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Humana Reports Fourth Quarter and Full Year 2007 Financial Results

  • 2007 EPS of $4.91, ahead of company expectations
  • Raising projected 2008 EPS to a range of $5.35 to $5.55
  • Revenues of $25.3 billion in 2007
  • Medical membership of 11.5 million at December 31, 2007
  • Specialty membership of 6.8 million at December 31, 2007
  • January 2008 Medicare Advantage membership of 1,243,000
  • 2007 operating cash flows of $1.2 billion

Category:

Monday, February 4, 2008 6:00 am EST

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028

LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE: HUM) today reported financial results for the quarter ended December 31, 2007 (4Q07) including diluted earnings per common share (EPS) of $1.43, significantly above the companys previous guidance for 4Q07 EPS of $1.27 to $1.32 primarily due to a lower income tax rate for 2007 than previously anticipated and a gain from the sale of a venture capital investment during 4Q07. The company earned $0.92 per share for the quarter ended December 31, 2006 (4Q06).

For the year ended December 31, 2007 (FY07), the company reported EPS of $4.91(a)(b) versus $2.90 for the year ended December 31, 2006 (FY06). The companys FY07 EPS included earnings of $0.25 per share(a) that are not anticipated to recur in future periods.

The company has raised its EPS projection for the year ending December 31, 2008 (FY08E) to reflect a lower tax rate than previously anticipated, with EPS now expected to be in the range of $5.35 to $5.55, an increase of 9 to 13 percent over FY07 EPS, or 15 to 19 percent(a)(b) versus the non-GAAP EPS for FY07.

Our 2007 results show that Humanas unique value proposition resonates deeply with Americas seniors, said Michael B. McCallister, the company's president and chief executive officer. Treating members as actively engaged health-care consumers instead of passive health-care users is what we do across all our lines of business, and accounts for Humanas across-the-board growth and success.

Revenues 4Q07 consolidated revenues rose 12 percent to $6.34 billion from $5.66 billion in 4Q06, with total premium and administrative services fees up 12 percent compared to the prior years quarter. This year-over-year increase was primarily driven by higher average Medicare Advantage membership versus 4Q06.

FY07 consolidated revenues rose 18 percent to $25.29 billion from $21.42 billion in FY06 with total premium and administrative services fees up 18 percent compared to the prior years period, also primarily driven by higher average enrollment in the companys Medicare Advantage and stand-alone Prescription Drug Plans (PDPs).

Benefit expenses(c) The 4Q07 consolidated benefits ratio(c) (benefit expenses as a percent of premium revenues) of 80.3 percent was 290 basis points lower than the 4Q06 benefit ratio of 83.2 percent, the combined result of a 360 basis point decline in the Government Segment benefits ratio and a 110 basis point decline in the Commercial Segment benefits ratio.

The consolidated benefits ratio for FY07 of 83.0 percent was 100 basis points lower than the FY06 consolidated benefits ratio of 84.0 percent, substantially due to a 120 basis point decline in the Government Segment benefits ratio (including a 40 basis point benefit from favorable prior year claims development(a)) and a 120 basis point improvement in the benefits ratio for the Commercial Segment.

Selling, general, & administrative (SG&A) expenses The 4Q07 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) increased 130 basis points to 16.0 percent for 4Q07 from 14.7 percent in 4Q06. The year-over-year increase was primarily the result of higher marketing and other administrative expenses associated with the Medicare selling season for 2008 enrollment, which began during 4Q07, as well as the acquisition of two specialty products companies in 4Q07.

The SG&A expense ratio for FY07 of 13.9 percent was 40 basis points lower than that for FY06 of 14.3 percent primarily driven by efficiency and productivity gains associated with higher average medical membership year to date, partially offset by the companys expanding mail-order pharmacy business as well as differences in the composition of the companys medical membership portfolio for 2007 versus 2006.

Income taxes The effective income tax rate for 4Q07 of 32.2 percent was significantly lower than the September 30, 2007 year-to-date rate of 36.5 percent reflecting a revised estimate for the companys state tax rate and the favorable resolution of an Internal Revenue Service audit item.

The effective income tax rate for FY07 declined 70 basis points from the prior year, primarily reflecting the benefit from a lower state tax rate as the companys earnings became more geographically diverse in FY07.

Government Segment Results

Pretax results:

  • Government Segment pretax earnings were $304.6 million in 4Q07 compared to $187.3 million in 4Q06. As expected, the year-over-year improvement in fourth quarter pretax earnings for this segment primarily reflects a more normal benefits ratio pattern for the Part D benefit for 2007 as well as administrative cost efficiency associated with higher average Medicare Advantage membership. The extended enrollment period for the Part D benefit during 2006 distorted the claims pattern associated with the beneficiaries progression through the Part D benefit stages in that year.
  • For FY07, pretax earnings for the Government Segment of $1.03 billion increased by $513.7 million, or 100 percent versus FY06 pretax earnings for the segment of $513.8 million, primarily reflecting the same factors impacting the year-over-year comparison for the fourth quarter. This segments pretax earnings for FY07 on a non-GAAP basis were $958.7 million(a)(b).

Enrollment:

  • Medicare Advantage membership grew to 1,143,000 at December 31, 2007, an increase of 140,400, or 14 percent, from December 31, 2006 and was essentially unchanged versus September 30, 2007. Average Medicare Advantage membership for 4Q07 was up 14 percent compared to that for 4Q06. The companys expanded participation in various Medicare products and markets combined with the companys increased sales and marketing efforts for these programs led to the higher membership level year over year.
  • Membership in the companys stand-alone PDPs totaled 3,442,000 at December 31, 2007 compared to 3,536,600 at December 31, 2006 and 3,459,700 at September 30, 2007.
  • January 2008 membership in the companys Medicare Advantage plans approximated 1,243,000.
  • January 2008 Medicare stand-alone PDP membership approximated 3,180,000.

