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Humana Inc. Reports Financial Results for Fourth Quarter And Full Year 2005

Category:

Monday, February 6, 2006 5:00 am EST

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
us4448591028
"Humana achieved record levels of revenues, net income and membership in 2005, as our Medicare business grew significantly and our Commercial profits improved"
LOUISVILLE, Ky.--(BUSINESS WIRE)--Feb. 6, 2006--Humana Inc. (NYSE: HUM):

-- 2005 consolidated revenues of $14.4 billion

-- 4Q05 EPS up 34 percent

-- 2005 cash flows from operations of more than $625 million

-- Medical membership of 7.1 million at December 31, 2005

Humana Inc. today reported $0.39 in diluted earnings per common share (EPS) for the quarter ended December 31, 2005 (4Q05) compared to EPS of $0.29 for the quarter ended December 31, 2004 (4Q04), an increase of 34 percent.

For the year ended December 31, 2005 (FY05), the company reported EPS of $1.87 versus $1.72 for the year ended December 31, 2004 (FY04), an increase of 9 percent.

"Humana achieved record levels of revenues, net income and membership in 2005, as our Medicare business grew significantly and our Commercial profits improved," said Michael B. McCallister, Humana's president and chief executive officer. "But the real story of 2005 was our successful preparation for unprecedented Medicare expansion in 2006 and beyond. We are now superbly positioned to take advantage of this multi-year growth opportunity."

The company also evaluates its earnings performance on a non-GAAP basis. See management's explanation under item (a) of the "Footnotes" section of this news release. Below is a reconciliation of GAAP to non-GAAP results for 4Q05 and FY05. There were no non-GAAP reconciling items for 4Q04 or FY04.

 4Q05 Consolidated Results of                                     EPS  Operations                    Pretax   Pretax     Net          Growth ($ in thousands except EPS)    Income   Margin    Income    EPS  Rate ---------------------------------------------------------------------- GAAP results                   $99,216    2.7%   $64,607   $0.39   34% ---------------------------------------------------------------------- Expenses related to  Hurricane Katrina (b)          20,314    0.6%    12,676    0.07 ---------------------------------------------------------------------- Non-GAAP results (a)          $119,530    3.3%   $77,283   $0.46   59% ---------------------------------------------------------------------- 
 FY05 Consolidated Results of                                     EPS  Operations                     Pretax   Pretax    Net          Growth ($ in thousands except EPS)     Income   Margin   Income    EPS  Rate ---------------------------------------------------------------------- GAAP results                   $421,714   2.9%  $308,483   $1.87    9% ---------------------------------------------------------------------- Class action litigation  settlement (c)                  71,850           44,834    0.27 ---------------------------------------------------------------------- Expenses related to  Hurricane Katrina (b)           27,013           16,857    0.10 ---------------------------------------------------------------------- Realization of tax gain  contingency (d)                      -         (22,800)   (0.14) ---------------------------------------------------------------------- Total reconciling items          98,863   0.7%    38,891    0.23 ---------------------------------------------------------------------- Non-GAAP results (a)           $520,577   3.6%  $347,374   $2.10   22% ---------------------------------------------------------------------- 

The company now expects EPS for the year ending December 31, 2006 (FY06) of at least $2.81, including expenses of $0.10 per share resulting from new stock option accounting rules implemented on January 1, 2006. Below is an analysis of the company's projected earnings for FY06 on a non-GAAP basis, as well as the anticipated stock options comparability restatement for FY05.

 EPS                                 FY06E         FY05     Growth Rate ---------------------------------------------------------------------- GAAP results                    At least $2.81    $1.87   At least 50% ---------------------------------------------------------------------- Excess net realized capital  gains (f)                              (0.11)        - ---------------------------------------------------------------------- Class action litigation  settlement (c)                             -      0.27 ---------------------------------------------------------------------- Expenses related to Hurricane  Katrina (b)                                -      0.10 ---------------------------------------------------------------------- Realization of tax gain  contingency (d)                            -     (0.14) ---------------------------------------------------------------------- Projected options expense  restatement (e)                            -     (0.08) ---------------------------------------------------------------------- Total reconciling items                 (0.11)     0.15 ---------------------------------------------------------------------- Non-GAAP results (a) (e)        At least $2.70    $2.02   At least 34% ---------------------------------------------------------------------- 

Increases in Medicare membership and improved Government Segment underwriting results combined with improved Commercial Segment earnings drove the year-over-year increases in both GAAP and non-GAAP EPS during 4Q05 and FY05.

Revenues - 4Q05 consolidated revenues rose 14 percent to $3.66 billion from $3.21 billion in 4Q04, with total premium and administrative services fees also up 14 percent compared to the prior year's quarter. FY05 consolidated revenues were up 10 percent to $14.42 billion versus $13.10 billion for FY04. Continued increases in membership in the company's higher-premium Medicare plans more than offset reduced revenues from its Commercial Segment membership on a year-over-year basis for both the quarter and the full year.

Medical costs - the company's medical expense ratio (medical expenses as a percent of premium revenue or MER) of 82.1 percent in 4Q05 decreased 260 basis points from an MER of 84.7 in 4Q04. Excluding the 60 basis point increase to the MER associated with the hurricane, the related consolidated non-GAAP ratio of 81.5 percent declined 320 basis points with improvements in both the Government and Commercial Segment MERs.

Selling, general, & administrative (SG&A) expenses - the company's consolidated SG&A expense ratio (SG&A expenses as a percent of premiums plus administrative services fees or SG&A expense ratio) increased to 16.7 percent for 4Q05 from 14.5 percent in 4Q04, the result of significant Medicare investment spending during 4Q05 to prepare for 2006 Medicare opportunities.

