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Humana Reports Detailed Second Quarter 2007 Financial Results

Category:

Monday, July 30, 2007 6:00 am EDT

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028

LOUISVILLE, Ky.--(BUSINESS WIRE)--

Humana Inc. (NYSE: HUM):

  • Full year EPS expected to grow more than 50 percent in 2007
  • Lower administrative costs primarily from efficiency and productivity gains
  • Improving medical expense ratios in both segments
  • GAAP cash flows from operations up 33 percent year to date
  • Non-GAAP cash flows from operations up 71 percent year to date

Humana Inc. (NYSE: HUM) today reported financial results for the quarter ended June 30, 2007 (2Q07) including diluted earnings per common share (EPS) of $1.28, as announced in the companys July 18, 2007 press release. The company earned $0.53 per share for the quarter ended June 30, 2006 (2Q06). The year-over-year improvement in second quarter results reflected higher operating earnings in both of the companys business segments, primarily driven by efficiency gains in its consolidated administrative costs as well as medical expense ratio improvement.

As also announced on July 18, 2007, the company estimates EPS for the year ending December 31, 2007 (FY07E) will be in the range of $4.40 to $4.50 versus $2.90 for the year ended December 31, 2006 (FY06).

An across-the-board focus on operational excellence led to an extremely strong second quarter, said Michael B. McCallister, Humana's president and chief executive officer. These same dynamics are expected to fuel Humanas performance for the remainder of the year and position us well for growth into the future.

For the six months ended June 30, 2007 (1H07) the company reported $1.70 in EPS compared to $1.03 for the six months ended June 30, 2006 (1H06). Results for 1H06 included approximately $0.19 per share of venture capital gains that did not recur in 1H07. The year-over-year increase in 1H07 financial results was primarily due to better operating performance in both business segments.

Revenues 2Q07 consolidated revenues rose 19 percent to $6.43 billion from $5.41 billion in 2Q06, with total premium and administrative services fees up 18 percent compared to the prior years quarter. This year-over-year increase was primarily driven by higher average Medicare membership versus 2Q06.

1H07 consolidated revenues rose 25 percent to $12.63 billion from $10.11 billion in 1H06 with total premium and administrative services fees up 25 percent compared to the prior years period, also primarily driven by higher average enrollment in the companys Medicare plans.

Medical costs The 2Q07 consolidated medical expense ratio (medical expenses as a percent of premium revenues or MER) of 83.4 percent was 170 basis points lower than the 2Q06 MER of 85.1 percent as a result of MER improvement in both the Government and Commercial segments.

The consolidated MER for 1H07 of 85.1 percent was 70 basis points higher than the 1H06 consolidated MER of 84.4 percent, as the year-over-year increase in the Government Segment MER resulting from the Medicare Part D claims pattern outweighed the improvement in the Commercial Segment MER.

Selling, general, & administrative (SG&A) expenses The 2Q07 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) decreased 70 basis points to 13.0 percent for 2Q07 from 13.7 percent in 2Q06. The year-over-year decline was primarily the result of improving administrative cost efficiency and productivity gains associated with servicing the companys 11.3 million medical members.

The SG&A expense ratio for 1H07 of 13.2 percent was 160 basis points lower than that for 1H06 of 14.8 percent also primarily driven by efficiency and productivity gains.

Government Segment Results Summary

Pretax results:

  • Government Segment pretax earnings were $288.8 million in 2Q07 compared to $98.0 million in 2Q06. As expected, this primarily reflects a more normal MER pattern for the Part D benefit for 2007 as well as administrative cost efficiency associated with higher average Medicare medical membership. The extended enrollment period for this benefit during 2006 distorted the claims pattern associated with the beneficiaries progression through the Part D benefit stages in the prior year.
  • For 1H07, pretax earnings for the Government Segment of $306.7 million increased by $187.1 million, or 157 percent versus 1H06 pretax earnings for the segment of $119.6 million, primarily reflecting the same factors impacting the year-over-year comparison for the second quarter.

Enrollment:

  • Medicare Advantage membership grew to 1,133,700 at June 30, 2007, an increase of 173,900, or 18 percent, from June 30, 2006 and 20,300, or 2 percent, from March 31, 2007. Average Medicare Advantage membership for 2Q07 was up 28 percent compared to that for 2Q06. The companys expanded participation in various Medicare products and markets combined with the companys increased sales and marketing efforts for these programs led to the higher membership level both year over year and sequentially.
  • Membership in the companys stand-alone Prescription Drug Plans (PDPs) totaled 3,440,100 at June 30, 2007 compared to 3,458,800 at June 30, 2006 and 3,473,700 at March 31, 2007. Average stand-alone PDP membership was 21 percent higher in 2Q07 than 2Q06.
  • TRICARE membership of 2,868,200 at June 30, 2007 was essentially unchanged from both June 30, 2006 and March 31, 2007.
  • Medicaid membership of 567,600 at June 30, 2007 increased 149,100 from June 30, 2006 due primarily to the award of a new Puerto Rico regional ASO contract during the fourth quarter of 2006, partially offset by eligible Puerto Rico Medicaid members choosing to move into the Medicare Advantage program.

