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Humana Inc. Reports First Quarter 2006 Financial Results of $0.50 Earnings per Share

Category:

Monday, May 1, 2006 5:00 am EDT

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028
"Better-than-expected Medicare membership growth and good progress in our Commercial business during the first quarter has led us to raise our guidance this morning for full-year earnings per share. By maximizing this year's opportunities, we're also establishing a strong foundation for robust growth in 2007 and beyond."
LOUISVILLE, Ky.--(BUSINESS WIRE)--May 1, 2006--Humana Inc. (NYSE: HUM):

-- 2006 EPS outlook raised to $2.82 to $2.88

-- Consolidated revenues increase $1.32 billion, or 39 percent year over year

-- Medical membership up 32 percent year over year and 31 percent sequentially

-- New Medicare PDP business impacts quarterly earnings pattern

-- GAAP cash flows from operations of $1.01 billion

-- Non-GAAP cash flows from operations of $233.3 million

Humana Inc. (NYSE: HUM) today reported $0.50 in diluted earnings per common share (EPS) for the quarter ended March 31, 2006 (1Q06), within the range of the company's guidance for 1Q06 EPS of $0.50 to $0.55. As expected, the change in the quarterly pattern of 2006 earnings resulting from the introduction of the company's stand-alone Medicare Prescription Drug Plans (PDPs), combined with higher Medicare sales, marketing, and service infrastructure costs versus a year ago, resulted in a year-over-year decline in 1Q06 EPS, while driving an increase in Medicare revenues of over $1.25 billion, or 127 percent. EPS for the quarter ended March 31, 2005 (1Q05) of $0.65 (a) was $0.15 higher than 1Q06 EPS.

The company estimates EPS for the year ending December 31, 2006 (FY06E) will be in the range of $2.82 to $2.88 versus $1.79 (a) for the year ended December 31, 2005 (FY05), a growth rate of approximately 60 percent.

"This is a transformative year for Humana, and we're on track to achieve the objectives that will produce 2006 growth in both earnings and revenues of more than 50 percent," said Michael B. McCallister, Humana's president and chief executive officer. "Better-than-expected Medicare membership growth and good progress in our Commercial business during the first quarter has led us to raise our guidance this morning for full-year earnings per share. By maximizing this year's opportunities, we're also establishing a strong foundation for robust growth in 2007 and beyond."

The company also evaluates its earnings performance on a non-GAAP basis. See management's explanation under item (b) of the "Footnotes" section of this news release. Below is a reconciliation of GAAP to non-GAAP results for 1Q06 and FY06E.

                                                                                                                            Year-over- 1Q06 Consolidated Results                                      Year     of Operations               Pretax   Pretax   Net            Change   ($ in thousands except EPS)  Income   Margin  Income    EPS  in EPS(a) --------------------------------------------------------------------- GAAP results               $131,208     2.8%  $83,715  $0.50  (23%) --------------------------------------------------------------------- Excess net realized   capital gains(c)           (29,113)  (0.6%)  (18,167) (0.11) --------------------------------------------------------------------- Non-GAAP results(b)        $102,095     2.2%  $65,548  $0.39  (24%)(e) ---------------------------------------------------------------------                                                             EPS Growth FY06E Consolidated Results of Operations      EPS          Rate(a) ---------------------------------------------------------------------- GAAP results                             $2.82 to $2.88   58% to 61% ---------------------------------------------------------------------- Excess net realized capital gains(c)         (0.11) ---------------------------------------------------------------------- Non-GAAP results(b)                      $2.71 to $2.77  34% to 37%(f) ---------------------------------------------------------------------- 

Revenues - 1Q06 consolidated revenues rose 39 percent to $4.70 billion from $3.39 billion in 1Q05, with total premium and administrative services fees up 37 percent compared to the prior year's quarter. These substantial increases are primarily the result of significantly higher enrollment in the company's Medicare Advantage plans and the implementation of stand-alone PDPs for Medicare beneficiaries on January 1, 2006.

Medical costs - The company's medical expense ratio (medical expenses as a percent of premium revenue or MER) of 83.7 percent in 1Q06 was unchanged from that for 1Q05 as significant year-over-year improvement in this metric for the Commercial Segment was offset by a higher Government Segment MER. The higher MER in the Government Segment results from the inclusion of stand-alone PDP results in the current period.

Selling, general, & administrative (SG&A) expenses - As expected, 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 16.1 percent for 1Q06 from 14.3 percent (a) in 1Q05 due to the increase in SG&A expenses associated with the Medicare expansion coupled with a substantial increase in the percentage of Commercial medical members in ASO accounts. The increase in SG&A related to Medicare results from the build out of infrastructure and support functions in advance of the anticipated escalation in enrollment and from sales and marketing costs associated with the more concentrated 2006 Medicare selling season.

Acquisition - Effective May 1, 2006, the company completed its acquisition of CHA Health, a Kentucky-based health plan, adding approximately 92,500 Commercial medical members for cash consideration of approximately $65.0 million.

Government Segment Results Summary

    1Q06 Government Segment Results ($ in thousands)                         Pretax Income   Pretax Margin ---------------------------------------------------------------------- GAAP results                                 $21,572          0.7% ---------------------------------------------------------------------- Excess net realized capital gains(c)          (1,872)           - ---------------------------------------------------------------------- Non-GAAP results(b)                          $19,700          0.7% ---------------------------------------------------------------------- 

Pretax results:

-- Government Segment pretax earnings were $21.6 million in 1Q06 compared to $70.5 million (a) in 1Q05. This decline was anticipated as the company's Medicare stand-alone PDP offerings change its quarterly pattern of earnings for 2006.