Premiums and administrative services fees:

  • Medicare Advantage premiums of $2.80 billion in 4Q07 increased 22 percent compared to $2.30 billion in 4Q06, primarily the result of higher average membership.
  • Medicare stand-alone PDP premiums of $820.3 million in 4Q07 decreased 7 percent compared to $882.0 million in 4Q06, primarily the result of a 2 percent decline in average membership versus that for 4Q06.
  • Military services(d) premiums and administrative services fees during 4Q07 increased $30.6 million to $691.0 million compared to $660.4 million in 4Q06.

Benefit Expenses(c):

  • The Government Segment benefits ratio decreased 360 basis points to 80.1 percent in 4Q07 compared to 83.7 percent in the prior years quarter. This decrease reflects a more normalized benefits ratio 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 4Q07 of 13.7 percent was 140 basis points higher than that for 4Q06 of 12.3 percent and increased 350 basis points from the third quarter of 2007. Each of these changes was primarily the result of higher marketing and other administrative expenses associated with the Medicare selling season for 2008 enrollment which began during 4Q07.

Commercial Segment Results

Pretax results:

  • Commercial Segment pretax earnings were $54.4 million in 4Q07 compared to $53.9 million in 4Q06. Commercial Segment operating earnings in 4Q07 continue to reflect the companys commitment to underwriting discipline and strategic growth in select lines of business.
  • For FY07, pretax earnings for the Commercial Segment of $261.8 million were $13.5 million, or 5 percent higher than FY06 pretax earnings for the segment of $248.2 million. Operating earnings for this segment excluding venture capital gains reflect a full year of the companys commitment to underwriting discipline and strategic line-of-business growth. Venture capital gains included in this segments results were $6.3 million in FY07 versus $56.0 million in FY06.

Enrollment:

  • Commercial Segment medical membership grew 167,800 members to 3,451,600 at December 31, 2007, an increase of 5 percent from December 31, 2006 and September 30, 2007. Approximately 95,900 of the increase in medical members related to members acquired via an acquisition completed during 4Q07 (primarily ASO members).
  • Membership in strategic areas of commercial growth rose organically as follows during 4Q07 compared to 4Q06: Individual product membership increased 35 percent, Smart plans and other consumer offerings membership grew 29 percent, Small Group business membership was up 2 percent, and total ASO members were 1 percent higher than the prior year.
  • Membership in Commercial Segment specialty products at December 31, 2007 rose to 6,783,800 compared to 1,902,800(e) at December 31, 2006, primarily driven by the addition of membership from two specialty-product companies acquired during 4Q07.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment increased 11 percent to $1.74 billion in 4Q07 compared to $1.57 billion in the prior years quarter, primarily due to commitment to underwriting discipline, strategic line-of-business growth and the acquisition of two specialty products companies in 4Q07.
  • Commercial Segment medical premiums for fully-insured groups increased approximately 5 percent on a per-member basis during 4Q07 compared to 4Q06.

Benefit Expenses:

  • In 4Q07, the Commercial Segment benefits ratio of 81.0 percent was 110 basis points lower than the 4Q06 benefits ratio of 82.1 percent, primarily reflecting the acquisition of two specialty products companies in 4Q07, continued underwriting discipline and strategic medical membership line-of-business growth.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 21.8 percent for 4Q07 compares to 20.4 percent in 4Q06, primarily the combined result of higher average Individual and ASO membership, costs associated with increased business for the companys mail order pharmacy, and the acquisition of two specialty products companies in 4Q07. Average Individual product membership rose 32 percent and average ASO membership increased 3 percent versus the prior years quarter.

Balance Sheet

  • Cash and cash equivalents declined $545.2 million or 21 percent sequentially due to the payment of Part D risk-share payable of approximately $726 million.
  • Parent company cash and investments increased $111.3 million to $535.7 million at December 31, 2007 from $424.4 million at December 31, 2006.
  • Debt-to-total capitalization at December 31, 2007 was 29.5 percent, up 380 basis points from September 30, 2007 due primarily to the completion of two acquisitions during 4Q07. This ratio was up 10 basis points compared to December 31, 2006.

Cash Flows from Operations

Cash flows used in operations for 4Q07 of $189.8 million compared to cash flows provided by operations of $534.9 million in 4Q06 primarily reflects the payment of Part D risk-share payable for the 2006 plan year of approximately $726 million.

FY07 cash flows from operations of $1.22 billion versus $1.69 billion for FY06 also reflect the same factors impacting 4Q07 year-over-year comparisons.

Acquisitions

During 4Q07, the company completed the acquisitions of CompBenefits Corporation and KMG America Corporation (KMG) for total cash consideration of approximately $525 million plus the assumption of approximately $36 million of debt. CompBenefits is a leading full-service provider of dental and vision benefit plans and increased Humanas specialty membership by approximately 4.4 million(e). KMG offers supplemental life and health insurance products and services and increased Humanas specialty membership approximately 427,500(e)(f) and the companys medical membership by 95,900(f).

Footnotes

(a) During the quarter ended September 30, 2007, the company realized pretax income of approximately $68.9 million ($0.25 per share after tax) related to favorable prior-year claims development that it does not anticipate recurring in future periods, with approximately $54.0 million related to 2006 Medicare Part D claims and the remainder related to Military services claims. The Medicare Part D development primarily related to the resolution of first-year Part D implementation matters including enrollment discrepancies and the related impact on claim estimates. The claims development related to Military services resulted from the settlement of certain claims payment accuracy provisions for prior option periods. A reconciliation of GAAP to non-GAAP amounts related to this favorable development is included in the statistical pages of this earnings press release.

