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ADDING MULTIMEDIA Humana Inc. Reports Financial Results for Fourth Quarter And Full Year 2006; Raises 2007 EPS Guidance

  • Raising 2007 EPS estimate to a range of $4.00 to $4.20
  • 2006 EPS of $2.90, above companys expectations
  • 2006 consolidated revenues of $21.4 billion, up nearly 50 percent
  • Medical membership grew 4.2 million in 2006 to 11.3 million

Category:

Monday, February 5, 2007 7:11 am EST

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028

LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE:HUM) today reported $0.92 in diluted earnings per common share (EPS) for the quarter ended December 31, 2006 (4Q06), above the companys previous guidance for EPS of $0.84 to $0.90. The 4Q06 EPS compares to $0.37(a)(e) EPS for the quarter ended December 31, 2005 (4Q05). Excluding 4Q05 expenses of $0.07 per share related to Hurricane Katrina(e), EPS for 4Q06 is up 109 percent(b) versus the prior year. The year-over-year improvement in the quarter results from substantial earnings increases from membership growth in the companys Government segment.

For the year ended December 31, 2006 (FY06), the company reported EPS of $2.90(f) versus $1.79(a)(d)(e)(g) for the year ended December 31, 2005 (FY05), an increase of 62 percent.

Humana now estimates EPS for the year ending December 31, 2007 (FY07E) in the range of $4.00 to $4.20 versus the companys previous estimate of $3.90 to $4.10. The companys revised outlook for 2007 equates to a growth rate of 38 to 45 percent over the FY06 EPS of $2.90(f).

Strong fourth quarter results capped off a record-breaking year in which Medicare membership growth dramatically increased Humanas size, geographic reach and brand awareness, said Michael B. McCallister, Humanas president and chief executive officer. This enabled us to exceed our EPS estimates for the quarter and the year. Just as importantly, it positioned us for further progress in 2007, as shown by our raising full-year EPS guidance this morning.

Revenues 4Q06 consolidated revenues rose 54 percent to $5.66 billion from $3.66 billion in 4Q05, with total premium and administrative services fees up 53 percent compared to the prior years quarter. Investment income increased by 87 percent year over year in 4Q06 to $79.9 million driven by higher invested balances during 4Q06 and the timing of venture capital investment gains in FY06 versus FY05. Other income increased to $25.9 million in 4Q06 from $4.6 million in 4Q05 primarily because of operations of the companys mail order pharmacy facility which opened during the first half of FY06.

FY06 consolidated revenues rose 49 percent to $21.42 billion from $14.42 billion in FY05 with total premium and administrative services fees up 48 percent compared to the prior years period. Both the quarter and full year increases were primarily the result of higher enrollment in the companys Medicare Advantage plans and new 2006 revenues from stand-alone Prescription Drug Plans (PDPs) for Medicare beneficiaries.

Medical costs The companys consolidated medical expense ratio (medical expenses as a percent of premium revenue or MER) of 83.2 percent in 4Q06 was 110 basis points higher than the 4Q05 MER of 82.1 percent(e) due to an increase in the Government Segment MER outweighing an improvement in that for the Commercial Segment. The change in MER in the Government Segment was primarily due to the stand-alone PDP results in 2006, as described more fully in the Government Segment results discussion below.

The consolidated MER for FY06 of 84.0 percent was 80 basis points higher than the FY05 consolidated MER of 83.2 percent(e), driven by the same factors impacting the fourth quarter year-over-year comparison.

Selling, general, & administrative (SG&A) expenses The companys consolidated SG&A expense ratio (SG&A expenses as a percent of premiums plus administrative services fees) decreased to 14.7 percent for 4Q06 from 16.9 percent(a) in 4Q05. The year-over-year decline of 220 basis points was primarily the result of administrative cost leverage associated with revenues from higher average medical membership. Administrative spending associated with the 2007 open enrollment period for Medicare primarily led to a 160 basis-point increase in the consolidated SG&A expense ratio in 4Q06 compared to the third quarter of 2006.

The SG&A expense ratio for FY06 of 14.3 percent was 110 basis points lower than the FY05 ratio of 15.4 percent(a)(d)(e), primarily due to the administrative cost leverage provided by revenues from higher average medical membership. Additionally, the FY06 ratio improved year-over-year as a result of administrative costs in FY05 for the settlement of class action litigation(d) which did not recur in FY06.

Government Segment Results Summary

Pretax results:

  • Government Segment pretax earnings were $187.3 million in 4Q06 compared to $55.8 million(a)(e) in 4Q05. This increase reflects higher earnings in the companys Medicare Advantage plans resulting from significantly higher membership, partially offset by results for new Medicare PDP offerings in 2006.
  • For FY06, pretax earnings for the Government Segment of $513.8 million were 62 percent higher than FY05 pretax earnings for the segment of $316.7 million(a)(d)(e) with the increase in results year over year primarily due to higher earnings in the companys Medicare Advantage plans resulting from significantly higher membership, partially offset by results for new Medicare PDP offerings in 2006. In addition, the year-over-year improvement was impacted by approximately $39.3 million of FY05 expenses related to the settlement of class action litigation(d) and Hurricane Katrina(e) that did not recur in FY06.

Enrollment:

  • Medicare Advantage membership grew to 1,002,600 at December 31, 2006, an increase of 444,800, or 80 percent, from December 31, 2005 and 9,600, or 1 percent, from September 30, 2006. The companys expanded participation in various Medicare products and markets combined with the companys increased sales and marketing efforts for these programs led to the higher membership level year over year. Medicare Advantage membership for January 2007 approximated 1.1 million members.
  • Membership in the companys stand-alone PDPs totaled 3,536,600 at December 31, 2006. January 2007 stand-alone PDP membership also approximated 3.5 million.
  • As expected, TRICARE membership of 2,880,000 at December 31, 2006 was essentially unchanged from both December 31, 2005 and September 30, 2006.
  • Medicaid membership of 569,100 at December 31, 2006 increased 111,200 from December 31, 2005 and 156,500 from September 30, 2006 due primarily to the award of a new Puerto Rico regional ASO contract during 4Q06, partially offset by eligible Puerto Rico Medicaid members choosing to move into the Medicare Advantage program.