Premiums and administrative services fees:

  • Medicare Advantage premiums of $2.80 billion in 2Q07 increased 33 percent compared to $2.11 billion in 2Q06, primarily the result of higher average membership.
  • Medicare stand-alone Part D premiums of $1.05 billion in 2Q07 increased 31 percent compared to $801.8 million in 2Q06, primarily the result of higher average membership.
  • TRICARE premiums and administrative services fees during 2Q07 increased $71.8 million to $740.6 million compared to $668.8 million in 2Q06.

Medical Expenses:

  • The Government Segment MER decreased 170 basis points to 84.3 percent in 2Q07 compared to 86.0 percent in the prior years quarter. This decrease reflects a more normalized MER pattern for the Medicare Part D benefit for 2007. The extended enrollment period for this benefit during the prior year distorted the claims pattern associated with the beneficiaries progression through the Part D benefit stages in 2006.

SG&A Expenses:

  • The Government Segments SG&A expense ratio for 2Q07 of 10.0 percent was 150 basis points lower than that for 2Q06 of 11.5 percent primarily driven by efficiency and productivity gains associated with servicing higher average Medicare membership. The 2Q07 SG&A expense ratio was approximately 30 basis points lower than previously expected primarily due to improving staffing metrics and enhanced processes associated with servicing its Medicare business.

Commercial Segment Results Summary

Pretax results:

  • Commercial Segment pretax earnings were $50.8 million in 2Q07 compared to $42.3 million in 2Q06. Commercial Segment operating earnings in 2Q07 continue to reflect the companys commitment to underwriting discipline and strategic growth in select lines of business.
  • For 1H07, pretax earnings for the Commercial Segment of $145.2 million were $6.8 million, or 5 percent lower than 1H06 pretax earnings for the segment of $152.0 million as a result of a $45.3 million pretax gain associated with the sale of a venture capital investment that occurred in 1Q06.

Enrollment:

  • Commercial Segment medical membership of 3,278,700 at June 30, 2007 was essentially unchanged from both June 30, 2006 and March 31, 2007.
  • Membership in the companys Smart plans and other consumer offerings grew to 480,900 at June 30, 2007, an increase of 64,500, or 15 percent, from June 30, 2006 and 9,600, or 2 percent, from March 31, 2007. Medical members in these products comprise approximately 15 percent of Commercial medical membership at June 30, 2007 and March 31, 2007 compared to 13 percent at June 30, 2006.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment decreased 3 percent to $1.59 billion in 2Q07 compared to $1.64 billion in the prior years quarter, primarily due to lower average commercial fully-insured membership, down 8 percent year over year, as well as a shift in business mix from fully-insured to ASO enrollment.
  • Commercial Segment medical premiums for fully-insured groups increased approximately 5 percent on a per-member basis during 2Q07 compared to 2Q06.

Medical Expenses:

  • In 2Q07, the Commercial Segment MER of 80.7 percent was 220 basis points lower than the 2Q06 MER of 82.9 percent, primarily reflecting improving medical cost utilization trends and the companys continued commitment to underwriting discipline.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 21.8 percent for 2Q07 compares to 18.7 percent in 2Q06, primarily the combined result of higher average ASO membership and administrative costs associated with increased business for the companys mail order pharmacy. Average ASO membership increased 8 percent versus the prior years quarter.

Balance Sheet

  • Cash and cash equivalents of $3.72 billion increased $26.7 million or 1 percent sequentially. The early receipt of the April Medicare premium from the Centers for Medicare and Medicaid Services (CMS) during 1Q07 was essentially offset by the early receipt of the July Medicare premium from CMS during 2Q07.
  • Parent company cash and investments decreased to $419.3 million at June 30, 2007 from $424.4 million at December 31, 2006.
  • Unearned revenues of $1.36 billion increased 2 percent from the March 31, 2007 balance of $1.33 billion also due to the timing of the receipts of Medicare premiums from CMS.
  • Debt-to-total capitalization at June 30, 2007 was 26.1 percent, down 350 basis points from March 31, 2007 due primarily to the repayment of 1Q07 borrowings against the companys credit facility.
  • The companys working capital at June 30, 2007 included approximately $690.2 million in net Part D risk-share payables to CMS associated with the companys Medicare Advantage and stand-alone PDP offerings. Approximately $728.1 million of this net liability related to Part D plan offerings for the year ended December 31, 2006.
  • Days in claims payable excluding the impact of Medicare stand-alone PDPs were up slightly to 62.4 days at June 30, 2007 from 62.0 days at March 31, 2007.

Cash Flows from Operations

Cash flows provided by operations for 2Q07 of $477.3 million compared to cash provided by operations of $534.9 million in 2Q06.

