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Humana Inc. Reports Second Quarter 2006 Financial Results including Earnings Per Share of $0.53

Category:

Monday, July 31, 2006 5:00 am EDT

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028
"We're on track to grow revenues by 50 percent this year as we enhance our reputation as the consumer leader in health benefits and expand our Medicare business into a long-term growth engine."
LOUISVILLE, Ky.--(BUSINESS WIRE)--July 31, 2006--Humana Inc. (NYSE: HUM):

-- EPS for second quarter up 8 percent versus prior year

-- Consolidated revenues up 52 percent to $5.41 billion

-- Medical membership exceeds 11 million

-- Full-year cash flow guidance raised

Humana Inc. (NYSE: HUM) today reported $0.53 in diluted earnings per common share (EPS) for the quarter ended June 30, 2006 (2Q06), $0.19 per share higher than the mid-point of the company's prior guidance. On a year-over-year basis, the 2Q06 EPS is 8 percent higher than the company's EPS for the quarter ended June 30, 2005 (2Q05) of $0.49 (a). The upside in the quarter was a combination of better-than-expected performance in the company's Medicare Advantage, commercial and TRICARE business lines, partially offset by profit margins in its Prescription Drug Plans (PDPs) moving to the low end of the projected range.

The company continues to estimate EPS for the year ending December 31, 2006 (FY06E) 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. In addition to the impact of changes associated with second quarter performance, this forecast has been revised to reflect management's updated expectations for Medicare marketing costs in the latter half of 2006. In order to maximize 2007 Medicare growth opportunities, the company now anticipates its second-half 2006 Medicare marketing costs to be approximately $0.15 per share higher than it had previously forecast.

"Strong results in our Medicare Advantage, Commercial and TRICARE businesses combined to produce second-quarter earnings that significantly surpassed our expectations," said Michael B. McCallister, Humana's president and chief executive officer. "We're on track to grow revenues by 50 percent this year as we enhance our reputation as the consumer leader in health benefits and expand our Medicare business into a long-term growth engine."

For the six months ended June 30, 2006 (1H06) the company reported $1.03 in EPS compared to $1.14 (a) for the six months ended June 30, 2005 (1H05). The year-over-year decline in year-to-date results was expected given the change in the quarterly pattern of 2006 earnings primarily driven by the introduction of the company's stand-alone Medicare PDPs in January 2006. Higher Medicare administrative costs in 1H06 versus 1H05 also contributed to the decline in earnings from the 2005 period. Given these factors, earnings are expected to increase in the second half of the year compared to the same period in 2005.

Revenues - 2Q06 consolidated revenues rose 52 percent to $5.41 billion from $3.55 billion in 2Q05, with total premium and administrative services fees also up 52 percent compared to the prior year's quarter. These increases were primarily the result of higher enrollment in the company's Medicare Advantage plans and new 2006 revenues from stand-alone PDPs for Medicare beneficiaries.

1H06 consolidated revenues rose 46 percent to $10.11 billion from $6.93 billion in 1H05 with total premium and administrative services fees up 45 percent compared to the prior year's period, also primarily driven by enrollment in the company's Medicare Advantage plans and stand-alone PDPs.

Medical costs - The company's medical expense ratio (medical expenses as a percent of premium revenue or MER) of 85.1 percent in 2Q06 was 130 basis points higher than that for 2Q05 as 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 primarily results from the introduction of the stand-alone PDP results in 2006, as described more fully in the Government Segment results discussion below.

The consolidated MER for 1H06 of 84.4 percent was 60 basis points higher than the 1H05 consolidated MER of 83.8 percent, driven by the same factors affecting the 2Q06 MER.

Selling, general, & administrative (SG&A) expenses - The company's consolidated SG&A expense ratio (SG&A expenses as a percent of premiums plus administrative services fees or SG&A expense ratio) decreased to 13.7 percent for 2Q06 from 14.0 percent (a) in 2Q05. This resulted primarily from growth in revenues which began to outpace the related increase in administrative spending on a consolidated basis during the quarter. The consolidated SG&A ratio improved 240 basis points compared to the first quarter of 2006 for this reason.

The SG&A expense ratio for 1H06 of 14.8 percent was 70 basis points higher than the 1H05 ratio of 14.1 percent (a) due to the increase in SG&A expenses associated with the Medicare expansion in the first quarter of 2006 coupled with an increase in the percentage of Commercial medical members in ASO accounts. The increase in the Medicare administrative costs results from the build out of infrastructure and support functions in advance of the anticipated continued escalation in enrollment as well as sales and marketing spending occurring in a more concentrated 2006 Medicare selling season.

Government Segment Results Summary

Pretax results:

-- Government Segment pretax earnings were $98.0 million in 2Q06 compared to $102.5 million(a) in 2Q05. This decline was anticipated because Medicare stand-alone PDP offerings changed the company's quarterly pattern of earnings for 2006 given the medical expense patterns associated with PDP benefit designs.

-- For 1H06, pretax earnings for the Government Segment of $119.6 million were $53.4 million, or 31 percent lower than 1H05 pretax earnings for the segment of $173.0 million(a) with the first half results also impacted primarily by the new PDP offerings in 2006.

Enrollment:

-- Medicare Advantage membership rose to 959,800 at June 30, 2006, an increase of 485,500, or 102 percent, from June 30, 2005 and 218,600, or 29 percent, from March 31, 2006. The company's expanded participation in various Medicare products and markets combined with the company's increased sales and marketing efforts for these programs led to the higher membership level.

-- July 2006 Medicare Advantage membership approximated 990,000. The company now expects Medicare Advantage membership will approximate 1 million at December 31, 2006.