Revenues:

  • Medicare Advantage premiums of $2.30 billion in 4Q06 increased 89 percent compared to $1.22 billion in 4Q05, primarily the result of the expanded geography across which Medicare Advantage products were offered together with higher enrollment in geographies where these products were offered in FY05. Medicare Advantage premiums per member increased 1 percent year over year during 4Q06, reflecting the shift in membership mix to a higher percentage of lower premium Private Fee-for-Service products.
  • Medicare PDP premiums added $882.0 million in new revenues in 4Q06 versus 4Q05.
  • TRICARE premiums and administrative services fees during 4Q06 of $660.4 million compared to $585.3 million in 4Q05.

Medical Expenses:

  • The Government Segment MER increased 240 basis points to 83.7 percent in 4Q06 compared to 81.3 percent(e) in the prior years quarter. This increase is primarily the result of the stand-alone PDPs first offered in January 2006.
  • The FY06 MER for the companys stand-alone PDP business was 92.5 percent, primarily driven by a FY06 MER of 115.9 percent in the companys Complete plan offering.

SG&A Expenses:

  • The Government Segments SG&A expense ratio for 4Q06 of 12.3 percent was 330 basis points lower than that for 4Q05 of 15.6 percent(a) primarily driven by the expense leverage provided by revenues associated with higher average membership for this segment. On a sequential basis, the segments SG&A expense ratio increased 220 basis points, primarily driven by the expenses associated with the 2007 Medicare open enrollment period.

Commercial Segment Results Summary

Pretax results:

  • Commercial Segment pretax earnings were $53.9 million in 4Q06 compared to $38.9 million(a)(e) in 4Q05. Commercial Segment operating earnings in 4Q06 continue to reflect the companys commitment to underwriting discipline and the strategic shift to a higher mix of ASO members. Additionally, 4Q05 results included approximately $15.9 million in expenses related to Hurricane Katrina(e) that did not recur in 4Q06.
  • For FY06, pretax earnings for the Commercial Segment of $248.2 million(f) were 188 percent higher than FY05 pretax earnings for the segment of $86.2 million(a)(d)(e) primarily reflecting the absence of litigation(d) and Hurricane Katrina(e) expenses incurred in FY05 that did not recur in FY06 together with higher-than-usual annual venture capital gains, continued underwriting discipline, and year-over-year improvement in medical cost utilization trends.

Enrollment:

  • Commercial Segment medical membership of 3,283,800 at December 31, 2006 increased approximately 113,000 or 4 percent, from December 31, 2005 and declined 8,100, or less than 1 percent, from September 30, 2006.
  • Membership in the companys Smart plans and other consumer offerings increased year over year by 51,900 or 13 percent to 437,900 at December 31, 2006. Medical members in these products comprise over 13 percent of Commercial medical membership at December 31, 2006 compared to 12 percent at December 31, 2005.

Revenues:

  • Premiums and administrative services fees for the Commercial Segment decreased 6 percent to $1.57 billion in 4Q06 compared to $1.67 billion in the prior years quarter, as an increase in administrative services fees resulting from a 31 percent increase in ASO membership was more than offset by lower premiums due to declines in at-risk enrollment.
  • Commercial Segment medical premiums for fully insured groups increased approximately 6 percent on a per-member basis during 4Q06 compared to 4Q05. This increase primarily reflects a higher percentage of lower-premium small group members in 4Q06 than in 4Q05.

Medical Expenses:

  • In 4Q06, the Commercial Segment MER of 82.1 percent was 80 basis points lower than the 4Q05 MER of 82.9 percent(e), primarily reflecting improving medical cost utilization trends and the companys commitment to underwriting discipline.
  • The company experienced commercial medical cost same-store trend components for FY06 as follows: inpatient hospital utilization flat to 1 percent; inpatient and outpatient hospital rates upper single digits; outpatient hospital utilization low to mid single digits; physician mid single digits; and pharmacy high single digits to low double digits. This is also consistent with the same-store medical cost trend components the company is projecting for FY07.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 20.8 percent for 4Q06 compares to 18.3 percent(a) in 4Q05, primarily the result of lower average fully-insured medical enrollment and an increase in the percentage of Commercial medical membership related to ASO. The segments SG&A expense ratio increased 10 basis points from that for the third quarter of 2006.

Balance Sheet

  • Cash and cash equivalents of $1.74 billion increased $559.1 million or 47 percent sequentially primarily as a result of an increase in operating cash flows during 4Q06.
  • Parent company cash and investments increased to $424.4 million at December 31, 2006 from $419.6 million at December 31, 2005.
  • Debt-to-total capitalization at December 31, 2006 was 29.4 percent, up 430 basis points from September 30, 2006 due primarily to 4Q06 borrowings against the companys credit facility.
  • The companys working capital at December 31, 2006 included approximately $738.7 million in net Part D risk-share payables to CMS associated with the companys Medicare Advantage and stand-alone PDP offerings.
  • Days in claims payable declined one day on a sequential basis to 60.2 days at December 31, 2006 from 61.2 days at September 30, 2006. This sequential decline primarily related to the timing of payments to the companys pharmacy benefit manager.

Cash Flows from Operations

Cash flows provided by operations for 4Q06 of $534.9 million compared to cash used in operations of $250.8 million(a) in 4Q05. The company also evaluates operating cash flows on a non-GAAP basis(b)(c).

Cash flows from operations

($ in millions)

4Q06 4Q05(a) FY06 FY05(a)

GAAP cash flows provided by (used in) operations

$534.9  ($250.8)

 

$1,686.7 

 

$610.1 

Timing of premium payment from CMS(c)

384.8 

 

 

19.8 

Non-GAAP cash flows provided by operations(b)(c) $534.9  $134.0 

$1,686.7 

$629.9 

Non-GAAP cash flows provided by operations rose to $534.9 million in 4Q06 from $134.0 million(a)(b)(c) in 4Q05 driven by growth in the companys Medicare operations including the associated increase in Part D risk-share payables to CMS.

Footnotes

(a) In accordance with Generally Accepted Accounting Principles (GAAP), Humana adopted the retrospective method for implementing new stock option accounting rules on January 1, 2006. Consequently, prior period results in this news release have been adjusted to retrospectively reflect the expensing of stock options.

(b) The company has included certain financial measures that are not in accordance with GAAP 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 as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

(c) When reviewing and analyzing Humanas 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 companys operating cash flow. Therefore, decisions such as managements forecasting and business plans regarding cash flow use this non-GAAP financial measure.

(d) On October 18, 2005, the company announced it had reached an agreement to settle a nationwide class action suit that had been pending in U.S. District Court in Miami for more than six years. Pursuant to the settlement, Humanas 3Q05 financial results included pretax expenses of $72 million ($45 million after tax or $0.27 per share) in connection with the settlement and other related litigation costs.

