senior tranches
having high credit support, with over 99% of the collateral consisting of prime loans. The weighted average
credit rating of all commercial mortgage-backed securities was AA+ at December 31, 2013.
All issuers of securities we own that were trading at an unrealized loss at December 31, 2013 remain current
on all contractual payments. After taking into account these and other factors previously described, we believe
these unrealized losses primarily were caused by an increase in market interest rates and tighter liquidity
conditions in the current markets than when the securities were purchased. At December 31, 2013, we did not
intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is
not likely that we will be required to sell these securities before recovery of their amortized cost basis. As a
result, we believe that the securities with an unrealized loss were not other-than-temporarily impaired at
December 31, 2013. There were no material other-than-temporary impairments in 2013, 2012, or 2011.
Goodwill and Long-lived Assets
At December 31, 2013, goodwill and other long-lived assets represented 27% of total assets and 61% of
total stockholders’ equity, compared to 27% and 62%, respectively, at December 31, 2012.
We are required to test at least annually for impairment at a level of reporting referred to as the reporting
unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.
A reporting unit either is our operating segments or one level below the operating segments, referred to as a
component, which comprise our reportable segments. A component is considered a reporting unit if the
component constitutes a business for which discrete financial information is available that is regularly reviewed
by management. We are required to aggregate the components of an operating segment into one reporting unit if
they have similar economic characteristics. Goodwill is assigned to the reporting unit that is expected to benefit
from a specific acquisition. The carrying amount of goodwill for our reportable segments has been
retrospectively adjusted to conform to the 2013 segment change discussed in Note 2 to the consolidated financial
statements included in Item 8. – Financial Statements and Supplementary Data.
We use a two-step process to review goodwill for impairment. The first step is a screen for potential
impairment, and the second step measures the amount of impairment, if any. Our strategy, long-range business
plan, and annual planning process support our goodwill impairment tests. These tests are performed, at a
minimum, annually in the fourth quarter, and are based on an evaluation of future discounted cash flows. We rely
on this discounted cash flow analysis to determine fair value. However outcomes from the discounted cash flow
analysis are compared to other market approach valuation methodologies for reasonableness. We use discount
rates that correspond to a market-based weighted-average cost of capital and terminal growth rates that
correspond to long-term growth prospects, consistent with the long-term inflation rate. Key assumptions in our
cash flow projections, including changes in membership, premium yields, medical and operating cost trends, and
certain government contract extensions, are consistent with those utilized in our long-range business plan and
annual planning process. If these assumptions differ from actual, including the impact of the ultimate outcome of
the Health Care Reform Law, the estimates underlying our goodwill impairment tests could be adversely
affected. Goodwill impairment tests completed in each of the last three years did not result in an impairment loss.
The fair value of our reporting units with significant goodwill exceeded carrying amounts by a substantial
margin. A 100 basis point increase in the discount rate would not have a significant impact on the amount of
margin for any of our reporting units with significant goodwill.
Long-lived assets consist of property and equipment and other finite-lived intangible assets. These assets are
depreciated or amortized over their estimated useful life, and are subject to impairment reviews. We periodically
review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the
asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future
86