(b) The company believes that the non-GAAP measures included in this release, 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) The company has renamed medical expenses as benefit expenses and the related medical expense ratio as benefits ratio reflecting the expansion of its specialty offerings in 4Q07.

(d) The company has renamed TRICARE as military services reflecting the addition of contracts with the Department of Veteran Affairs in 4Q07.

(e) The Commercial Segment provides a full range of insured specialty products including dental, vision and other supplemental products. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.

(f) Approximately 500,000 members in stand-alone stop loss, long-term care, and network access products previously reported by KMG have been excluded from Humanas membership statistics since the related business is not material to Humanas operations.

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-Qs for the quarters ended March 31, 2007, June 30, 2007, and September 30, 2007,
  • Form 8-Ks filed during 2007 and 2008.

About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nations largest publicly traded health and supplemental benefits companies, with approximately 11.5 million medical members. Humana is a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government programs and individuals.

Over its 47-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. Earnings Guidance Points as of February 4, 2008

 

(in accordance with

Generally Accepted

Accounting Principles)

  For the year ending December 31, 2008   Comments

Diluted earnings per

common share

Full year 2008: $5.35 to $5.55

First quarter 2008: $0.80 to $0.85

     
Revenues Consolidated revenues: $28 billion to $30 billion
 
Premiums and ASO fees:
Medicare Advantage: $13 billion to $14 billion;
Medicare stand-alone PDPs: Approximately $3.4 billion;
Military services: $3.2 billion to $3.4 billion;
Commercial Segment: $7.2 billion to $7.7 billion
 
Consolidated investment income: $350 million to $370 million

 

 

Consolidated other revenue: $200 million to $250 million

Other revenue primarily relates to revenues associated with the company's mail order pharmacy

Ending medical

membership (fully-

insured and ASO

combined)

Medicare Advantage: Up 200,000 to 250,000 from prior year

 

Medicare stand-alone PDPs: 3.15 million to 3.20 million

 

Military services: No material change from prior year

 

Medicaid: No material change from prior year

 

Commercial: Up approximately 65,000 to 95,000 from prior year

 

Benefit expenses

Medicare products: benefits

ratio in the range of 83%

to 84%

Medicare Advantage and stand-alone PDP combined
 
Commercial fully-insured groups: Same-store net benefit expense trends and premium yields of 6% to 7% (3.5% to 4.5% including the impact of changes in the company's business mix)

 

 

 

Secular Commercial benefit expense trend components as follows: inpatient hospital utilization - flat to 1 percent; inpatient and outpatient hospital rates - mid to upper single digits; outpatient hospital utilization - low to mid single digits; physician - mid single digits; and pharmacy - mid to upper single digits.

Secular trends exclude the impact of benefit buy-downs

Selling, general &

administrative

expense ratio

 

13.5% to 14% SG&A expenses as a percent of premiums, administrative costs, and other revenue

Depreciation &

amortization

$230 million to $240 million  
Interest expense $75 million to $80 million  

Government Segment

operating margins

Medicare products: approximately 5%

 

 

Military services: 2.5% to 3.5%

Medicare Advantage and stand-alone PDP combined

Commercial Segment

pretax earnings

$280 million to $300 million  

Cash flows from

operations

$1.5 billion to $1.8 billion  
Capital expenditures Approximately $275 million  
Effective tax rate 35.5% to 36%  

Shares used in

computing

full-year EPS

Approximately 173 million  
 

Humana Inc.

Statistical Schedules

And

Supplementary Information

4Q07 Earnings Release

 
 
Humana Inc.
Statistical Schedules and Supplementary Information
4Q07 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 Benefits Payable
S-16 GAAP to Non-GAAP Reconciliation
S-17-18 Footnotes
 
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
       

Three Months Ended

December 31,

  Dollar Percentage
2007 2006 Change Change
Revenues:
Premiums $6,113,693 $5,456,853 $656,840 12.0 %
Administrative services fees 97,027 92,490 4,537 4.9 %
Investment income 86,298 79,937 6,361 8.0 %
Other revenue 41,777 25,939 15,838 61.1 %
Total revenues 6,338,795 5,655,219 683,576 12.1 %
Operating expenses:
Benefits 4,912,251 4,541,775 370,476 8.2 %
Selling, general and administrative 1,000,376 817,038 183,338 22.4 %
Depreciation 40,297 34,607 5,690 16.4 %
Other intangible amortization 7,937 4,812 3,125 64.9 %
Total operating expenses 5,960,861 5,398,232 562,629 10.4 %
Income from operations 377,934 256,987 120,947 47.1 %
Interest expense 18,947 15,806 3,141 19.9 %
Income before income taxes 358,987 241,181 117,806 48.8 %
Provision for income taxes 115,768 86,160 29,608 34.4 %
Net income $243,219 $155,021 $88,198 56.9 %
Basic earnings per common share $1.45 $0.94 $0.51 54.3 %
Diluted earnings per common share $1.43 $0.92 $0.51 55.4 %
Shares used in computing basic earnings per common share 167,871 165,338
Shares used in computing diluted earnings per common share 170,677 168,748
 

S-3

 
 