-- Membership in the company's stand-alone PDPs totaled 3,458,800 at June 30, 2006, a sequential increase of 1.5 million, or 77 percent, primarily driven by strong sales during the final two weeks of the open enrollment period which ended on May 15, 2006. The company now anticipates stand-alone PDP membership of approximately 3.5 million at the end of 2006. The significant PDP membership growth during May is not anticipated to substantially increase the company's net earnings for 2006. This is primarily due to the front-loaded pattern of medical spend generally associated with PDP members and the shortened time frame during which such spending would occur for these members through the remainder of 2006 given their enrollment timing.

-- As expected, TRICARE membership of 2,874,500 at June 30, 2006 was essentially unchanged from March 31, 2006. The company also anticipates no material change in TRICARE membership during 2006 compared to year-end 2005.

-- Medicaid membership of 418,500 at June 30, 2006 declined 59,400 from June 30, 2005 and 8,500 from March 31, 2006 due primarily to the non-renewal of the Illinois Medicaid contract in the third quarter of 2005 and a continuing shift of eligible Puerto Rico Medicaid members to the Medicare program.

Revenues:

-- Medicare Advantage premiums of $2.11 billion in 2Q06 increased 93 percent compared to $1.09 billion in 2Q05, primarily the result of higher enrollment, increases in per-member revenues from CMS, and the expanded geography across which Medicare Advantage products were offered. Medicare Advantage premiums per member increased 2 percent year over year during 2Q06, primarily resulting from the increase in per-member revenues from CMS, combined with an increase in the percentage of Medicare Advantage members in the company's Private Fee-For-Service products together with a more diverse geographic mix than in the prior year. At June 30, 2006, approximately 46 percent of the company's Medicare Advantage members were in Private Fee-For-Service plans versus 11 percent at June 30, 2005.

-- Medicare PDP premiums added $801.8 million in new revenues in 2Q06 versus 2Q05.

-- TRICARE premiums and administrative services fees during 2Q06 of $668.8 million compared to $626.6 million in 2Q05. The year-over-year increase primarily reflects a higher reimbursement for claims incurred in 2Q06 combined with revenue from favorable performance for the second option period which concluded on March 31, 2006.

Medical Expenses:

-- The Government Segment MER increased 220 basis points to 86.0 percent in 2Q06 compared to 83.8 percent in the prior year's quarter. The increase is primarily the result of the establishment of the stand-alone PDPs in January 2006. The MER for the company's PDP business was 92.7 percent for 2Q06.

-- 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. The company now anticipates an MER for the full year for its stand-alone PDPs in the range of 86 percent to 89 percent, with MER improvement expected in each quarter sequentially throughout the remainder of the year. Variables that may impact the quarterly MER for the stand-alone PDPs primarily 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 2Q06 of 11.5 percent was 90 basis points higher than that for 2Q05 of 10.6 percent(a) primarily 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 higher year over year. On a sequential basis, the segment's SG&A ratio improved 230 basis points primarily due to the administrative cost leverage provided by revenues associated with higher average membership for this segment.

-- The company anticipates that its SG&A expense ratio for the second half of 2006 will improve over that for 1H06 as marketing expenses decline during the Medicare Advantage lock-in period that began 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

Pretax results:

-- Results for the Commercial Segment during 2Q06 reflect pretax income of $42.3 million compared to $22.3 million(a) in 2Q05. Commercial Segment operating earnings in 2Q06 primarily reflect year-over-year improvements in medical cost utilization trends and the company's commitment to underwriting discipline.

-- For 1H06, pretax earnings for the Commercial Segment of $152.0 million were $83.5 million, or 122 percent higher than 1H05 pretax earnings for the segment of $68.5 million(a) primarily reflecting the same drivers which impacted 2Q06 earnings performance combined with higher-than-average capital gains in the first quarter of 2006.

Enrollment:

-- Commercial Segment medical membership of 3,313,900 at June 30, 2006 increased approximately 114,200, or 4 percent, from June 30, 2005 and 54,500, or 2 percent, from March 31, 2006. The sequential increase in Commercial Segment medical membership was primarily the result of the company's acquisition of CHA Health on May 1, 2006.

-- Membership in the company's Smart plans and other consumer offerings increased year over year to 416,400 at June 30, 2006, representing approximately 13 percent of Commercial medical membership compared to 11 percent at June 30, 2005 and 13 percent at March 31, 2006.

Revenues:

-- Premiums and administrative services fees for the Commercial Segment decreased 1 percent to $1.64 billion in 2Q06 compared to $1.66 billion in the prior year's quarter, as an increase in administrative services fees resulting from a 21 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 5.5 percent on a per-member basis during 2Q06 compared to 2Q05. This increase primarily 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 the small group business generally include a higher level of benefit buy-downs versus larger employers. The company anticipates the FY06 range of increase in commercial premiums for fully insured group membership to be in the range of the expected increase in per-member medical costs.

Medical Expenses:

-- In 2Q06, the Commercial Segment MER of 82.9 percent was 90 basis points lower than the 2Q05 MER of 83.8 percent, again primarily reflecting improving medical cost utilization trends and the company's commitment to underwriting discipline.

-- Per-member medical costs for commercial fully insured group accounts are now forecasted to rise in the range of 5.5 to 6.5 percent during 2006, including the effect of a greater percentage of the company's fully-insured groups being weighted towards small employers, as discussed above.

-- The company continues to project individual components of commercial medical cost trend for 2006 will 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 18.8 percent for 2Q06 compares to 17.7 percent(a) in 2Q05, primarily 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 2Q06 versus 37 percent in the prior year. On a sequential basis, the segment's SG&A ratio improved 160 basis points primarily due to progressively higher administrative cost leverage.

Cash Flows from Operations

Cash flows provided by operations for 2Q06 of $534.9 million compared to $179.3 million(a) in 2Q05. The company also evaluates operating cash flows on a non-GAAP basis(b)(c).