(e) During the latter half of 2005, certain of Humanas operations were affected by the unusually harsh impact of Hurricane Katrina. Expenses related to Hurricane Katrina primarily stem from the companys 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. Hurricane Katrina related pretax expenses of $7 million ($4 million after tax or $0.03 per share) were included in the companys 3Q05 financial results with another $20 million in pretax expenses ($13 million after tax or $0.07 per share) included in the companys 4Q05 financial results.

(f) During the first quarter of 2006, the company realized a gain on the sale of an investment totaling approximately $52 million on a pretax basis, which was $34 million higher than the pretax capital gains anticipated for 2006. The company, in turn, donated $0.02 per share of the $0.13 per share in excess capital gains to the Humana Foundation.

(g) During the first quarter of 2005, the company realized a favorable tax contingency of $23 million or $0.14 per share.

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 companys expectations for future earnings. A live virtual presentation (audio with slides) may be accessed via Humanas 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 Historical Presentations section of the Investor Relations page at www.humana.com.

Cautionary Statement

This news release contains forward-looking statements and earnings guidance points. 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 following documents filed by Humana with the Securities and Exchange Commission:

  • Form 10-K for the year ended December 31, 2005,
  • Form 10-Qs for the quarters ended March 31, 2006, June 30, 2006, and September 30, 2006.

About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nations largest publicly traded health benefits companies, with over 11 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.

Over its 46-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.

More information regarding Humana is available to investors via the Investor Relations page of the companys web site at 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 Guidance Points as of February 5, 2007

For the year ending December 31, 2007

Comments
Diluted earnings per common share FY07: $4.00 to $4.20

1Q07: $0.35 to $0.40

2007 growth rate of 38% to 45%
Revenues Consolidated revenues: $24 billion to $26 billion;

Medicare Advantage: $10.5 billion to $12.0 billion;

Medicare stand-alone PDPs: $3.0 billion to $3.5 billion;

TRICARE: $2.7 billion to $3.0 billion;

Commercial: $6.0 billion to $7.0 billion

 
Ending medical membership Medicare Advantage: approximately 1,130,000 to 1,200,000;

Medicare stand-alone PDPs: approximately 3.6 million;

TRICARE: No material change from prior year;

Medicaid: No material change from prior year;

Commercial: Up approximately 50,000 to 75,000 from prior year

 

 

 

 

 

 

 

Commercial represents combined ASO and fully insured medical membership

Medical costs

Total Medicare products (Medicare Advantage and stand-alone PDP combined) MER in the range of 82% to 84%;

Commercial fully insured groups: Medical cost trends in the range of 5% to 6%; premium yields in line with medical cost trends

 

 

 

2007 same-store trends for Commercial medical cost detailed components are not anticipated to be materially different from 2006

Selling, general & administrative expenses

Consolidated SG&A expense ratio of 13% to 14%  
Investment income and interest expense

Investment income of $280 million to $290 million with no material benefit from venture capital gains;

Interest expense of approximately $70 million

 

 

Net investment income by segment:

55% to 60% Government Segment; 40% to 45% Commercial Segment

2007 is not forecast to include any material gains from venture capital investments due to fewer such investments now held by the company

Investment income (net of interest expense) is recorded to the business segments based upon changes in working capital that fund cash available for investment

Pretax results Total Medicare products (Medicare Advantage and stand-alone PDP combined): 4% to 5% pretax margin including pretax income on stand-alone PDP;

TRICARE: Approximately 3% to 4% pretax margin;

Commercial Segment: $190 million to $210 million including no material benefit from venture capital gains

Investment and other income and interest expense are recorded at the segment level but not at the line-of-business level
Cash flows from operations $1.0 billion to $1.8 billion Updated to reflect detailed review of 12/31/06 balance sheet and intricacies of Part D risk-share calculations
Capital expenditures Approximately $200 million  

Effective tax rate

Approximately 36% to 37%  
Shares used in computing EPS Approximately 171 million  

Humana Inc.
Statistical Schedules
And
Supplementary Information
4Q06 Earnings Release

Statistical Schedules and Supplementary Information
4Q06 Earnings Release
 
Contents
 
Page Description
 
S-3 4th Quarter Consolidated Statements of Income
S-4 YTD Consolidated Statements of Income
S-5 Consolidated Balance Sheets
S-6 4th Quarter Consolidated Statements of Cash Flows
S-7 YTD Consolidated Statements of Cash Flows
S-8 Key Income Statement Ratios and Segment Operating Results
S-9 Membership Detail
S-10 4th Quarter Premiums and Administrative Services Fees Detail
S-11 YTD Premiums and Administrative Services Fees Detail
S-12 Percentage of Ending Membership under Capitation Arrangements
S-13 Detail of Medical and Other Expenses Payable Balance and Year-to-Date Changes
S-14-15 Medical Claims Reserves Statistics
S-16 4Q05 GAAP to Non-GAAP Reconciliation
S-17 YTD GAAP to Non-GAAP Reconciliation
S-18 2005 Quarters Adjusted to Reflect Retrospective Application of Expensing Stock Options
S-19 2003 Through 2005 Adjusted to Reflect Retrospective Application of Expensing Stock Options
S-20 Footnotes

S-3

Humana Inc.
4th Quarter Consolidated Statements of Income
In thousands, except per common share results
   
Three Months Ended December 31,
 

Dollar

Percentage
2006  2005 (A) Change Change
Revenues:
Premiums $5,456,853  $3,552,393  $1,904,460  53.6%
Administrative services fees 92,490  63,197  29,293  46.4%
Investment income 79,937  42,856  37,081  86.5%
Other revenue 25,939  4,634  21,305  459.8%
Total revenues 5,655,219  3,663,080  1,992,139  54.4%
Operating expenses:
Medical 4,541,775  2,914,831  1,626,944  55.8%
Selling, general and administrative 817,038  609,519  207,519  34.0%
Depreciation 34,607  28,769  5,838  20.3%
Other intangible amortization 4,812  4,958  (146) -2.9%
Total operating expenses 5,398,232  3,558,077  1,840,155  51.7%
Income from operations 256,987  105,003  151,984  144.7%
Interest expense 15,806  10,329  5,477  53.0%
Income before income taxes 241,181  94,674  146,507  154.7%
Provision for income taxes 86,160  32,898  53,262  161.9%
Net income $155,021  $61,776  $93,245  150.9%
 