 
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
 

Twelve Months Ended

December 31,

Dollar Percentage
2007 2006 Change Change
Revenues:
Premiums $24,434,347 $20,729,182 $3,705,165 17.9 %
Administrative services fees 391,515 341,211 50,304 14.7 %
Investment income 314,239 291,880 22,359 7.7 %
Other revenue 149,888 54,264 95,624 176.2 %
Total revenues 25,289,989 21,416,537 3,873,452 18.1 %
Operating expenses:
Benefits 20,270,531 17,421,204 2,849,327 16.4 %
Selling, general and administrative 3,476,468 3,021,509 454,959 15.1 %
Depreciation 162,397 128,634 33,763 26.2 %
Other intangible amortization 22,415 19,964 2,451 12.3 %
Total operating expenses 23,931,811 20,591,311 3,340,500 16.2 %
Income from operations 1,358,178 825,226 532,952 64.6 %
Interest expense 68,878 63,141 5,737 9.1 %
Income before income taxes 1,289,300 762,085 527,215 69.2 %
Provision for income taxes 455,616 274,662 180,954 65.9 %
Net income $833,684 $487,423 $346,261 71.0 %
Basic earnings per common share $5.00 $2.97 $2.03 68.4 %
Diluted earnings per common share $4.91 $2.90 $2.01 69.3 %
Shares used in computing basic earnings per common share 166,871 164,137
Shares used in computing diluted earnings per common share 169,820 167,996
 

S-4

 
 
 
Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
       
December 31, September 30, December 31, Sequential Change
2007 2007   2006 Dollar   Percent
Assets  
Current assets:
Cash and cash equivalents $2,040,453 $2,585,670 $1,740,304
Investment securities 3,635,317 3,475,300 3,192,273
Receivables, net:
Premiums 592,761 685,242 667,657
Administrative services fees 12,780 12,556 13,284
Securities lending collateral 1,337,049 830,589 627,990
Other 1,114,486   1,579,610     1,062,455  
Total current assets 8,732,846 9,168,967 7,303,963 ($436,121 ) -4.8 %
Property and equipment, net 637,241 570,798 545,004
Other assets:
Long-term investment securities 1,015,050 420,769 414,877
Goodwill 1,663,939 1,330,585 1,310,631
Other 829,998   548,530     524,011  
Total other assets 3,508,987   2,299,884     2,249,519  
Total assets $12,879,074   $12,039,649     $10,098,486   $839,425 7.0 %
 
Liabilities and Stockholders' Equity
Current liabilities:

Benefits payable(A)

$2,696,833 $2,790,463 $2,410,407
Trade accounts payable and accrued expenses 1,268,963 2,237,630 1,626,658
Book overdraft 269,226 253,356 293,605
Securities lending payable 1,337,049 830,589 627,990
Unearned revenues 219,780   177,080     155,298  
Total current liabilities 5,791,851 6,289,118 5,113,958 ($497,267 ) -7.9 %
Long-term debt 1,687,823 1,292,858 1,269,100

Future policy benefits payable(A)

980,686 325,396 320,573

Other long-term liabilities(A)

389,777   393,400     340,969  
Total liabilities 8,850,137   8,300,772     7,044,600   $549,365 6.6 %
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; 10,000,000 shares authorized, none issued - - -

Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 186,738,885 issued at December 31, 2007

31,123 30,995 30,491
Capital in excess of par value 1,497,998 1,462,953 1,357,077
Retained earnings 2,742,782 2,499,563 1,909,098
Accumulated other comprehensive income (loss) 14,021 (11,042 ) (13,205 )
Treasury stock, at cost, 16,720,528 shares at December 31, 2007 (256,987 ) (243,592 )   (229,575 )
Total stockholders' equity 4,028,937   3,738,877     3,053,886   $290,060 7.8 %
Total liabilities and stockholders' equity $12,879,074   $12,039,649     $10,098,486   $839,425 7.0 %
 
Debt-to-total capitalization ratio 29.5 % 25.7 % 29.4 %
 

S-5

 
 
 
Humana Inc.
Consolidated Statements of Cash Flows

Dollars in thousands

 

       

Three Months Ended

December 31,

  Dollar Percentage
2007 2006 Change Change
Cash flows from operating activities
Net income $243,219 $155,021
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 48,234 39,419
Stock-based compensation 11,264 8,157
Provision for deferred income taxes 443 47,793

Changes in operating assets and liabilities excluding the effects of acquisitions:

Receivables 106,524 64,063
Other assets 162,761 23,559
Benefits payable (134,659 ) (78,840 )
Other liabilities (666,022 ) 272,883
Unearned revenues 42,700 8,978
Other (4,296 ) (6,132 )
Net cash (used in) provided by operating activities (189,832 ) 534,901   ($724,733 ) -135.5 %
Cash flows from investing activities
Acquisitions, net of cash acquired (465,987 ) (1,700 )
Purchases of property and equipment (83,188 ) (56,549 )
Proceeds from sales of property and equipment 10,580 171
Purchases of investment securities (856,641 ) (763,830 )
Proceeds from maturities of investment securities 296,707 186,315
Proceeds from sales of investment securities 415,677 523,238
Change in securities lending collateral (506,460 ) 289,335  
Net cash (used in) provided by investing activities (1,189,312 ) 176,980   ($1,366,292 ) -772.0 %
Cash flows from financing activities
Receipts from CMS contract deposits 918,108 574,602
Withdrawals from CMS contract deposits (941,718 ) (753,855 )
Borrowings under credit agreement 500,000 300,000
Repayments under credit agreement (175,000 ) -
Debt issue costs - (184 )
Change in book overdraft 15,870 12,361
Change in securities lending payable 506,460 (289,335 )
Common stock repurchases (13,395 ) (10,641 )
Tax benefit from stock-based compensation 10,617 8,048
Proceeds from stock option exercises and other 12,985   6,193  
Net cash provided by (used in) financing activities 833,927   (152,811 ) $986,738 645.7 %
(Decrease)/increase in cash and cash equivalents (545,217 ) 559,070
Cash and cash equivalents at beginning of period 2,585,670   1,181,234  
Cash and cash equivalents at end of period $2,040,453   $1,740,304  
 