 Cash flows from operations  ($ in millions)                 2Q06     2Q05(a)    1H06     1H05(a) ---------------------------------------------------------------------- GAAP cash flows provided by  operations                      $534.9    $179.3  $1,542.8    $274.9 ---------------------------------------------------------------------- Timing of premium payment from  CMS (c)                         (257.2)       --  (1,031.7)     19.8 ---------------------------------------------------------------------- Non-GAAP cash flows provided  by operations (b)(c)            $277.7    $179.3    $511.1    $294.7 ---------------------------------------------------------------------- 

Non-GAAP cash flows provided by operations rose to $277.7 million in 2Q06 from $179.3 million in 2Q05 driven by growth in the company's Medicare operations. The company now expects that cash flows from operations for 2006 will be in the range of $850 million to $950 million driven by expected higher earnings over the prior year together with anticipated changes in working capital.

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

Conference Call & Virtual Slide Presentation

Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and the company's expectations for future earnings. A live virtual presentation (audio with slides) may be accessed via Humana's Investor Relations page at www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.

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

Cautionary Statement

This news release contains forward-looking statements. The forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described in the following documents filed by Humana with the Securities and Exchange Commission

-- Form 10-K for the year ended December 31, 2005,

-- Form 10-Q for the quarter ended March 31, 2006,

-- Form 8-Ks filed during May, June, and July 2006.