Basic earnings per common share $0.94  $0.38  $0.56  147.4%
Diluted earnings per common share $0.92  $0.37  $0.55  148.6%
 
Shares used in computing basic earnings per common share 165,338  162,405 
Shares used in computing diluted earnings per common share

168,748 

166,521 

S-4

Humana Inc.
YTD Consolidated Statements of Income
In thousands, except per common share results
   
Twelve Months Ended December 31,
  Dollar Percentage
2006  2005 (A) Change Change
Revenues:
Premiums $20,729,182  $14,001,591  $6,727,591  48.0%
Administrative services fees 341,211  259,437  $81,774  31.5%
Investment income 291,880  142,976  $148,904  104.1%
Other revenue 54,264  14,123  $40,141  284.2%
Total revenues 21,416,537  14,418,127  $6,998,410  48.5%
Operating expenses:
Medical 17,421,204  11,651,470  $5,769,734  49.5%
Selling, general and administrative 3,021,509  2,195,604  $825,905  37.6%
Depreciation 128,634  105,051  $23,583  22.4%
Other intangible amortization 19,964  23,807  ($3,843) -16.1%
Total operating expenses 20,591,311  13,975,932  $6,615,379  47.3%
Income from operations 825,226  442,195  $383,031  86.6%
Interest expense 63,141  39,315  $23,826  60.6%
Income before income taxes 762,085  402,880  $359,205  89.2%
Provision for income taxes 274,662  106,150  $168,512  158.7%
Net income $487,423  $296,730  $190,693  64.3%
 
Basic earnings per common share $2.97  $1.83  $1.14  62.3%
Diluted earnings per common share $2.90  $1.79  $1.11  62.0%
 
Shares used in computing basic earnings per common share 164,137  161,714 
Shares used in computing diluted earnings per common share 167,996  165,560 

S-5

Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
     

Dec. 31,

Sept. 30,

Dec. 31,

Sequential Change

2006  2006  2005 (A) Dollar Percent
Assets
Current assets:
Cash and cash equivalents $1,740,304  $1,181,234  $732,016 
Investment securities 3,192,273  3,242,711  2,354,904 
Receivables, net:
Premiums 667,657  729,949  723,190 
Administrative services fees 13,284  15,055  15,462 
Securities lending collateral 627,990  917,325  47,610 
Other 1,091,465  1,015,717  333,004 
Total current assets 7,332,973  7,101,991  4,206,186  $230,982  3.3%
Property and equipment 545,004  518,930  484,412 
Other assets:
Long-term investment securities 414,877  408,281  391,035 
Goodwill 1,310,631  1,307,231  1,264,575 
Other 524,011  569,718  523,406 
Total other assets 2,249,519  2,285,230  2,179,016 
Total assets $10,127,496  $9,906,151  $6,869,614  $221,345  2.2%
 
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable $2,488,261  $2,562,943  $1,909,682 
Trade accounts payable and accrued expenses 1,626,658  1,477,977  560,550 
Book overdraft 293,605  281,244  280,005 
Securities lending payable 627,990  917,325  47,610 
Unearned revenues 155,298  146,320  120,489 
Current portion of long-term debt -  301,254 
Total current liabilities 5,191,812  5,385,809  3,219,590  ($193,997) -3.6%
Long-term debt 1,269,100  970,144  513,790 
Other long-term liabilities 612,698  657,735  627,360 
Total liabilities 7,073,610  7,013,688  4,360,740  $59,922  0.9%
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;
182,947,691 issued at December 31, 2006 30,491  30,391  29,843 
Capital in excess of par value 1,357,077  1,333,503  1,235,888 
Retained earnings 1,909,098  1,754,077  1,421,675 
Accumulated other comprehensive (loss) income (13,205) (6,574) 24,832 
Treasury stock, at cost, 16,314,151 shares at December 31, 2006 (229,575) (218,934) (203,364)
Total stockholders' equity 3,053,886  2,892,463  2,508,874  $161,423  5.6%
Total liabilities and stockholders' equity $10,127,496  $9,906,151  $6,869,614  $221,345  2.2%
 
Debt to total capitalization ratio 29.4% 25.1% 24.5%

S-6

Humana Inc.
4th Quarter Consolidated Statements of Cash Flows
Dollars in thousands
 
Three Months Ended December 31,
  Dollar Percentage
2006  2005 (A) Change Change
Cash flows from operating activities
Net income $155,021  $61,776 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 39,419  33,727 
Stock-based compensation 8,157  7,716 
Provision (benefit) for deferred income taxes 47,793  (9,784)
Changes in operating assets and liabilities excluding the effects of acquisitions:
 
Receivables 64,063  (27,512)
Other assets 23,559  (32,675)
Medical and other expenses payable (74,682) 92,456 
Other liabilities 268,725  46,246 
Unearned revenues 8,978  (413,419)
Other (6,132) (9,315)
Net cash provided by (used in) operating activities 534,901  (250,784) $785,685  313.3%
 
Cash flows from investing activities
Acquisitions, net of cash acquired (1,700) (50,028)
Purchases of property and equipment (56,549) (53,528)
Proceeds from sales of property and equipment 171  1,849 
Purchases of investment securities (763,830) (2,023,793)
Proceeds from maturities of investment securities 186,315  1,165,312 
Proceeds from sales of investment securities 523,238  730,595 
Change in securities lending collateral 289,335  69,943 
Net cash provided by (used in) investing activities 176,980  (159,650) $336,630  210.9%
 
Cash flows from financing activities
Receipts from CMS contract deposits 574,602  - 
Withdrawals from CMS contract deposits (753,855) - 
Borrowings under credit agreement 300,000  200,000 
Debt issue costs (184) - 
Change in book overdraft 12,361  21,572 
Change in securities lending payable (289,335) (69,943)
Common stock repurchases (10,641) (293)
Tax benefit from stock-based compensation 8,048  4,287 
Proceeds from stock option exercises and other 6,193  7,891 
Net cash (used in) provided by financing activities (152,811) 163,514  ($316,325) -193.5%
 
Increase/(decrease) in cash and cash equivalents 559,070  (246,920)
Cash and cash equivalents at beginning of period 1,181,234  978,936 
 