Enrollment:

-- Medicare Advantage membership rose to 741,200 at March 31, 2006, an increase of 291,300 (65 percent) from March 31, 2005 and 183,400 (33 percent) from December 31, 2005. The company's expanded participation in various Medicare programs and markets combined with the company's increased sales and marketing efforts for these programs led to the higher membership level.

-- Membership in the company's Medicare Advantage plans continued to rise in the second quarter and approximated 800,000 in April 2006 with May 2006 expected to approximate 860,000 upon completion of the standard monthly enrollment reconciliations with the Centers for Medicare and Medicaid Services (CMS). The company continues to expect Medicare Advantage membership in the range of 900,000 to 1.1 million by December 31, 2006.

-- Membership in the company's stand-alone PDPs totaled 1,959,000 at March 31, 2006. PDP sales momentum continues to be strong with April 2006 membership of approximately 2.2 million and May 2006 expected to approximate 2.6 million. The company now anticipates PDP membership in the range of 2.7 million to 2.9 million by the end of 2006.

-- As expected, TRICARE membership of 2,874,000 at March 31, 2006 was essentially unchanged from December 31, 2005. The company also anticipates no material change in TRICARE membership during 2006.

-- Medicaid membership of 427,000 at March 31, 2006 declined 50,200 from March 31, 2005 and 30,900 from December 31, 2005 due to the non-renewal of the Illinois Medicaid contract in the third quarter of 2005 and a shift of eligible Puerto Rico Medicaid members to the Medicare program.

Revenues:

-- Medicare Advantage premiums of $1.72 billion in 1Q06 increased 75 percent compared to $983.1 million in 1Q05, the result of substantially higher enrollment, increases in per-member premiums, and the impact of changes in the geographic mix of the related membership. Medicare Advantage premiums per member increased 6 percent year over year during 1Q06.

-- Medicare PDP premiums added $515.2 million in new revenues in 1Q06.

-- TRICARE premiums and administrative services fees during 1Q06 of $611.9 million compare to $575.7 million in 1Q05. The year-over-year increase primarily reflects a higher premium for the second option period which began April 1, 2005.

-- Investment income for the quarter included a capital gain of approximately $6.4 million associated with the sale of a venture capital investment.

Medical Expenses:

-- The Government Segment MER increased 50 basis points to 85.6 percent in 1Q06 compared to 85.1 percent in the prior year's quarter. The increase is primarily the result of the establishment of the stand-alone PDPs in January 2006 (MER of 96.4 percent in 1Q06) partially offset by improvement in the MER for Medicare Advantage plans year over year during 1Q06.

-- The MER for stand-alone PDP offerings over each of the interim reporting periods is impacted by the recognition of benefit costs as incurred under each plan's provisions. Different PDP designs offered by the company result in varying levels of coverage through each of the different layers of beneficiary cost responsibility as specified under the Standard PDP, as defined by statute. The company anticipates an MER for the full year for its stand-alone PDPs in the range of 85 percent to 88 percent, with MER improvement expected in each sequential quarter throughout the year. Variables that may impact the quarterly MER for the stand-alone PDPs include: (1) the timing of member enrollment, (2) the PDP offering chosen by the member, and (3) the speed with which members move through their deductibles.

SG&A Expenses:

-- The Government Segment's SG&A expense ratio for 1Q06 of 13.8 percent was 290 basis points higher than that for 1Q05 of 10.9 percent (a) driven by expenses associated with the infrastructure build out of the company's expanded Medicare offerings. In particular, marketing expenses and service costs per member were significantly higher year over year. The company anticipates that its SG&A expense ratio will improve as marketing expenses decline substantially during the Medicare Advantage lock-in period beginning July 1, 2006 and the average membership associated with the Medicare expansion increases throughout the year, providing more leverage against administrative costs.

Commercial Segment Results Summary

    1Q06 Commercial Segment Results ($ in thousands)                        Pretax Income   Pretax Margin ---------------------------------------------------------------------- GAAP results                              $109,636            6.4% ---------------------------------------------------------------------- Excess net realized capital gains(c)       (27,241)          (1.5%) ---------------------------------------------------------------------- Non-GAAP results(b)                        $82,395            4.9% ---------------------------------------------------------------------- 

Pretax results:

-- Results for the Commercial Segment during 1Q06 reflect pretax income of $109.6 million compared to $46.2 million(a) in 1Q05. Non-GAAP pretax income for the segment of $82.4 million increased $36.2 million compared to 1Q05. Commercial Segment operating earnings in 1Q06 reflect year-over-year improvements in utilization trends and the timing of the benefit of capital gains.

-- The company now projects 2006 pretax earnings in its Commercial Segment of between $180 million and $220 million, driven by improving medical costs trends combined with disciplined pricing.

Enrollment:

-- Commercial Segment medical membership of 3,259,400 at March 31, 2006 increased approximately 40,000 (1 percent) from March 31, 2005 and 88,600 (3 percent) from December 31, 2005. The sequential increase in Commercial Segment medical membership was attributable to higher administrative services only (ASO) membership partially offset by a decline in fully insured group membership.

-- ASO medical membership of 1,395,200 at March 31, 2006 accounted for approximately 43 percent of the company's Commercial medical membership, a growth rate in enrollment of 18 percent year over year and 19 percent since December 31, 2005.

-- Membership in the company's Smart plans and other consumer offerings increased to 421,200 at March 31, 2006, representing approximately 13 percent of Commercial medical membership compared to 12 percent at March 31, 2005.

Revenues:

-- Premiums and administrative services fees for the Commercial Segment decreased 2 percent to $1.62 billion in 1Q06 compared to $1.66 billion in the prior year's quarter, as an increase in administrative services fees resulting from an 18 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 7 percent on a per-member basis during 1Q06 compared to 1Q05. This increase includes the effect of a greater percentage of the company's fully-insured group block being weighted towards small groups, as its large group business becomes more weighted towards ASO. Premium yield and medical cost trends for small group business currently include a higher level of benefit buydowns versus larger employers. 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.