Cash flows from operations

($ in millions)

2Q07   2Q06   1H07   1H06
Cash flows provided by operations in accordance with Generally Accepted Accounting Principles (GAAP) $477.3    

$534.9

   

$2,051.7

   

$1,542.8

 

Timing of premium payment from CMS(a)

(45.6 )   (257.2 )  

(1,175.3

)

  (1,031.7 )
Non-GAAP cash flows provided by operations(a)(b) $431.7     $277.7    

$876.4

    $511.1  

The company also evaluates operating cash flows on a non-GAAP basis(a)(b). Non-GAAP cash flows provided by operations rose to $431.7 million(a)(b) in 2Q07 from $277.7 million(a)(b) in 2Q06 driven primarily by growth in the companys Medicare operations.

Footnotes

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

(b) The company believes that this non-GAAP measure, when presented in conjunction with the comparable GAAP measure, is useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses this non-GAAP financial measure as an indicator 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.

Conference Call & Virtual Slide Presentation

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

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

Cautionary Statement

This news release contains statements and earnings guidance points that are forward-looking. The forward-looking items herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking items 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, 2006,
  • Form 10-Q for the quarter ended March 31, 2007,
  • Form 8-Ks filed during 2007.

About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nations largest publicly traded health benefits companies, with approximately 11.3 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 46-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.

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

  • Annual reports to stockholders;
  • Securities and Exchange Commission filings;
  • Most recent investor conference presentations;
  • Quarterly earnings news releases;
  • Replay of most recent earnings release conference calls;
  • Calendar of events (includes upcoming earnings conference call dates and times, as well as planned interaction with research analysts and institutional investors);
  • Corporate Governance information.

Humana Inc.

 
Guidance Points as of July 30, 2007   For the year ending December 31, 2007 (in accordance with Generally Accepted Accounting Principles)   Comments
Diluted earnings per common share (EPS)   Full year 2007: $4.40 to $4.50

3Q07: $1.45 to $1.50

   
Revenues Consolidated revenues:
$24.5 billion to $25.5
billion;
 
Premiums and ASO fees:
Medicare Advantage:
$10.5 billion to
$11.0 billion;
Medicare
stand-alone PDPs:
Approximately $3.5
billion;
TRICARE:
Approximately $3.0
billion;
Commercial: $6.5

 

billion to $7.0

 

billion;

 

 

Investment income:

 

$290 million to

 

$300 million;

 

 

Other revenue: $150

Other revenue primarily

million to $155

relates to revenues

million

associated with the

company's mail order

pharmacy; related

 

administrative costs

 

are in SG&A expenses

   

 

   
Ending medical Medicare Advantage:
membership (fully- 1,120,000 to
insured and ASO 1,130,000;
combined)
Medicare stand-alone
PDPs: 3.4 million to
3.5 million;
 
TRICARE: No material
change from prior
year;
 
Medicaid: Down
approximately 10,000;
 
Commercial: Up
approximately 50,000
to 75,000 from prior
    year    
Medical costs Total Medicare Medicare Advantage and
products: MER in the stand-alone PDP
range of 82.5% to combined
83.5%;

 

 

Commercial fully-

2007 secular Commercial

insured groups:

medical cost trend

Medical cost trends in

components as follows:

the range of 4.5% to

inpatient hospital

5.0%; premium yields

utilization - flat to

in line with medical

1 percent; inpatient

cost trends

and outpatient

hospital rates - mid

to upper single
digits; outpatient
hospital utilization -
low to mid single
digits; physician -
mid single digits; and
pharmacy - low double
        digits.
Selling, general & administrative expenses   Consolidated SG&A expense ratio of 13% to 14%   SG&A expenses as a percent of premiums, administrative costs, and other revenue
Depreciation & amortization   Approximately $185 million    
Interest expense   Approximately $70 million  

 

Pretax results Total Medicare Medicare Advantage and
products: stand-alone PDP
Approximately 5% combined
pretax margin;
 
TRICARE: Approximately
3.5% pretax margin;
 
 

 

Commercial Segment:

Includes no material

$230 million to $240

benefit from venture

    million  

capital gains

Cash flows from operations   $1.2 billion to $1.5 billion   Includes accrual for estimated 2007 Part D risk-share payable in the range of zero to $200 million
Capital expenditures   Approximately $220 million    
Effective tax rate   Approximately 36% to 37%    
Shares used in computing EPS   Approximately 171 million    

S-1

Humana Inc.

Statistical Schedules

And

Supplementary Information

2Q07 Earnings Release

S-2

Humana Inc.