Cash and cash equivalents at end of period $1,740,304  $732,016 

S-7

Humana Inc.
YTD Consolidated Statements of Cash Flows
Dollars in thousands
   
Twelve Months Ended December 31,
Dollar Percentage
2006  2005 (A) Change Change
Cash flows from operating activities
Net income $487,423  $296,730 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 148,598  128,858 
Stock-based compensation 32,558  30,153 
Provision (benefit) for deferred income taxes 70,062  (39,007)
Changes in operating assets and liabilities excluding the effects of acquisitions:
 
Receivables 58,554  (156,748)
Other assets (365,454) (63,962)
Medical and other expenses payable 557,381  450,297 
Other liabilities 734,718  25,617 
Unearned revenues 29,870  (45,610)
Other (66,998) (16,246)
Net cash provided by operating activities 1,686,712  610,082  $1,076,630  176.5%
 
Cash flows from investing activities
Acquisitions, net of cash acquired (28,062) (402,844)
Purchases of property and equipment (193,151) (165,846)
Proceeds from sales of property and equipment 9,623  4,497 
Purchases of investment securities (4,269,221) (3,717,916)
Proceeds from maturities of investment securities 1,664,332  1,761,588 
Proceeds from sales of investment securities 1,742,793  1,723,015 
Change in securities lending collateral (580,380) 30,230 
Net cash used in investing activities (1,654,066) (767,276) ($886,790) -115.6%
 
Cash flows from financing activities
Receipts from CMS contract deposits 2,002,451  - 
Withdrawals from CMS contract deposits (2,124,717) - 
Borrowings under credit agreement 550,000  494,000 
Repayments under credit agreement (300,000) (294,000)
Proceeds from issuance of senior notes 498,545  - 
Repayment of senior notes (300,000) - 
Debt issue costs (5,980) - 
Change in book overdraft 13,600  87,945 
Change in securities lending payable 580,380  (30,230)
Common stock repurchases (26,211) (2,364)
Tax benefit from stock-based compensation 38,839  15,545 
Proceeds from stock option exercises and other 48,735  38,235 
Net cash provided by financing activities 975,642  309,131  $666,511  215.6%
 
Increase in cash and cash equivalents 1,008,288  151,937 
Cash and cash equivalents at beginning of period 732,016  580,079 
 
Cash and cash equivalents at end of period $1,740,304  $732,016 

S-8

Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
       

Three Months Ended December 31,

Twelve Months Ended December 31,
   
Percentage Percentage
2006  2005 (A) Difference Change 2006  2005 (A) Difference Change
Medical expense ratio
Government Segment 83.7% 81.3% 2.4% 85.0% 83.1% 1.9%
Commercial Segment 82.1% 82.9% -0.8% 81.7% 83.3% -1.6%
Consolidated 83.2% 82.1% 1.1% 84.0% 83.2% 0.8%
 
Selling, general, and administrative expense ratio
 
Government Segment 12.3% 15.6% -3.3% 11.8% 12.7% -0.9%
Commercial Segment 20.8% 18.3% 2.5% 20.2% 18.5% 1.7%
Consolidated 14.7% 16.9% -2.2% 14.3% 15.4% -1.1%
 
 
Detail of Pretax Income
Government Segment $187,288  $55,805  $131,483  235.6% $513,845  $316,676  $197,169  62.3%
Commercial Segment 53,893  38,869  15,024  38.7% 248,240  86,204  162,036  188.0%
Consolidated $241,181  $94,674  $146,507  154.7% $762,085  $402,880  $359,205  89.2%
 
Detail of Pretax Margins
Government Segment 4.6% 2.9% 1.7% 3.5% 4.2% -0.7%
Commercial Segment 3.3% 2.3% 1.0% 3.7% 1.3% 2.4%
Consolidated 4.3% 2.6% 1.7% 3.6% 2.8% 0.8%

S-9

Humana Inc.
Membership Detail
In thousands
         
Ending Ending Year-over-year Change Ending Sequential Change
December 31, 2006 Average - 4Q06 December 31, 2005 Amount Percent September 30, 2006 Amount Percent
Medical Membership:
Government Segment:
Medicare Advantage - HMO 457.9  457.1  427.9  30.0  7.0% 455.4  2.5  0.5%
Medicare Advantage - PPO 71.7  72.1  8.6  63.1  733.7% 71.1  0.6  0.8%
Medicare Advantage - PFFS 473.0  472.7  121.3  351.7  289.9% 466.5  6.5  1.4%
Total Medicare Advantage 1,002.6  1,001.9  557.8  444.8  79.7% 993.0  9.6  1.0%
Medicare - PDP - Standard 2,097.2  2,093.9  2,097.2  100.0% 2,081.7  15.5  0.7%
Medicare - PDP - Enhanced 1,025.4  1,027.9  1,025.4  100.0% 1,021.6  3.8  0.4%
Medicare - PDP - Complete 414.0  418.1  414.0  100.0% 417.7  (3.7) -0.9%
Total Medicare stand-alone PDPs 3,536.6  3,539.9  3,536.6  100.0% 3,521.0  15.6  0.4%
Total Medicare 4,539.2  4,541.8  557.8  3,981.4  713.8% 4,514.0  25.2  0.6%
TRICARE insured 1,716.4  1,718.1  1,750.9  (34.5) -2.0% 1,721.3  (4.9) -0.3%
TRICARE ASO 1,163.6  1,158.7  1,138.2  25.4  2.2% 1,141.4  22.2  1.9%
Total TRICARE 2,880.0  2,876.8  2,889.1  (9.1) -0.3% 2,862.7  17.3  0.6%
Medicaid insured 390.7  398.7  457.9  (67.2) -14.7% 412.6  (21.9) -5.3%
Medicaid ASO 178.4  121.0  178.4  100.0% 178.4  100.0%
Total Medicaid 569.1  519.7  457.9  111.2  24.3% 412.6  156.5  37.9%
Total Government Segment 7,988.3  7,938.3  3,904.8  4,083.5  104.6% 7,789.3  199.0  2.6%
Commercial Segment:
Fully insured medical:
Group 1,563.9  1,565.0  1,836.9  (273.0) -14.9% 1,597.1  (33.2) -2.1%
Individual 182.6  180.3  158.1  24.5  15.5% 175.4  7.2  4.1%
Medicare supplement 7.7  7.7  4.8  2.9  60.4% 7.4  0.3  4.1%
Total fully insured medical 1,754.2  1,753.0  1,999.8  (245.6) -12.3% 1,779.9  (25.7) -1.4%
ASO 1,529.6  1,526.4  1,171.0  358.6  30.6% 1,512.0  17.6  1.2%
Total Commercial Segment 3,283.8  3,279.4  3,170.8  113.0  3.6% 3,291.9  (8.1) -0.2%
 