S-6

 
 
 
Humana Inc.
Consolidated Statements of Cash Flows

Dollars in thousands

 

       
Twelve Months Ended December 31,
  Dollar Percentage
2007 2006 Change   Change
Cash flows from operating activities
Net income $833,684 $487,423
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 184,812 148,598
Stock-based compensation 42,132 32,558
(Benefit) provision for deferred income taxes (32,736 ) 70,062

Changes in operating assets and liabilities excluding the effects of acquisitions:

Receivables 89,667 58,554
Other assets 105,689 (365,454 )
Benefits payable 245,397 540,067
Other liabilities (317,855 ) 752,032
Unearned revenues 64,482 29,870
Other 8,990   (66,998 )
Net cash provided by operating activities 1,224,262   1,686,712   ($462,450 ) -27.4 %
Cash flows from investing activities
Acquisitions, net of cash acquired (493,493 ) (28,062 )
Purchases of property and equipment (239,244 ) (193,151 )
Proceeds from sales of property and equipment 26,514 9,623
Purchases of investment securities (3,488,631 ) (4,269,221 )
Proceeds from maturities of investment securities 1,387,967 1,664,332
Proceeds from sales of investment securities 1,670,555 1,742,793
Change in securities lending collateral (709,059 ) (580,380 )
Net cash used in investing activities (1,845,391 ) (1,654,066 ) ($191,325 ) -11.6 %
Cash flows from financing activities
Receipts from CMS contract deposits 2,866,170 2,002,451
Withdrawals from CMS contract deposits (3,051,241 ) (2,124,717 )
Borrowings under credit agreement 1,685,000 550,000
Repayments under credit agreement (1,335,000 ) (300,000 )
Proceeds from issuance of senior notes - 498,545
Repayment of senior notes - (300,000 )
Debt issue costs - (5,980 )
Change in book overdraft (24,379 ) 13,600
Change in securities lending payable 709,059 580,380
Common stock repurchases (27,412 ) (26,211 )
Tax benefit from stock-based compensation 37,443 38,839
Proceeds from stock option exercises and other 61,638   48,735  
Net cash provided by financing activities 921,278   975,642   ($54,364 ) -5.6 %
Increase in cash and cash equivalents 300,149 1,008,288
Cash and cash equivalents at beginning of period 1,740,304   732,016  
Cash and cash equivalents at end of period $2,040,453   $1,740,304  
 

S-7

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

Three Months Ended

December 31,

Twelve Months Ended

December 31,

   
Percentage Percentage
2007 2006 Difference Change 2007 2006 Difference Change

Benefits ratio(B)

Government Segment 80.1 % 83.7 % -3.6 % 83.8 % 85.0 % -1.2 %
Commercial Segment 81.0 % 82.1 % -1.1 % 80.5 % 81.7 % -1.2 %
Consolidated 80.3 % 83.2 % -2.9 % 83.0 % 84.0 % -1.0 %

Selling, general, and administrative expense ratio(C)

Government Segment 13.7 % 12.3 % 1.4 % 11.2 % 11.8 % -0.6 %
Commercial Segment 21.8 % 20.4 % 1.4 % 21.5 % 20.0 % 1.5 %
Consolidated 16.0 % 14.7 % 1.3 % 13.9 % 14.3 % -0.4 %
Detail of Pretax Income
Government Segment $304,577 $187,288 $117,289 62.6 % $1,027,531 $513,845 $513,686 100.0 %
Commercial Segment 54,410   53,893   517   1.0 % 261,769   248,240   13,529   5.4 %
Consolidated $358,987   $241,181   $117,806   48.8 % $1,289,300   $762,085   $527,215   69.2 %
Detail of Pretax Margins
Government Segment 6.7 % 4.6 % 2.1 % 5.6 % 3.5 % 2.1 %
Commercial Segment 3.0 % 3.3 % -0.3 % 3.9 % 3.7 % 0.2 %
Consolidated 5.7 % 4.3 % 1.4 % 5.1 % 3.6 % 1.5 %
 

S-8

 
 
 
Humana Inc.
Membership Detail

In thousands

 

               
Ending Ending Year-over-year Change Ending Sequential Change

December 31,

2007

Average - 4Q07  

December 31,

2006

Amount   Percent

September 30,

2007

Amount   Percent
Medical Membership:    
Government Segment:
Medicare Advantage - HMO 453.1 452.6 457.9 (4.8 ) -1.0 % 451.7 1.4 0.3 %
Medicare Advantage - PPO 74.1 73.2 71.7 2.4 3.3 % 71.1 3.0 4.2 %
Medicare Advantage - PFFS 615.8 615.1   473.0 142.8   30.2 % 615.2 0.6   0.1 %
Total Medicare Advantage 1,143.0 1,140.9   1,002.6 140.4   14.0 % 1,138.0 5.0   0.4 %
Medicare - PDP - Standard 2,131.9 2,141.9 2,097.2 34.7 1.7 % 2,148.9 (17.0 ) -0.8 %
Medicare - PDP - Enhanced 1,091.5 1,089.8 1,025.4 66.1 6.4 % 1,085.1 6.4 0.6 %
Medicare - PDP - Complete 218.6 221.0   414.0 (195.4 ) -47.2 % 225.7 (7.1 ) -3.1 %
Total Medicare stand-alone PDPs 3,442.0 3,452.7   3,536.6 (94.6 ) -2.7 % 3,459.7 (17.7 ) -0.5 %
Total Medicare 4,585.0 4,593.6   4,539.2 45.8   1.0 % 4,597.7 (12.7 ) -0.3 %