-- As disclosed in the company's fourth quarter 2005 earnings press release, investment income for 1Q06 included a capital gain of approximately $45.3 million associated with the sale of a venture capital investment. The company has historically recorded substantial capital gains from such investments each year, though the timing has not been historically consistent as to the quarters in which such gains occur.

Medical Expenses:

-- In 1Q06, the Commercial Segment MER of 80.1 percent was 210 basis points lower than the 1Q05 MER of 82.2 percent, reflecting improving medical cost utilization trends and an improving customer risk profile.

-- Per-member medical costs for commercial fully insured group accounts are now forecasted to rise in the range of 6 to 7 percent during 2006, including the effect of a greater percentage of our fully-insured groups being weighted towards small employers, as discussed above. Commercial group "same store" medical cost trends are now expected to be approximately 50 to 75 basis points lower than the company's previous forecast.

-- Individual components of Commercial medical cost trend for 2006 are anticipated to approximate 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.

SG&A Expenses:

-- The Commercial Segment SG&A expense ratio of 20.4 percent for 1Q06 compares to 17.8 percent (a) in 1Q05, the result of lower average fully-insured medical enrollment and an increase in the percentage of commercial medical membership related to ASO to 43 percent in 1Q06 versus 37 percent in the prior year.

Cash Flows from Operations

Cash flows provided by operations for 1Q06 of $1.01 billion compared to $95.6 million (a) in 1Q05. The company also evaluates operating cash flows on a non-GAAP basis, as described in footnote (d) of the "Footnotes" section of this news release.

  Cash flows from operations  ($ in millions)                                 1Q06         1Q05(a) ---------------------------------------------------------------------- GAAP cash flows provided by operations         $1,008.0        $95.6 ---------------------------------------------------------------------- Timing of premium payment from CMS(d)            (774.7)        19.8 ---------------------------------------------------------------------- Non-GAAP cash flows provided by  operations(b)(d)                                $233.3       $115.4 ---------------------------------------------------------------------- 

Non-GAAP cash flows provided by operations increased to $233.3 million in 1Q06 from $115.4 million (a) in 1Q05 driven by growth in the company's Medicare operations. The company continues to expect that cash flows from operations for 2006 will be in the range of $750 million to $850 million driven by expected higher earnings.

