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Humana Reports Second Quarter Financial Results; Increases Projected 2008 EPS; Provides Updates on Acquisition and Share Repurchase Activity

  • $1.24 EPS for second quarter ahead of managements expectations
  • Full year 2008 EPS now projected in the range of $4.30 to $4.40
  • Signed definitive agreement to acquire Cariten Healthcare
  • Share repurchase authorization increased to $250 million

Category:

Monday, August 4, 2008 6:00 am EDT

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 June 30, 2008 (2Q08) including diluted earnings per common share (EPS) of $1.24 compared to $1.28 per share for the quarter ended June 30, 2007 (2Q07). The 2Q08 results were ahead of managements previous guidance for EPS of $1.15 to $1.20, primarily due to better-than-anticipated financial results for the companys stand-alone Medicare Prescription Drug Plan (PDP) offerings.

For the six months ended June 30, 2008 (1H08) the company reported $1.71 in EPS compared to $1.70 for the six months ended June 30, 2007 (1H07). The companys Commercial Segment operating performance improved year-over-year while improved operating performance in the Government Segments Medicare Advantage business was more than offset by the previously announced PDP operating shortfall.

We had a good quarter across all our lines of business and with our PDP issue playing out better than expected, weve raised EPS guidance for the year and are well positioned for a strong 2009, said Michael B. McCallister, Humanas president and chief executive officer of Humana.

In light of the better-than-anticipated second quarter results, the company now anticipates achieving EPS for the year ending December 31, 2008 (FY08) in the range of $4.30 to $4.40, up from its previous guidance of $4.10 to $4.35.

Revenues 2Q08 consolidated revenues rose 14 percent to $7.35 billion from $6.43 billion in 2Q07, with total premium and administrative services fees also up 14 percent compared to the prior years quarter. This year-over-year increase was primarily driven by higher average membership in 2Q08 versus 2Q07 for the companys Medicare Advantage, Commercial medical and specialty products as well as higher premium yields for the companys Medicare Advantage products.

1H08 consolidated revenues rose 13 percent to $14.31 billion from $12.63 billion in 1H07 with total premium and administrative services fees up 13 percent compared to the prior years period, also driven primarily by similar increases in average enrollment and premium yields as those affecting the year-over-year comparisons for 2Q08.

Benefit expenses The 2Q08 consolidated benefits ratio (benefit expenses as a percent of premium revenues) was higher than that for the prior years quarter, as expected. The 2Q08 consolidated benefits ratio of 85.0 percent compares to 83.4 percent in 2Q07. This year-over-year increase was primarily driven by a 200 basis point increase in the Government Segment benefits ratio associated with higher PDP claim expenses.

The consolidated benefits ratio for 1H08 of 85.8 percent was 70 basis points higher than the 1H07 consolidated benefits ratio of 85.1 percent with a 140 basis points increase in this year-to-date metric for the Government Segment outpacing the 110 basis point improvement year to date in the benefits ratio for the Commercial Segment.

Selling, general, & administrative (SG&A) expenses The 2Q08 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) declined 40 basis points to 12.6 percent for 2Q08 from 13.0 percent in 2Q07. The year-over-year improvement reflects the combined result of declines in the SG&A expense ratio for both of the companys business segments.

The SG&A expense ratio for 1H08 of 13.2 percent was unchanged from that for 1H07 of 13.2 percent as a 70 basis point increase in this metric for the Commercial Segment was essentially offset by a 30 basis point improvement in the SG&A expense ratio for the Government Segment.

Government Segment Results

Pretax results:

  • Primarily as a result of less favorable 2008 PDP operating results, 2Q08 Government Segment pretax earnings were lower than 2Q07, with pretax income of $249.4 million in 2Q08 compared to $288.8 million in 2Q07. The year-over-year decline in operating performance was partially offset by improved operating performance in the companys Medicare Advantage business.
  • For 1H08, pretax earnings for the Government Segment of $246.2 million declined by 20 percent versus 1H07 pretax earnings for the segment of $306.7 million, also primarily reflecting the less favorable performance year over year in the companys stand-alone PDP business, partially offset by improved Medicare Advantage performance.

Enrollment:

  • Medicare Advantage membership grew to 1,345,000 at June 30, 2008, an increase of 211,300 members, or 19 percent from June 30, 2007, up 77,300, or 6 percent versus March 31, 2008, and 202,000 members, or 18 percent year to date. Net Medicare Advantage membership gains for 2Q08 include 40,700 members from acquisitions completed during the quarter.
  • Membership in the companys stand-alone PDPs totaled 3,105,200 at June 30, 2008 compared to 3,440,100 at June 30, 2007 and 3,150,200 at March 31, 2008.
  • Military services membership at June 30, 2008 of 2,943,800 was up approximately 3 percent from June 30, 2007 and essentially unchanged from March 31, 2008.