 Government Segment Results Summary ----------------------------------  4Q05 Government Segment Results                       Pretax    Pretax ($ in thousands)                             MER      Income    Margin ---------------------------------------------------------------------- GAAP results                                 81.3%    $57,395     2.9% ---------------------------------------------------------------------- Impact of non-GAAP reconciling item (b)     (0.2%)      4,388     0.3% ---------------------------------------------------------------------- Non-GAAP results (a)                         81.1%    $61,783     3.2% ---------------------------------------------------------------------- 
 FY05 Government Segment Results             SG&A       Pretax   Pretax ($ in thousands)                  MER   Expense Ratio  Income   Margin ---------------------------------------------------------------------- GAAP results                      83.1%       12.6%    $323,268   4.2% ---------------------------------------------------------------------- Impact of non-GAAP reconciling  items (b) (c)                    (0.1%)      (0.5%)     39,277   0.6% ---------------------------------------------------------------------- Non-GAAP results (a)              83.0%       12.1%    $362,545   4.8% ---------------------------------------------------------------------- 

Pretax results:

-- Government Segment pretax earnings were $57.4 million in 4Q05 compared to $35.9 million in 4Q04. Non-GAAP pretax income for the segment of $61.8 million improved year over year by $25.9 million or 72 percent, the result of higher Medicare membership and the related operational leverage during 4Q05 as well as improved TRICARE earnings performance.

Enrollment:

-- Medicare Advantage membership rose to 557,800 at December 31, 2005, an increase of 180,600 (48 percent) from December 31, 2004 and 54,700 (11 percent) from September 30, 2005. The company's expanded participation in various Medicare programs and markets during the quarter combined with the company's increased marketing efforts for these programs led to the higher membership level.

-- The company continues to expect Medicare Advantage geographic expansions to contribute to organic enrollment growth primarily during the first six months of 2006, with projected Medicare Advantage membership in the range of 900,000 to 1.1 million by the end of FY06. Membership in the company's stand-alone Prescription Drug Plans (PDPs) are anticipated to approximate 1.9 million to 2.2 million members by the end of 2006 with enrollment also primarily occurring during the first half of 2006.

-- As expected, TRICARE membership of 2,889,100 at December 31, 2005 was essentially unchanged from September 30, 2005. The company also anticipates no material change in TRICARE membership during FY06.

Revenues:

-- Medicare Advantage premiums of $1.22 billion in 4Q05 increased 54 percent compared to $791.1 million in 4Q04, the result of substantially higher enrollment and increases in per-member premiums.

-- Medicare Advantage premiums per member increased 7 percent year over year during 4Q05 due primarily to higher per-member standard reimbursement rates from the government, the company's effectiveness in demonstrating the risk profile of its membership and the acquisition of CarePlus Health Plans of Florida in February 2005.

-- TRICARE premiums and administrative services fees during 4Q05 of $585.3 million compare to $486.9 million in 4Q04. The year-over-year increase reflects a higher negotiated premium for the second option period as well as a full complement of membership under the new contract for the full quarter in 2005.

Medical Expenses:

-- The Government Segment MER decreased 440 basis points to 81.3 percent in 4Q05 compared to 85.7 percent in the prior year's quarter, with improvements in the MERs for each of the lines of business within this segment. Excluding the 20 basis point increase in the MER from Hurricane Katrina, the related non-GAAP ratio of 81.1 percent declined 460 basis points reflecting lower inpatient utilization trends in its government portfolio.

SG&A Expenses:

-- The Government Segment's SG&A expense ratio for 4Q05 of 15.5 percent was 360 basis points higher than that for 4Q04 of 11.9 percent driven by expenses associated with the 2006 Medicare opportunity incurred during 4Q05.

 Commercial Segment Results Summary ----------------------------------  4Q05 Commercial Segment Results                       Pretax    Pretax ($ in thousands)                             MER      Income    Margin ---------------------------------------------------------------------- GAAP results                                 82.9%    $41,821     2.4% ---------------------------------------------------------------------- Impact of non-GAAP reconciling item (b)     (1.0%)     15,926     1.0% ---------------------------------------------------------------------- Non-GAAP results (a)                         81.9%    $57,747     3.4% ---------------------------------------------------------------------- 
 FY05 Commercial Segment Results             SG&A       Pretax   Pretax ($ in thousands)                  MER   Expense Ratio  Income   Margin ---------------------------------------------------------------------- GAAP results                      83.3%        18.3%    $98,446   1.4% ---------------------------------------------------------------------- Impact of non-GAAP reconciling  items (b) (c)                   (0.3%)       (0.6%)     59,586   0.9% ---------------------------------------------------------------------- Non-GAAP results (a)              83.0%       17.7%    $158,032   2.3% ---------------------------------------------------------------------- 

Pretax results:

-- Results for the Commercial Segment during 4Q05 reflect pretax income of $41.8 million compared to $27.3 million in 4Q04. Non-GAAP pretax income for the segment of $57.7 million increased $30.4 million compared to 4Q04. Commercial Segment operating earnings in 4Q05 reflect improvements in utilization trends experienced primarily during the second half of 2005.

Enrollment:

-- Commercial Segment medical membership of 3,170,800 at December 31, 2005 decreased approximately 4 percent or 134,300 from the prior year end, driven by a decrease in fully-insured accounts.

-- The company's HumanaOne product demonstrated continued growth during 4Q05, increasing individual medical membership by 3 percent sequentially with a year-to-date growth rate of 25 percent. ASO membership of 1,171,000 and consumer-choice membership of 371,100 at December 31, 2005 reflect the company's expanded presence in each of these sectors. ASO membership grew 15 percent during FY05 while consumer choice membership grew 52 percent during the same period.