     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 reflect     the restatement for the expensing of stock options.  (b) The Company has included certain financial measures that are     not in accordance with 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 as a substitute for, or superior to,     financial measures prepared in accordance with GAAP.  (c) During 1Q06 the company realized a gain on the sale of an     investment totaling approximately $52 million (pretax) or $0.19 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 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.  (d) 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.  (e) Computed by comparing 1Q06 non-GAAP EPS to 1Q05 non-GAAP EPS     of $0.51. 1Q05 GAAP EPS of $0.65 included the realization of a tax     gain contingency of $0.14 per share.  (f) Computed by comparing FY06E non-GAAP EPS to FY05 non-GAAP EPS     of $2.02. FY05 GAAP EPS of $1.79 included expenses associated with     a class action litigation settlement of $0.27 per share, expenses     related to Hurricane Katrina of $0.10 per share, and the benefit     from the realization of a tax gain contingency of $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 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, 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 9.3 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 45-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 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 May 1, 2006   Diluted earnings per common share FY06: $2.82 to $2.88                                   2Q06: $0.31 to $0.36 ---------------------------------------------------------------------- Revenues                          Consolidated: $21 billion to $22                                     billion                                   Medicare Advantage:  $8.5 billion to                                     $10.2 billion                                   Medicare stand-alone PDPs:  $2.6                                     billion to $2.7 billion                                   TRICARE:  $2.5 billion to $2.9                                     billion                                   Commercial:  $6.5 billion to $7.0                                     billion ---------------------------------------------------------------------- Year-end medical membership       Medicare Advantage: 900,000 to 1.1                                     million                                   Medicare stand-alone PDPs: 2.7                                     million to 2.9 million                                   TRICARE: No material change from                                     prior year                                   Medicaid:  Down approximately 40,000                                   Commercial: No material change from                                     prior year ---------------------------------------------------------------------- Medical costs                     Medicare - stand-alone PDPs: MER in                                     the range of 85% to 88%                                   Commercial:  Medical cost trends in                                     the range of 6% to 7%; premium                                     yields at least in line with                                      medical cost trends ---------------------------------------------------------------------- Selling, general &                Consolidated SG&A expense ratio of  administrative expenses            13% to 14% ---------------------------------------------------------------------- Pretax results                    Medicare Advantage: 3% to 5% pretax (1) excluding allocation of         margin(1)     investment and other          Medicare stand-alone PDPs:  1% to 3%     income and interest             pretax margin(1)     expense                       TRICARE: Approximately 3% to 4%                                     pretax margin(1)                                   Commercial Segment: $180 million to                                     $220 million ---------------------------------------------------------------------- Cash flows from operations        $750 million to $850 million ---------------------------------------------------------------------- Capital expenditures              $125 million to $135 million ---------------------------------------------------------------------- Effective tax rate                Approximately 35% to 37% ---------------------------------------------------------------------- Weighted average shares           Approximately 168 million  outstanding used to compute  diluted earnings per common  share ----------------------------------------------------------------------                                  Humana Inc.                          Statistical Schedules                                   And                        Supplementary Information                          1Q06 Earnings Release   Humana Inc.                                                        S-2 Statistical Schedules and Supplementary Information 1Q06 Earnings Release  Contents  Page         Description ----         -----------  S-3          Consolidated Statements of Income S-4          Consolidated Balance Sheets S-5          Consolidated Statements of Cash Flows S-6          2005 Quarters Restated to Include Stock Options Expense S-7          2003 Through 2005 Restated to Include Stock Options                 Expense S-8          Key Income Statement Ratios and Segment Operating Results S-9          Premiums and Administrative Services Fees Detail S-10         Membership Detail S-11         Percentage of Ending Membership under Capitation                Arrangements S-12         Detail of Medical and Other Expenses Payable Balance and                 Year-to-Date Changes S-13-14      Medical Claims Reserves Statistics S-15         Footnotes     Humana Inc.                                                        S-3 Consolidated Statements of Income In thousands, except per share results                                                          ----------------------                            Three Months Ended                                  March 31,                                    ----------------------   Dollar   Percentage                                2006      2005(A)   Change     Change                           ---------------------- --------------------- Revenues:  Premiums                 $4,521,486 $3,290,815  $1,230,671      37.4%  Administrative services   fees                        78,678     63,513      15,165      23.9%  Investment income            98,902     30,211      68,691     227.4%  Other income                  5,299      2,686       2,613      97.3%                           ---------------------- -----------      Total revenues        4,704,365  3,387,225   1,317,140      38.9%                           ---------------------- ----------- Operating expenses:  Medical                   3,783,926  2,753,733   1,030,193      37.4%  Selling, general and   administrative             740,886    479,040     261,846      54.7%  Depreciation                 29,852     24,806       5,046      20.3%  Other intangible   amortization                 5,054      4,443         611      13.8%                           ---------------------- -----------      Total operating       expenses             4,559,718  3,262,022   1,297,696      39.8%                           ---------------------- ----------- Income from operations       144,647    125,203      19,444      15.5% Interest expense              13,439      8,523       4,916      57.7%                           ---------------------- ----------- Income before income taxes   131,208    116,680      14,528      12.5% Provision for income taxes    47,493      9,945      37,548     377.6%                           ---------------------- ----------- Net income                   $83,715   $106,735    ($23,020)    -21.6%                           ====================== ===========  Basic earnings per   common share                  $0.51      $0.66      ($0.15)    -22.7% Diluted earnings per  common share                  $0.50      $0.65      ($0.15)    -23.1%  Shares used in computing  basic earnings per common  share                       163,116    160,911 Shares used in computing  diluted earnings per  common share                167,325    164,496        Humana Inc.                                                        