Premiums and administrative services fees:

  • Medicare Advantage premiums of $3.49 billion in 2Q08 increased 25 percent compared to $2.80 billion in 2Q07, primarily the combined result of a 17 percent increase in average membership and higher per member premium revenues.
  • Medicare stand-alone PDP premiums of $905.1 million in 2Q08 decreased 14 percent compared to $1.05 billion in 2Q07, primarily the result of a 10 percent decline in average membership versus that for 2Q07.
  • Military services premiums and administrative services fees during 2Q08 increased $83.8 million to $824.4 million compared to $740.6 million in 2Q07.

Benefit Expenses:

  • The Government Segment benefits ratio increased 200 basis points to 86.3 percent in 2Q08 compared to 84.3 percent in the prior years quarter. As previously noted, improved operating performance year over year in the companys Medicare Advantage business was more than offset by an increase in the stand-alone PDP benefits ratio.

SG&A Expenses:

  • The Government Segments SG&A expense ratio for 2Q08 of 9.5 percent was 50 basis points lower than that for 2Q07 of 10.0 percent and improved 120 basis points from the first quarter of 2008. The improvements were primarily driven by leverage associated with higher average Medicare Advantage membership and increased Medicare premium yields. The sequential improvement also reflects lower marketing and other administrative expenses associated with the Medicare selling season for 2008 enrollment which concluded during the first quarter of 2008.

Commercial Segment Results

Pretax results:

  • Commercial Segment pretax earnings increased 49 percent year over year, to $75.6 million in 2Q08 compared to $50.8 million in 2Q07. This favorable performance was produced by continued strength in the companys areas of strategic Commercial focus individual, small-group, ASO and consumer plans as well as overall underwriting discipline and growth from specialty-product acquisitions in the fourth quarter of 2007.
  • The segments 40 percent increase in pretax earnings for 1H08 ($202.7 million versus $145.2 million in 1H07) was also primarily attributable to the factors outlined above.

Enrollment:

  • Commercial Segment medical membership grew 279,800 members to 3,558,500 at June 30, 2008, an increase of 9 percent from the June 30, 2007 medical membership for the segment of 3,278,700 and up 3 percent year to date. On an organic basis, Commercial Segment medical membership grew 120,800 members, or 4 percent year-over-year and 43,800 members, or 1 percent year to date.
  • Organic medical membership growth in strategic commercial lines of business for 2Q08 compared to 2Q07 were as follows: HumanaOne membership increased 45 percent, Smart plans and other consumer offerings membership grew 23 percent, Small Group business membership increased 13 percent and ASO membership was essentially unchanged.
  • Membership in Commercial Segment specialty products(a) at June 30, 2008 rose to 6,744,400 compared to 1,930,000 at June 30, 2007, primarily driven by the addition of membership from two specialty-product companies acquired during the fourth quarter of 2007. Specialty membership was essentially unchanged from December 31, 2007.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment increased 17 percent to $1.85 billion in 2Q08 compared to $1.59 billion in the prior years quarter, primarily due to revenues associated with acquired companies and growth in strategic lines of business.
  • Commercial Segment medical premiums for fully-insured groups increased approximately 2 percent on a per-member basis during 2Q08 compared to 2Q07 reflecting a shift in the mix of fully-insured group business from the prior years quarter to include less groups with higher-than-average premiums.

Benefit Expenses:

  • The Commercial Segment benefits ratio for 1H08 improved 110 basis points year over year, primarily reflecting the impact of specialty product acquisitions, together with continued underwriting discipline. In 2Q08, the benefits ratio of 81.0 percent was 30 basis points higher than the 2Q07 benefits ratio of 80.7 percent, primarily due to the 2Q07 benefits ratio including a modest impact of favorable prior period development related to 1Q07 medical claims estimates. The first two quarters of 2008 more precisely reflect the sequential claims patterns for the companys growing book of high-deductible health plans.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 21.5 percent for 2Q08 compares to 21.8 percent in 2Q07, primarily driven by leverage associated with an 8 percent increase in average Commercial medical membership as well as higher specialty product membership acquired via transactions that closed in the fourth quarter of 2007.

Balance Sheet

  • Cash and cash equivalents of $1.17 billion at June 30, 2008 declined $513.6 million from March 31, 2008 primarily due to the completion of two acquisitions, ordinary course cash transfers into investment securities, and share repurchases during 2Q08.
  • Parent company cash and investments decreased to $171.5 million at June 30, 2008 from $535.7 million at December 31, 2007. In addition to the completion of two acquisitions and share repurchases during 1H08, the parent company received dividends from operating subsidiaries of $296.0 million versus $377.0 million in 1H07, primarily attributable to lower-than-anticipated dividends from entities operating stand-alone PDPs.
  • Net premiums receivable at June 30, 2008 of $987.1 million were up $239.3 million from March 31, 2008 primarily due to an increase in certain Medicare premiums receivable. The company collected the related $257.4 million balance outstanding on that receivable at June 30, 2008 in July 2008.
  • Days in claims payable of 57.2 at June 30, 2008 reflect an increase of 0.3 days from 56.9 at March 31, 2008.
  • Debt-to-total capitalization at June 30, 2008 was 28.0 percent, down 30 basis points from 28.3 percent at March 31, 2008. During 2Q08 the company completed an aggregate offering of $750 million of senior notes, the net proceeds of which were used to repay all outstanding borrowings against the companys $1.00 billion bank credit agreement.

