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Humana Reports Third Quarter Financial Results, Provides 2009 Financial Guidance, Comments on Capital and Liquidity

  • 2009 earnings per share projected in range of $5.90 to $6.10
  • Business operating results and cash flows in line with managements expectations
  • 3Q08 EPS of $1.09 included $0.40 in realized losses from distressed securities
  • 3Q08 cash flows from operations of over $575 million
  • Strong capital position and ample liquidity levels expected to continue

Category:

Monday, October 27, 2008 5:00 am EDT

Dateline:

LOUISVILLE, Ky.

Public Company Information:

NYSE:
HUM
US4448591028

LOUISVILLE, Ky.--(BUSINESS WIRE)--Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended September 30, 2008 (3Q08) of $1.09 compared to $1.78 per share for the quarter ended September 30, 2007 (3Q07). The 3Q08 results included $0.40 per share in realized losses primarily associated with other-than-temporary impairments in the companys investment and securities lending portfolios as well as sales of distressed financial institution securities during 3Q08. Excluding the $0.40 in realized losses, non-GAAP 3Q08 EPS of $1.49(a)(e) was at the upper end of the companys prior guidance of $1.45 to $1.50 per share.

Looking ahead to the year ending December 31, 2009 (FY09), the company anticipates a significant increase in earnings over that for the year ending December 31, 2008 (FY08) with EPS projected for FY09 to be in the range of $5.90 to $6.10.

Our operating results came in as expected during the third quarter and, more importantly, we're forecasting good EPS growth in 2009, said Michael B. McCallister, Humanas president and chief executive officer. As we previously disclosed, a relatively small portion of our investments were in financial institutions that are now in distress. However, that did not impact our operational progress and our financial position remains strong.

The company has updated its expectations for 2008 EPS as follows:

    Fourth Quarter 2008   Full Year 2008
Previous guidance range midpoint   $1.17     $4.35  
3Q08 realized investment losses:        
Lehman Brothers and AIG securities(b)   n/a     (0.27 )
Agency preferred shares including Fannie Mae and Freddie Mac(c)   n/a     (0.01 )
Other   n/a     (0.12 )
Lower net investment income   (0.10 )   (0.10 )
Revised guidance range midpoint   $1.07     $3.85  
Current guidance range   $1.00 to $1.10   $3.80 to $3.90

Consolidated Highlights for 3Q08

Revenues 3Q08 consolidated revenues rose 13 percent to $7.15 billion from $6.32 billion in 3Q07, with total premium and administrative services fees up 15 percent compared to the prior years quarter, primarily driven by higher average membership in 3Q08 versus 3Q07 for the companys Medicare Advantage, Commercial medical and specialty products.

Consolidated revenues for 3Q08 include a net realized investment loss of $16.8 million in 3Q08 versus net realized investment income of $82.4 million in 3Q07. The year-over-year decline resulted from realized losses associated with other-than-temporary investment impairments and sales of distressed financial institution securities during 3Q08, as follows:

(In millions)

Government Segment   $51.9
Commercial Segment 56.4
Consolidated $108.3

Benefit expenses The 3Q08 consolidated benefits ratio (benefit expenses as a percent of premium revenues) was higher than that for the prior years quarter, as expected. The 3Q08 consolidated benefits ratio of 83.1 percent compares to 81.3 percent in 3Q07. This year-over-year increase was primarily driven by a 270 basis point increase in the Government Segment benefits ratio associated with higher PDP claim expenses.

Selling, general, & administrative (SG&A) expenses The 3Q08 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 13.7 percent for 3Q08 compares to 13.3 percent in 3Q07. The 40 basis-point year-over-year increase was driven by a higher SG&A expense ratio for the Commercial Segment associated with a higher mix of members in specialty and individual medical products than in the prior year.

Investment and Securities Lending Portfolios

At September 30, 2008, the company had cash, cash equivalents, and debt and equity securities in its investment portfolio of $6.46 billion, up 2 percent from $6.36 billion at June 30, 2008. Additionally, the company held securities as collateral in connection with the companys securities lending program of $488.4 million at September 30, 2008 compared to $800.3 million at June 30, 2008.