About Humana

Humana Inc., headquartered in Louisville, Ky., is one of the nation's 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 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 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 July 31, 2006  Diluted earnings per        Full year: $2.82 to $2.88  common share               Third quarter 2006: $0.95 to $1.00 ---------------------------------------------------------------------- Revenues                    Consolidated: $21 billion to $22 billion                             Medicare Advantage:  $8.5 billion to $9.0                              billion                             Medicare stand-alone PDPs:  $2.8 billion                              to $3.2 billion                              TRICARE:  $2.5 billion to $2.9 billion                             Commercial:  $6.5 billion to $7.0 billion ---------------------------------------------------------------------- Year-end medical            Medicare Advantage: approximately 1  membership                  million                             Medicare stand-alone PDPs: approximately                              3.5 million                              TRICARE: No material change from prior                               year                             Medicaid:  Down approximately 40,000 from                              prior year                             Commercial: Up approximately 140,000 to                              150,000 from prior year including the                              benefit of members acquired via the CHA                              Health acquisition ---------------------------------------------------------------------- Medical costs               Medicare stand-alone PDPs: MER in the                              range of 86% to 89%                             Commercial fully insured groups:  Medical                              cost trends in the range of 5.5% to 6.5%;                              premium yields in line with medical cost                              trends ---------------------------------------------------------------------- Selling, general &          Consolidated SG&A expense ratio of 13% to  administrative expenses     14% ---------------------------------------------------------------------- Pretax results              Medicare Advantage: 3% to 5% pretax (1) excluding allocation     margin(1) of investment and other     Medicare stand-alone PDPs:  Approximately income and interest          1% pretax margin(1) expense                     TRICARE: Approximately 3% to 4% pretax                              margin(1)                             Commercial Segment: $200 million to $240                              million ---------------------------------------------------------------------- Cash flows from             $850 million to $950 million  operations ---------------------------------------------------------------------- Capital expenditures        $155 million to $165 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                         2Q06 Earnings Release   Humana Inc.                                                        S-2 Statistical Schedules and Supplementary Information 2Q06 Earnings Release  Contents  Page           Description ------------   -------------------------------------------------------  S-3            2Q06 Consolidated Statements of Income S-4            YTD Consolidated Statements of Income S-5            Consolidated Balance Sheets S-6            2Q06 Consolidated Statements of Cash Flows S-7            YTD Consolidated Statements of Cash Flows S-8            2005 Quarters Adjusted to Reflect Retrospective                 Application of Expensing Stock Options S-9            2003 Through 2005 Adjusted to Reflect Retrospective                 Application of Expensing Stock Options S-10           Key Income Statement Ratios and Segment Operating                 Results S-11           Membership Detail S-12           2Q06 Premiums and Administrative Services Fees Detail S-13           YTD Premiums and Administrative Services Fees Detail S-14           Percentage of Ending Membership under Capitation                 Arrangements S-15           Detail of Medical and Other Expenses Payable Balance                 and Year-to-Date Changes S-16-17        Medical Claims Reserves Statistics S-18           Footnotes   Humana Inc.                                                        S-3 2Q06 Consolidated Statements of Income In thousands, except per common share results                             Three Months Ended                                June 30,                         -----------------------                                                   Dollar    Percentage                            2006      2005 (A)     Change      Change                         ----------------------- ---------------------- Revenues:   Premiums              $5,264,475  $3,446,019  $1,818,456       52.8%   Administrative    services fees            83,711      66,655      17,056       25.6%   Investment income         50,567      31,131      19,436       62.4%   Other income               8,416       2,556       5,860      229.3%                         ----------------------- -----------       Total revenues     5,407,169   3,546,361   1,860,808       52.5%                         ----------------------- ----------- Operating expenses:   Medical                4,479,501   2,888,509   1,590,992       55.1%   Selling, general and    administrative          733,863     490,919     242,944       49.5%   Depreciation              31,613      24,815       6,798       27.4%   Other intangible    amortization              4,983       6,948      (1,965)     -28.3%                         ----------------------- -----------       Total operating        expenses          5,249,960   3,411,191   1,838,769       53.9%                         ----------------------- ----------- Income from operations     157,209     135,170      22,039       16.3% Interest expense            16,887      10,322       6,565       63.6%                         ----------------------- ----------- Income before income  taxes                     140,322     124,848      15,474       12.4% Provision for income  taxes                      50,833      43,436       7,397       17.0%                         ----------------------- ----------- Net income                 $89,489     $81,412      $8,077        9.9%                         ======================= ===========  Basic earnings per  common share                $0.55       $0.50       $0.05       10.0% Diluted earnings per  common share                $0.53       $0.49       $0.04        8.2%  Shares used in  computing basic  earnings per common  share                     163,706     161,492 Shares used in  computing diluted  earnings per common  share                     167,536     165,149    Humana Inc.                                                        S-4 YTD Consolidated Statements of Income In thousands, except per common share results                              Six Months Ended                                 June 30,                         -----------------------                                                   Dollar    Percentage                             2006      2005 (A)    Change      Change                         ----------------------- ---------------------- Revenues:   Premiums              $9,785,961  $6,736,834  $3,049,127       45.3%   Administrative    services fees           162,389     130,168     $32,221       24.8%   Investment income        149,469      61,342     $88,127      143.7%   Other income              13,715       5,242      $8,473      161.6%                         ----------------------- -----------       Total revenues    10,111,534   6,933,586  $3,177,948       45.8%                         ----------------------- ----------- Operating expenses:   Medical                8,263,427   5,642,242  $2,621,185       46.5%   Selling, general and    administrative        1,474,749     969,959    $504,790       52.0%   Depreciation              61,465      49,621     $11,844       23.9%   Other intangible    amortization             10,037      11,391     ($1,354)     -11.9%                         ----------------------- -----------       Total operating        expenses          9,809,678   6,673,213  $3,136,465       47.0%                         ----------------------- ----------- Income from operations     301,856     260,373     $41,483       15.9% Interest expense            30,326      18,845     $11,481       60.9%                         ----------------------- ----------- Income before income  taxes                     271,530     241,528     $30,002       12.4% Provision for income  taxes                      98,326      53,381     $44,945       84.2%                         ----------------------- ----------- Net income                $173,204    $188,147    ($14,943)      -7.9%                         ======================= ===========  Basic earnings per  common share                $1.06       $1.17      ($0.11)      -9.4% Diluted earnings per  common share                $1.03       $1.14      ($0.11)      -9.6%  Shares used in  computing basic  earnings per common  share                     163,411     161,202 Shares used in  computing diluted  earnings per common  share                     167,430     164,823                            Humana Inc.                                                        