Cash Flows from Operations

Cash flows provided by operations for 2Q08 of $104.0 million compared to cash flows provided by operations of $477.3 million in 2Q07 primarily reflecting changes in working capital accounts. Net premiums receivable at June 30, 2008 of $987.1 million were up $239.3 million from March 31, 2008 primarily due to an increase in certain Medicare premiums receivable. The company collected the related $257.4 million balance outstanding on that receivable at June 30, 2008 in July 2008.

The company also evaluates operating cash flows on a non-GAAP basis(b).

Cash flows from operations

($ in millions)

    2Q08     2Q07     1H08     1H07

GAAP cash flows provided by operations

$   104.0

$

 

477.3

  $   108.5 $   2,051.7  

Timing of premium payment from CMS(b)

        (45.6 )         (1,175.3 )
Non-GAAP cash flows provided by operations(b) $   104.0 $   431.7   $   108.5 $   876.4  

Non-GAAP cash flows provided by operations declined to $104.0 million(b) in 2Q08 from $431.7 million(b) in 2Q07 also driven primarily by the changes in working capital accounts described above.

Acquisition Activity

The company also announced today that it had signed a definitive agreement to purchase PHP Companies, Inc. (d/b/a Cariten Healthcare) (Cariten), from Knoxville, Tennessee-based Covenant Health for cash consideration of approximately $245 million. The transaction is anticipated to close during the fourth quarter of 2008 and is not anticipated to materially affect Humanas earnings guidance for the FY08.

During 2Q08 the company also announced its intent to acquire Metcare Health Plans, Inc. (Metcare) in Florida and completed its acquisitions of the SecureHorizons Medicare Advantage HMO business in Las Vegas, Nevada and OSF Health Plans in Illinois.

Share Repurchase Program

In February 2008, the companys Board of Directors authorized the use of up to $150 million for share repurchases. As of August 1, 2008, the company had repurchased approximately 2.1 million of its outstanding shares at an average price per share of $44.19 and had approximately $57.2 million remaining on the February 2008 authorization.

The company also announced today that its Board of Directors had increased the companys share repurchase authorization for use of up to $250 million for this program, excluding the $92.8 million used year to date in connection with the February 2008 authorization. These discretionary repurchases may be made from time to time in the open market or in privately negotiated transactions. The program has an end date of December 31, 2009.

Footnotes

(a)

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

(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.

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 company documents, as filed with the Securities and Exchange Commission:

  • Form 10-K for the year ended December 31, 2007;
  • Form 10-Q for the quarter ended March 31, 2008;
  • Form 8-Ks filed during 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;
  • Replays of most recent earnings release conference calls;
  • Calendar of events (including 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 August 4, 2008

(in accordance with Generally Accepted Accounting Principles)

 

For the year ending December 31, 2008

(Excludes pending acquisitions of Metcare and Cariten)

 

Comments

Diluted earnings per common share

Full year 2008: $4.30 to $4.40

 

Excludes impact of future share repurchases

Third quarter 2008: $1.45 to $1.50

     
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: $3.3 billion to $3.5 billion;
Commercial Segment: Approximately $7.5 billion
 
Consolidated investment income: $345 million to $355 million
 
Consolidated other revenue: $190 million to $200 million
     
Ending medical membership (fully-insured and ASO combined)

Medicare Advantage: Up approximately 240,000 from prior year

 

Includes 40,700 Medicare Advantage members acquired via acquisitions completed year to date

Medicare stand-alone PDPs: Down approximately 370,000 from prior year

 

Military services: No material change from prior year

 

Medicaid: Down approximately 180,000 from prior year

 

Commercial: Up approximately 150,000 from prior year

Includes 63,000 Commercial members acquired via acquisitions completed year to date

     

Benefit expenses

Medicare products: benefits ratio in the range of 85.0% to 85.5%

Medicare Advantage and stand-alone PDP combined

Commercial fully-insured groups:

Same-store net benefit expense trends and premium yields of 6% to 7% (2% to 3% 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 services fees, and other revenue
     
Depreciation & amortization $215 million to $220 million
     
Interest expense $70 million to $75 million
     
Government Segment operating margins

Medicare products: Approximately 3.5%

 

Medicare Advantage and stand-alone PDP combined

Military services: 2.5% to 3.0%

     
Commercial Segment pretax earnings $280 million to $300 million
     
Cash flows from operations $1.0 billion to $1.2 billion
     
Capital expenditures Approximately $275 million
     
Effective tax rate 35.0% to 35.5%
     
Shares used in computing full-year EPS Approximately 169 million Excludes impact of future share repurchases

 

Humana Inc.

Statistical Schedules

And

Supplementary Information

2Q08 Earnings Release

 

S-1

 

Humana Inc.

Statistical Schedules and Supplementary Information

2Q08 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 Footnotes
 

S-2

 

Humana Inc.