The company regularly evaluates its investment securities for impairment. For the purpose of determining gross realized gains and losses, the cost of investment securities is based upon specific identification. In analyzing individual securities for other-than-temporary impairments, the company considers factors affecting the issuer, factors affecting the industry the issuer operates within, and general debt and equity market trends. The company also considers the length of time an investments fair value has been below its carrying value, the severity of the decline, the near-term prospects for recovery to cost, and the companys intent and ability to hold the investment until maturity or market recovery is realized.

As of September 30, 2008, approximately 1.3 percent of the assets in the companys investment portfolio and approximately 5.1 percent of the securities held as collateral in connection with its securities lending program were deemed to have been impaired on an other-than-temporary basis, with the related losses realized as a component of 3Q08 net income.

Government Segment Results

Pretax results:

  • Government segment pretax income decreased to $271.7 million in 3Q08 from $416.3 million in 3Q07 as the improved operating performance in the companys Medicare Advantage business was more than offset by the combined effect of the previously announced lower 2008 PDP operating results and net realized investment losses during 3Q08.

Enrollment:

  • Medicare Advantage membership grew to 1,368,000 at September 30, 2008, an increase of 230,000 members, or 20 percent from September 30, 2007, up 23,000, or 2 percent versus June 30, 2008, and 225,000 members, or 20 percent year to date. The increased net Medicare Advantage membership includes 7,300 members from acquisitions during 3Q08 and 48,000 such members acquired year to date.
  • Membership in the companys stand-alone PDPs totaled 3,089,000 at September 30, 2008 compared to 3,459,700 at September 30, 2007 and 3,105,200 at June 30, 2008.
  • Military services membership at September 30, 2008 of 2,953,900 was up approximately 3 percent from September 30, 2007 and essentially unchanged from June 30, 2008.

Premiums and administrative services fees:

  • Medicare Advantage premiums of $3.50 billion in 3Q08 increased 24 percent compared to $2.83 billion in 3Q07, primarily the combined result of a 19 percent increase in average membership and higher per member premium revenues.
  • Medicare stand-alone PDP premiums of $782.9 million in 3Q08 decreased 12 percent compared to $890.4 million in 3Q07, primarily the result of a 10 percent decline in average membership versus that for 3Q07.
  • Military services premiums and administrative services fees during 3Q08 increased $58.8 million to $790.6 million compared to $731.8 million in 3Q07.

Benefit Expenses:

  • The Government Segment benefits ratio increased 270 basis points to 84.1 percent in 3Q08 compared to 81.4 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 3Q08 of 10.2 percent was unchanged from that of 3Q07 and increased 70 basis points from the second quarter of 2008 as the company prepared for marketing of its 2009 Medicare plans on October 1, 2008.

Commercial Segment Results

Pretax results:

  • Commercial Segment pretax earnings decreased 82 percent year over year, to $11.2 million in 3Q08 compared to $62.2 million in 3Q07. The net decline primarily reflects the effect of $56.4 million in net realized investment losses during 3Q08 associated with other-than-temporary investment write-downs and sales of securities from distressed financial institutions which more than offset the impact of improved operating results.

Enrollment:

  • Commercial Segment medical membership grew 254,900 members to 3,554,000 at September 30, 2008, an increase of 8 percent from the September 30, 2007 medical membership for the segment of 3,299,100 and up 3 percent year to date. On an organic basis, Commercial Segment medical membership grew 191,800 members, or 6 percent year-over-year and 39,300 members, or 1 percent year to date.
  • Organic medical membership growth in strategic commercial lines of business for 3Q08 compared to 3Q07 were as follows: HumanaOne membership increased 42 percent, Smart plans and other consumer offerings membership grew 20 percent, Small Group business membership increased 4 percent and ASO membership grew 4 percent.
  • Membership in Commercial Segment specialty products(d) at September 30, 2008 rose to 6,727,400 compared to 1,930,100 at September 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 $1.88 billion in 3Q08 compared to $1.61 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 3 percent on a per-member basis during 3Q08 compared to 3Q07 reflecting a shift in the mix of fully-insured group business from the prior years quarter to include fewer groups with higher-than-average premiums.