S-5 Consolidated Balance Sheets Dollars in thousands, except share amounts                                                       Sequential Change                    June 30,   March 31, December 31, -----------------                      2006       2006      2005 (A)    Dollar   Percent                   ---------------------------------- ----------------- Assets Current assets:  Cash and cash   equivalents     $2,258,464 $1,843,405    $732,016  Investment   securities       2,998,440  2,623,009   2,354,904  Receivables, net:    Premiums          767,610    763,061     723,190    Administrative     services fees     14,842     21,652      15,462  Securities   lending   collateral         240,849    250,322      47,610  Other               778,821    517,877     333,004                   ----------------------------------    Total current     assets         7,059,026  6,019,326   4,206,186  $1,039,700  17.3% Property and  equipment           505,721    498,267     484,412 Other assets:  Long-term   investment   securities         387,362    374,583     391,035  Goodwill          1,307,650  1,265,176   1,264,575  Other               576,841    540,668     523,406                   ----------------------------------    Total other     assets         2,271,853  2,180,427   2,179,016                   ---------------------------------- Total assets      $9,836,600 $8,698,020  $6,869,614  $1,138,580  13.1%                   ==================================  Liabilities and  Stockholders'  Equity Current  liabilities:  Medical and   other expenses   payable         $2,457,643 $2,169,489  $1,909,682  Trade accounts   payable and   accrued   expenses         1,102,919    871,231     560,550  Book overdraft      271,824    275,587     280,005  Securities   lending payable    240,849    250,322      47,610  Unearned   revenues         1,170,278    920,678     120,489  Current portion   of long-term   debt               299,941    300,231     301,254                   ----------------------------------    Total current     liabilities    5,543,454  4,787,538   3,219,590    $755,916  15.8% Long-term debt       784,399    601,225     513,790 Other long-term  liabilities         849,952    741,498     627,360                   ----------------------------------     Total      liabilities   7,177,805  6,130,261   4,360,740  $1,047,544  17.1%                   ---------------------------------- 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;   181,012,456   issued at June   30, 2006            30,170     30,085      29,843  Capital in   excess of par   value            1,285,399  1,264,161   1,235,888  Retained   earnings         1,594,879  1,505,390   1,421,675  Accumulated   other   comprehensive   (loss) income      (43,352)   (28,408)     24,832  Treasury stock,   at cost,   15,948,235   shares at June   30, 2006          (208,301)  (203,469)   (203,364)                   ----------------------------------    Total     stockholders'     equity         2,658,795  2,567,759   2,508,874     $91,036   3.5%                   ---------------------------------- Total liabilities  and  stockholders'  equity           $9,836,600 $8,698,020  $6,869,614  $1,138,580  13.1%                   ==================================  Debt to total  capitalization  ratio                  29.0%      26.0%       24.5%   Humana Inc.                                                        S-6 2Q06 Consolidated Statements of Cash Flows Dollars in thousands                            Three Months Ended                                June 30,                         -----------------------                                                   Dollar    Percentage                            2006      2005 (A)     Change      Change                         ----------------------- ---------------------- Cash flows from  operating activities   Net income               $89,489     $81,412   Adjustments to    reconcile net income    to net cash provided    by operating    activities:     Depreciation and      amortization           36,596      31,763     Stock-based      compensation            8,471       7,646     Provision for      deferred income      taxes                   2,479       3,124     Changes in      operating assets      and liabilities      excluding the      effects of      acquisitions:       Receivables            3,104     (19,825)       Other assets        (174,050)    (20,154)       Medical and other        expenses payable    266,956     131,501       Other liabilities     57,967     (13,949)       Unearned revenues    244,661     (22,535)     Other                     (818)        304                         ----------------------- Net cash provided by  operating activities      534,855     179,287    $355,568      198.3%                         -----------------------  Cash flows from  investing activities   Acquisitions, net of    cash acquired           (25,818)     (4,627)   Purchases of property    and equipment           (36,712)    (31,034)   Proceeds from sales    of property and    equipment                    18          30   Purchases of    investment    securities             (594,890)   (531,234)   Proceeds from    maturities of    investment    securities              100,289     131,947   Proceeds from sales    of investment    securities              152,855     325,329   Change in securities    lending collateral        9,473      49,680                         ----------------------- Net cash used in  investing activities     (394,785)    (59,909)  ($334,876)    -559.0%                         -----------------------  Cash flows from  financing activities   Receipts from CMS    contract deposits       550,868           -   Withdrawals from CMS    contract deposits      (462,981)          -   Repayments under    credit agreement       (300,000)    (25,000)   Proceeds from    issuance of senior    notes                   498,545           -   Debt issue costs          (3,825)          -   Change in book    overdraft                (3,763)    (10,248)   Change in securities    lending payable          (9,473)    (49,680)   Common stock    repurchases              (4,832)       (315)   Tax benefit from    stock-based    compensation              5,252       2,570   Proceeds from stock    option exercises and    other                     5,198       6,821                         ----------------------- Net cash provided by  (used in) financing  activities                274,989     (75,852)   $350,841      462.5%                         -----------------------  Increase in cash and  cash equivalents          415,059      43,526 Cash and cash  equivalents at  beginning of period     1,843,405     560,264                         -----------------------  Cash and cash  equivalents at end of  period                 $2,258,464    $603,790                         =======================   Humana Inc.                                                        S-7 YTD Consolidated Statements of Cash Flows Dollars in thousands                            Six Months Ended                                 June 30,                         -----------------------                                                   Dollar    Percentage                             2006       2005 (A)   Change      Change                         ----------------------- ---------------------- Cash flows from  operating activities   Net income              $173,204    $188,147   Adjustments to    reconcile net income    to net cash provided    by (used in)    operating    activities:     Depreciation and      amortization           71,502      61,012     Stock-based      compensation           15,051      14,370     (Benefit) provision      for deferred      income taxes           (1,226)     11,186     Changes in      operating assets      and liabilities      excluding the      effects of      acquisitions:        Receivables         (42,957)    (26,250)        Other assets       (359,300)    (28,514)        Medical and         other expenses         payable            526,763     218,166        Other         liabilities        172,719    (117,906)        Unearned         revenues         1,044,850     (44,951)     Other                  (57,778)       (400)                         ----------------------- Net cash provided by  operating activities    1,542,828     274,860  $1,267,968      461.3%                         -----------------------  Cash flows from  investing activities   Acquisitions, net of    cash acquired           (25,931)   (352,726)   Purchases of property    and equipment           (81,973)    (67,227)   Proceeds from sales    of property and    equipment                 2,156          38   Purchases of    investment    securities           (2,258,548) (1,245,605)   Proceeds from    maturities of    investment    securities            1,010,397     393,612   Proceeds from sales    of