Consolidated Statements of Income

In thousands, except per common share results
 
 

Three Months Ended

June 30,

   
  Dollar Percentage
2008 2007 Change   Change
Revenues:
Premiums $ 7,106,752 $ 6,223,250 $ 883,502 14.2 %
Administrative services fees 112,964 97,093 15,871 16.3 %
Investment income 80,821 72,052 8,769 12.2 %
Other revenue   50,325   34,402   15,923   46.3 %
Total revenues   7,350,862   6,426,797   924,065   14.4 %
Operating expenses:
Benefits 6,038,482 5,190,418 848,064 16.3 %
Selling, general and administrative 916,041 826,459 89,582 10.8 %
Depreciation 44,141 48,820 (4,679 ) -9.6 %
Other intangible amortization   9,317   5,444   3,873   71.1 %
Total operating expenses   7,007,981   6,071,141   936,840   15.4 %
Income from operations 342,881 355,656 (12,775 ) -3.6 %
Interest expense   17,867   16,066   1,801   11.2 %
Income before income taxes 325,014 339,590 (14,576 ) -4.3 %
Provision for income taxes   115,118   122,744   (7,626 ) -6.2 %
Net income $ 209,896 $ 216,846   ($6,950 ) -3.2 %
 
Basic earnings per common share $ 1.26 $ 1.30 ($0.04 ) -3.1 %
Diluted earnings per common share $ 1.24 $ 1.28 ($0.04 ) -3.1 %
 
Shares used in computing basic earnings per common share 167,146 166,614
Shares used in computing diluted earnings per common share 168,997 169,596
 

S-3

 

Humana Inc.

Consolidated Statements of Income

In thousands, except per common share results
 
 

Six Months Ended

June 30,

   
  Dollar Percentage
2008 2007 Change   Change
Revenues:
Premiums $ 13,819,353 $ 12,227,813 $ 1,591,540 13.0 %
Administrative services fees 224,943 192,957 31,986 16.6 %
Investment income 170,780 145,579 25,201 17.3 %
Other revenue   95,490   65,261   30,229   46.3 %
Total revenues   14,310,566   12,631,610   1,678,956   13.3 %
Operating expenses:
Benefits 11,856,516 10,404,418 1,452,098 14.0 %
Selling, general and administrative 1,866,486 1,647,069 219,417 13.3 %
Depreciation 87,098 84,329 2,769 3.3 %
Other intangible amortization   17,318   9,999   7,319   73.2 %
Total operating expenses   13,827,418   12,145,815   1,681,603   13.8 %
Income from operations 483,148 485,795 (2,647 ) -0.5 %
Interest expense   34,206   33,984   222   0.7 %
Income before income taxes 448,942 451,811 (2,869 ) -0.6 %
Provision for income taxes   158,876   163,724   (4,848 ) -3.0 %
Net income $ 290,066 $ 288,087 $ 1,979   0.7 %
 
Basic earnings per common share $ 1.73 $ 1.73 $ 0.00 0.0 %
Diluted earnings per common share $ 1.71 $ 1.70 $ 0.01 0.6 %
 
Shares used in computing basic earnings per common share 167,668 166,213
Shares used in computing diluted earnings per common share 169,799 169,276
 

S-4

 

Humana Inc.

Consolidated Balance Sheets

Dollars in thousands, except share amounts
 
  June 30,   March 31,   December 31,   Sequential Change
2008 2008   2007 Dollar   Percent
Assets  
Current assets:
Cash and cash equivalents $ 1,174,642 $ 1,688,287 $ 2,040,453
Investment securities 4,195,562 3,954,830 3,635,317
Receivables, net:
Premiums 987,074 747,806 592,761
Administrative services fees 12,644 11,517 12,780
Securities lending collateral 800,326 973,925 1,337,049
Other   1,290,295     1,233,910       1,114,486  
Total current assets 8,460,543 8,610,275 8,732,846 ($149,732 ) -1.7 %
Property and equipment, net 655,431 636,935 637,241
Other assets:
Long-term investment securities 989,253 963,106 1,015,050
Goodwill 1,817,460 1,683,604 1,663,939
Other   1,017,296     868,108       829,998  
Total other assets   3,824,009     3,514,818       3,508,987  
Total assets $ 12,939,983   $ 12,762,028     $ 12,879,074   $ 177,955 1.4 %
 
Liabilities and Stockholders' Equity
Current liabilities:
Benefits payable $ 3,105,691 $ 2,885,371 $ 2,696,833
Trade accounts payable and accrued expenses 1,350,924 1,356,405 1,268,963
Book overdraft 297,965 291,246 269,226
Securities lending payable 800,326 973,925 1,337,049
Unearned revenues   210,770     227,492       219,780  
Total current liabilities 5,765,676 5,734,439 5,791,851 $ 31,237 0.5 %
Long-term debt 1,635,098 1,601,335 1,687,823
Future policy benefits payable 980,257 968,719 980,686
Other long-term liabilities   355,224     405,061       389,777  
Total liabilities   8,736,255     8,709,554       8,850,137   $ 26,701 0.3 %
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; 187,648,393 issued at June 30, 2008

31,275 31,165 31,123
Capital in excess of par value 1,542,378 1,527,979 1,497,998
Retained earnings 3,032,848 2,822,952 2,742,782
Accumulated other comprehensive (loss) income (51,125 ) 7,312 14,021
Treasury stock, at cost, 18,755,909 shares at June 30, 2008   (351,648 )   (336,934 )     (256,987 )
Total stockholders' equity   4,203,728     4,052,474       4,028,937   $ 151,254 3.7 %
Total liabilities and stockholders' equity $ 12,939,983   $ 12,762,028     $ 12,879,074   $ 177,955 1.4 %
 
Debt-to-total capitalization ratio 28.0 % 28.3 % 29.5 %
 

S-5

 

Humana Inc.