Benefit Expenses:

  • The Commercial Segment benefits ratio for 3Q08 of 80.2 percent was 80 basis points lower than the 3Q07 benefits ratio of 81.0 percent, primarily due to a higher mix of individual and small group membership as a percent of the fully insured book and higher specialty product membership compared to the prior years quarter, together with continued underwriting discipline.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 23.0 percent for 3Q08 compares to 21.8 percent in 3Q07, primarily driven by the higher administrative costs per member associated with small group, individual, administrative services only and specialty membership.

Cash Flows from Operations

Cash flows provided by operations for 3Q08 of $577.3 million compared to cash flows used in operations of $637.7 million in 3Q07 primarily reflecting changes in working capital accounts associated with the timing of the receipt of certain premiums from Medicare, impacting both premiums receivable and unearned revenues.

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

Cash flows from operations

($ in millions)

  3Q08   3Q07   YTD08   YTD07

GAAP cash flows provided by operations

  $577.3  

($637.7

)

  $685.7   $1,414.1

Timing of premium payment from CMS(a)(f)

    1,175.3      
Non-GAAP cash flows provided by operations(a)(f)   $577.3   $537.6     $685.7   $1,414.1

Non-GAAP cash flows provided by operations increased to $577.3 million(a)(f) in 3Q08 from $537.6 million(a)(f) in 3Q07 also driven primarily by the changes in working capital accounts described above.

Capital and Liquidity

The company believes both the parent company (Humana Inc.) and its operating subsidiaries have ample capital and liquidity to meet all financial regulatory requirements and to satisfy their respective obligations.

Because premium revenues are generally collected in advance of medical claim payments by a period of up to several months, the companys business produces positive cash flows during periods of increasing enrollment. In addition, to support its liquidity needs the parent company has available a 5-year, $1.0 billion unsecured revolving credit agreement which expires in July 2011. As of September 30, 2008 there were no borrowings outstanding under this credit agreement. During the fourth quarter of 2008, the company expects to draw approximately $250 million under the revolving credit agreement in order to complete its pending acquisition of Cariten Healthcare (announced August 4, 2008).

The company has various issuances of senior notes. As of September 30, 2008, the senior notes outstanding aggregated approximately $1.55 billion, with the first senior notes due to mature in June 2016. Upon issuance of each of the senior notes, the company had entered into interest-rate swap agreements to exchange the fixed interest rate under these senior notes for variable interest rates based on LIBOR. Based primarily on conditions in the credit markets, on October 7, 2008, the company terminated each of the swap agreements outstanding associated with its senior notes, resulting in an anticipated weighted-average fixed coupon rate on the companys senior notes of 6.28 percent versus a weighted average fixed rate on the senior notes of 6.94 percent and the then-current floating rate of 6.59 percent. In exchange for terminating its rights under the various interest-rate swaps, the company received $108.3 million in cash from its counterparties, which resulted in an offsetting adjustment to the related debt obligations.

Certain of the companys subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to the parent company, and require minimum levels of equity as well as limit the investments to approved securities. The amount of dividends that may be paid to the parent company by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entitys level of statutory income and statutory capital and surplus. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of the assets held, minimum requirements can vary significantly at the state level.

As of June 30, 2008, the company had aggregate statutory capital and surplus of $3.0 billion in its state-regulated subsidiaries, $1.1 billion above the aggregate $1.9 billion in applicable statutory requirements which would trigger any regulatory action by the respective states. The company anticipates at least maintaining the current excess subsidiary capital levels when statutory filings for 3Q08 are completed in November 2008, primarily driven by subsidiary operating earnings exceeding realized investment losses during 3Q08.

Acquisition Activity

During 3Q08, the company completed its acquisition of Metcare Health Plans, Inc. in Florida. On August 4, 2008, the company announced its intent to acquire PHP Companies, Inc. (d/b/a Cariten Healthcare), from Knoxville, Tennessee-based Covenant Health for cash consideration of approximately $245 million. The transaction has received all required regulatory approvals and is scheduled to close in the fourth quarter of 2008.