investment    securities              712,685     759,835   Change in securities    lending collateral     (193,239)        842                         ----------------------- Net cash used in  investing activities     (834,453)   (511,231)  ($323,222)     -63.2%                         -----------------------  Cash flows from  financing activities   Receipts from CMS    contract deposits     1,045,062           -   Withdrawals from CMS    contract deposits      (736,425)          -   Borrowings under    credit agreement        100,000     294,000   Repayments under    credit agreement       (300,000)    (50,000)   Proceeds from    issuance of senior    notes                   498,545           -   Debt issue costs          (3,825)          -   Change in book    overdraft                (8,181)     (9,567)   Change in securities    lending payable         193,239        (842)   Common stock    repurchases              (4,937)     (1,691)   Tax benefit from    stock-based    compensation             13,656       6,225   Proceeds from stock    option exercises and    other                    20,939      21,957                         ----------------------- Net cash provided by  financing activities      818,073     260,082    $557,991      214.5%                         -----------------------  Increase in cash and  cash equivalents        1,526,448      23,711 Cash and cash  equivalents at  beginning of period       732,016     580,079                         -----------------------  Cash and cash  equivalents at end of  period                 $2,258,464    $603,790                         =======================   Humana Inc.                                                        S-8 2005 Quarters Adjusted to Reflect Retrospective Application of  Expensing Stock Options In thousands, except per common share results                     ------------------------- -------------------------                              1Q05                      2Q05                    ------------------------- -------------------------                      Reported   Adjusted (A)   Reported   Adjusted (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   Adjusted (A)   Reported   Adjusted (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-9 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                        December 31, 2005         December 31, 2004                    ------------------------- -------------------------                      Reported   Adjusted (A)   Reported   Adjusted (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    Adjusted (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-10 Key Income Statement Ratios and Segment Operating Results Dollars in thousands                                 Three Months Ended                                    June 30,                              -------------------                                                             Percentage                                2006    2005 (A)  Difference   Change                              ------------------- ---------- ---------- Medical expense ratio  Government Segment              86.0%     83.8%       2.2%  Commercial Segment              82.9%     83.8%      -0.9%  Consolidated                    85.1%     83.8%       1.3%  Selling, general, and  administrative expense ratio  Government Segment              11.5%     10.6%       0.9%  Commercial Segment              18.8%     17.7%       1.1%  Consolidated                    13.7%     14.0%      -0.3%   Detail of Pretax Income  Government Segment           $97,981  $102,531    ($4,550)      -4.4%  Commercial Segment            42,341    22,317     20,024       89.7%                              ------------------- ----------  Consolidated                $140,322  $124,848    $15,474       12.4%                              =================== ==========  Detail of Pretax Margins  Government Segment               2.6%      5.5%      -2.9%  Commercial Segment               2.5%      1.3%       1.2%  Consolidated                     2.6%      3.5%      -0.9%                                 Six Months Ended                                    June 30,                              -------------------                                                             Percentage                                 2006   2005 (A)  Difference   Change                              ------------------- --------------------- Medical expense ratio  Government Segment              85.8%     84.4%       1.4%  Commercial Segment              81.5%     83.0%      -1.5%  Consolidated                    84.4%     83.8%       0.6%  Selling, general, and  administrative expense  ratio  Government Segment              12.5%     10.8%       1.7%  Commercial Segment              19.6%     17.7%       1.9%  Consolidated                    14.8%     14.1%       0.7%   Detail of Pretax Income  Government Segment          $119,553  $173,003   ($53,450)     -30.9%  Commercial Segment           151,977    68,525     83,452      121.8%                              ------------------- ----------  Consolidated                $271,530  $241,528    $30,002       12.4%                              =================== ==========  Detail of Pretax Margins  Government Segment               1.8%      4.9%      -3.1%  Commercial Segment               4.5%      2.0%       2.5%  Consolidated                     2.7%      3.5%      -0.8%   Humana Inc.                                                       S-11 Membership Detail In thousands                                 Ending                       Ending                             June 30, 2006 Average - 2Q06 June 30, 2005                             ------------------------------------------ Medical Membership: Government Segment:  Medicare Advantage - HMO          457.0          453.8         418.0  Medicare Advantage - PPO           64.6           54.7           3.7  Medicare Advantage - PFFS         438.2          379.7          52.6                             ------------------------------------------      Total Medicare       Advantage                    959.8          888.2         474.3                             ------------------------------------------  Medicare - PDP - Standard       2,066.5        1,755.4             -  Medicare - PDP - Enhanced         977.2          743.8             -  Medicare - PDP - Complete         415.1          355.0             -                             ------------------------------------------      Total Medicare stand-       alone PDPs                 3,458.8        2,854.2             -                             ------------------------------------------          Total Medicare          4,418.6        3,742.4         474.3                             ------------------------------------------  TRICARE insured                 1,732.6        1,732.0       1,733.6  TRICARE ASO                     1,141.9        1,141.8       1,142.8                             ------------------------------------------      Total TRICARE               2,874.5        2,873.8       2,876.4  Medicaid                          418.5          422.2         477.9                             ------------------------------------------  Total Government Segment        7,711.6        7,038.4       3,828.6                             ------------------------------------------ Commercial Segment:  Fully insured medical:      Group                       1,716.4        1,707.9       1,873.7      Individual                    170.0          167.7         144.0      Medicare supplement             6.7            6.4           3.6                             ------------------------------------------  Total fully insured   medical                        1,893.1        1,882.0       2,021.3  ASO                             1,420.8        1,411.5       1,178.4                             ------------------------------------------  Total Commercial Segment        3,313.9        3,293.5       3,199.7                             ------------------------------------------  Total medical membership        11,025.5       10,331.9       7,028.3                             ==========================================   Specialty Membership (all  Commercial Segment)  Dental - fully insured            955.6          954.2         893.7  Dental - ASO                      496.5          496.8         488.9                             ------------------------------------------      Total dental                1,452.1        1,451.0       1,382.6  Group life                        427.2          427.0         437.1  Short-term disability              15.6           15.7          16.4                             ------------------------------------------ Total specialty membership       1,894.9        1,893.7       1,836.1                             ==========================================                              Year-over-year                Sequential                                Change        Ending        Change                           ----------------  March 31, ----------------                            Amount  Percent    2006     Amount  Percent                           -------- ------- ---------- -------- ------- Medical