Consolidated Statements of Cash Flows

Dollars in thousands
 

 

 

Three Months Ended

June 30,

   
  Dollar Percentage
2008 2007 Change   Change
Cash flows from operating activities
Net income $ 209,896 $ 216,846
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 53,458 54,264
(Gain) loss on sale of investment securities, net (8,585 ) 1,587
Stock-based compensation 13,249 10,462
Provision (benefit) for deferred income taxes 2,761 (17,900 )

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

Receivables (229,603 ) 139,567
Other assets (112,388 ) (107,522 )
Benefits payable 192,924 62,814
Other liabilities (3,401 ) 80,889
Unearned revenues (20,169 ) 24,692
Other   5,881     11,567  
Net cash provided by operating activities   104,023     477,266   ($373,243 ) -78.2 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (262,255 ) (224 )
Purchases of property and equipment (64,960 ) (43,973 )
Proceeds from sales of property and equipment 2 2
Purchases of investment securities (1,861,577 ) (908,244 )
Proceeds from maturities of investment securities 102,369 212,471
Proceeds from sales of investment securities 1,389,636 444,692
Change in securities lending collateral   173,599     (296,870 )
Net cash used in investing activities   (523,186 )   (592,146 ) $ 68,960 11.6 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 590,538 639,722
Withdrawals from CMS contract deposits (573,184 ) (708,277 )
Borrowings under credit agreement 175,000 400,000
Repayments under credit agreement (850,000 ) (510,000 )
Proceeds from issuance of senior notes 749,247 -
Debt issue costs (5,480 ) -
Change in book overdraft 6,719 5,074
Change in securities lending payable (173,599 ) 296,870
Common stock repurchases (14,714 ) (16 )
Excess tax benefit from stock-based compensation 167 5,426
Proceeds from stock option exercises and other   824     12,791  
Net cash (used in) provided by financing activities   (94,482 )   141,590   ($236,072 ) -166.7 %
 
(Decrease)/increase in cash and cash equivalents (513,645 ) 26,710
Cash and cash equivalents at beginning of period   1,688,287     3,694,059  
 
Cash and cash equivalents at end of period $ 1,174,642   $ 3,720,769  
 

S-6

 

Humana Inc.

Consolidated Statements of Cash Flows

Dollars in thousands
 
 

Six Months Ended

June 30,

   
  Dollar Percentage
2008 2007 Change   Change
Cash flows from operating activities
Net income $ 290,066 $ 288,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 104,416 94,328
Gain on sale of investment securities, net (18,849 ) (85 )
Stock-based compensation 27,165 20,264
Provision (benefit) for deferred income taxes 10,572 (24,011 )

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

Receivables (383,385 ) (16,612 )
Other assets (195,211 ) (126,467 )
Benefits payable 381,462 456,882
Other liabilities (104,475 ) 143,426
Unearned revenues (12,457 ) 1,199,719
Other   9,158     16,216  
Net cash provided by operating activities   108,462     2,051,747   ($1,943,285 ) -94.7 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (266,093 ) (27,005 )
Purchases of property and equipment (112,047 ) (114,717 )
Proceeds from sales of property and equipment 2 4,072
Purchases of investment securities (3,524,144 ) (1,873,295 )
Proceeds from maturities of investment securities 274,347 769,956
Proceeds from sales of investment securities 2,649,402 926,603
Change in securities lending collateral   536,723     (718,075 )
Net cash used in investing activities   (441,810 )   (1,032,461 ) $ 590,651 57.2 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 1,188,830 1,483,359
Withdrawals from CMS contract deposits (1,079,245 ) (1,223,982 )
Borrowings under credit agreement 425,000 710,000
Repayments under credit agreement (1,225,000 ) (760,000 )
Proceeds from issuance of senior notes 749,247 -
Debt issue costs (5,480 ) -
Change in book overdraft 28,739 (3,959 )
Change in securities lending payable (536,723 ) 718,075
Common stock repurchases (94,661 ) (7,203 )
Excess tax benefit from stock-based compensation 9,344 14,554
Proceeds from stock option exercises and other   7,486     30,335  
Net cash (used in) provided by financing activities   (532,463 )   961,179   ($1,493,642 ) -155.4 %
 
(Decrease)/increase in cash and cash equivalents (865,811 ) 1,980,465
Cash and cash equivalents at beginning of period   2,040,453     1,740,304  
 
Cash and cash equivalents at end of period $ 1,174,642   $ 3,720,769  
 

S-7

 