S-4 Consolidated Balance Sheets Dollars in thousands, except par values                                                                    March 31,   Dec. 31,    Dollar   Percentage                               2006      2005(A)    Change     Change                           ---------------------- --------------------- Assets Current assets:   Cash and cash    equivalents            $1,843,405   $732,016   Investment securities    2,623,009  2,354,904   Receivables, net:       Premiums               763,061    723,190       Administrative        services fees          21,652     15,462   Securities lending    collateral                250,322     47,610   Other                      517,877    333,004                           ----------------------     Total current assets   6,019,326  4,206,186  $1,813,140      43.1% Property and equipment       498,267    484,412 Other assets:   Long-term investment    securities                374,583    391,035   Goodwill                 1,265,176  1,264,575   Other                      540,668    523,406                           ----------------------     Total other assets     2,180,427  2,179,016                           ---------------------- Total assets              $8,698,020 $6,869,614  $1,828,406      26.6%                           ======================  Liabilities and  Stockholders' Equity Current liabilities:   Medical and other    expenses payable       $2,169,489 $1,909,682   Trade accounts payable    and accrued expenses      871,231    560,550   Book overdraft             275,587    280,005   Securities lending    payable                   250,322     47,610   Unearned revenues          920,678    120,489   Current portion of     long-term debt            300,231    301,254                           ----------------------     Total current      liabilities           4,787,538  3,219,590  $1,567,948      48.7% Long-term debt               601,225    513,790 Other long-term  liabilities                 741,498    627,360                           ----------------------     Total liabilities      6,130,261  4,360,740  $1,769,521      40.6%                           ---------------------- 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; 180,496,685     issued at March 31, 2006   30,085     29,843   Capital in excess of     par value               1,264,161  1,235,888   Retained earnings        1,505,390  1,421,675   Accumulated other    comprehensive (loss)    income                    (28,408)    24,832   Treasury stock, at cost,    15,848,413 shares at    March 31, 2006           (203,469)  (203,364)                           ----------------------     Total stockholders'      equity                2,567,759  2,508,874     $58,885       2.3%                           ---------------------- Total liabilities and  stockholders' equity     $8,698,020 $6,869,614  $1,828,406      26.6%                           ======================  Debt to total  capitalization ratio           26.0%      24.5%      Humana Inc.                                                        S-5 Consolidated Statements of Cash Flows Dollars in thousands                                --------------------                                Three Months Ended                                     March 31,                                      --------------------  Dollar  Percentage                                    2006    2005(A)  Change    Change                               -------------------- ------------------- Cash flows from operating  activities    Net income                    $83,715 $106,735    Adjustments to reconcile     net income to net cash     provided by operating     activities:        Depreciation and         amortization              34,906   29,249        Stock compensation          6,580    6,724        (Benefit) provision for         deferred income taxes     (3,705)   8,062        Changes in operating         assets and liabilities         excluding the effects          of acquisitions:            Receivables           (46,061)  (6,425)            Other assets         (185,250)  (8,360)            Medical and other             expenses payable     259,807   86,665            Other liabilities     114,752 (103,957)            Unearned revenues     800,189  (22,416)        Other                     (56,960)    (704)                               -------------------- Net cash provided by   operating activities          1,007,973   95,573  $912,400     954.7%                               --------------------  Cash flows from investing  activities    Acquisitions, net of cash     acquired                        (113)(348,099)    Purchases of property and     equipment                    (45,261) (36,193)    Proceeds from sales of     property and equipment         2,138        8    Purchases of investment     securities                (1,663,658)(714,371)    Proceeds from maturities       of investment securities     910,108  261,665    Proceeds from sales of     investment securities        559,830  434,506    Change in securities     lending collateral          (202,712) (48,838)                               -------------------- Net cash used in investing  activities                     (439,668)(451,322)  $11,654       2.6%                               --------------------  Cash flows from financing  activities    Receipts from CMS contract     deposits                     494,194        -    Withdrawals from CMS     contract deposits           (273,444)       -    Borrowings under credit     agreement                    100,000  294,000    Repayments under credit     agreement                          -  (25,000)    Change in book overdraft       (4,418)     681    Change in securities     lending payable              202,712   48,838    Common stock repurchases         (105)  (1,376)    Tax benefit from stock     compensation                   8,404    3,655    Proceeds from stock option     exercises and other           15,741   15,136                               -------------------- Net cash provided by    financing activities            543,084  335,934  $207,150      61.7%                               --------------------  Increase (decrease) in   cash and cash equivalents     1,111,389  (19,815) Cash and cash equivalents   at beginning of period          732,016  580,079                               --------------------  Cash and cash equivalents   at end of period             $1,843,405 $560,264                               ====================     Humana Inc.                                                        S-6 2005 Quarters Restated to Include Stock Options Expense In thousands, except per share results                          ----------------------- -----------------------                                  1Q05                     2Q05                                ----------------------- -----------------------                                                                               Reported   Restated(A)  Reported   Restated(A)                        ----------- ----------- ----------- -----------  Revenues               $3,387,225  $3,387,225  $3,546,361  $3,546,361   Pretax income (loss):  Government               $72,224     $70,472    $104,092    $102,531   Commercial                49,463      46,208      25,215      22,317                         ----------- ----------- ----------- -----------    Consolidated          $121,687    $116,680    $129,307    $124,848   Net income               $109,795    $106,735     $84,137     $81,412   Diluted earnings per   common share               $0.67       $0.65       $0.51       $0.49   Shares used in computing  diluted earnings per    common share             164,179     164,496     164,908     165,149     SG&A expense ratio:  Government                  10.8%       10.9%       10.6%       10.6%  Commercial                  17.6%       17.8%       17.5%       17.7%    Consolidated              14.1%       14.3%       13.8%       14.0%  Total assets           $6,149,593  $6,149,593  $6,277,907  $6,277,907  Total liabilities      $3,949,788  $3,916,471  $3,961,719  $3,927,862  Total stockholders'   equity                $2,199,805  $2,233,122  $2,316,188  $2,350,045   Net cash provided by   (used in) operating   activities               $99,228     $95,573    $181,857    $179,287  Net cash used in   investing activities   ($451,322)  ($451,322)   ($59,909)   ($59,909) Net cash provided by   (used in) financing   activities              $332,279    $335,934    ($78,422)   ($75,852)                             ----------------------- -----------------------                                 3Q05                    4Q05                        ----------------------- -----------------------                                                 Reported   Restated(A)  Reported   Restated(A)                        ----------- ----------- ----------- -----------  Revenues               $3,821,461  $3,821,461  $3,663,080  $3,663,080  Pretax income (loss):  Government               $89,557     $87,868     $57,395     $55,805  Commercial               (18,053)    (21,190)     41,821      38,869                        ----------- ----------- ----------- -----------    Consolidated           $71,504     $66,678     $99,216     $94,674  Net income                $49,944     $46,807     $64,607     $61,776  Diluted earnings per   common share               $0.30       $0.28       $0.39       $0.37  Shares used in computing  diluted earnings per    common share             166,037     166,076     166,371     166,521  SG&A expense ratio:  Government                  13.1%       13.2%       15.5%       15.6%  Commercial                  20.0%       20.2%       18.1%       18.3%    Consolidated              16.2%       16.3%       16.7%       16.9%  Total assets           $6,832,421  $6,832,421  $6,869,614  $6,869,614 Total liabilities      $4,466,451  $4,432,166  $4,395,509  $4,360,740 Total stockholders'   equity                $2,365,970  $2,400,255  $2,474,105  $2,508,874  Net cash provided by   (used in) operating   activities              $591,039    $586,006   ($246,497)  ($250,784) Net cash used in   investing activities    ($96,395)   ($96,395)  ($159,650)  ($159,650) Net cash provided by   (used in) financing   activities             ($119,498)  ($114,465)   $159,227    $163,514       Humana Inc.                                                        