Share Repurchase Program

On July 28, 2008, the companys Board of Directors increased its 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 Board of Directors prior authorization in February 2008. 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. The company has not yet repurchased shares under the July 2008 authorization.

Footnotes

(a) 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.

(b) Investments were disclosed by the company in its Form 8-K filed with the Securities and Exchange Commission on September 15, 2008.

(c) Investments were disclosed by the company during its second quarter 2008 earnings conference call held August 4, 2008.

(d) 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.

(e) Realized investment losses for the 2008 third quarter which are excluded for this non-GAAP measure result from portfolio valuations associated with current financial market conditions and primarily do not relate to the underwriting or servicing of the companys products.

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

Conference Call & Virtual Slide Presentation

Humana will host a conference call, as well as a virtual slide presentation, at 7:00 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 quarters ended March 31, 2008 and June 30, 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 October 27, 2008

(in accordance with Generally Accepted Accounting Principles)   For the year ending December 31, 2008

(assumes a 4Q08 close for the pending acquisition of Cariten Healthcare)

  For the year ending December 31, 2009

(assumes a 4Q08 close for the pending acquisition of Cariten Healthcare)

  Comments
Diluted earnings per common share   Full year 2008: $3.80 to $3.90

 

Fourth quarter 2008: $1.00 to $1.10

  Full year 2009: $5.90 to $6.10   Excludes impact of future share repurchases
Revenues  

Consolidated revenues: Approximately $29 billion

 

Consolidated revenues: $30 billion to $32 billion

 

 

 

Premiums and ASO fees:

Premiums and ASO fees:

Medicare Advantage: $13.5 billion to $14 billion;

Medicare Advantage: $15 billion to $16 billion;

Medicare stand-alone PDPs: Approximately $3.4 billion;

Medicare stand-alone PDPs: $2.6 billion to $2.9 billion;

Military services: $3.2 billion to $3.3 billion;

Military services: $3.5 billion to $3.6 billion;

Commercial Segment: Approximately $7.5 billion

Commercial Segment: Approximately $8.0 billion to $8.2 billion

 

Consolidated investment income: $225 million to $235 million

Consolidated investment income: $370 million to $385 million

 
   

Consolidated other revenue: Approximately $200 million

 

Consolidated other revenue: $240 million to $260 million

   

Ending medical membership (fully-insured and ASO combined)

Medicare Advantage: Up approximately 300,000 from prior year

Medicare Advantage: Up 25,000 to 75,000 from prior year

FY08 includes 94,700 Medicare Advantage members from 2008 acquisitions

 

Medicare stand-alone PDPs: Down approximately 350,000 from prior year

Medicare stand-alone PDPs: Down 650,000 to 750,000 from prior year

 

Military services: No material change from prior year

Military services: No material change from prior year

 

Medicaid: Down approximately 87,000 from prior year

Medicaid: Down approximately 93,000 from prior year

Acquisition of Cariten Healthcare includes approximately 93,000 members from a Medicaid contract that terminates on December 31, 2008

 
   

Commercial: Up approximately 190,000 from prior year

 

Commercial: No material change from prior year

 

FY08 includes 136,600 Commercial members from 2008 acquisitions

Benefit expenses

Medicare Advantage & stand-alone PDP combined: benefits ratio in the range of 85.0% to 85.5%

Medicare Advantage & stand-alone PDP combined: benefits ratio in the range of 83.5% to 84.5%

 

 

Commercial fully-insured groups:

Commercial fully-insured groups:

Same-store net benefit expense trends and premium yields of 6% to 7% (2.5% to 3.5% including the impact of changes in the companys business mix)

Same-store net benefit expense trends and premium yields: no significant change from prior year

 
   

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 Commercial benefit expense trend components: no significant change from prior year

 

Secular trends exclude the impact of benefit buy-downs

Selling, general & administrative expense ratio   13.5% to 14%   13% to 14%   SG&A expenses as a percent of premiums, administrative services fees, and other revenue
Depreciation & amortization   $215 million to $220 million   $240 million to $260 million    
Interest expense   $80 million to $85 million   $110 million to $115 million    
Government Segment operating margins