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
2008 2007 Difference   Change 2008 2007 Difference   Change
Benefits ratio
Government Segment 86.3 % 84.3 % 2.0 % 88.1 % 86.7 % 1.4 %
Commercial Segment 81.0 % 80.7 % 0.3 % 79.0 % 80.1 % -1.1 %
Consolidated 85.0 % 83.4 % 1.6 % 85.8 % 85.1 % 0.7 %
 

Selling, general, and administrative expense ratio (A)

Government Segment 9.5 % 10.0 % -0.5 % 10.1 % 10.4 % -0.3 %
Commercial Segment 21.5 % 21.8 % -0.3 % 21.9 % 21.2 % 0.7 %
Consolidated 12.6 % 13.0 % -0.4 % 13.2 % 13.2 % 0.0 %
 
 
Detail of pretax income
Government Segment $ 249,449 $ 288,790 ($39,341 ) -13.6 % $ 246,212 $ 306,655 ($60,443 ) -19.7 %
Commercial Segment   75,565     50,800   24,765   48.8 %   202,730     145,156   57,574   39.7 %
Consolidated $ 325,014   $ 339,590   ($14,576 ) -4.3 % $ 448,942   $ 451,811   ($2,869 ) -0.6 %
 
Detail of pretax margins
Government Segment 4.6 % 6.0 % -1.4 % 2.4 % 3.3 % -0.9 %
Commercial Segment 3.9 % 3.1 % 0.8 % 5.3 % 4.4 % 0.9 %
Consolidated 4.4 % 5.3 % -0.9 % 3.1 % 3.6 % -0.5 %
 

S-8

 

Humana Inc.

Membership Detail

In thousands

 
 

 

   

 

  Year-over-year Change  

 

  Sequential Change

Ending

June 30, 2008

Average - 2Q08  

Ending

June 30, 2007

Amount   Percent

Ending

March 31, 2008

Amount   Percent
Medical Membership:    
Government Segment:
Medicare Advantage - HMO 494.0 485.2 452.4 41.6 9.2 % 465.6 28.4 6.1 %
Medicare Advantage - PPO 163.5 156.6 66.9 96.6 144.4 % 134.0 29.5 22.0 %
Medicare Advantage - PFFS 687.5 685.5   614.4 73.1   11.9 % 668.1 19.4   2.9 %
Total Medicare Advantage 1,345.0 1,327.3   1,133.7 211.3   18.6 % 1,267.7 77.3   6.1 %
Medicare - PDP - Standard 1,531.6 1,542.4 2,131.0 (599.4 ) -28.1 % 1,584.5 (52.9 ) -3.3 %
Medicare - PDP - Enhanced 1,409.4 1,401.8 1,075.9 333.5 31.0 % 1,394.9 14.5 1.0 %
Medicare - PDP - Complete 164.2 165.8   233.2 (69.0 ) -29.6 % 170.8 (6.6 ) -3.9 %
Total Medicare stand-alone PDPs 3,105.2 3,110.0   3,440.1 (334.9 ) -9.7 % 3,150.2 (45.0 ) -1.4 %
Total Medicare 4,450.2 4,437.3   4,573.8 (123.6 ) -2.7 % 4,417.9 32.3   0.7 %
Military services insured 1,737.6 1,734.2 1,717.6 20.0 1.2 % 1,728.1 9.5 0.5 %
Military services ASO 1,206.2 1,203.4   1,150.6 55.6   4.8 % 1,193.0 13.2   1.1 %
Total military services 2,943.8 2,937.6   2,868.2 75.6   2.6 % 2,921.1 22.7   0.8 %
Medicaid insured 387.7 385.1 384.9 2.8 0.7 % 384.2 3.5 0.9 %
Medicaid ASO 173.8 174.6   182.7 (8.9 ) -4.9 % 175.4 (1.6 ) -0.9 %
Total Medicaid 561.5 559.7   567.6 (6.1 ) -1.1 % 559.6 1.9   0.3 %
Total Government Segment 7,955.5 7,934.6   8,009.6 (54.1 ) -0.7 % 7,898.6 56.9   0.7 %
Commercial Segment:
Fully-insured medical:
Group 1,623.3 1,605.9 1,533.0 90.3 5.9 % 1,572.9 50.4 3.2 %
Individual 297.2 289.4 205.0 92.2 45.0 % 272.9 24.3 8.9 %
Medicare supplement 16.1 15.7   8.3 7.8   94.0 % 15.2 0.9   5.9 %
Total fully-insured medical 1,936.6 1,911.0 1,746.3 190.3 10.9 % 1,861.0 75.6 4.1 %
ASO 1,621.9 1,612.7   1,532.4 89.5   5.8 % 1,597.7 24.2   1.5 %
Total Commercial Segment 3,558.5 3,523.7   3,278.7 279.8   8.5 % 3,458.7 99.8   2.9 %
 
Total medical membership 11,514.0 11,458.3   11,288.3 225.7   2.0 % 11,357.3 156.7   1.4 %
 
Specialty Membership
Dental - fully-insured 2,612.2 2,618.8 978.1 1,634.1 167.1 % 2,632.8 (20.6 ) -0.8 %
Dental - ASO 1,074.0 1,078.8   499.9 574.1   114.8 % 1,084.1 (10.1 ) -0.9 %
Total dental 3,686.2 3,697.6 1,478.0 2,208.2 149.4 % 3,716.9 (30.7 ) -0.8 %
Vision 2,160.9 2,251.1 - 2,160.9 100.0 % 2,301.0 (140.1 ) -6.1 %

Other supplemental benefits(B)

897.3 898.5   452.0 445.3   98.5 % 898.3 (1.0 ) -0.1 %
Total specialty membership 6,744.4 6,847.2   1,930.0 4,814.4   249.5 % 6,916.2 (171.8 ) -2.5 %
 

S-9

 

Humana Inc.