Revenues:

-- Premiums and administrative services fees for the Commercial Segment decreased 5 percent to $1.67 billion in 4Q05 compared to $1.77 billion in the prior year's quarter, as an increase in administrative services fees resulting from a 15 percent increase in ASO membership were more than offset by lower premiums due to declines in at-risk enrollment.

-- Commercial Segment medical premiums for fully insured groups increased approximately 8 percent on a per-member basis during 4Q05 compared to 4Q04. The company anticipates FY06 commercial premiums for fully insured group membership to increase at least equal to the expected rise in per-member medical costs.

Medical Expenses:

-- In 4Q05, the Commercial Segment MER of 82.9 percent was 100 basis points lower than the 4Q04 MER of 83.9 percent. Excluding the 100 basis point increase in the MER from Hurricane Katrina, the related non-GAAP ratio of 81.9 percent declined 200 basis points reflecting lower inpatient utilization trends in its commercial portfolio.

-- Per-member medical costs for commercial fully insured group accounts are forecasted to rise in the range of 7 to 9 percent for FY06.

SG&A Expenses:

-- The Commercial Segment SG&A expense ratio of 18.1 percent for 4Q05 compares to 16.6 percent in 4Q04, the result of lower average fully-insured medical enrollment and an increase in the percentage of ASO commercial membership to 37 percent in 4Q05 versus 31 percent in the prior year.

Cash Flows from Operations

Cash flows used in operations for 4Q05 of $246.5 million compared to $19.5 million cash flows provided by operations in 4Q04. The company also evaluates operating cash flows on a non-GAAP basis, as described in footnote (g) of the "Footnotes" section of this news release.

 Cash flows from  operations ($     4Q04       4Q05      FY04       FY05       FY06  in millions)     Actual     Actual    Actual     Actual    Expected ---------------------------------------------------------------------- GAAP cash flows  provided by  (used in)  operations         $19.5    ($246.5)   $347.8    $625.6  $750 to $850 ---------------------------------------------------------------------- Timing of  premium payment  received from  CMS (g)                -      384.8     211.9      19.8            - ---------------------------------------------------------------------- Non-GAAP cash  flows provided  by operations  (a) (g)            $19.5     $138.3    $559.7    $645.4  $750 to $850 ---------------------------------------------------------------------- 

Non-GAAP cash flows provided by operations increased to $138.3 million in 4Q05 from $19.5 million in 4Q04 driven by improved operating performance in 4Q05 and the negative impact upon cash flows of the final phase of the TRICARE contract transition in 4Q04.

The company now anticipates that cash flows from operations for FY06 will be in the range of $750 million to $850 million driven by expected higher earnings.

Balance Sheet

At December 31, 2005, cash and investment securities comprised 51 percent of the company's total assets compared to 52 percent at September 30, 2005. Debt as a percent of total capitalization (debt plus stockholders' equity) increased 400 basis points to 24.8 percent from 20.8 percent at September 30, 2005 as the company increased its borrowings during 4Q05 primarily in anticipation of funding additional capital into certain subsidiaries during FY06 in conjunction with anticipated growth in revenues.

Cash and investments at the parent company at December 31, 2005 of $419.6 million compared to $439.3 million at December 31, 2004, reflecting the company's use of parent company cash for acquisition activity during FY05.

Footnotes

(a) The Company has included certain financial measures that are not in accordance with Generally Accepted Accounting Principles (GAAP) in its summary of financial results and earnings projections within this news release. The company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses these non-GAAP financial measures as indicators of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not a substitute for, or superior to, financial measures prepared in accordance with GAAP.

(b) During the latter half of 2005, certain of Humana's operations were affected by the unusually harsh impact of Hurricane Katrina. Expenses related to Hurricane Katrina primarily stem from the company's efforts, in close cooperation with Departments of Insurance in the affected states, to help our members by offering participating-provider benefits at non-participating providers, paying claims for members who were unable at that time to meet their premium obligations and similar measures. Expenses related to Hurricane Katrina are not expected to have a material impact upon the company's results for FY06.

(c) On October 18, 2005, the company announced it had reached an agreement to settle a nationwide class action suit that has been pending in U.S. District Court in Miami for more than six years. The agreement has received preliminary court approval with final approval anticipated in 1Q06.

(d) In the first quarter of 2005 the company realized a federal income tax benefit from a contingency item that was resolved in February 2005.

(e) On January 1, 2006, the company adopted the provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" using the retrospective transition model outlined therein. Thus, the company anticipates restating its FY05 results during FY06 to allow for comparability.

(f) During 1Q06 the company realized a gain on the sale of an investment totaling approximately $52 million (pretax) or $0.20 in EPS, which is $34 million (pretax) or $0.13 per share higher than the capital gains assumed in the company's 2006 non-GAAP EPS guidance of at least $2.70, and $34 million (pretax) higher than the capital gains realized in 2005. The company, in turn, donated $0.02 per share of the excess gains to the Humana Foundation.

(g) When reviewing and analyzing Humana's operating cash flows, company management applies the CMS premium payment in each month to match the corresponding disbursements. To do otherwise distorts meaningful analysis of the company's operating cash flow. Therefore, decisions such as management's forecasting and business plans regarding cash flow use this non-GAAP financial measure.

Conference Call & Virtual Slide Presentation

Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and the company's expectations for future earnings.

A live virtual presentation (audio with slides) may be accessed via Humana's Investor Relations page at www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.

