Humana 2015 Annual Report Download - page 141

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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18. EXPENSES ASSOCIATED WITH LONG-DURATION INSURANCE PRODUCTS
Premiums associated with our long-duration insurance products accounted for approximately 1% of our
consolidated premiums and services revenue for the year ended December 31, 2015. We use long-duration accounting
for products such as long-term care, life insurance, annuities, and certain health and other supplemental policies sold
to individuals because they are expected to remain in force for an extended period beyond one year and because premium
received in the earlier years is intended to pay anticipated benefits to be incurred in future years. As a result, we defer
policy acquisition costs, primarily consisting of commissions, and amortize them over the estimated life of the policies
in proportion to premiums earned.
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 premium rate increase, interest rate, mortality,
morbidity, persistency (the percentage of policies remaining in-force), 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). As discussed in Note 2, beginning in 2014, health policies sold
to individuals that conform to the Health Care Reform Law are accounted for under a short-duration model because
premiums received in the current year are intended to pay anticipated benefits in that year.
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, 2015 and 2014.
2015 2014
Deferred
acquisition
costs
Future policy
benefits
payable
Deferred
acquisition
costs
Future policy
benefits
payable
(in millions)
Other long-term assets $ 135 $ — $ 167 $ —
Trade accounts payable and accrued expenses —(64)—(68)
Long-term liabilities — (2,151)—
(2,349)
Total asset (liability) $ 135 $ (2,215) $ 167 $ (2,417)
In addition, future policy benefits payable include amounts of $205 million at December 31, 2015 and $210 million
at December 31, 2014 which are subject to 100% coinsurance agreements as more fully described in Note 19.
In 2015, we recorded a net reduction in benefits expense of $80 million associated with future policy benefits
primarily due to the release of reserves as individual commercial medical members transitioned to plans compliant
with the Health Care Reform Law. Benefits expense associated with future policy benefits payable was $32 million in
2014 and $354 million in 2013. 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 $63 million in 2015, $39 million in 2014, and $55 million in 2013. The increase in
amortization in 2015 primarily reflects the effect of existing previously underwritten members transitioning to policies
compliant with the Health Care Reform Law with us and other carriers.
Future policy benefits payable include $1.5 billion at December 31, 2015 and 2014 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, 2015 and $123 million of additional liability at December 31, 2014. Amounts charged to
accumulated other comprehensive income are net of applicable deferred taxes.