Statistical Schedules and Supplementary Information

2Q07 Earnings Release

 

Contents

 
Page Description
 
S-3-4 Consolidated Statements of Income
S-5 Consolidated Balance Sheets
S-6-7 Consolidated Statements of Cash Flows
S-8 Key Income Statement Ratios and Segment Operating Results
S-9 Membership Detail
S-10-11 Premiums and Administrative Services Fees Detail
S-12 Percentage of Ending Membership under Capitation Arrangements
S-13-15 Medical Claims Reserves
S-16 Footnotes

S-3

Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
     
Three Months Ended June 30,
Dollar Percentage
2007   2006 Change   Change
Revenues:
Premiums $6,223,250 $5,264,475 $958,775 18.2 %
Administrative services fees 97,093 83,711 13,382 16.0 %
Investment income 72,052 50,567 21,485 42.5 %
Other revenue 34,402   8,416 25,986   308.8 %
Total revenues 6,426,797   5,407,169 1,019,628   18.9 %
Operating expenses:
Medical 5,190,418 4,479,501 710,917 15.9 %
Selling, general and administrative 826,459 733,863 92,596 12.6 %
Depreciation 48,820 31,613 17,207 54.4 %
Other intangible amortization 5,444   4,983 461   9.3 %
Total operating expenses 6,071,141   5,249,960 821,181   15.6 %
Income from operations 355,656 157,209 198,447 126.2 %
Interest expense 16,066   16,887 (821 ) -4.9 %
Income before income taxes 339,590 140,322 199,268 142.0 %
Provision for income taxes 122,744   50,833 71,911   141.5 %
Net income $216,846   $89,489 $127,357   142.3 %
 
Basic earnings per common share $1.30 $0.55 $0.75 136.4 %
Diluted earnings per common share $1.28 $0.53 $0.75 141.5 %
 
Shares used in computing basic earnings per common share 166,614 163,706
Shares used in computing diluted earnings per common share 169,596 167,536

S-4

Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
     
Six Months Ended June 30,
Dollar Percentage
2007   2006 Change   Change
Revenues:
Premiums $12,227,813 $9,785,961 $2,441,852 25.0 %
Administrative services fees 192,957 162,389 30,568 18.8 %
Investment income 145,579 149,469 (3,890 ) -2.6 %
Other revenue 65,261   13,715 51,546   375.8 %
Total revenues 12,631,610   10,111,534 2,520,076   24.9 %
Operating expenses:
Medical 10,404,418 8,263,427 2,140,991 25.9 %
Selling, general and administrative 1,647,069 1,474,749 172,320 11.7 %
Depreciation 84,329 61,465 22,864 37.2 %
Other intangible amortization 9,999   10,037 (38 ) -0.4 %
Total operating expenses 12,145,815   9,809,678 2,336,137   23.8 %
Income from operations 485,795 301,856 183,939 60.9 %
Interest expense 33,984   30,326 3,658   12.1 %
Income before income taxes 451,811 271,530 180,281 66.4 %
Provision for income taxes 163,724   98,326 65,398   66.5 %
Net income $288,087   $173,204 $114,883   66.3 %
 
Basic earnings per common share $1.73 $1.06 $0.67 63.2 %
Diluted earnings per common share $1.70 $1.03 $0.67 65.0 %
 
Shares used in computing basic earnings per common share 166,213 163,411
Shares used in computing diluted earnings per common share 169,276 167,430

S-5

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

June 30,

March 31,

Dec. 31,

Sequential Change
2007   2007   2006 Dollar Percent
Assets
Current assets:
Cash and cash equivalents $3,720,769 $3,694,059 $1,740,304
Investment securities 3,323,536 3,154,920 3,192,273
Receivables, net:
Premiums 685,479 826,314 667,657
Administrative services fees 12,074 10,806 13,284
Securities lending collateral 1,346,065 1,049,195 627,990
Other 1,318,003     1,135,298     1,091,465  
Total current assets 10,405,926 9,870,592 7,332,973 $535,334 5.4 %
Property and equipment, net 569,412 571,405 545,004
Other assets:
Long-term investment securities 400,775 380,138 414,877
Goodwill 1,330,585 1,331,418 1,310,631
Other 628,267     552,572     524,011  
Total other assets 2,359,627     2,264,128     2,249,519  
Total assets $13,334,965     $12,706,125     $10,127,496   $628,840 4.9 %
 
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable $2,954,146 $2,886,214 $2,488,261
Trade accounts payable and accrued expenses 2,084,463 1,977,465 1,626,658
Book overdraft 289,646 284,572 293,605
Securities lending payable 1,346,065 1,049,195 627,990
Unearned revenues 1,355,017     1,330,325     155,298  
Total current liabilities 8,029,337 7,527,771 5,191,812 $501,566 6.7 %
Long-term debt 1,189,570 1,329,334 1,269,100
Other long-term liabilities 740,560     689,493     612,698  
Total liabilities 9,959,467     9,546,598     7,073,610   $412,869 4.3 %
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; 185,002,041 issued at June 30, 2007
30,833 30,746 30,491
Capital in excess of par value 1,422,370 1,393,582 1,357,077
Retained earnings 2,197,185 1,980,339 1,909,098
Accumulated other comprehensive loss (38,112 ) (8,378 ) (13,205 )
Treasury stock, at cost, 16,439,317 shares at June 30, 2007 (236,778 )   (236,762 )   (229,575 )
Total stockholders' equity 3,375,498     3,159,527     3,053,886   $215,971 6.8 %
Total liabilities and stockholders' equity $13,334,965     $12,706,125     $10,127,496   $628,840 4.9 %
 