Total medical membership 11,272.1  11,217.7  7,075.6  4,196.5  59.3% 11,081.2  190.9  1.7%
 
 
Specialty Membership (all Commercial Segment)
Dental - fully insured 959.8  960.0  960.5  (0.7) -0.1% 960.5  (0.7) -0.1%
Dental - ASO 492.2  490.8  496.0  (3.8) -0.8% 488.2  4.0  0.8%
Total dental 1,452.0  1,450.8  1,456.5  (4.5) -0.3% 1,448.7  3.3  0.2%
Group life 436.8  437.1  429.2  7.6  1.8% 436.1  0.7  0.2%
Short-term disability 14.0  14.5  16.4  (2.4) -14.6% 14.9  (0.9) -6.0%
Total specialty membership 1,902.8  1,902.4  1,902.1  0.7  0.0% 1,899.7  3.1  0.2%

S-10

Humana Inc.
4th Quarter Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
 
    Per Member per Month (B)
Three Months Ended December 31, Three Months Ended December 31,
Dollar Percentage
2006  2005  Change Change 2006  2005 
Premium revenues
Government Segment:
Medicare Advantage $2,302,609  $1,218,036  $1,084,573  89.0% $766  $755 
Medicare stand-alone PDPs 881,994  881,994  100.0% $83 
Total Medicare 3,184,603  1,218,036  1,966,567  161.5%
TRICARE insured (C) 645,892  575,127  70,765  12.3% $125  $110 
Medicaid insured 133,877  139,609  (5,732) -4.1% $112  $101 
Total Government Segment premiums 3,964,372  1,932,772  2,031,600  105.1%
Commercial Segment:
Fully insured medical 1,387,855  1,518,472  (130,617) -8.6% $264  $253 
Specialty 104,626  101,149  3,477  3.4% $21  $20 
Total Commercial Segment premiums 1,492,481  1,619,621  (127,140) -7.8%
Total premium revenues $5,456,853  $3,552,393  $1,904,460  53.6%
 
 
Administrative services fees
TRICARE ASO (C) $14,548  $10,189  $4,359  42.8% $4  $3 
Medicaid ASO 1,423  1,423  100.0% $4 
Total Government Segment 15,971  10,189  5,782  56.7%
Commercial Segment 76,519  53,008  23,511  44.4% $13  $11 
Total administrative services fees $92,490  $63,197  $29,293  46.4%

S-11

Humana Inc.
YTD Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
   
    Per Member per Month (B)
Twelve Months Ended December 31, Twelve Months Ended December 31,
Dollar Percentage
2006  2005  Change Change 2006  2005 
Premium revenues
Government Segment:
Medicare Advantage $8,499,064  $4,590,362  $3,908,702  85.2% $794  $799 
Medicare stand-alone PDPs 3,050,304  3,050,304  100.0% $88 
Total Medicare 11,549,368  4,590,362  6,959,006  151.6%
TRICARE insured (C) 2,543,930  2,407,653  136,277  5.7% $123  $115 
Medicaid insured 520,520  548,714  (28,194) -5.1% $104  $97 
Total Government Segment premiums 14,613,818  7,546,729  7,067,089  93.6%
Commercial Segment:
Fully insured medical 5,704,378  6,068,115  (363,737) -6.0% $260  $249 
Specialty 410,986  386,747  24,239  6.3% $21  $20 
Total Commercial Segment premiums 6,115,364  6,454,862  (339,498) -5.3%
Total premium revenues $20,729,182  $14,001,591  $6,727,591  48.0%
 
 
Administrative services fees
TRICARE ASO (C) $48,019  $50,059  ($2,040) -4.1% $3  $4 
Medicaid ASO 1,423  1,423  100.0% $4 
Total Government Segment 49,442  50,059  (617) -1.2%
Commercial Segment 291,769  209,378  82,391  39.4% $12  $10 
Total administrative services fees $341,211  $259,437  $81,774  31.5%

S-12

Humana Inc.
Percentage of Ending Membership under Capitation Arrangements
   
Government Segment Commercial Segment
December 31, 2006 Medicare Advantage Medicare stand-alone PDPs TRICARE Medicaid Total Govt. Segment Fully insured ASO Total Comm. Segment Total Medical Membership
 
Capitated HMO hospital system based (D) 3.0% 0.4% 1.9% 1.0% 0.6%
Capitated HMO physician group based (D) 2.4% 26.1% 2.2% 1.7% 0.9% 1.8%
Risk-sharing (E) 27.9% 42.1% 6.4% 1.5% 0.8% 4.8%
All other membership 66.7% 100.0% 100.0% 31.8% 91.0% 94.9% 100.0% 97.3% 92.8%
Total medical membership 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
 
December 31, 2005
 
Capitated HMO hospital system based (D) 6.3% 0.9% 2.1% 1.3% 1.1%
Capitated HMO physician group based (D) 4.2% 37.2% 5.0% 2.0% 1.2% 3.3%
Risk-sharing (E) 41.3% 59.9% 12.9% 2.5% 1.6% 7.8%
All other membership 48.2% 100.0% 2.9% 81.2% 93.4% 100.0% 95.9% 87.8%
Total medical membership 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

S-13

Humana Inc.
Detail of Medical and Other Expenses Payable Balance and Year-to-Date Changes
Dollars in thousands
 
 

Dec. 31,

Sept. 30,

Dec. 31,

2006  2006  2005 
Detail of medical and other expenses payable
IBNR and other medical expenses payable (F) $1,686,051  $1,715,791  $1,125,205 
TRICARE IBNR (G) 318,583  332,962  409,413 
TRICARE other medical expenses payable (H) 94,699  95,593  88,443 
Unprocessed claim inventories (I) 218,400  187,900  148,200 
Processed claim inventories (J) 115,424  89,500  83,635 
Payable to pharmacy benefit administrator (K) 55,104  141,197  54,786 
Total medical and other expenses payable $2,488,261  $2,562,943  $1,909,682 
 
 
 