All parties interested in the audio-only portion of the conference call are invited to dial 888-625-7430. No password is required. The company suggests participants dial in approximately ten minutes in advance of the call. For those unable to participate in the live event, the virtual presentation archive will be available in the Presentations section of the Investor Relations page at www.humana.com.

Cautionary Statement

This news release contains forward-looking statements. The forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described in the company's Form 10-K for the year ended December 31, 2004 and its Form 10-Qs for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005, as filed by Humana with the Securities and Exchange Commission.

About Humana

Humana Inc., headquartered in Louisville, Ky., is one of the nation's largest publicly traded health benefits companies, with approximately 9 million medical members. Humana offers a diversified portfolio of health insurance products and related services - through traditional and consumer-choice plans - to employer groups, government-sponsored plans, and individuals.

More information regarding Humana is available to investors via the Investor Relations page of the company's web site at http://www.humana.com, including copies of:

-- Annual report to stockholders;

-- Securities and Exchange Commission filings;

-- Most recent investor conference presentation;

-- Quarterly earnings news releases;

-- Replay of most recent earnings release conference call;

-- Calendar of events (includes upcoming earnings conference call dates, times, and access number, as well as planned interaction with research analysts and institutional investors);

-- Corporate Governance information.

 Humana Inc. - GAAP Earnings Guidance Points For the year ending December 31, 2006 As of February 6, 2006   Diluted earnings    FY06: At least $2.81 per share  per common share   1Q06: $0.50 to $0.55 per share ---------------------------------------------------------------------- Revenues            Consolidated: $21 billion to $22 billion                     Medicare Advantage:  $8.5 billion to $10.2 billion                     Medicare stand-alone PDPs:  $1.9 billion to $2.5                      billion                     TRICARE:  $2.5 billion to $2.9 billion                     Commercial:  $6.5 billion to $7.0 billion ---------------------------------------------------------------------- Year-end medical    Medicare Advantage: 900,000 to 1.1 million  membership         Medicare stand-alone PDPs: 1.9 million to 2.2                      million                     TRICARE: No material change from prior year                     Medicaid:  No material change from prior year                     Commercial: No material change from prior year ---------------------------------------------------------------------- Selling, general    Consolidated SG&A expense ratio of 12% to 13%  & administrative  expenses ---------------------------------------------------------------------- Pretax earnings     Medicare Advantage: 3% to 5% pretax margin(1) (1)excluding        Medicare stand-alone PDPs:  1% to 3%  pretax    allocation of     margin(1)    investment       TRICARE: Approximately 3% to 4% pretax margin(1)    and other        Commercial Segment: $140 million to $180 million    income and       pretax income    interest    expense ---------------------------------------------------------------------- Cash flows from     $750 million to $850 million  operations ---------------------------------------------------------------------- Capital             $125 million to $135 million  expenditures ---------------------------------------------------------------------- Effective tax       Approximately 35% to 37%  rate ---------------------------------------------------------------------- Weighted average    Approximately 168 million  shares  outstanding  used to compute  diluted  earnings per  common share ---------------------------------------------------------------------- 
                          Statistical Schedules                            and Supplementary                               Information   Humana Inc. ---------------------------------------------------------------------- In thousands  Ending Medical                December 31,                     Percent  Membership                 2005       2004      Difference     Change ---------------------------------------------------------------------- Commercial:    Fully insured           1,999.8    2,286.5      (286.7)      (12.5)    ASO                     1,171.0    1,018.6       152.4        15.0 ---------------------------------------------------------------------- Total Commercial           3,170.8    3,305.1      (134.3)       (4.1) ----------------------------------------------------------------------  Government:    Medicare Advantage        557.8      377.2       180.6        47.9    Medicaid                  457.9      478.6       (20.7)       (4.3)    TRICARE                 1,750.9    1,789.4       (38.5)       (2.2)    TRICARE ASO             1,138.2    1,082.4        55.8         5.2 ----------------------------------------------------------------------        Total TRICARE       2,889.1    2,871.8        17.3         0.6 ---------------------------------------------------------------------- Total Government           3,904.8    3,727.6       177.2         4.8 ----------------------------------------------------------------------    Total ending medical     membership             7,075.6    7,032.7        42.9         0.6 ----------------------------------------------------------------------  ----------------------------------------------------------------------  Ending Specialty              December 31,                     Percent  Membership                 2005       2004      Difference     Change ---------------------------------------------------------------------- Commercial:    Dental-fully insured      960.5      825.8       134.7        16.3    Dental-ASO                496.0      420.9        75.1        17.8 ----------------------------------------------------------------------      Total Dental          1,456.5    1,246.7       209.8        16.8    Group life                429.2      444.6       (15.4)       (3.5)    Short-term disability      16.4       16.9        (0.5)       (3.0) ----------------------------------------------------------------------    Total ending     specialty membership   1,902.1    1,708.2       193.9        11.4 ----------------------------------------------------------------------  ----------------------------------------------------------------------                           Three months ended     Twelve months ended                               December 31,           December 31, Premiums                    2005       2004        2005        2004 ---------------------------------------------------------------------- Commercial:    Fully insured     medical             $1,518,472 $1,633,240  $6,068,115  $6,614,482    Specialty               101,149     89,632     386,747     349,564 ---------------------------------------------------------------------- Total Commercial         1,619,621  1,722,872   6,454,862   6,964,046 ----------------------------------------------------------------------  Government:    Medicare Advantage    1,218,036    791,064   4,590,362   3,086,598    TRICARE                 575,127    475,751   2,407,653   2,127,595    Medicaid                139,609    133,298     548,714     511,193 ---------------------------------------------------------------------- Total Government         1,932,772  1,400,113   7,546,729   