Debt-to-total capitalization ratio 26.1 % 29.6 % 29.4 %

S-6

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
 

Three Months Ended

June 30,

Dollar Percentage
2007   2006 Change   Change
Cash flows from operating activities
Net income $216,846 $89,489
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 54,264 36,596
Stock-based compensation 10,462 8,471
(Benefit) provision for deferred income taxes (17,900 ) 2,479
Changes in operating assets and liabilities excluding the effects of acquisitions:
 
Receivables 139,567 3,104
Other assets (107,522 ) (174,050 )
Medical and other expenses payable 67,932 266,956
Other liabilities 75,771 57,967
Unearned revenues 24,692 244,661
Other 13,154     (818 )
Net cash provided by operating activities 477,266     534,855   ($57,589 ) -10.8 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (224 ) (25,818 )
Purchases of property and equipment (43,973 ) (36,712 )
Proceeds from sales of property and equipment 2 18
Purchases of investment securities (908,244 ) (594,890 )
Proceeds from maturities of investment securities 212,471 100,289
Proceeds from sales of investment securities 444,692 152,855
Change in securities lending collateral (296,870 )   9,473  
Net cash used in investing activities (592,146 )   (394,785 ) ($197,361 ) -50.0 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 639,722 550,868
Withdrawals from CMS contract deposits (708,277 ) (462,981 )
Borrowings under credit agreement 400,000 -
Repayments under credit agreement (510,000 ) (300,000 )
Proceeds from issuance of senior notes - 498,545
Debt issue costs - (3,825 )
Change in book overdraft 5,074 (3,763 )
Change in securities lending payable 296,870 (9,473 )
Common stock repurchases (16 ) (4,832 )
Tax benefit from stock-based compensation 5,426 5,252
Proceeds from stock option exercises and other 12,791     5,198  
Net cash provided by financing activities 141,590     274,989   ($133,399 ) -48.5 %
 
Increase in cash and cash equivalents 26,710 415,059
Cash and cash equivalents at beginning of period 3,694,059     1,843,405  
 
Cash and cash equivalents at end of period $3,720,769     $2,258,464  

S-7

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
 

Six Months Ended

June 30,

Dollar Percentage
2007   2006 Change   Change
Cash flows from operating activities
Net income $288,087 $173,204
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 94,328 71,502
Stock-based compensation 20,264 15,051
Benefit for deferred income taxes (24,011 ) (1,226 )
Changes in operating assets and liabilities excluding the effects of acquisitions:
 
Receivables (16,612 ) (42,957 )
Other assets (126,467 ) (359,300 )
Medical and other expenses payable 465,885 526,763
Other liabilities 134,423 172,719
Unearned revenues 1,199,719 1,044,850
Other 16,131     (57,778 )
Net cash provided by operating activities 2,051,747     1,542,828   $508,919 33.0 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (27,005 ) (25,931 )
Purchases of property and equipment (114,717 ) (81,973 )
Proceeds from sales of property and equipment 4,072 2,156
Purchases of investment securities (1,873,295 ) (2,258,548 )
Proceeds from maturities of investment securities 769,956 1,010,397
Proceeds from sales of investment securities 926,603 712,685
Change in securities lending collateral (718,075 )   (193,239 )
Net cash used in investing activities (1,032,461 )   (834,453 ) ($198,008 ) -23.7 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 1,483,359 1,045,062
Withdrawals from CMS contract deposits (1,223,982 ) (736,425 )
Borrowings under credit agreement 710,000 100,000
Repayments under credit agreement (760,000 ) (300,000 )
Proceeds from issuance of senior notes - 498,545
Debt issue costs - (3,825 )
Change in book overdraft (3,959 ) (8,181 )
Change in securities lending payable 718,075 193,239
Common stock repurchases (7,203 ) (4,937 )
Tax benefit from stock-based compensation 14,554 13,656
Proceeds from stock option exercises and other 30,335     20,939  
Net cash provided by financing activities 961,179     818,073   $143,106 17.5 %
 
Increase in cash and cash equivalents 1,980,465 1,526,448
Cash and cash equivalents at beginning of period 1,740,304     732,016  
 
Cash and cash equivalents at end of period $3,720,769     $2,258,464  

S-8

Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
       
Three Months Ended June 30, Six Months Ended June 30,
 
Percentage Percentage
2007 2006 Difference   Change 2007 2006 Difference   Change
Medical expense ratio
Government Segment 84.3 % 86.0 % -1.7 % 86.7 % 85.8 % 0.9 %
Commercial Segment 80.7 % 82.9 % -2.2 % 80.1 % 81.5 % -1.4 %
Consolidated 83.4 % 85.1 % -1.7 % 85.1 % 84.4 % 0.7 %
 
Selling, general, and administrative expense ratio
 
Government Segment 10.0 % 11.5 % -1.5 % 10.4 % 12.5 % -2.1 %
Commercial Segment 21.8 % 18.7 % 3.1 % 21.2 % 19.5 % 1.7 %
Consolidated 13.0 % 13.7 % -0.7 % 13.2 % 14.8 % -1.6 %
 