S-7 2003 Through 2005 Restated to Include Stock Options Expense In thousands, except per share results                     ------------------------- -------------------------                        For the year ended        For the year ended                            December 31, 2005         December 31, 2004                       ------------------------- -------------------------                      Reported   Restated(A)    Reported   Restated(A)                     ------------ ------------ ------------ ------------  Revenues           $14,418,127  $14,418,127  $13,104,325  $13,104,325   Pretax income:  Government           $323,268     $316,676     $273,840     $269,063   Commercial             98,446       86,204      142,010      130,315                     ------------ ------------ ------------ ------------    Consolidated       $421,714     $402,880     $415,850     $399,378   Net income            $308,483     $296,730     $280,012     $269,947   Diluted earnings per  common share            $1.87        $1.79        $1.72        $1.66   Shares used in   computing diluted   earnings per  common share          165,374      165,560      162,456      162,905   SG&A expense ratio:  Government               12.6%        12.7%        12.2%        12.3%  Commercial               18.3%        18.5%        16.4%        16.5%    Consolidated           15.3%        15.4%        14.5%        14.6%  Total assets        $6,869,614   $6,869,614   $5,657,617   $5,657,617  Total liabilities   $4,395,509   $4,360,740   $3,567,493   $3,533,369  Total stockholders'   equity             $2,474,105   $2,508,874   $2,090,124   $2,124,248   Net cash provided   by operating   activities           $625,627     $610,082     $347,809     $344,061  Net cash used in   investing   activities          ($767,276)   ($767,276)   ($624,081)   ($624,081) Net cash provided   by (used in)   financing  activities           $293,586     $309,131     ($75,053)    ($71,305)                           ---------------------------                          For the year ended                           December 31, 2003                     ---------------------------                      Reported    Restated (A)                     ------------ --------------  Revenues            $12,226,311    $12,226,311  Pretax income:  Government            $223,706       $221,240  Commercial             121,010        114,973                     ------------ --------------    Consolidated        $344,716       $336,213  Net income             $228,934       $223,739  Diluted earnings per  common share             $1.41          $1.38  Shares used in   computing diluted   earnings per  common share           161,960        162,406  SG&A expense ratio:  Government                13.4%          13.5%  Commercial                16.9%          17.0%    Consolidated            15.4%          15.4%  Total assets         $5,379,814     $5,379,814 Total liabilities    $3,543,865     $3,510,842 Total stockholders'  equity              $1,835,949     $1,868,972  Net cash provided   by operating   activities            $413,140       $397,921 Net cash used in   investing   activities           ($382,837)     ($382,837) Net cash provided   by (used in)   financing  activities            $179,744       $194,963       Humana Inc.                                                        S-8 Key Income Statement Ratios and Segment Operating Results Dollars in thousands                               ------------------                              Three Months Ended                                   March 31,                              ------------------                                                             Percentage                                  2006    2005(A) Difference   Change                              ------------------ ---------------------- Medical expense ratio    Government Segment            85.6%    85.1%       0.5%    Commercial Segment            80.1%    82.2%      -2.1%    Consolidated                  83.7%    83.7%       0.0%  Selling, general, and  administrative expense ratio    Government Segment            13.8%    10.9%       2.9%    Commercial Segment            20.4%    17.8%       2.6%    Consolidated                  16.1%    14.3%       1.8%   Detail of Pretax Income    Government Segment         $21,572  $70,472   ($48,900)    -69.4%    Commercial Segment         109,636   46,208     63,428     137.3%                              ------------------ ----------    Consolidated              $131,208 $116,680    $14,528      12.5%                              ================== ==========  Detail of Pretax Margins    Government Segment             0.7%     4.2%      -3.5%    Commercial Segment             6.4%     2.7%       3.7%    Consolidated                   2.8%     3.4%      -0.6%       Humana Inc.                                                        S-9 Premiums and Administrative Services Fees Detail Dollars in thousands, except PMPM                                                                                                                                                                       -------------------------                                                  Three Months Ended                                                          March 31,                                                     -------------------------  Dollar   Percentage                               2006        2005     Change     Change                           ------------------------- --------------------  Premium revenues Government Segment:   Medicare Advantage     $1,720,843    $983,141    $737,702    75.0%     Medicare -     Stand-alone PDPs         515,157           -     515,157   100.0%                          ------------------------- -----------       Total Medicare      2,236,000     983,141   1,252,859   127.4%     TRICARE insured(C)        600,754     562,328      38,426     6.8%     Medicaid                  129,467     134,414      (4,947)   -3.7%                          ------------------------- -----------   Total Government     Segment premiums       2,966,221   1,679,883   1,286,338    76.6%                          ------------------------- ----------- Commercial Segment:   Fully insured     medical                1,453,932   1,517,394     (63,462)   -4.2%     Specialty                 101,333      93,538       7,795     8.3%                          ------------------------- -----------   Total Commercial     Segment premiums       1,555,265   1,610,932     (55,667)   -3.5%                          ------------------------- ----------- Total premium   revenues                $4,521,486  $3,290,815  $1,230,671    37.4%                          ========================= ===========   Administrative   services fees   Government segment     (TRICARE-related)(C)     $11,191     $13,402     ($2,211)  -16.5%     Commercial segment         67,487      50,111      17,376    34.7%                          ------------------------- ----------- Total administrative   services fees              $78,678     $63,513     $15,165    23.9%                          ========================= ===========                              -------------------------                           Per Member per Month(B)                             Three Months Ended                                   March  31,                                         -------------------------  Dollar   Percentage                             2006         2005      Change     Change                         -------------------------  ------------------- Premium revenues Government Segment:   Medicare Advantage        $830         $786         $44        5.5%   Medicare - Stand-alone    PDPs                       99            -          99      100.0%        Total Medicare         308          786        (478)     -60.8%   TRICARE insured (C)        116          106           9        8.9%   Medicaid                    99           94           6        5.9%    Total Government     Segment premiums          216          210           5        2.5%  Commercial Segment:   Fully insured medical      259          245          13        5.5%   Specialty                   21           20           1        6.5%    Total Commercial     Segment premiums          158          157           1        0.4%  Total premium revenues      $191         $180         $11        6.1%    Administrative services   fees   Government segment    (TRICARE-related)(C)        $3           $4         ($1)     -19.5%   Commercial segment          12           10           2       18.4% Total administrative   services fees                $9           $8          $1       13.0%                                Humana Inc.                                                       