5,725,386 ---------------------------------------------------------------------- Total premiums          $3,552,393 $3,122,985 $14,001,591 $12,689,432 ----------------------------------------------------------------------  ----------------------------------------------------------------------                             Three months ended    Twelve months ended Administrative services       December 31,           December 31,  fees                       2005       2004        2005        2004 ---------------------------------------------------------------------- Commercial                 $53,008    $42,244    $209,378    $166,032 Government                  10,189     11,132      50,059     106,764 ---------------------------------------------------------------------- Total administrative  services fees             $63,197    $53,376    $259,437    $272,796 ----------------------------------------------------------------------  Humana Inc. ---------------------------------------------------------------------- Dollars in thousands, except per share results                           Three months ended     Twelve months ended Consolidated Statements     December 31,            December 31,  of Income               2005 (a)    2004       2005 (a)      2004 ---------------------------------------------------------------------- Revenues:    Premiums            $3,552,393 $3,122,985  $14,001,591 $12,689,432    Administrative     services fees          63,197     53,376      259,437     272,796    Investment income       42,856     31,375      142,976     132,838    Other income             4,634      1,889       14,123       9,259 ----------------------------------------------------------------------       Total revenues    3,663,080  3,209,625   14,418,127  13,104,325 ---------------------------------------------------------------------- Operating expenses:    Medical              2,914,831  2,645,480   11,651,470  10,669,647    Selling, general and     administrative        604,977    461,169    2,176,770   1,877,864    Depreciation            28,769     30,640      105,051     107,286    Other intangible     amortization            4,958      2,437       23,807      10,506 ----------------------------------------------------------------------       Total operating        expenses         3,553,535  3,139,726   13,957,098  12,665,303 ---------------------------------------------------------------------- Income from operations    109,545     69,899      461,029     439,022    Interest expense        10,329      6,648       39,315      23,172 ---------------------------------------------------------------------- Income before income  taxes                     99,216     63,251      421,714     415,850    Provision for income     taxes                  34,609     16,125      113,231     135,838 ---------------------------------------------------------------------- Net income                $64,607    $47,126     $308,483    $280,012 ----------------------------------------------------------------------  Basic earnings per  common share               $0.40      $0.30        $1.91       $1.75 Diluted earnings per  common share               $0.39      $0.29        $1.87       $1.72  Shares used in  computing basic  earnings per common  share (000's)            162,405    159,598      161,714     160,421 Shares used in  computing diluted  earnings per common  share (000's)            166,371    162,138      165,374     162,456  Operating Results by  Segment ---------------------------------------------------------------------- Pretax income    Commercial             $41,821    $27,306      $98,446    $142,010    Government              57,395     35,945      323,268     273,840 ----------------------------------------------------------------------       Consolidated        $99,216    $63,251     $421,714    $415,850 ----------------------------------------------------------------------  Key Ratios ---------------------------------------------------------------------- Medical expense ratio    Commercial                82.9%      83.9%        83.3%       83.9%    Government                81.3%      85.7%        83.1%       84.3% ----------------------------------------------------------------------       Consolidated           82.1%      84.7%        83.2%       84.1% ----------------------------------------------------------------------  Selling, general, and  administrative expense  ratio    Commercial                18.1%      16.6%        18.3%       16.4%    Government                15.5%      11.9%        12.6%       12.2% ----------------------------------------------------------------------       Consolidated           16.7%      14.5%        15.3%       14.5% ----------------------------------------------------------------------  (a) The company also evaluates its earnings performance on a     non-GAAP basis as described more fully within this news release. 
 Humana Inc. ---------------------------------------------------------------------- Dollars in thousands                                       December   September   December                                         31,        30,         31, Consolidated Balance Sheets            2005       2005        2004 ---------------------------------------------------------------------- Assets Current assets:    Cash and cash equivalents         $732,016    $978,936    $580,079    Investment securities            2,354,904   2,228,424   2,145,645    Receivables, net:       Premiums                        723,190     695,344     554,661       Administrative services fees     15,462      15,796      24,954    Securities lending collateral       47,610     117,553      77,840    Other                              333,004     247,083     212,958 ----------------------------------------------------------------------       Total current assets          4,206,186   4,283,136   3,596,137 ----------------------------------------------------------------------  Property and equipment, net           484,412     457,078     399,506  Other assets:    Long-term investment securities    391,035     365,634     348,465    Goodwill                         1,264,575   1,220,461     885,572    Other                              523,406     506,112     427,937 ----------------------------------------------------------------------       Total other assets            2,179,016   2,092,207   1,661,974 ----------------------------------------------------------------------    Total assets                    $6,869,614   6,832,421  $5,657,617 ----------------------------------------------------------------------  Liabilities and Stockholders'  Equity Current liabilities:    Medical and other expenses     payable                        $1,909,682  $1,817,226  $1,422,010    Trade accounts payable and     accrued expenses                  560,550     509,438     488,332    Book overdraft                     280,005     258,433     192,060    Securities lending payable          47,610     117,553      77,840    Unearned revenues                  120,489     533,908     146,326    Current portion of long-term     debt                              301,254     302,366           - ----------------------------------------------------------------------       Total current liabilities     3,219,590   3,538,924   2,326,568 ----------------------------------------------------------------------    Long-term debt                     513,790     317,210     636,696    Other long-term liabilities        662,129     610,317     604,229 ----------------------------------------------------------------------       Total liabilities             4,395,509   4,466,451   3,567,493 ---------------------------------------------------------------------- Commitments and contingencies Stockholders' equity:    Preferred stock, $1 par;     10,000,000 shares authorized;     none issued                             -           -           -    Common stock, $0.16 2/3 par;     300,000,000 shares authorized;     179,062,807 shares issued at     December 31, 2005                  29,843      29,768      29,340    Capital in excess of par value   1,098,117   1,083,631   1,017,156    Retained earnings                1,538,306   1,473,699   1,229,823    Accumulated other comprehensive     income (loss)                      24,832      (3,504)     16,526    Unearned stock compensation        (13,629)    (14,553)     (1,721)    Treasury stock, at cost,     15,846,384 shares at December     31, 2005                         (203,364)   (203,071)   (201,000) ----------------------------------------------------------------------       Total stockholders' equity    2,474,105   2,365,970   2,090,124 ----------------------------------------------------------------------    Total liabilities and     stockholders' equity           $6,869,614   6,832,421  $5,657,617 ----------------------------------------------------------------------  ---------------------------------------------------------------------- Debt to total capitalization ratio       24.8%       20.8%       23.3% ---------------------------------------------------------------------- 
 Humana Inc. ---------------------------------------------------------------------- Dollars in thousands                             Three months ended    Twelve months ended Consolidated Statements        December 31,          December 31,  of Cash Flows              2005 (a)    2004     2005 (a)    2004 (a) ---------------------------------------------------------------------- Cash flows from  operating activities  Net income                 $64,607   $47,126    $308,483    $280,012  Adjustments to   reconcile net income   to net cash (used in)   provided by operating   activities:   Depreciation and    amortization              33,727    33,077     128,858     117,792   (Benefit) provision    for deferred income    taxes                     (9,300)   26,063     (38,362)     53,608   Changes in operating    assets and    liabilities excluding    the effects of    acquisitions:    Receivables              (27,512) (151,334)   (156,748)    (44,625)    Other assets             (32,675)   22,767     (63,962)      3,991    Medical and other     expenses payable         92,456   (14,125)    450,297      78,791    Other liabilities         51,760    39,057      47,598      65,732    Unearned revenues       (413,419)   13,667     (45,610)   (190,759)   Other                      (6,141)    3,187      (4,927)    (16,733) ----------------------------------------------------------------------   Net cash (used in)    provided by operating    activities              (246,497)   19,485     625,627     347,809 ----------------------------------------------------------------------  Cash flows from  investing activities   Acquisitions, net of    cash acquired            (50,028)  (25,838)   (402,844)   (141,810)   Purchases of property    and equipment            (53,528)  (41,196)   (165,846)   (114,096)   Proceeds from sales of    property and    equipment                  1,849     1,519       4,497      30,491   Purchases of    investment securities (2,023,793) (491,429) (3,717,916) (4,106,210)   Proceeds from    maturities of    investment securities  1,165,312   174,869   1,761,588   1,015,144   Proceeds from sales of    investment securities    730,595   479,896   1,723,015   2,683,749   Change in securities    lending collateral        69,943     4,502      30,230       8,651 ----------------------------------------------------------------------   Net cash (used in)    provided by investing    activities              (159,650)  102,323    (767,276)   (624,081) ----------------------------------------------------------------------  Cash flows from  financing activities   Borrowings under    credit agreement         200,000         -     494,000           -   Repayments under    credit agreement               -         -    (294,000)          -   Change in book    overdraft                 21,572    75,954      87,945     (26,994)   Change in securities    lending payable          (69,943)   (4,502)    (30,230)     (8,651)   Common stock    repurchases                 (293)   (2,552)     (2,364)    (67,024)   Proceeds from stock    option exercises and    other                      7,891    14,281      38,235      27,616 ----------------------------------------------------------------------   Net cash provided by    (used in) financing    activities               159,227    83,181     293,586     (75,053) ----------------------------------------------------------------------    (Decrease) increase in    cash and cash    equivalents             (246,920)  204,989     151,937    (351,325)   Cash and cash    equivalents at    beginning of period      978,936   375,090     580,079     931,404 ----------------------------------------------------------------------   Cash and cash    equivalents at end of    period                  $732,016  $580,079    $732,016    $580,079 ----------------------------------------------------------------------  (a) Refer to the "Cash Flows from Operations" section within this     news release for an evaluation of operating cash flows on a     non-GAAP basis. 
 Humana Inc. ----------------------------------------------------------------------  ---------------------------------------------------------------------- Percentage of Ending Membership Under Capitation Arrangements ----------------------------------------------------------------------                                                    Commercial Segment                                                 ----------------------                                                  Fully          Total                                                 Insured  ASO   Segment                                                 ---------------------- December 31, 2005 ----------------- Capitated HMO    hospital system based  A                        2.1%           1.3% Capitated HMO    physician group based  A                        2.0%           1.2% Risk-sharing  B                                    2.5%           1.6% All other membership                              93.4% 100.0%   95.9%                                                 ----------------------    Total                                         100.0% 100.0%  100.0%                                                 ======================  ----------------------------------------------------------------------  December 31, 2004 ----------------- Capitated HMO    hospital system based  A                        3.1%     -     2.1% Capitated HMO    physician group based  A                        2.5%     -     1.7% Risk-sharing  B                                    3.0%     -     2.1% All other membership                              91.4% 100.0%   94.1%                                                 ----------------------    Total                                         100.0% 100.0%  100.0%                                                 ======================                                    Government Segment                     ------------------------------------------ Consol.                     