 
Detail of Pretax Income
Government Segment $288,790 $97,981 $190,809 194.7 % $306,655 $119,553 $187,102 156.5 %
Commercial Segment 50,800   42,341   8,459   20.0 % 145,156   151,977   (6,821 ) -4.5 %
Consolidated $339,590   $140,322   $199,268   142.0 % $451,811   $271,530   $180,281   66.4 %
 
Detail of Pretax Margins
Government Segment 6.0 % 2.6 % 3.4 % 3.3 % 1.8 % 1.5 %
Commercial Segment 3.1 % 2.5 % 0.6 % 4.4 % 4.5 % -0.1 %
Consolidated 5.3 % 2.6 % 2.7 % 3.6 % 2.7 % 0.9 %

S-9

Humana Inc.
Membership Detail

In thousands

 

           
Ending Ending Year-over-year Change Ending Sequential Change
June 30, 2007   Average - 2Q07   June 30, 2006 Amount   Percent March 31, 2007 Amount   Percent
Medical Membership:
Government Segment:
Medicare Advantage - HMO 452.4 454.2 457.0 (4.6 ) -1.0 % 462.1 (9.7 ) -2.1 %
Medicare Advantage - PPO 66.9 66.5 64.6 2.3 3.6 % 64.6 2.3 3.6 %
Medicare Advantage - PFFS 614.4   611.9   438.2 176.2   40.2 % 586.7 27.7   4.7 %
Total Medicare Advantage 1,133.7   1,132.6   959.8 173.9   18.1 % 1,113.4 20.3   1.8 %
Medicare - PDP - Standard 2,131.0 2,133.1 2,066.5 64.5 3.1 % 2,146.2 (15.2 ) -0.7 %
Medicare - PDP - Enhanced 1,075.9 1,075.2 977.2 98.7 10.1 % 1,084.0 (8.1 ) -0.7 %
Medicare - PDP - Complete 233.2   235.7   415.1 (181.9 ) -43.8 % 243.5 (10.3 ) -4.2 %
Total Medicare stand-alone PDPs 3,440.1   3,444.0   3,458.8 (18.7 ) -0.5 % 3,473.7 (33.6 ) -1.0 %
Total Medicare 4,573.8   4,576.6   4,418.6 155.2   3.5 % 4,587.1 (13.3 ) -0.3 %
TRICARE insured 1,717.6 1,719.4 1,732.6 (15.0 ) -0.9 % 1,712.9 4.7 0.3 %
TRICARE ASO 1,150.6   1,161.1   1,141.9 8.7   0.8 % 1,165.5 (14.9 ) -1.3 %
Total TRICARE 2,868.2   2,880.5   2,874.5 (6.3 ) -0.2 % 2,878.4 (10.2 ) -0.4 %
Medicaid insured 384.9 384.0 418.5 (33.6 ) -8.0 % 384.0 0.9 0.2 %
Medicaid ASO 182.7   181.7   - 182.7   100.0 % 175.4 7.3   4.2 %
Total Medicaid 567.6   565.7   418.5 149.1   35.6 % 559.4 8.2   1.5 %
Total Government Segment 8,009.6   8,022.8   7,711.6 298.0   3.9 % 8,024.9 (15.3 ) -0.2 %
Commercial Segment:
Fully-insured medical:
Group 1,533.0 1,530.1 1,716.4 (183.4 ) -10.7 % 1,528.6 4.4 0.3 %
Individual 205.0 200.3 170.0 35.0 20.6 % 192.1 12.9 6.7 %
Medicare supplement 8.3   7.8   6.7 1.6   23.9 % 7.4 0.9   12.2 %
Total fully-insured medical 1,746.3 1,738.2 1,893.1 (146.8 ) -7.8 % 1,728.1 18.2 1.1 %
ASO 1,532.4   1,525.8   1,420.8 111.6   7.9 % 1,529.4 3.0   0.2 %
Total Commercial Segment 3,278.7   3,264.0   3,313.9 (35.2 ) -1.1 % 3,257.5 21.2   0.7 %
 
Total medical membership 11,288.3   11,286.8   11,025.5 262.8   2.4 % 11,282.4 5.9   0.1 %
 
 
Specialty Membership (all Commercial Segment)
 
Dental - fully-insured 978.1 979.9 955.6 22.5 2.4 % 980.5 (2.4 ) -0.2 %
Dental - ASO 499.9   497.8   496.5 3.4   0.7 % 503.7 (3.8 ) -0.8 %
Total dental 1,478.0 1,477.7 1,452.1 25.9 1.8 % 1,484.2 (6.2 ) -0.4 %
Group life 439.8 439.2 427.2 12.6 2.9 % 437.9 1.9 0.4 %
Short-term disability 12.2   12.5   15.6 (3.4 ) -21.8 % 13.1 (0.9 ) -6.9 %
Total specialty membership 1,930.0   1,929.4   1,894.9 35.1   1.9 % 1,935.2 (5.2 ) -0.3 %

S-10

Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
     

Per

Member per Month(A)