S-10 Membership Detail In thousands                                                                                                                                                                                                                                            Ending     Ending                                      Average    March 31,  March 31,                                     - 1Q06       2006       2005                                     --------------------------------  Medical Membership: Government Segment:    Medicare Advantage - HMO          439.2      443.7      412.4      Medicare Advantage - PPO           28.3       35.4        2.3      Medicare Advantage - PFFS         223.7      262.1       35.2                                    --------------------------------         Total Medicare Advantage      691.2      741.2      449.9                                    --------------------------------     Medicare - PDP - Standard       1,193.6    1,289.2          -      Medicare - PDP - Enhanced         329.9      421.0          -      Medicare - PDP - Complete         203.8      248.8          -                                    --------------------------------         Total Medicare - Stand-         alone PDPs                 1,727.3    1,959.0          -                                    --------------------------------             Total Medicare          2,418.5    2,700.2      449.9                                    --------------------------------     TRICARE insured                 1,733.5    1,724.7    1,723.4      TRICARE ASO                     1,145.5    1,149.3    1,148.4                                    --------------------------------         Total TRICARE               2,879.0    2,874.0    2,871.8      Medicaid                          434.3      427.0      477.2                                    --------------------------------     Total Government Segment        5,731.8    6,001.2    3,798.9                                    --------------------------------  Commercial Segment:    Fully insured medical:        Group                       1,705.6    1,695.1    1,902.8          Individual                    161.1      163.1      133.6          Medicare supplement             5.7        6.0        2.9                                    --------------------------------     Total fully insured      medical                        1,872.4    1,864.2    2,039.3      ASO                             1,399.2    1,395.2    1,180.1                                    --------------------------------     Total Commercial Segment        3,271.6    3,259.4    3,219.4                                    --------------------------------   Total medical membership           9,003.4    9,260.6    7,018.3                                    ================================    Specialty Membership   (all Commercial Segment)    Dental - fully insured            951.3      950.6      874.6      Dental - ASO                      494.0      494.7      488.0                                    --------------------------------         Total dental                1,445.3    1,445.3    1,362.6      Group life                        422.2      421.3      444.9      Short-term disability              15.9       15.7       16.6                                    --------------------------------  Total specialty membership         1,883.4    1,882.3    1,824.1                                    ================================                           -------------------            -------------------                        Year-over-year                   Sequential                     -------------------            -------------------                                            Ending                                              Percentage  Dec. 31,          Percentage                     Difference  Change      2005  Difference  Change                     ------------------    -------  ------------------- Medical Membership: Government Segment:  Medicare Advantage    - HMO                   31.3      7.6%     427.9     15.8     3.7%  Medicare Advantage    - PPO                   33.1   1439.1%       8.6     26.8   311.6%  Medicare Advantage    - PFFS                 226.9    644.6%     121.3    140.8   116.1%                       ---------           -------- ---------      Total Medicare        Advantage          291.3     64.7%     557.8    183.4    32.9%                       ---------           -------- ---------  Medicare - PDP    - Standard           1,289.2    100.0%         -  1,289.2   100.0%  Medicare - PDP    - Enhanced             421.0    100.0%         -    421.0   100.0%  Medicare - PDP    - Complete             248.8    100.0%         -    248.8   100.0%                       ---------           -------- ---------     Total Medicare -       Stand-alone PDPs  1,959.0    100.0%         -  1,959.0   100.0%                       ---------           -------- ---------        Total Medicare  2,250.3    500.2%     557.8  2,142.4   384.1%                       ---------           -------- ---------  TRICARE insured           1.3      0.1%   1,750.9    (26.2)   -1.5%  TRICARE ASO               0.9      0.1%   1,138.2     11.1     1.0%                       ---------           -------- ---------      Total TRICARE         2.2      0.1%   2,889.1    (15.1)   -0.5%  Medicaid                (50.2)   -10.5%     457.9    (30.9)   -6.7%                       ---------           -------- ---------  Total Government    Segment              2,202.3     58.0%   3,904.8  2,096.4    53.7%                       ---------           -------- --------- Commercial Segment:  Fully insured medical:   Group                 (207.7)   -10.9%   1,836.9   (141.8)   -7.7%   Individual              29.5     22.1%     158.1      5.0     3.2%   Medicare supplement      3.1    106.9%       4.8      1.2    25.0%                       ---------           -------- ---------  Total fully insured    medical               (175.1)    -8.6%   1,999.8   (135.6)   -6.8%  ASO                     215.1     18.2%   1,171.0    224.2    19.1%                       ---------           -------- ---------  Total Commercial    Segment                 40.0      1.2%   3,170.8     88.6     2.8%                       ---------           -------- ---------  Total medical   membership            2,242.3     31.9%   7,075.6  2,185.0    30.9%                       =========           ======== =========   Specialty Membership  (all Commercial  Segment)  Dental - fully insured   76.0      8.7%     960.5     (9.9)   -1.0%  Dental - ASO              6.7      1.4%     496.0     (1.3)   -0.3%                       ---------           -------- ---------      Total dental         82.7      6.1%   1,456.5    (11.2)   -0.8%  Group life              (23.6)    -5.3%     429.2     (7.9)   -1.8%  Short-term disability    (0.9)    -5.4%      16.4     (0.7)   -4.3%                       ---------           -------- --------- Total specialty   membership               58.2      3.2%   1,902.1    (19.8)   -1.0%                       =========           ======== =========       Humana Inc.                                                       