Medicare                   TRICARE  Total   Total                     Advantage Medicaid TRICARE   ASO   Segment Medical                     ------------------------------------------ ------- December 31, 2005 ----------------- Capitated HMO  hospital system   based  A               6.3%                             0.9%    1.1% Capitated HMO    physician group     based  A             4.2%    37.2%                    5.0%    3.3% Risk-sharing  B         41.3%    59.9%                   12.9%    7.8% All other  membership             48.2%     2.9%  100.0%  100.0%   81.2%   87.8%                     ------------------------------------------- ------    Total               100.0%   100.0%  100.0%  100.0%  100.0%  100.0%                     =========================================== ======  ----------------------------------------------------------------------  December 31, 2004 ----------------- Capitated HMO    hospital system     based  A            10.2%     3.6%      -       -     1.5%    1.8% Capitated HMO    physician group     based  A             1.1%    39.3%      -       -     5.2%    3.5% Risk-sharing  B         55.2%    50.4%      -       -    12.0%    7.4% All other  membership             33.5%     6.7%  100.0%  100.0%   81.3%   87.3%                     ------------------------------------------- ------    Total               100.0%   100.0%  100.0%  100.0%  100.0%  100.0%                     =========================================== ======  A - In a limited number of circumstances, we contract with hospitals and physicians to accept financial risk for a defined set of HMO membership. In transferring this risk, we prepay these providers a monthly fixed-fee per member to coordinate substantially all of the medical care for their capitated HMO membership, including some health benefit administrative functions and claims processing. For these capitated HMO arrangements, we generally agree to reimbursement rates that target a medical expense ratio ranging from 82% to 89%. Providers participating in hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within their system for their HMO membership. Providers participating in physician-based capitated HMO arrangements generally have subcontracted specialist physicians and are responsible for reimbursing such hospitals and physicians for services rendered to their HMO membership.  B - In some circumstances, we contract with physicians under risk-sharing arrangements whereby physicians have assumed some level of risk for all or a portion of the medical costs of their HMO membership. Although these arrangements do include capitation payments for services rendered, we process substantially all of the claims under these arrangements. 
 Humana Inc. ---------------------------------------------------------------------- Dollars in thousands  ---------------------------------------------------------------------- Medical Claim Reserves - Details and Statistics ----------------------------------------------------------------------  Change in medical and other expenses payable: ---------------------------------------------  The change in medical and other expenses payable is summarized as  follows:                                                For the       For the                                                Twelve        Twelve                                             Months Ended  Months Ended                                             December 31,  December 31,                                                 2005          2004                                             -------------------------- Balances at January 1                        $1,422,010    $1,272,156  Acquisitions                                     37,375        71,063  Incurred related to:       Current year                           11,765,662    10,763,105       Prior years - non-TRICARE                 (72,868)      (68,448)       Prior years - TRICARE (2)                 (41,324)      (25,010)                                             -------------------------- Total incurred                               11,651,470    10,669,647                                             --------------------------  Paid related to:       Current year                           (9,979,449)   (9,504,331)       Prior years                            (1,221,724)   (1,086,525)                                             -------------------------- Total paid                                  (11,201,173)  (10,590,856)                                             --------------------------  Balances at end of period                    $1,909,682    $1,422,010                                             ==========================   The impact of any change in "incurred related to prior years" claims  may be offset as we re-establish the "incurred related to current  year".  Our reserving practice is to consistently recognize the  actuarial best estimate of our ultimate liability for our claims  within a level of confidence required to meet actuarial standards.  Thus, only when the release of a prior year reserve is not offset  with the same level of conservatism in estimating the current year  reserve will the redundancy reduce medical expense.  We have  consistently applied this methodology in determining our best  estimate for unpaid claims liability in each period.   (2) Changes in estimates of TRICARE incurred claims for prior years  recognized during 2004 and 2005 resulted primarily from claim costs  and utilization levels developing favorably from the levels  originally estimated for the second half of the prior year.  As a  result of substantial risk-sharing provisions with the Department of  Defense and with subcontractors, any resulting impact on operations  from the change in estimates of incurred related to prior years is  substantially reduced, whether positive or negative. 
 Humana Inc. ---------------------------------------------------------------------- Dollars in thousands  Medical Claim Reserves - Details and Statistics ----------------------------------------------------------------------   Medical and Other Expenses Payable Detail: ------------------------------------------                                     December     September    December                                       31,          30,          31,                                      2005         2005         2004                                  ------------------------------------- A IBNR and other medical expenses    payable                        $1,125,205   $1,101,066    $910,525 B TRICARE IBNR                       409,413      416,259     284,647 C TRICARE other medical expenses    payable                            88,443       72,474       6,970 D Unprocessed claim inventories      148,200      136,700     115,300 E Processed claim inventories         83,635       54,907      97,801 F Payable to pharmacy benefit    administrator                      54,786       35,820       6,767                                  -------------------------------------         Total medical and other          expenses payable         $1,909,682   $1,817,226  $1,422,010                                  =====================================   A  IBNR represents an estimate of medical expenses payable for claims    incurred but not reported (IBNR) at the balance sheet date. The    level of IBNR is primarily impacted by membership levels, medical    claim trends and the receipt cycle time, which represents the    length of time between when a claim is initially incurred and when    the claim form is received (i.e. a shorter time span results in    lower reserves for claims IBNR).  Other medical expenses payable    includes amounts payable to providers under capitation    arrangements.  B  TRICARE IBNR has increased at December 31, 2005 versus the prior    year due to the transition to the new South region contract in the    fourth quarter 2004 lowering medical expenses during that quarter.  