Membership: Government Segment:  Medicare Advantage - HMO    39.0     9.3%     443.7     13.3     3.0%  Medicare Advantage - PPO    60.9  1645.9%      35.4     29.2    82.5%  Medicare Advantage -   PFFS                      385.6   733.1%     262.1    176.1    67.2%                           --------         ---------- --------      Total Medicare       Advantage             485.5   102.4%     741.2    218.6    29.5%                           --------         ---------- --------  Medicare - PDP -   Standard                2,066.5   100.0%   1,289.2    777.3    60.3%  Medicare - PDP -   Enhanced                  977.2   100.0%     421.0    556.2   132.1%  Medicare - PDP -   Complete                  415.1   100.0%     248.8    166.3    66.8%                           --------         ---------- --------      Total Medicare       stand-alone PDPs    3,458.8   100.0%   1,959.0  1,499.8    76.6%                           --------         ---------- --------          Total Medicare   3,944.3   831.6%   2,700.2  1,718.4    63.6%                           --------         ---------- --------  TRICARE insured             (1.0)   -0.1%   1,724.7      7.9     0.5%  TRICARE ASO                 (0.9)   -0.1%   1,149.3     (7.4)   -0.6%                           --------         ---------- --------      Total TRICARE           (1.9)   -0.1%   2,874.0      0.5     0.0%  Medicaid                   (59.4)  -12.4%     427.0     (8.5)   -2.0%                           --------         ---------- --------  Total Government Segment 3,883.0   101.4%   6,001.2  1,710.4    28.5%                           --------         ---------- -------- Commercial Segment:  Fully insured medical:      Group                 (157.3)   -8.4%   1,695.1     21.3     1.3%      Individual              26.0    18.1%     163.1      6.9     4.2%      Medicare supplement      3.1    86.1%       6.0      0.7    11.7%                           --------         ---------- --------  Total fully insured   medical                  (128.2)   -6.3%   1,864.2     28.9     1.6%  ASO                        242.4    20.6%   1,395.2     25.6     1.8%                           --------         ---------- --------  Total Commercial Segment   114.2     3.6%   3,259.4     54.5     1.7%                           --------         ---------- --------  Total medical membership  3,997.2    56.9%   9,260.6  1,764.9    19.1%                           ========         ========== ========   Specialty Membership (all  Commercial Segment)  Dental - fully insured      61.9     6.9%     950.6      5.0     0.5%  Dental - ASO                 7.6     1.6%     494.7      1.8     0.4%                           --------         ---------- --------      Total dental            69.5     5.0%   1,445.3      6.8     0.5%  Group life                  (9.9)   -2.3%     421.3      5.9     1.4%  Short-term disability       (0.8)   -4.9%      15.7     (0.1)   -0.6%                           --------         ---------- -------- Total specialty  membership                  58.8     3.2%   1,882.3     12.6     0.7%                           ========         ========== ========   Humana Inc.                                                       S-12 2Q06 Premiums and Administrative Services Fees Detail Dollars in thousands, except per member per month                              Three Months Ended                                 June 30,                          -----------------------                                                    Dollar   Percentage                             2006        2005       Change     Change                          ----------------------- --------------------- Premium revenues Government Segment:   Medicare Advantage     $2,109,406  $1,092,442  $1,016,964      93.1%   Medicare stand-alone    PDPs                     801,755           -     801,755     100.0%                          ----------------------- -----------       Total Medicare      2,911,161   1,092,442   1,818,719     166.5%   TRICARE insured (C)       657,627     611,179      46,448       7.6%   Medicaid                  129,158     134,730      (5,572)     -4.1%                          ----------------------- -----------   Total Government    Segment premiums       3,697,946   1,838,351   1,859,595     101.2%                          ----------------------- ----------- Commercial Segment:   Fully insured medical   1,464,646   1,512,278     (47,632)     -3.1%   Specialty                 101,883      95,390       6,493       6.8%                          ----------------------- -----------   Total Commercial    Segment premiums       1,566,529   1,607,668     (41,139)     -2.6%                          ----------------------- ----------- Total premium revenues   $5,264,475  $3,446,019  $1,818,456      52.8%                          ======================= ===========   Administrative services  fees   Government segment    (TRICARE-related) (C)    $11,144     $15,392     ($4,248)    -27.6%   Commercial segment         72,567      51,263      21,304      41.6%                          ----------------------------------- Total administrative  services fees              $83,711     $66,655     $17,056      25.6%                          ===================================                                                Per Member per Month (B)                                            Three Months Ended June 30,                                            ---------------------------                                               2006            2005                                            --------------------------- Premium revenues Government Segment:   Medicare Advantage                              $792           $780   Medicare stand-alone    PDPs                                            $94              -   TRICARE insured (C)                             $127           $117   Medicaid                                        $102            $94  Commercial Segment:   Fully insured medical                           $259           $249   Specialty                                        $21            $20  Administrative services fees   Government segment    (TRICARE-related) (C)                            $3             $4   Commercial segment                               $13            $10   Humana Inc.                                                       S-13 YTD Premiums and Administrative Services Fees Detail Dollars in thousands, except per member per month                                Six Months Ended                                 June 30,                          -----------------------                                                    Dollar   Percentage                              2006        2005      Change     Change                          ----------------------- --------------------- Premium revenues Government Segment:   Medicare Advantage     $3,830,249  $2,075,583  $1,754,666      84.5%   Medicare stand-alone    PDPs                   1,316,912           -   1,316,912     100.0%                          ----------------------- -----------       Total Medicare      5,147,161   2,075,583   3,071,578     148.0%   TRICARE insured (C)     1,258,381   1,173,507      84,874       7.2%   Medicaid                  258,625     269,144     (10,519)     -3.9%                          ----------------------- -----------   Total Government    Segment premiums       6,664,167   3,518,234   3,145,933      89.4%                          ----------------------- ----------- Commercial Segment:   Fully insured medical   2,918,578   3,029,672    (111,094)     -3.7%   Specialty                 203,216     188,928      14,288       7.6%                          ----------------------- -----------   Total Commercial    Segment premiums       3,121,794   3,218,600     (96,806)     -3.0%                          ----------------------- ----------- Total premium revenues   $9,785,961  $6,736,834  $3,049,127      45.3%                          ======================= ===========   Administrative services  fees   Government segment    (TRICARE-related) (C)    $22,335     $28,794     ($6,459)    -22.4%   Commercial segment        140,054     101,374      38,680      38.2%                          ----------------------- ----------- Total administrative  services fees             $162,389    $130,168     $32,221      24.8%                          ======================= ===========                                                Per Member per Month (B)                                             Six Months Ended June 30,                                            ---------------------------                                                 2006          2005                                            --------------------------- Premium revenues Government Segment:   Medicare Advantage                              $808           $783   Medicare stand-alone    PDPs                                             $6              -   TRICARE insured (C)                             $121           $112   Medicaid                                        $101            $94  Commercial Segment:   Fully insured medical                           $259           $247   Specialty                                        $21            $20  Administrative services fees   Government segment    (TRICARE-related) (C)                            $3             $4   Commercial segment                               $12            $10   Humana Inc.                                                       