Year Ended Nine Months Ended Year Ended

Dec. 31, 2006

Sept. 30, 2006

Dec. 31, 2005

Year-to-date changes in medical and other expenses payable
 
 
Balances at January 1 $1,909,682  $1,909,682  $1,422,010 
 
Acquisitions 21,198  21,198  37,375 
 
Incurred related to:
Current year (L) 17,696,654  13,163,725  11,765,662 
Prior years - non-TRICARE (L) (178,998) (173,223) (72,868)
Prior years - TRICARE (M) (96,452) (111,073) (41,324)
Total incurred 17,421,204  12,879,429  11,651,470 
 
Paid related to:
Current year

(15,532,079)

(10,912,017)

(9,979,449)

Prior years

(1,331,744)

(1,335,349)

(1,221,724)
Total paid (16,863,823) (12,247,366) (11,201,173)
 
Balances at end of period $2,488,261  $2,562,943  $1,909,682 

S-14

Humana Inc.
Medical Claims Reserves Statistics
 
 
Receipt Cycle Time (N)
 
2006  2005  Change Percentage Change
1st Quarter Average 16.1  16.6  (0.5) -3.0%
2nd Quarter Average 15.8  15.9  (0.1) -0.6%
3rd Quarter Average 16.0  16.7  (0.7) -4.2%
4th Quarter Average 15.8  16.9  (1.1) -6.5%
Full Year Average 15.9  16.5  (0.6) -3.6%
 
 
 
Unprocessed Claims Inventories
 
Date Estimated Valuation (000's) Claim Item Counts Number of Days on Hand
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 
3/31/2006  $185,300  683,900  5.6 
6/30/2006  $193,700  702,000  4.8 
9/30/2006  $187,900  623,900  5.4 
12/31/2006  $218,400  757,700  6.1 

S-15

Humana Inc.
Medical Claims Reserves Statistics (Continued)
 
Days in Claims Payable (O)
Quarter Ended Days in Claim Payable (DCP) Annual Change Percentage Change DCP Excluding Capitation Annual Change Percentage Change
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%
3/31/2006  59.1  8.6  17.0% 65.5  9.4  16.8%
6/30/2006  59.5  6.7  12.7% 65.5  6.9  11.8%
9/30/2006  61.2  7.2  13.3% 67.1  6.3  10.4%
12/31/2006  60.2  (0.1) -0.2% 66.5  (0.1) -0.2%
Year-to-Date Change in Days in Claims Payable (P) (Q)
2006  2005 
DCP - 4th quarter of prior year 60.3  49.5 
Components of year-to-date change in DCP:
Change in claims receipt cycle time (1.6) 0.2 
Change in unprocessed claims inventories 1.7  1.0 
Change in processed claims inventories 0.8  (0.4)
Change in TRICARE reserve balances (2.1) 3.9 
Change in pharmacy payment cutoff (1.3) 1.5 
Change in provider payables under risk arrangements 1.9  1.4 
All other 0.5  3.2 
DCP - current quarter 60.2  60.3 

S-16

Humana Inc.
4Q05 GAAP to Non-GAAP Reconciliation
Dollars in thousands, except EPS
 
 
4Q06 4Q05
GAAP (A) Adjustments Non-GAAP
    Hurricane Katrina  
Consolidated
Pretax income $241,181  $94,674  $20,314  $114,988 
Pretax margin 4.3% 2.6% 0.5% 3.1%
Net income $155,021  $61,776  $12,676  $74,452 
EPS $0.92  $0.37  $0.07  $0.44 
Growth rate vs. P/Y GAAP 148.6%
Growth rate vs. P/Y Non-GAAP 109.1%
MER 83.2% 82.1% -0.6% 81.5%
SG&A ratio 14.7% 16.9% 16.9%
 
Government Segment
Pretax income $187,288  $55,805  $4,388  $60,193 
Pretax margin 4.6% 2.9% 0.2% 3.1%
MER 83.7% 81.3% -0.2% 81.1%
SG&A ratio 12.3% 15.6% 15.6%
 
Commercial Segment
Pretax income $53,893  $38,869  $15,926  $54,795 
Pretax margin 3.3% 2.3% 0.9% 3.2%
MER 82.1% 82.9% -1.0% 81.9%
SG&A ratio 20.8% 18.3% 18.3%

S-17

Humana Inc.
YTD GAAP to Non-GAAP Reconciliation
Dollars in thousands, except EPS
 

FY06

FY05

GAAP Adjustments Non-GAAP GAAP (A) Adjustments Non-GAAP
    Excess Net Realized Capital Gains - 1Q06         Realization of Tax Gain Contingency Class Action Litigation Settlement Hurricane Katrina    
Consolidated
Pretax income $762,085  ($29,113) $732,972  $402,880  $71,850  $27,013  $501,743 
Pretax margin 3.6% -0.2% 3.4% 2.8% 0.5% 0.2% 3.5%
Net income 487,423  ($18,167) $469,256  $296,730  ($22,800) $44,834  $16,857  $335,621 
EPS $2.90  ($0.11) $2.79  $1.79  ($0.14) $0.27  $0.10  $2.02 
Growth rate 62.0% 38.1%
MER 84.0%

84.0% 83.2% -0.2% 83.0%
SG&A ratio 14.3% 14.3% 15.4% -0.5% 14.9%
 
Government Segment
Pretax income $513,845  ($1,872) $511,973  $316,676  $33,360  $5,917  $355,953 
Pretax margin 3.5% 3.5% 4.2% 0.4% 0.1% 4.7%
MER 85.0% 85.0% 83.1% -0.1% 83.0%
SG&A ratio 11.8% 11.8% 12.7% -0.5% 12.2%
 
Commercial Segment
Pretax income $248,240  ($27,241) $220,999  $86,204  $38,490  $21,096  $145,790 
Pretax margin 3.7% -0.4% 3.3% 1.3% 0.5% 0.3% 2.1%
MER 81.7% 81.7% 83.3% -0.3% 83.0%
SG&A ratio 20.2% -0.1% 20.1% 18.5% -0.6% 17.9%

S-18

Humana Inc.
2005 Quarters Adjusted to Reflect Retrospective Application of Expensing Stock Options
In thousands, except per common share results
                       
1Q05 2Q05 3Q05 4Q05
Reported Adjusted (A) Reported Adjusted (A) Reported Adjusted (A) Reported Adjusted (A)
 
Revenues $3,387,225  $3,387,225  $3,546,361  $3,546,361  $3,821,461  $3,821,461  $3,663,080  $3,663,080 
 
Pretax income (loss):
Government $72,224  $70,472  $104,092  $102,531  $89,557  $87,868  $57,395  $55,805 
Commercial 49,463  46,208  25,215  22,317  (18,053) (21,190) 41,821  38,869 
Consolidated $121,687  $116,680  $129,307  $124,848  $71,504  $66,678  $99,216  $94,674 
 