Three Months Ended June 30,

Three Months Ended

June 30,

Dollar Percentage
2007   2006 Change   Change 2007   2006
Premium revenues
Government Segment:
Medicare Advantage $2,804,438 $2,109,406 $695,032 32.9 % $825 $792
Medicare stand-alone PDPs 1,051,259   801,755 249,504   31.1 % $102 $94
Total Medicare 3,855,697 2,911,161 944,536 32.4 %

TRICARE insured(B)

725,040 657,627 67,413 10.3 % $141 $127
Medicaid insured 132,486   129,158 3,328   2.6 % $115 $102
Total Government Segment premiums 4,713,223   3,697,946 1,015,277   27.5 %
Commercial Segment:
Fully-insured medical 1,402,082 1,464,646 (62,564 ) -4.3 % $269 $259
Specialty 107,945   101,883 6,062   5.9 % $22 $21
Total Commercial Segment premiums 1,510,027   1,566,529 (56,502 ) -3.6 %
Total premium revenues $6,223,250   $5,264,475 $958,775   18.2 %
 
 
Administrative services fees

TRICARE ASO(B)

$15,535 $11,144 $4,391 39.4 % $4 $3
Medicaid ASO 2,136   - 2,136   100.0 % $4 -
Total Government Segment 17,671 11,144 6,527 58.6 %
Commercial Segment 79,422   72,567 6,855   9.4 % $13 $13
Total administrative services fees $97,093   $83,711 $13,382   16.0 %

S-11

Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
     

Per Member per Month(A)

Six Months Ended June 30, Six Months Ended June 30,
Dollar Percentage
2007   2006 Change   Change 2007   2006
Premium revenues
Government Segment:
Medicare Advantage $5,547,149 $3,830,249 $1,716,900 44.8 % $828 $808
Medicare stand-alone PDPs 1,957,685   1,316,912 640,773   48.7 % $94 $96
Total Medicare 7,504,834 5,147,161 2,357,673 45.8 %

TRICARE insured(B)

1,452,255 1,258,381 193,874 15.4 % $141 $121
Medicaid insured 261,811   258,625 3,186   1.2 % $113 $101
Total Government Segment premiums 9,218,900   6,664,167 2,554,733   38.3 %
Commercial Segment:
Fully-insured medical 2,792,887 2,918,578 (125,691 ) -4.3 % $269 $259
Specialty 216,026   203,216 12,810   6.3 % $22 $21
Total Commercial Segment premiums 3,008,913   3,121,794 (112,881 ) -3.6 %
Total premium revenues $12,227,813   $9,785,961 $2,441,852   25.0 %
 
 
Administrative services fees

TRICARE ASO(B)

$29,829 $22,335 $7,494 33.6 % $4 $3
Medicaid ASO 4,232   - 4,232   100.0 % $4 -
Total Government Segment 34,061 22,335 11,726 52.5 %
Commercial Segment 158,896   140,054 18,842   13.5 % $13 $12
Total administrative services fees $192,957   $162,389 $30,568   18.8 %

S-12

Humana Inc.
Percentage of Ending Membership under Capitation Arrangements
   
Government Segment Commercial Segment
June 30, 2007 Medicare Advantage   Medicare stand-alone PDPs   TRICARE   Medicaid   Total Govt. Segment   Fully-insured   ASO   Total Comm. Segment   Total Medical Membership
 

Capitated HMO hospital system based(C)

2.5% - - - 0.3% 1.4% - 0.8% 0.5%

Capitated HMO physician group based(C)

2.0% - - 26.0% 2.1% 1.5% - 0.8% 1.8%

Risk-sharing(D)

24.3% - - 41.4% 6.4% 1.5% - 0.8% 4.8%
All other membership 71.2%   100.0%   100.0%   32.6%   91.2%   95.6%   100.0%   97.6%   92.9%
Total medical membership 100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%
 
June 30, 2006
 

Capitated HMO hospital system based(C)

3.4% - - - 0.4% 1.8% - 1.1% 0.6%

Capitated HMO physician group based(C)

2.5% - - 34.7% 2.2% 1.7% - 1.0% 1.8%

Risk-sharing(D)

27.9% - - 64.6% 7.0% 2.3% - 1.3% 5.3%
All other membership 66.2%   100.0%   100.0%   0.7%   90.4%   94.2%   100.0%   96.6%   92.3%
Total medical membership 100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%

S-13

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

Dollars in thousands

 
June 30, March 31, December 31,
2007   2007   2006
Detail of medical and other expenses payable

IBNR and other medical expenses payable(E)

$2,028,722 $1,869,209 $1,686,051
TRICARE IBNR (F) 308,112 361,786 318,583

TRICARE other medical expenses payable(G)

100,975 97,994 94,699

Unprocessed claim inventories(H)

211,300 222,300 218,400

Processed claim inventories(I)

142,171 135,241 115,424

Payable to pharmacy benefit administrator(J)

162,866     199,684     55,104  
Total medical and other expenses payable $2,954,146     $2,886,214     $2,488,261  
 