S-14 Percentage of Ending Membership under Capitation Arrangements                                      Government Segment                      -------------------------------------------------                                   Medicare                      Total                      Medicare    stand-alone                     Govt. June 30, 2006        Advantage      PDPs    TRICARE  Medicaid  Segment -------------        -------------------------------------------------  Capitated HMO  hospital system  based (D)                 3.4%           -       -        -      0.4% Capitated HMO  physician group  based (D)                 2.5%           -       -     34.7%     2.2% Risk-sharing (E)          27.9%           -       -     64.6%     7.0% All other membership      66.2%       100.0%  100.0%     0.7%    90.4%                      -------------------------------------------------     Total medical      membership          100.0%       100.0%  100.0%   100.0%   100.0%                      =================================================  June 30, 2005 -------------  Capitated HMO  hospital system  based (D)                 7.6%           -       -      3.1%     1.3% Capitated HMO  physician group  based (D)                 4.9%           -       -     35.5%     5.0% Risk-sharing (E)          46.1%           -       -     55.3%    12.6% All other membership      41.4%           -   100.0%     6.1%    81.1%                      -------------------------------------------------     Total medical      membership          100.0%           -   100.0%   100.0%   100.0%                      =================================================                                    Commercial Segment                        -----------------------------------                                                               Total                            Fully                Total Comm.   Medical June 30, 2006             insured         ASO     Segment   Membership -------------          ----------------------------------------------- Capitated HMO  hospital system  based (D)                    1.8%          -         1.1%        0.6% Capitated HMO  physician group  based (D)                    1.7%          -         1.0%        1.8% Risk-sharing (E)              2.3%          -         1.3%        5.3% All other membership         94.2%      100.0%       96.6%       92.3%                        -----------------------------------------------     Total medical      membership             100.0%      100.0%      100.0%      100.0%                        ===============================================  June 30, 2005 ------------- Capitated HMO  hospital system  based (D)                    2.7%          -         1.7%        1.5% Capitated HMO  physician group  based (D)                    2.4%          -         1.5%        3.4% Risk-sharing (E)              2.5%          -         1.6%        7.6% All other membership         92.4%      100.0%       95.2%       87.5%                        -----------------------------------------------     Total medical      membership             100.0%      100.0%      100.0%      100.0%                        ===============================================   Humana Inc.                                                       S-15 Detail of Medical and Other Expenses Payable Balance   and Year-to-Date Changes Dollars in thousands                                                           Sequential                                                            Change                   June 30,    March 31,  December 31, ----------------                     2006         2006        2005      Dollar  Percent                  ------------------------------------ ---------------- Detail of  medical and  other expenses  payable   IBNR and other    medical    expenses    payable (F)   $1,580,587   $1,313,806  $1,125,205  $266,781   20.3%   TRICARE IBNR (G)  316,251      346,774     409,413   (30,523)  -8.8%   TRICARE other    medical    expenses    payable (H)       92,963       90,073      88,443     2,890    3.2%   Unprocessed    claim    inventories (I)  193,700      185,300     148,200     8,400    4.5%   Processed    claim    inventories (J)  128,926       83,945      83,635    44,981   53.6%   Payable to    pharmacy    benefit    administrator    (K)              145,216      149,591      54,786    (4,375)  -2.9%                  ------------------------------------ --------- Total medical  and other  expenses  payable         $2,457,643   $2,169,489  $1,909,682  $288,154   13.3%                  ==================================== =========                    Six Months                    Ended     Year Ended                   June 30,   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       21,198       37,375    Incurred    related to:     Current      year (L)     8,449,662   11,765,662     Prior years      - non-      TRICARE (L)   (118,602)     (72,868)     Prior years -       TRICARE (M)    (83,464)     (41,324)                  ------------------------   Total incurred  8,247,596   11,651,470                  ------------------------    Paid related to:     Current year (6,708,473)  (9,979,449)     Prior years  (1,012,360)  (1,221,724)                  ------------------------   Total paid     (7,720,833) (11,201,173)                  ------------------------    Balances at    end of period $2,457,643   $1,909,682                  ========================  Humana Inc.                                                       S-16 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          15.8        15.9        (0.1)     -0.6%   3rd Quarter Average             -        16.7         N/A       N/A   4th Quarter Average             -        16.9         N/A       N/A                        -------------------------------------   Full Year Average            15.9        16.5        (0.6)     -3.6%                        =====================================    Unprocessed Claims Inventories                           Estimated                 Number of                          Valuation   Claim Item     Days on           Date            (000's)      Counts         Hand   -------------------- -------------------------------------             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   -------------------- -------------------------------------             6/30/2006      $193,700     702,000         4.8   -------------------- -------------------------------------   Humana Inc.                                                       S-17 Medical Claims Reserves Statistics (Continued)   Days in Claims Payable (O) (P)              Days in              Claim                        DCP  Quarter    Payable  Annual  Percentage Excluding   Annual  Percentage   Ended      (DCP)   Change    Change   Capitation  Change    Change ----------------------------------------------------------------------  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% ----------------------------------------------------------------------  6/30/2006     59.5     6.7       12.7%       65.5     6.9       11.8% ----------------------------------------------------------------------    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               (2.5)    0.2        Change in unprocessed claims inventories           1.1     1.0        Change in processed claims inventories             1.1    (0.4)        Change in TRICARE reserve balances                (5.5)    3.9        Change in pharmacy payment cutoff                    -     1.5        Growth in Medicare PFFS membership                 4.4     1.2        Growth in individual membership                    0.8     0.9        Change in provider payables under risk         arrangements                                      1.2     1.4        All other                                         (1.4)    1.1                                                       ---------------- DCP - current quarter                                    59.5    60.3                                                       ================   Humana Inc.                                                       S-18 Footnotes to Statistical Schedules and Supplementary Information 2Q06 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 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) The impact of any change in "incurred related to prior years"     claims is offset as the company re-establishes such amounts in the     "incurred related to current year".   (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 the company's largest claim     processing platforms representing approximately 82% 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) 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 Second Quarter 2006 Financial Results

Contact:

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