Military services insured(B)

1,719.1 1,722.6 1,716.4 2.7 0.2 % 1,720.4 (1.3 ) -0.1 %

Military services ASO(B)

1,146.8 1,145.3   1,163.6 (16.8 ) -1.4 % 1,137.0 9.8   0.9 %

Total military services(B)

2,865.9 2,867.9   2,880.0 (14.1 ) -0.5 % 2,857.4 8.5   0.3 %
Medicaid insured 384.4 384.3 390.7 (6.3 ) -1.6 % 383.8 0.6 0.2 %
Medicaid ASO 180.6 183.6   178.4 2.2   1.2 % 182.8 (2.2 ) -1.2 %
Total Medicaid 565.0 567.9   569.1 (4.1 ) -0.7 % 566.6 (1.6 ) -0.3 %
Total Government Segment 8,015.9 8,029.4   7,988.3 27.6   0.3 % 8,021.7 (5.8 ) -0.1 %
Commercial Segment:
Fully-insured medical:
Group 1,547.0 1,541.7 1,563.9 (16.9 ) -1.1 % 1,530.2 16.8 1.1 %
Individual 246.9 238.7 182.6 64.3 35.2 % 223.7 23.2 10.4 %
Medicare supplement 14.7 13.0   7.7 7.0   90.9 % 11.3 3.4   30.1 %
Total fully-insured medical 1,808.6 1,793.4 1,754.2 54.4 3.1 % 1,765.2 43.4 2.5 %
ASO 1,643.0 1,574.0   1,529.6 113.4   7.4 % 1,533.9 109.1   7.1 %
Total Commercial Segment 3,451.6 3,367.4   3,283.8 167.8   5.1 % 3,299.1 152.5   4.6 %
Total medical membership 11,467.5 11,396.8   11,272.1 195.4   1.7 % 11,320.8 146.7   1.3 %
Specialty Membership
Dental - fully-insured 2,649.3 2,642.6 959.8 1,689.5 176.0 % 974.7 1,674.6 171.8 %
Dental - ASO 990.5 990.1 492.2 498.3   101.2 % 499.3 491.2   98.4 %
Total dental 3,639.8 3,632.7 1,452.0 2,187.8 150.7 % 1,474.0 2,165.8 146.9 %
Vision 2,272.8 2,264.7 - 2,272.8 100.0 % - 2,272.8 100.0 %

Other supplemental benefits(D)

871.2 597.8 450.8 420.4   93.3 % 456.1 415.1   91.0 %
Total specialty membership 6,783.8 6,495.2 1,902.8 4,881.0   256.5 % 1,930.1 4,853.7   251.5 %

 

 

The Commercial Segment provides a full range of insured specialty products including dental, vision and other supplemental products. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products. Approximately 500,000 members in stand-alone stop loss, long-term care, and network access products previously reported by KMG America (acquired in 4Q07) have been excluded from Humanas membership statistics since the related business is not material to Humanas operations.

 

S-9

 
 
 
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
           
  Per Member per Month (E)

Three Months Ended

December 31,

Three Months Ended

December 31,

Dollar Percentage  
2007 2006 Change Change 2007 2006
Premium revenues
Government Segment:
Medicare Advantage $2,800,681 $2,302,609 $498,072 21.6 % $818 $766
Medicare stand-alone PDPs 820,320 881,994 (61,674 ) -7.0 % $79 $83
Total Medicare 3,621,001 3,184,603 436,398 13.7 %

Military services insured(B)(F)

673,362 645,892 27,470 4.3 % $130 $125
Medicaid insured 158,174 133,877 24,297   18.1 % $137 $112
Total Government Segment premiums 4,452,537 3,964,372 488,165   12.3 %
Commercial Segment:
Fully-insured medical 1,451,229 1,387,855 63,374 4.6 % $270 $264
Specialty 209,927 104,626 105,301   100.6 % $12 $21
Total Commercial Segment premiums 1,661,156 1,492,481 168,675   11.3 %
Total premium revenues $6,113,693 $5,456,853 $656,840   12.0 %
Administrative services fees

Military services ASO(B)(F)

$17,599 $14,548 $3,051 21.0 % $5 $4
Medicaid ASO 2,159 1,423 736 51.7 % $4 $4
Commercial Segment 77,269 76,519 750   1.0 % $10 $13
Total administrative services fees $97,027 $92,490 $4,537   4.9 %
 
 

S-10

 
 
 
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
           
  Per Member per Month (E)

Twelve Months Ended

December 31,

Twelve Months Ended

December 31,

Dollar Percentage  
2007 2006 Change   Change 2007   2006
Premium revenues
Government Segment:
Medicare Advantage $11,173,417 $8,499,064 $2,674,353 31.5 % $826 $794

Medicare stand-alone PDPs

3,668,425 3,050,304 618,121   20.3 % $88 $88
Total Medicare 14,841,842 11,549,368 3,292,474 28.5 %

Military services insured(B)(F)

2,839,790 2,543,930 295,860 11.6 % $138 $123
Medicaid insured 555,594 520,520 35,074   6.7 % $120 $104
Total Government Segment premiums 18,237,226 14,613,818 3,623,408   24.8 %
Commercial Segment:
Fully-insured medical 5,663,000 5,704,378 (41,378 ) -0.7 % $269 $260
Specialty 534,121 410,986 123,135   30.0 % $16 $21
Total Commercial Segment premiums 6,197,121 6,115,364 81,757   1.3 %
Total premium revenues $24,434,347 $20,729,182 $3,705,165   17.9 %
Administrative services fees

Military services ASO(B)(F)

$65,103 $48,019 $17,084 35.6 % $5 $3
Medicaid ASO 8,556 1,423 7,133 501.3 % $4 $4
Commercial Segment 317,856 291,769 26,087   8.9 % $12 $12
Total administrative services fees $391,515 $341,211 $50,304   14.7 %
 
 

S-11

 
 
 
Humana Inc.
Percentage of Ending Membership under Capitation Arrangements
 
         
Government Segment Commercial Segment
December 31, 2007

Medicare

Advantage

 

Medicare

stand-alone

PDPs

 

Military

Services(B)

  Medicaid  

Total

Govt.