Premiums and Administrative Services Fees Detail

Dollars in thousands, except per member per month
 
         

Per Member per Month(C)

Three Months Ended

June 30,

Three Months Ended

June 30,

Dollar Percentage  
2008 2007 Change   Change 2008   2007
Premium revenues
Government Segment:
Medicare Advantage $ 3,491,824 $ 2,804,438 $ 687,386 24.5 % $ 877 $ 825
Medicare stand-alone PDPs   905,071   1,051,259   (146,188 ) -13.9 % $ 97 $ 102
Total Medicare 4,396,895 3,855,697 541,198 14.0 %

Military services insured(D)

806,976 725,040 81,936 11.3 % $ 155 $ 141
Medicaid insured   141,976   132,486   9,490   7.2 % $ 123 $ 115
Total Government Segment premiums   5,345,847   4,713,223   632,624   13.4 %
Commercial Segment:
Fully-insured medical 1,526,026 1,402,082 123,944 8.8 % $ 266 $ 269
Specialty   234,879   107,945   126,934   117.6 % $ 13 $ 22
Total Commercial Segment premiums   1,760,905   1,510,027   250,878   16.6 %
Total premium revenues $ 7,106,752 $ 6,223,250 $ 883,502   14.2 %
 
Administrative services fees

Military services ASO(D)

$ 17,403 $ 15,535 $ 1,868 12.0 % $ 5 $ 4
Medicaid ASO 2,053 2,136 (83 ) -3.9 % $ 4 $ 4
Commercial Segment   93,508   79,422   14,086   17.7 % $ 12 $ 13
Total administrative services fees $ 112,964 $ 97,093 $ 15,871   16.3 %
 

S-10

 

Humana Inc.

Premiums and Administrative Services Fees Detail

Dollars in thousands, except per member per month
 
         

Per Member per Month(C)

Six Months Ended

June 30,

Six Months Ended

June 30,

Dollar Percentage  
2008 2007 Change   Change 2008   2007
Premium revenues
Government Segment:
Medicare Advantage $ 6,659,541 $ 5,547,149 $ 1,112,392 20.1 % $ 862 $ 828
Medicare stand-alone PDPs   1,780,070   1,957,685   (177,615 ) -9.1 % $ 95 $ 94
Total Medicare 8,439,611 7,504,834 934,777 12.5 %

Military services insured(D)

1,617,635 1,452,255 165,380 11.4 % $ 156 $ 141
Medicaid insured   285,656   261,811   23,845   9.1 % $ 124 $ 113
Total Government Segment premiums   10,342,902   9,218,900   1,124,002   12.2 %
Commercial Segment:
Fully-insured medical 3,007,512 2,792,887 214,625 7.7 % $ 267 $ 269
Specialty   468,939   216,026   252,913   117.1 % $ 13 $ 22
Total Commercial Segment premiums   3,476,451   3,008,913   467,538   15.5 %
Total premium revenues $ 13,819,353 $ 12,227,813 $ 1,591,540   13.0 %
 
Administrative services fees

Military services ASO(D)

$ 37,927 $ 29,829 $ 8,098 27.1 % $ 5 $ 4
Medicaid ASO 4,235 4,232 3 0.1 % $ 4 $ 4
Commercial Segment   182,781   158,896   23,885   15.0 % $ 11 $ 13
Total administrative services fees $ 224,943 $ 192,957 $ 31,986   16.6 %
 

S-11

 

Humana Inc.

Percentage of Ending Membership under Capitation Arrangements

 
  Government Segment   Commercial Segment  

June 30, 2008

Medicare

Advantage

 

Medicare

stand-alone

PDPs

 

Military

Services

  Medicaid  

Total Govt.

Segment

Fully-insured   ASO  

Total Comm.

Segment

 

Total

Medical

Membership

           

Capitated HMO hospital system based(E)

1.9 % - - - 0.3 % 1.3 % - 0.7 % 0.4 %

Capitated HMO physician group based(E)

3.7 % - - 26.8 % 2.5 % 1.4 % - 0.8 % 2.0 %

Risk-sharing(F)

20.4 % - - 41.7 % 6.4 % 1.3 % - 0.7 % 4.7 %
All other membership 74.0 %   100.0 %   100.0 %   31.5 %   90.8 %   96.0 %   100.0 %   97.8 %   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, 2007

 

Capitated HMO hospital system based(E)

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

Capitated HMO physician group based(E)

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

Risk-sharing(F)

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 %
 

S-12

 

Humana Inc.