 
Six Months Ended Three Months Ended Year Ended
June 30, 2007  

March 31, 2007

  December 31, 2006
Year-to-date changes in medical and other expenses payable
 
 
Balances at January 1 $2,488,261 $2,488,261 $1,909,682
 
Acquisitions - - 21,198
 
Incurred related to:

Current year(K)

10,574,111 5,370,722 17,696,654

Prior years - non-TRICARE(K)

(156,032 ) (148,777 ) (178,998 )

Prior years - TRICARE(L)

(13,661 )   (7,945 )   (96,452 )
Total incurred 10,404,418     5,214,000     17,421,204  
 
Paid related to:
Current year (8,275,133 ) (3,800,981 ) (15,532,079 )
Prior years (1,663,400 )   (1,015,066 )   (1,331,744 )
Total paid (9,938,533 )   (4,816,047 )   (16,863,823 )
 
Balances at end of period $2,954,146     $2,886,214     $2,488,261  

S-14

Humana Inc.
Medical Claims Reserves Statistics
 

Receipt Cycle Time(M)

 

2007   2006   Change   Percentage Change
1st Quarter Average 15.6 16.1 (0.5 ) -3.1 %
2nd Quarter Average 15.6 15.8 (0.2 ) -1.3 %
3rd Quarter Average - 16.0 N/A N/A
4th Quarter Average -   15.8   N/A   N/A
Full Year Average 15.6   15.9   (0.3 ) -1.9 %
 
 
 
Unprocessed Claims Inventories
 
Date   Estimated Valuation (000's)   Claim Item Counts   Number of Days on Hand
6/30/2005 $119,500 443,600 4.0
9/30/2005 $136,700 512,800 4.7
12/31/2005 $148,200 498,400 4.6
3/31/2006 $185,300 683,900 5.6
6/30/2006 $193,700 702,000 4.8
9/30/2006 $187,900 623,900 5.4
12/31/2006 $218,400 757,700 6.1
3/31/2007   $222,300   747,200   5.5  
6/30/2007   $211,300   751,600   4.9  

S-15

Humana Inc.
Medical Claims Reserves Statistics (Continued)
 

Days in Claims Payable(N)

Quarter Ended   Days in Claim Payable (DCP)   Annual Change   Percentage Change   DCP Excluding Capitation   Annual Change   Percentage Change
6/30/2005 52.8 5.4 11.4 % 58.6 4.5 8.3 %
9/30/2005 54.0 2.2 4.2 % 60.8 1.7 2.9 %
12/31/2005 60.3 10.8 21.8 % 66.6 11.8 21.5 %
3/31/2006 59.1 8.6 17.0 % 65.5 9.4 16.8 %
6/30/2006 59.5 6.7 12.7 % 65.5 6.9 11.8 %
9/30/2006 61.2 7.2 13.3 % 67.1 6.3 10.4 %
12/31/2006 60.2 (0.1 ) -0.2 % 66.5 (0.1 ) -0.2 %
3/31/2007   62.0   2.9     4.9 %   67.8     2.3     3.5 %
6/30/2007   62.4   2.9     4.9 %   69.7     4.2     6.4 %
 

Year-to-Date Change in Days in Claims Payable(O)(P)

 
2007   2006
DCP - 4th quarter of prior year 60.2 60.3
Components of year-to-date change in DCP:
Change in claims receipt cycle time (0.8 ) (1.6 )
Change in unprocessed claims inventories (0.2 ) 1.7
Change in processed claims inventories 0.6 0.8
Change in TRICARE reserve balances (0.1 ) (2.1 )
Change in pharmacy payment cutoff - (1.3 )
Change in provider payables under risk arrangements 2.5 1.9
All other 0.2     0.5  
DCP - current quarter 62.4     60.2  

S-16

Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information
2Q07 Earnings Release
 
Footnote
(A) 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).
(B)

TRICARE revenues are not contracted on a per-member basis.

(C) 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. 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 physicians and hospitals for services rendered to their HMO membership.
(D) 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.
(E) 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.
(F) TRICARE IBNR primarily fluctuates due to medical expense inflation and changes in the utilization of benefits.
(G) 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).
(H) 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.
(I) 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.
(J) 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.
(K) Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development). There were no changes in the approach used to determine our estimate of claim reserves during the quarter.
(L) Changes in estimates of TRICARE incurred claims for prior years result 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.
(M) The receipt cycle time measures the average length of time between when a claim was initially incurred and when the claim form was received. Receipt cycle time data for our largest claim processing platforms represents 70% to 75% of the company's fully-insured claims volume. Pharmacy claims are excluded from this measurement.
(N) A common metric for monitoring medical claim reserve levels relative to the medical claims expense is days in claims payable, or DCP, which represents the medical claim liabilities at the end of the period divided by average medical expenses per day in the quarterly period. Since the company has some providers under capitation payment arrangements (which do not require a medical claim IBNR reserve), the company has also summarized this metric excluding capitation expense. In addition, this calculation excludes the impact of the company's stand-alone PDP business.
(O) Excludes the impact of Medicare stand-alone PDPs.
(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.

Multimedia Files:

Humana Reports Detailed Second Quarter 2007 Financial Results

Contact:

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