Medicare Advantage & stand-alone PDP combined: Approximately 3.5%

Medicare Advantage & stand-alone PDP combined: Approximately 5%

Line-of-business-level results exclude the impact of investment income and interest expense
 
   

Military services: 2.5% to 3.0%

 

Military services: 2.5% to 3.0%

   
Commercial Segment pretax earnings $210 million to $215 million $300 million to $320 million

Segment-level results include the impact of investment income and interest expense

 
           

FY08 includes $56.4 million from realized investment losses associated with distressed financial institutions in 3Q08 and an estimated $13 million impact from lower net investment income in the fourth quarter of 2008 than previously anticipated

Cash flows from operations   $1.0 billion to $1.2 billion   $1.2 billion to $1.4 billion    
Capital expenditures   Approximately $260 million   Approximately $260 million    
Effective tax rate   35.0% to 35.5%   35% to 36%    
Shares used in computing full-year EPS   Approximately 169 million   Approximately 170 million   Excludes impact of future share repurchases

Humana Inc.

Statistical Schedules

And

Supplementary Information

3Q08 Earnings Release

       
 
Humana Inc.
Statistical Schedules and Supplementary Information
3Q08 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 Investments
S-17 Footnotes

Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
 
  Three Months Ended September 30,    
2008   2007

Dollar

Change

Percentage

Change

Revenues:
Premiums $6,991,569 $6,092,841 $898,728 14.8 %
Administrative services fees 114,401 101,531 12,870 12.7 %
Investment (loss) income (16,773 ) 82,362 (99,135 ) -120.4 %
Other revenue 58,973   42,850 16,123   37.6 %
Total revenues 7,148,170   6,319,584 828,586   13.1 %
Operating expenses:
Benefits 5,810,613 4,953,862 856,751 17.3 %
Selling, general and administrative 979,223 829,023 150,200 18.1 %
Depreciation 46,371 37,771 8,600 22.8 %
Other intangible amortization 9,755   4,479 5,276   117.8 %
Total operating expenses 6,845,962   5,825,135 1,020,827   17.5 %
Income from operations 302,208 494,449 (192,241 ) -38.9 %
Interest expense 19,348   15,947 3,401   21.3 %
Income before income taxes 282,860 478,502 (195,642 ) -40.9 %
Provision for income taxes 99,852   176,124 (76,272 ) -43.3 %
Net income $183,008   $302,378 ($119,370 ) -39.5 %
 
Basic earnings per common share $1.10 $1.81 ($0.71 ) -39.2 %
Diluted earnings per common share $1.09 $1.78 ($0.69 ) -38.8 %
 
Shares used in computing basic earnings per common share 166,647 167,188
Shares used in computing diluted earnings per common share 168,578 170,051

Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
 
  Nine Months Ended September 30,    
2008   2007

Dollar

Change

Percentage

Change

Revenues:
Premiums $20,810,922 $18,320,654 $2,490,268 13.6 %
Administrative services fees 339,344 294,488 44,856 15.2 %
Investment income 154,007 227,941 (73,934 ) -32.4 %
Other revenue 154,463 108,111 46,352   42.9 %
Total revenues 21,458,736 18,951,194 2,507,542   13.2 %
Operating expenses:
Benefits 17,667,129 15,358,280 2,308,849 15.0 %
Selling, general and administrative 2,845,709 2,476,092 369,617 14.9 %
Depreciation 133,469 122,100 11,369 9.3 %
Other intangible amortization 27,073 14,478 12,595   87.0 %
Total operating expenses 20,673,380 17,970,950 2,702,430   15.0 %
Income from operations 785,356 980,244 (194,888 ) -19.9 %
Interest expense 53,554 49,931 3,623   7.3 %
Income before income taxes 731,802 930,313 (198,511 ) -21.3 %
Provision for income taxes 258,728 339,848 (81,120 ) -23.9 %
Net income $473,074 $590,465 ($117,391 ) -19.9 %
 
Basic earnings per common share $2.83 $3.55 ($0.72 ) -20.3 %
Diluted earnings per common share $2.79 $3.48 ($0.69 ) -19.8 %
 