S-11 Percentage of Ending Membership under Capitation Arrangements                          -----------------------------------------------                                     Government Segment                                   -----------------------------------------------                                                                    Medicare -                     Total                         Medicare  stand-alone                     Govt. March 31, 2006         Advantage    PDPs     TRICARE  Medicaid Segment --------------         -----------------------------------------------  Capitated HMO hospital   system based(D)          4.5%        -          -         -      0.6% Capitated HMO physician  group based(D)           3.2%        -          -      35.5%     2.9% Risk-sharing(E)          31.9%        -          -      59.6%     8.2% All other membership     60.4%    100.0%     100.0%      4.9%    88.3%                        -----------------------------------------------   Total medical     membership           100.0%    100.0%     100.0%    100.0%   100.0%                        ===============================================  March 31, 2005 --------------  Capitated HMO hospital   system based(D)          8.1%        -          -       3.3%     1.4% Capitated HMO physician  group based(D)           0.9%        -          -      35.2%     4.5% Risk-sharing(E)          52.5%        -          -      53.0%    12.9% All other membership     38.5%        -      100.0%      8.5%    81.2%                        -----------------------------------------------   Total medical     membership           100.0%        -      100.0%    100.0%   100.0%                        ===============================================                               -------------------------------                                Commercial Segment                                  -------------------------------                                                                          Fully             Total Comm.  Total Medical March 31, 2006           insured    ASO       Segment     Membership --------------           ---------------------------------------------  Capitated HMO hospital  system based(D)             2.0%       -          1.1%          0.8% Capitated HMO physician  group based(D)              1.8%       -          1.0%          2.2% Risk-sharing(E)              2.3%       -          1.3%          5.8% All other membership        93.9%   100.0%        96.6%         91.2%                          ---------------------------------------------   Total medical     membership              100.0%   100.0%       100.0%        100.0%                          =============================================  March 31, 2005 --------------  Capitated HMO hospital  system based(D)             2.7%       -          1.7%          1.5% Capitated HMO physician  group based(D)              2.5%       -          1.6%          3.2% Risk-sharing(E)              2.6%       -          1.6%          7.7% All other membership        92.2%   100.0%        95.1%         87.6%                          ---------------------------------------------   Total medical     membership              100.0%   100.0%       100.0%        100.0%                          =============================================     Humana Inc.                                                       S-12 Detail of Medical and Other Expenses Payable Balance   and Year-to-Date Changes Dollars in thousands                              March 31,    Dec. 31,  Dollar   Percentage                                2006        2005    Change      Change                            ----------------------- ------------------- Detail of medical and other  expenses payable   IBNR and other medical    expenses payable(F)     $1,313,806  $1,125,205  $188,601      16.8%   TRICARE IBNR(G)             346,774     409,413   (62,639)    -15.3%   TRICARE other medical    expenses payable(H)         90,073      88,443     1,630       1.8%   Unprocessed claim    inventories(I)             185,300     148,200    37,100      25.0%   Processed claim    inventories(J)              83,945      83,635       310       0.4%   Payable to pharmacy    benefit administrator    (K)                        149,591      54,786    94,805     173.0%                            ----------------------- --------- Total medical and other  expenses payable          $2,169,489  $1,909,682  $259,807      13.6%                            ======================= =========                           Three Months                              Ended      Year Ended                            March 31,   December 31,                              2006          2005                            ----------------------- Year-to-date changes in  medical and other expenses  payable    Balances at January 1    $1,909,682  $1,422,010    Acquisitions                      -      37,375    Incurred related to:       Current year          3,964,706  11,765,662       Prior years -         non-TRICARE(L)        (125,469)    (72,868)       Prior years -         TRICARE(L)(M)          (59,207)    (41,324)                            -----------------------   Total incurred            3,780,030  11,651,470                            -----------------------    Paid related to:       Current year         (2,640,214) (9,979,449)       Prior years            (880,009) (1,221,724)                            -----------------------   Total paid               (3,520,223)(11,201,173)                            -----------------------    Balances at end      of period              $2,169,489  $1,909,682                            =======================     Humana Inc.                                                       S-13 Medical Claims Reserves Statistics    Receipt Cycle Time(N)                                                             Percentage                                         2006    2005 Change   Change                                     ----------------------------------  1st Quarter Average                    16.1    16.6  (0.5)    -3.0%  2nd Quarter Average                       -    15.9   N/A      N/A  3rd Quarter Average                       -    16.7   N/A      N/A  4th Quarter Average                       -    16.9   N/A      N/A                                     -----------------------  Full Year Average                      16.1    16.5  (0.4)    -2.4%                                     ========================  Unprocessed Claims Inventories                                                                                                                                                       Estimated     Claim    Number                                Valuation     Item     of Days                   Date           (000's)      Counts    on Hand  -------------------------------------------------------------             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             3/31/2006          $185,300     683,900      5.6       Humana Inc.                                                       S-14 Medical Claims Reserves Statistics (Continued)   Days in Claims Payable(O)(Q)                 Days in                Claims                      DCP                Payable Annual Percentage  Excluding  Annual Percentage Quarter Ended  (DCP)   Change  Change    Capitation  Change   Change ----------------------------------------------------------------------   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%   3/31/2006     59.1     8.6      17.0%      65.5     9.4      16.8%  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        (1.3)       0.2      Change in unprocessed claims inventories    1.0        1.0      Change in processed claims inventories        -       (0.4)      Change in TRICARE reserve balances         (4.3)       3.9      Change in pharmacy payment cutoff          (0.2)       1.5      Growth in Medicare PFFS membership          3.4        1.2      Growth in individual membership             1.1        0.9      Change in provider payables under risk        arrangements                               0.7        1.4      All other                                  (1.6)       1.1                                              --------------------- DCP - current quarter                           59.1       60.3                                              =====================      Humana Inc.                                                       S-15 Footnotes to Statistical Schedules and Supplementary Information 1Q06 Earnings Release  Footnote --------  (A) Restated 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 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 due to bi-weekly payments made three     times a month and the month-end cutoff.  (L) The impact of any change in "incurred related to prior years"     claims may be offset as the company re-establishes the "incurred     related to current year". The company's 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.  (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 representing approximately 87% 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.  (P) 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.  (Q) Excludes the impact of Medicare stand-alone PDPs. 

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Humana Inc. Reports First Quarter 2006 Financial Results

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Humana Inc.
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