Net income $109,795  $106,735  $84,137  $81,412  $49,944  $46,807  $64,607  $61,776 
 
Diluted earnings per common share $0.67  $0.65  $0.51  $0.49  $0.30  $0.28  $0.39  $0.37 
 
Shares used in computing diluted earnings per common share 164,179  164,496  164,908  165,149  166,037  166,076  166,371  166,521 
 
 
SG&A expense ratio:
Government 10.8% 10.9% 10.6% 10.6% 13.1% 13.2% 15.5% 15.6%
Commercial 17.6% 17.8% 17.5% 17.7% 20.0% 20.2% 18.1% 18.3%
Consolidated 14.1% 14.3% 13.8% 14.0% 16.2% 16.3% 16.7% 16.9%
 
Total assets $6,149,593  $6,149,593  $6,277,907  $6,277,907  $6,832,421  $6,832,421  $6,869,614  $6,869,614 
Total liabilities $3,949,788  $3,916,471  $3,961,719  $3,927,862  $4,466,451  $4,432,166  $4,395,509  $4,360,740 
Total stockholders' equity $2,199,805  $2,233,122  $2,316,188  $2,350,045  $2,365,970  $2,400,255  $2,474,105  $2,508,874 
 
Net cash provided by (used in) operating activities $99,228  $95,573  $181,857  $179,287  $591,039  $586,006  ($246,497) ($250,784)
Net cash used in investing activities ($451,322) ($451,322) ($59,909) ($59,909) ($96,395) ($96,395) ($159,650) ($159,650)
Net cash provided by (used in) financing activities $332,279  $335,934  ($78,422) ($75,852) ($119,498) ($114,465) $159,227  $163,514 

S-19

Humana Inc.
2003 Through 2005 Adjusted to Reflect Retrospective Application of Expensing Stock Options
In thousands, except per common share results
                 
For the year ended For the year ended For the year ended
December 31, 2005 December 31, 2004 December 31, 2003
Reported Adjusted (A) Reported Adjusted (A) Reported Adjusted (A)
 
Revenues $14,418,127  $14,418,127  $13,104,325  $13,104,325  $12,226,311  $12,226,311 
 
Pretax income:
Government $323,268  $316,676  $273,840  $269,063  $223,706  $221,240 
Commercial 98,446  86,204  142,010  130,315  121,010  114,973 
Consolidated $421,714  $402,880  $415,850  $399,378  $344,716  $336,213 
 
Net income $308,483  $296,730  $280,012  $269,947  $228,934  $223,739 
 
Diluted earnings per common share $1.87  $1.79  $1.72  $1.66  $1.41  $1.38 
 
Shares used in computing diluted earnings per common share 165,374  165,560  162,456  162,905  161,960  162,406 
 
SG&A expense ratio:

Government

12.6% 12.7% 12.2% 12.3% 13.4% 13.5%
Commercial 18.3% 18.5% 16.4% 16.5% 16.9% 17.0%
Consolidated 15.3% 15.4% 14.5% 14.6% 15.4% 15.4%
 
Total assets $6,869,614  $6,869,614  $5,657,617  $5,657,617  $5,379,814  $5,379,814 
Total liabilities $4,395,509  $4,360,740  $3,567,493  $3,533,369  $3,543,865  $3,510,842 
Total stockholders' equity $2,474,105  $2,508,874  $2,090,124  $2,124,248  $1,835,949  $1,868,972 
 
Net cash provided by operating activities $625,627  $610,082  $347,809  $344,061  $413,140  $397,921 
Net cash used in investing activities ($767,276) ($767,276) ($624,081) ($624,081) ($382,837) ($382,837)
Net cash provided by (used in) financing activities $293,586  $309,131  ($75,053) ($71,305) $179,744  $194,963 

S-20

Humana Inc.

Footnotes to Statistical Schedules and Supplementary Information

4Q06 Earnings Release

 

Footnote

(A) Adjusted to include stock-based compensation expense. Under SFAS 123R, which the company adopted effective January 1, 2006 using the modified retrospective method, stock-based compensation expense is recognized based on the grant date fair value over the vesting period.
(B) Computed based on average membership for the period (i.e., monthly ending membership during the period divided by the number of months in the period).
(C) TRICARE revenues are not contracted on a per member basis.
(D) In a limited number of circumstances, the company contracts with hospitals and physicians to accept financial risk for a defined set of HMO membership. In transferring this risk, the company prepays 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, the company generally agrees 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.
(E) In some circumstances, the company contracts 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, the company processes substantially all of the claims under these arrangements.
(F) 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.
(G) TRICARE IBNR decreased since the prior year end due to favorable development as more fully discussed in Footnote M below.
(H) 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 the company's balance sheet).
(I) 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 the company's behalf. Reserves for TRICARE unprocessed claims inventory are included in TRICARE IBNR.
(J) 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.
(K) The balance due to the company's pharmacy benefit administrator fluctuates as a result of the number of business days in the last payment cycle of the month. Payment cycles are every 10 days (10th & 20th of month) and the last day of the month.
(L) Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development). There were no changes in the approach used to determine our estimate of claim reserves during the quarter.
(M) Changes in estimates of TRICARE incurred claims for prior years recognized during 2006 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.
(N) The receipt cycle time measures the average length of time between when a claim was initially incurred and when the claim form was received. Receipt cycle time data for our largest claim processing platforms represents approximately 70% of the company's fully insured claims volume. Pharmacy claims are excluded from this measurement.
(O) A common metric for monitoring medical claim reserve levels relative to the medical claims expense 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 the company has some providers under capitation payment arrangements (which do not require a medical claim IBNR reserve), the company has also summarized this metric excluding capitation expense. In addition, this calculation excludes the impact of the company's stand-alone PDP business.
(P) Excludes the impact of Medicare stand-alone PDPs.
(Q) DCP fluctuates due to a number of issues, the more significant of which are detailed in the rollforward of DCP from the fourth quarter of the prior year. Growth in certain product lines can also impact DCP for the quarter since a provision for claims would not have been recorded for members that had not yet enrolled earlier in the quarter, yet those members would have a provision and corresponding reserve recorded upon enrollment later in the quarter.

Multimedia Files:

Humana Inc. Reports Financial Results for Fourth Quarter and Full Year 2006

Contact:

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