Shares used in computing basic earnings per common share 167,328 166,538
Shares used in computing diluted earnings per common share 169,392 169,535

Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
  September 30,   June 30,   December 31,   Sequential Change
2008   2008   2007 Dollar   Percent
Assets
Current assets:
Cash and cash equivalents $1,542,900 $1,174,642 $2,040,453
Investment securities 3,982,564 4,195,562 3,635,317
Receivables, net:
Premiums 697,497 987,074 592,761
Administrative services fees 12,156 12,644 12,780
Securities lending collateral 488,431 800,326 1,337,049
Other 1,476,439     1,290,295     1,114,486  
Total current assets 8,199,987 8,460,543 8,732,846 ($260,556 ) -3.1 %
Property and equipment, net 677,882 655,431 637,241
Other assets:
Long-term investment securities 930,450 989,253 1,015,050
Goodwill 1,823,280 1,817,460 1,663,939
Other 932,271     1,017,296     829,998  
Total other assets 3,686,001     3,824,009     3,508,987  
Total assets $12,563,870     $12,939,983     $12,879,074   ($376,113 ) -2.9 %
 
Liabilities and Stockholders' Equity
Current liabilities:
Benefits payable $3,068,587 $3,105,691 $2,696,833
Trade accounts payable and accrued expenses 1,240,631 1,350,924 1,268,963
Book overdraft 257,680 297,965 269,226
Securities lending payable 535,531 800,326 1,337,049
Unearned revenues 220,509     210,770     219,780  
Total current liabilities 5,322,938 5,765,676 5,791,851 ($442,738 ) -7.7 %
Long-term debt 1,668,233 1,635,098 1,687,823
Future policy benefits payable 988,672 980,257 980,686
Other long-term liabilities 313,495     355,224     389,777  
Total liabilities 8,293,338     8,736,255     8,850,137   ($442,917 ) -5.1 %
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; 10,000,000 shares authorized, none issued - - -
Common stock, $0.16 2/3 par; 300,000,000 shares authorized;
187,733,811 issued at September 30, 2008 31,289 31,275 31,123
Capital in excess of par value 1,558,625 1,542,378 1,497,998
Retained earnings 3,215,856 3,032,848 2,742,782
Accumulated other comprehensive (loss) income (172,484 ) (51,125 ) 14,021
Treasury stock, at cost, 19,022,596 shares at September 30, 2008 (362,754 )   (351,648 )   (256,987 )
Total stockholders' equity 4,270,532     4,203,728     4,028,937   $66,804 1.6 %
Total liabilities and stockholders' equity $12,563,870     $12,939,983     $12,879,074   ($376,113 ) -2.9 %
 
Debt-to-total capitalization ratio 28.1 % 28.0 % 29.5 %

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
  Three Months Ended September 30,    
2008   2007

Dollar

Change

 

Percentage

Change

Cash flows from operating activities  
Net income $183,008 $302,378
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

Depreciation and amortization 56,126 42,250
Loss (gain) on sale of investment securities, net 92,285 (2,387 )
Stock-based compensation 14,670 10,604
Benefit for deferred income taxes (31,983 ) (9,168 )

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

Receivables 290,065 (245 )
Other assets 28,280 69,395
Benefits payable (43,830 ) (76,826 )
Other liabilities (19,893 ) 204,741
Unearned revenues 3,359 (1,177,937 )
Other 5,188     (458 )
Net cash provided by (used in) operating activities 577,275     (637,653 ) $1,214,928 190.5 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired 3,746 (501 )
Purchases of property and equipment (67,500 ) (41,339 )
Proceeds from sales of property and equipment - 11,862
Purchases of investment securities (1,557,997 ) (758,695 )
Proceeds from maturities of investment securities 144,216 321,304
Proceeds from sales of investment securities 1,462,238 328,275
Change in securities lending collateral 264,795     515,476  
Net cash provided by investing activities 249,498     376,382   ($126,884 ) -33.7 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 585,551 464,703
Withdrawals from CMS contract deposits (728,707 ) (885,541 )
Borrowings under credit agreement - 475,000
Repayments under credit agreement - (400,000 )
Debt issue costs (1,182 ) -
Change in book overdraft (40,285 ) (36,290 )
Change in securities lending payable (264,795 ) (515,476 )
Common stock repurchases (11,106 ) (6,814 )
Excess tax benefit from stock-based compensation 450 12,272
Proceeds from stock option exercises and other 1,559     18,318  
Net cash used in financing activities (458,515 )   (873,828 ) $415,313 47.5 %
 
