Humana 2013 Annual Report Download - page 97

cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also
must estimate and make assumptions regarding the useful life we assign to our long-lived assets. If these
estimates or their related assumptions change in the future, we may be required to record impairment losses or
change the useful life, including accelerating depreciation or amortization for these assets. There were no
material impairment losses in the last three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and financial position are exposed to financial market risk, including those resulting from
changes in interest rates.
The level of our pretax earnings is subject to market risk due to changes in interest rates and the resulting
impact on investment income and interest expense. Prior to 2009, under interest rate swap agreements, we
exchanged the fixed interest rate under all of our senior notes for a variable interest rate based on LIBOR using
interest rate swap agreements. We terminated all of our interest rate swap agreements in 2008. We may re-enter
into interest rate swap agreements in the future depending on market conditions and other factors. Amounts
borrowed under the revolving credit portion of our $1.0 billion unsecured revolving credit agreement bear
interest at either LIBOR plus a spread or the base rate plus a spread. There were no borrowings outstanding under
our credit agreement at December 31, 2013 or December 31, 2012.
Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our
significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality
with a weighted average S&P credit rating of AA- at December 31, 2013. Our net unrealized position declined
$478 million from a net unrealized gain position of $728 million at December 31, 2012 to a net unrealized gain
position of $250 million at December 31, 2013. At December 31, 2013, we had gross unrealized losses of $127
million on our investment portfolio primarily due to an increase in market interest rates and tighter liquidity
conditions in the current markets than when the securities were purchased, and as such, there were no material
other-than-temporary impairments during 2013. While we believe that these impairments are temporary and we
currently do not have the intent to sell such securities, given the current market conditions and the significant
judgments involved, there is a continuing risk that future declines in fair value may occur and material realized
losses from sales or other-than-temporary impairments may be recorded in future periods.
Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is
indicative of the relationship between changes in fair value and changes in interest rates, providing a general
indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates.
However, actual fair values may differ significantly from estimates based on duration. The average duration of
our investment portfolio, including cash and cash equivalents, was approximately 4.3 years as of December 31,
2013 and 4.0 years as of December 31, 2012. Based on the duration including cash equivalents, a 1% increase in
interest rates would generally decrease the fair value of our securities by approximately $462 million.
We have also evaluated the impact on our investment income and interest expense resulting from a
hypothetical change in interest rates of 100, 200, and 300 basis points over the next twelve-month period, as
reflected in the following table. The evaluation was based on our investment portfolio and our outstanding
indebtedness at December 31, 2013 and 2012. Our investment portfolio consists of cash, cash equivalents, and
investment securities. The modeling technique used to calculate the pro forma net change in pretax earnings
considered the cash flows related to fixed income investments and debt, which are subject to interest rate changes
during a prospective twelve-month period. This evaluation measures parallel shifts in interest rates and may not
account for certain unpredictable events that may affect interest income, including unexpected changes of cash
flows into and out of the portfolio, changes in the asset allocation, including shifts between taxable and tax-
exempt securities, and spread changes specific to various investment categories. In the past ten years, changes in
3 month LIBOR rates during the year have exceeded 300 basis points once, have not changed between 200 and
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