C  TRICARE other medical expenses payable may include liabilities to    subcontractors and/or risk share payables to the Department of    Defense. The level of these balances may fluctuate from period to    period due to the timing of payment (cutoff) and whether or not the    balances are payables or receivables (receivables from the    Department of Defense are classified as receivables in our balance    sheet).  D  Unprocessed claim inventories represent the estimated valuation of    claims received but not yet fully processed.  TRICARE claim    inventories are not included in this amount as an independent third    party administrator processes all TRICARE medical claims on our    behalf.  Reserves for TRICARE claims inventory are included in    TRICARE IBNR.  E  Processed claim inventories represent the estimated valuation of    processed claims that are in the post claim adjudication process,    which consists of administrative functions such as audit and check    batching and handling.  F  The balance due to our pharmacy benefit administrator fluctuates    due to bi-weekly payments and the month-end cutoff. 
 Humana Inc. ---------------------------------------------------------------------- Dollars in thousands                                                                      - Medical Claim Reserves - Details and Statistics ----------------------------------------------------------------------  Receipt Cycle Time: ------------------- The receipt cycle time measures the average length of time between when a claim was initially incurred and when the claim form was received.  Below is a summary:                             Average Number of Days from Incurred Date                                       to Receipt Date (a)                               2005        2004      Change   % Change                          -------------------------------------------- 1st Quarter Average           16.6        17.4       (0.8)      -4.6% 2nd Quarter Average           15.9        16.7       (0.8)      -4.8% 3rd Quarter Average           16.7        16.9       (0.2)      -1.2% 4th Quarter Average           16.9        16.4        0.5        3.0%                          -------------------------------------------- Full Year Average             16.5        16.9       (0.4)      -2.4%                          ============================================  (a) Receipt cycle time data for our largest claim processing     platforms representing approximately 90% of our fully insured     claims volume.   Unprocessed Claim Inventories: ------------------------------ The estimated valuation and number of claims on hand that are yet to be processed are as follows:                       Estimated                     Number                      Valuation      Claim Item     of Days           Date         (000)          Counts       On Hand -----------------------------------------------------------     12/31/2003         $109,700       443,000          4.9      3/31/2004          $94,800       400,900          3.9      6/30/2004          $98,100       387,000          3.7      9/30/2004         $122,300       453,300          4.4     12/31/2004         $115,300       394,400          3.7      3/31/2005         $111,200       393,200          3.6      6/30/2005         $119,500       443,600          4.0      9/30/2005         $136,700       512,800          4.7 -----------------------------------------------------------     12/31/2005         $148,200       498,400          4.6 ----------------------------------------------------------- 
 Humana Inc. ---------------------------------------------------------------------- Medical Claim Reserves - Details and Statistics ----------------------------------------------------------------------  Days in Claims Payable (Quarterly): ----------------------------------- A common metric for monitoring medical claim reserve levels relative to the medical claim expenses is days in claims payable, or DCP, which represents the medical claim liabilities at the end of the period divided by average medical expenses per day in the quarterly period. Since we have some providers under capitation payment arrangements (which do not require a medical claim IBNR reserve), we have also summarized this metric excluding capitation expenses.                     Days                        DCP                  in Claims   Annual    %    Excluding   Annual    % Quarter Ended  Payable (DCP) Change  Change Capitation  Change  Change ----------------------------------------------------------------------   12/31/2003          46.2     1.0     2.2%     53.2    (0.1)    -0.2%    3/31/2004          47.4     0.9     1.9%     54.3    (0.4)    -0.7%    6/30/2004          47.4    (0.5)   -1.0%     54.1    (2.1)    -3.7%    9/30/2004          51.8     4.6     9.7%     59.1     4.6      8.4%   12/31/2004          49.5     3.3     7.1%     54.8     1.6      3.0%    3/31/2005          50.5     3.1     6.5%     56.1     1.8      3.3%    6/30/2005          52.8     5.4    11.4%     58.6     4.5      8.3%    9/30/2005          54.0     2.2     4.2%     60.8     1.7      2.9% ----------------------------------------------------------------------   12/31/2005          60.3    10.8    21.8%     66.6    11.8     21.5% ----------------------------------------------------------------------  This metric fluctuates due to all of the issues reviewed above, including the change in the receipt cycle time, the change in medical claim inventories, the change in TRICARE liability balances, the timing of our bi-weekly payment to our pharmacy benefits administrator and the timing of settlements with providers under risk-sharing arrangements.  Additionally growth in certain product lines which carry a different level of DCP will impact our overall DCP.  For example, individual and Medicare private fee-for-service (PFFS) product lines carry a higher level of DCP, resulting in an increase to our overall DCP as we grow in those product lines. Conversely, as we expand into Medicare PDPs during 2006, we expect a decline in DCP as a result of the rapid processing, or "short-tail" associated with prescription drug claims.  An annual recap follows:                                                    2005       2004                                                ------------------- 4th quarter-  prior year                                       49.5       46.2    Impact of change in claim     receipt cycle time                             0.2       (0.2)    Impact of change in unprocessed     claim inventories                              1.0        0.2    Impact of change in processed     claim inventories                             (0.4)       0.9    Impact of changing TRICARE     reserve balances                               3.9        1.6    Impact of change in pharmacy     payment cutoff                                 1.5       (0.4)    Impact of growth in Medicare     PFFS membership                                1.2    Impact of growth in individual     membership                                     0.9        0.7    Impact of change in provider payables     under risk arrangements                        1.4          -    All other                                       1.1        0.5                                                ------------------- Year to date-current year                         60.3       49.5                                                =================== 

Contact:

Humana Inc., Louisville
Investor Relations:
Regina Nethery, 502-580-3644
e-mail: Rnethery@humana.com
or
Corporate Communications:
Tom Noland, 502-580-3674
e-mail: Tnoland@humana.com