Increase/(decrease) in cash and cash equivalents 368,258 (1,135,099 )
Cash and cash equivalents at beginning of period 1,174,642     3,720,769  
 
Cash and cash equivalents at end of period $1,542,900     $2,585,670  

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
  Nine Months Ended September 30,    
2008   2007

Dollar

Change

 

Percentage

Change

Cash flows from operating activities  
Net income $473,074 $590,465
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 160,542 136,578
Loss (gain) on sale of investment securities, net 73,436 (2,472 )
Stock-based compensation 41,835 30,868
Benefit for deferred income taxes (21,411 ) (33,179 )

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

Receivables (93,320 ) (16,857 )
Other assets (166,931 ) (57,072 )
Benefits payable 337,632 380,056
Other liabilities (124,368 ) 348,167
Unearned revenues (9,098 ) 21,782
Other 14,346     15,758  
Net cash provided by operating activities 685,737     1,414,094   ($728,357 ) -51.5 %
 
Cash flows from investing activities
Acquisitions, net of cash acquired (262,347 ) (27,506 )
Purchases of property and equipment (179,547 ) (156,056 )
Proceeds from sales of property and equipment 2 15,934
Purchases of investment securities (5,082,141 ) (2,631,990 )
Proceeds from maturities of investment securities 418,563 1,091,260
Proceeds from sales of investment securities 4,111,640 1,254,878
Change in securities lending collateral 801,518     (202,599 )
Net cash used in investing activities (192,312 )   (656,079 ) $463,767 70.7 %
 
Cash flows from financing activities
Receipts from CMS contract deposits 1,774,381 1,948,062
Withdrawals from CMS contract deposits (1,807,952 ) (2,109,523 )
Borrowings under credit agreement 425,000 1,185,000
Repayments under credit agreement (1,225,000 ) (1,160,000 )
Proceeds from issuance of senior notes 749,247 -
Debt issue costs (6,662 ) -
Change in book overdraft (11,546 ) (40,249 )
Change in securities lending payable (801,518 ) 202,599
Common stock repurchases (105,767 ) (14,017 )
Excess tax benefit from stock-based compensation 9,794 26,826
Proceeds from stock option exercises and other 9,045     48,653  
Net cash (used in) provided by financing activities (990,978 )   87,351   ($1,078,329 ) -1234.5 %
 
(Decrease)/increase in cash and cash equivalents (497,553 ) 845,366
Cash and cash equivalents at beginning of period 2,040,453     1,740,304  
 
Cash and cash equivalents at end of period $1,542,900     $2,585,670  

Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
 
  Three Months Ended September 30,       Nine Months Ended September 30,    
 

 

 

 

2008   2007 Difference  

Percentage

Change

2008   2007 Difference  

Percentage

Change

Benefits ratio
Government Segment 84.1% 81.4% 2.7% 86.8% 85.0% 1.8%
Commercial Segment 80.2% 81.0% -0.8% 79.4% 80.4% -1.0%
Consolidated 83.1% 81.3% 1.8% 84.9% 83.8% 1.1%
 

Selling, general, and administrative expense ratio (A)

Government Segment 10.2% 10.2% 0.0% 10.1% 10.3% -0.2%
Commercial Segment 23.0% 21.8% 1.2% 22.3% 21.4% 0.9%
Consolidated 13.7% 13.3% 0.4% 13.4% 13.2% 0.2%
 
 
Detail of pretax income
Government Segment $271,701 $416,299 ($144,598) -34.7% $517,913 $722,954 ($205,041) -28.4%
Commercial Segment 11,159   62,203 (51,044) -82.1% 213,889   207,359 6,530 3.1%
Consolidated $282,860   $478,502 ($195,642) -40.9% $731,802   $930,313 ($198,511) -21.3%
 