Segment

Fully-insured   ASO  

Total Comm.

Segment

Total

Medical

Membership

Capitated HMO hospital system based(G)

2.4 % - - - 0.3 % 1.4 % - 0.7 % 0.5 %

Capitated HMO physician group based(G)

2.0 % - - 26.6 % 2.2 % 1.4 % - 0.8 % 1.8 %

Risk-sharing(H)

24.1 % - - 40.9 % 6.3 % 1.4 % - 0.8 % 4.7 %
All other membership 71.5 % 100.0 % 100.0 % 32.5 % 91.2 % 95.8 % 100.0 % 97.7 % 93.0 %
Total medical membership 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
December 31, 2006

Capitated HMO hospital system based(G)

3.0 % - - - 0.4 % 1.9 % - 1.0 % 0.6 %

Capitated HMO physician group based(G)

2.4 % - - 26.1 % 2.2 % 1.7 % - 0.9 % 1.8 %

Risk-sharing(H)

27.9 % - - 42.1 % 6.4 % 1.5 % - 0.8 % 4.8 %
All other membership 66.7 % 100.0 % 100.0 % 31.8 % 91.0 % 94.9 % 100.0 % 97.3 % 92.8 %
Total medical membership 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
 

S-12

 
 
 

Humana Inc.
Detail of Benefits Payable Balance and Year-to-Date Changes

Dollars in thousands

     
December 31, September 30, December 31,
2007 2007 2006

Detail of benefits payable(A)

IBNR and other benefits payable(I)

$1,918,460 $1,926,876 $1,608,196

Unprocessed claim inventories(J)

213,400 224,000 218,400

Processed claim inventories(K)

91,938 108,593 98,033

Payable to pharmacy benefit administrator(L)

131,663   117,880   55,104  

Benefits payable, excluding military services(B)

2,355,461 2,377,349 1,979,733

Military services IBNR(B)(M)

265,178 323,667 318,583

Other military services benefits payable(B)(N)

76,194   89,447   112,091  

Military services benefits payable(B)

341,372   413,114   430,674  
Total Benefits Payable $2,696,833   $2,790,463   $2,410,407  
Year Ended Nine Months Ended Year Ended

December 31,

2007

September 30,

2007

December 31,

2006

Year-to-date changes in benefits payable, excluding military services(B)(O)

Balances at January 1 $1,979,733 $1,979,733 $1,334,716
 
Acquisitions 41,030 - 21,198
 
Incurred related to:
Current year 18,015,246 13,655,982 15,374,855

Prior years(P)

(242,922 ) (215,747 ) (178,998 )
Total incurred 17,772,324   13,440,235   15,195,857  
Paid related to:
Current year (16,012,828 ) (11,636,269 ) (13,532,139 )
Prior years (1,424,798 ) (1,406,350 ) (1,039,899 )
Total paid (17,437,626 ) (13,042,619 ) (14,572,038 )
Balances at end of period $2,355,461   $2,377,349   $1,979,733  
Year Ended Nine Months Ended Year Ended

December 31,

2007

September 30,

2007

December 31,

2006

Summary of Consolidated Benefits Expense:
Total benefits expense incurred, per above $17,772,324 $13,440,235 $15,195,857

Military services benefits(B)

2,481,815 1,905,033 2,208,033

Future policy reserve expense(Q)

16,392   13,012   17,314  
Consolidated Benefits Expense 20,270,531   15,358,280   17,421,204  
 
 

S-13

 
 
 

Humana Inc.

Benefits Reserves Statistics(R)

       

Receipt Cycle Time(S)

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 15.9 16.0 (0.1 ) -0.6 %
4th Quarter Average 15.1 15.8 (0.7 ) -4.4 %
Full Year Average 15.6 15.9   (0.3 ) -1.9 %
Unprocessed Claims Inventories
Date  

Estimated

Valuation

(000s)

 

Claim Item

Counts

 

Number of

Days on Hand

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
9/30/2007   $224,000   819,100   6.1  
12/31/2007   $213,400   683,500   5.0  
 

S-14

 
 
 
Humana Inc.