Detail of Benefits Payable Balance and Year-to-Date Changes

Dollars in thousands

 
  June 30,   March 31,   December 31,
2008 2008   2007
Detail of benefits payable

IBNR and other benefits payable(G)

$ 2,196,494 $ 1,997,213 $ 1,918,460

Unprocessed claim inventories(H)

228,700 212,000 213,400

Processed claim inventories(I)

127,707 118,132 91,938

Payable to pharmacy benefit administrator(J)

  141,984     185,219       131,663  
Benefits payable, excluding military services 2,694,885 2,512,564 2,355,461
 

Military services IBNR(K)

320,172 281,208 265,178

Other military services benefits payable(L)

  90,634     91,599       76,194  
Military services benefits payable   410,806     372,807       341,372  
Total Benefits Payable $ 3,105,691   $ 2,885,371     $ 2,696,833  
 
 
Six Months Ended Six Months Ended Year Ended
June 30, 2008 June 30, 2007   December 31, 2007

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

 
Balances at January 1 $ 2,355,461 $ 1,979,733 $ 1,979,733
 
Acquisitions 27,396 - 41,030
 
Incurred related to:
Current year 10,628,582 9,284,684 18,015,246

Prior years(N)

  (221,485 )   (156,032 )     (242,922 )
Total incurred   10,407,097     9,128,652       17,772,324  
 
Paid related to:
Current year (8,602,235 ) (7,281,526 ) (16,012,828 )
Prior years   (1,492,834 )   (1,388,603 )     (1,424,798 )
Total paid   (10,095,069 )   (8,670,129 )     (17,437,626 )
 
Balances at end of period $ 2,694,885   $ 2,438,256     $ 2,355,461  
 
 
Six Months Ended Six Months Ended Year Ended
June 30, 2008 June 30, 2007   December 31, 2007
Summary of Consolidated Benefits Expense:
Total benefits expense incurred, per above $ 10,407,097 $ 9,128,652 $ 17,772,324
Military services benefits 1,429,657 1,266,763 2,481,815

Future policy benefit expense(O)

  19,762     9,003       16,392  
Consolidated Benefits Expense $ 11,856,516   $ 10,404,418     $ 20,270,531  
 

S-13

 

Humana Inc.

Benefits Payable Statistics(P)

 
 

Receipt Cycle Time(Q)

  2008   2007   Change   Percentage Change
1st Quarter Average 15.1 15.6   (0.5 )   -3.2 %
2nd Quarter Average 15.0 15.6 (0.6 ) -3.8 %
3rd Quarter Average - 15.9 N/A N/A
4th Quarter Average - 15.1   N/A   N/A
Full Year Average 15.1 15.6   (0.5 ) -3.2 %
 
 
Unprocessed Claims Inventories
 
Date  

Estimated Valuation

(000s)

 

Claim Item

Counts

 

Number of

Days on Hand

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
3/31/2008   $   212,000   673,000   4.4  
6/30/2008   $   228,700   742,800   4.6  
 

S-14

 

Humana Inc.

Benefits Payable Statistics (Continued)(P)

 
 

Days in Claims Payable(R)

Quarter Ended  

Days in Claim

Payable (DCP)

 

Change Last 4

Quarters

 

Percentage

Change

 

DCP Excluding

Capitation

 

Change Last 4

Quarters

 

Percentage

Change

 
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 9.1 %
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 %
3/31/2008   56.9   (2.4 )   -4.0 %   63.3     (2.7 )   -4.1 %
6/30/2008   57.2   (2.8 )   -4.7 %   63.3     (5.2 )   -7.6 %
 

Year-to-Date Change in Days in Claims Payable(S)

1H08 FY07
DCP - beginning of period 60.2 56.3
Components of change in DCP:
Internal versus outsourced claims processing cycle times

(2.6

)

 

(0.2 )
Increase in the Part D component of MAPD expense (1.9 ) (0.5 )
Increase in Medicare PPO business (1.1 ) 0.2
Change in unprocessed claims inventories (0.5 ) (0.1 )
Change in processed claims inventories 0.7 (0.1 )
Change in pharmacy payment cutoff (0.4 ) 0.3
Change in provider payables under risk arrangements 2.9 3.4
All other (0.1 ) 0.9  
DCP - end of period 57.2   60.2  
 

S-15

 

Humana Inc.

Footnotes to Statistical Schedules and Supplementary Information

2Q08 Earnings Release

 

Footnotes

(A)

  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.

(B)

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

(C)

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).

(D)

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

(E)

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 benefit 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.

(F)

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 benefit expenses 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.

(G)

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.

(H)

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

(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)

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

(L)

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).

(M)

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.

(N)

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.

(O)

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

(P)

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

(Q)

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 80% to 85% of the company's fully-insured claims volume. Pharmacy and specialty claims, including dental, vision and other supplemental benefits, are excluded from this measurement.

(R)

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)

DCP fluctuates due to a number of issues, the more significant of which are detailed in this rollforward. 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.

Multimedia Files:

Contact:

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