Benefits Reserves Statistics (Continued)(R)

 
 

Days in Claims Payable(A)(T)

Quarter Ended

 

Days in

Claim

Payable

(DCP)

 

Annual

Change

 

Percentage

Change

 

DCP

Excluding

Capitation

 

Annual

Change

 

Percentage

Change

12/31/2005   50.3   10.8   27.3 %   56.6   12.6   28.6 %
3/31/2006 53.5 11.4 27.2 % 60.5 12.5 26.1 %
6/30/2006 55.8 9.7 21.0 % 62.0 9.6 18.3 %
9/30/2006 57.5 7.2 14.2 % 64.3 5.5 9.4 %
12/31/2006 56.3 6.0 11.9 % 64.0 7.4 13.1 %
3/31/2007 59.3 5.8 10.8 % 66.0 5.5 9.0 %
6/30/2007 60.0 4.2 7.5 % 68.5 6.5 10.5 %
9/30/2007   61.8   4.3   7.5 %   70.2     5.9   9.2 %
12/31/2007   60.2   3.9   6.9 %   68.3     4.3   6.7 %

Year-to-Date Change in Days in Claims Payable(A)(U)

2007 2006
DCP - 4th quarter of prior year 56.3 50.3
Components of year-to-date change in DCP:
Change in claims receipt cycle time (1.0 ) (1.5 )
Change in unprocessed claims inventories (0.1 ) 2.0
Change in processed claims inventories (0.1 ) 0.4
Change in pharmacy payment cutoff 0.3 0.0
Change in provider payables under risk arrangements 3.4 3.0
All other 1.4   2.1  

(V)

DCP - current quarter 60.2   56.3  
 
 

S-15

 
 
 
Humana Inc.

GAAP to non-GAAP Reconciliation

In thousands, except per common share results
       
2007 2008

Pretax Income

  EPS

Forecasted EPS and

Growth Rate

Consolidated  
GAAP $1,289,300 $4.91 $5.35 to $5.55 9%-13%
 
Non GAAP adjustment for favorable prior year claims development (68,878) (0.25) -
 

Non-GAAP(W)

$1,220,422 $4.66 $5.35 to $5.55 15%-19%
 
 
2007
Government Segment Pretax Income
GAAP $1,027,531
 
Non GAAP adjustment for favorable prior year claims development (68,878)
 

Non-GAAP(W)

$958,653
 

S-16

 
 
 
Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information
4Q07 Earnings Release
 

Footnotes

(A)

Prior period amount associated with future policy benefits payable have been reclassified to conform with the current period classification. Future policy benefits payable includes long-term individual product reserves previously classified with benefits payable and reinsurance liabilities previously classified with other long-term liabilities. See also Note Q.

(B)

The company has renamed medical expenses as benefit expenses and the related medical expense ratio as benefits ratio reflecting the expansion of its specialty offerings in 4Q07. The company has also renamed TRICARE as military services reflecting the addition of contracts with the Department of Veteran Affairs in 4Q07.

(C)

The selling, general and administrative (SG&A) expense ratio is defined as SG&A expenses as a percent of premiums, administrative services fees and other revenue.

(D)

Other supplemental benefits include life, disability, and fixed benefit health plans including cancer and critical illness policies.

(E)

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).

(F)

Military services revenues are not contracted on a per-member basis.

(G)

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 benefits 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.

(H)

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.

(I)

IBNR represents an estimate of benefit expenses payable for claims incurred but not reported (IBNR) at the balance sheet date. The level of IBNR is primarily impacted by membership levels, benefit 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 benefits payable includes amounts payable to providers under capitation arrangements.

(J)

Unprocessed claim inventories represent the estimated valuation of claims received but not yet fully processed.

(K)

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.

(L)

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.

(M)

Military services IBNR primarily fluctuates due to benefit expense inflation and changes in the utilization of benefits. Amount includes unprocessed claim inventories as an independent third party administrator processes all military services benefit claims on the companys behalf.

(N)

Other military benefits 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).

(O)

The table excludes activity associated with military services benefits payable, because the federal government bears a substantial portion of the risk associated with financing the cost of health benefits. More specifically, the risk-sharing provisions of the military services contracts with the federal government and with subcontractors effectively limit profits and losses when actual claim experience varies from the targeted claim amount negotiated annually. As a result of these contract provisions, the impact of changes in estimates for prior year military services benefits payable are substantially offset by the associated changes in estimates of revenue from health care services reimbursements. As such, any impact on our results of operations is reduced substantially, whether positive or negative.

(P)

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.

(Q)

Future policy reserve expense has a related liability classified as a long-term liability on the balance sheet.

(R)

Benefits reserves statistics represents fully insured medical claims data and excludes military services claims data and specialty benefits.

(S)

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 represent 70% to 75% of the company's fully-insured claims volume. Pharmacy and specialty claims, including dental, vision and other supplemental benefits, are excluded from this measurement.

(T)

A common metric for monitoring benefits payable levels relative to the benefit expense is days in claims payable, or DCP, which represents the benefits payable at the end of the period divided by average benefit expenses per day in the quarterly period. Since the company has some providers under capitation payment arrangements (which do not require a benefits payable IBNR reserve), the company has also summarized this metric excluding capitation expense. In addition, this calculation excludes the impact of the company's military services and stand-alone PDP business.
 

S-17

 
 
 
Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information (Continued)
4Q07 Earnings Release

Footnotes (Continued)

(U)

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. This analysis excludes the impact of military services and Medicare stand-alone PDPs upon DCP.

(V)

Increase primarily relates to growth in the Medicare Advantage private fee-for-service product membership and related reserves during the year.

(W)

These non-GAAP numbers exclude favorable development in the Government Segment related to prior year matters of approximately $68.9 million, or $0.25 per diluted share, that are not expected to recur in future periods. The favorable claims development resulted from 1) the resolution of first year (2006) Part D implementation matters including enrollment discrepancies and the related impact on claims estimates ($54.0 million, or $0.20 per share) and 2) the adjustment of military services reserves as a result of the settlement of the claims payment accuracy provision for prior option periods under the South contract ($14.9 million, or $0.05 per share). The company believes that these non-GAAP measures, when presented in conjunction with the comparable GAAP measures, are useful to both management and its investors in analyzing the companys 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. These 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.
 

S-18

Multimedia Files:

Humana Reports Fourth Quarter and Full Year 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