Detail of pretax margins
Government Segment 5.2% 9.0% -3.8% 3.3% 5.2% -1.9%
Commercial Segment 0.6% 3.7% -3.1% 3.7% 4.2% -0.5%
Consolidated 4.0% 7.6% -3.6% 3.4% 4.9% -1.5%

Humana Inc.
Membership Detail
In thousands
  Ending   Average 3Q08   Ending   Year-over-year Change   Ending   Sequential Change
September 30, 2008     September 30, 2007 Amount   Percent June 30, 2008 Amount   Percent
Medical Membership:    
Government Segment:
Medicare Advantage - HMO 502.3 497.3 451.7 50.6 11.2% 494.0 8.3 1.7%
Medicare Advantage - PPO 171.0 168.7 71.1 99.9 140.5% 163.5 7.5 4.6%
Medicare Advantage - PFFS 694.7   692.6   615.2 79.5 12.9% 687.5 7.2 1.0%
Total Medicare Advantage 1,368.0   1,358.6   1,138.0 230.0 20.2% 1,345.0 23.0 1.7%
Medicare - PDP - Standard 1,495.7 1,507.3 2,148.9 (653.2) -30.4% 1,531.6 (35.9) -2.3%
Medicare - PDP - Enhanced 1,433.8 1,425.8 1,085.1 348.7 32.1% 1,409.4 24.4 1.7%
Medicare - PDP - Complete 159.5   161.1   225.7 (66.2) -29.3% 164.2 (4.7) -2.9%
Total Medicare stand-alone PDPs 3,089.0   3,094.2   3,459.7 (370.7) -10.7% 3,105.2 (16.2) -0.5%
Total Medicare 4,457.0   4,452.8   4,597.7 (140.7) -3.1% 4,450.2 6.8 0.2%
Military services insured 1,734.4 1,732.6 1,720.4 14.0 0.8% 1,737.6 (3.2) -0.2%
Military services ASO 1,219.5   1,215.1   1,137.0 82.5 7.3% 1,206.2 13.3 1.1%
Total military services 2,953.9   2,947.7   2,857.4 96.5 3.4% 2,943.8 10.1 0.3%
Medicaid insured 385.1 387.2 383.8 1.3 0.3% 387.7 (2.6) -0.7%
Medicaid ASO 177.3   178.8   182.8 (5.5) -3.0% 173.8 3.5 2.0%
Total Medicaid 562.4   566.0   566.6 (4.2) -0.7% 561.5 0.9 0.2%
Total Government Segment 7,973.3   7,966.5   8,021.7 (48.4) -0.6% 7,955.5 17.8 0.2%
Commercial Segment:
Fully-insured medical:
Group 1,596.0 1,601.9 1,530.2 65.8 4.3% 1,623.3 (27.3) -1.7%
Individual 316.8 311.1 223.7 93.1 41.6% 297.2 19.6 6.6%
Medicare supplement 18.4   17.6   11.3 7.1 62.8% 16.1 2.3 14.3%
Total fully-insured medical 1,931.2 1,930.6 1,765.2 166.0 9.4% 1,936.6 (5.4) -0.3%
ASO 1,622.8   1,622.3   1,533.9 88.9 5.8% 1,621.9 0.9 0.1%
Total Commercial Segment 3,554.0   3,552.9   3,299.1 254.9 7.7% 3,558.5 (4.5) -0.1%
 
Total medical membership 11,527.3   11,519.4   11,320.8 206.5 1.8% 11,514.0 13.3 0.1%
 
 
Specialty Membership
Dental - fully-insured 2,578.6 2,587.5 974.7 1,603.9 164.6% 2,612.2 (33.6) -1.3%
Dental - ASO 1,062.7   1,069.7   499.3 563.4 112.8% 1,074.0 (11.3) -1.1%
Total dental 3,641.3 3,657.2 1,474.0 2,167.3 147.0% 3,686.2 (44.9) -1.2%
Vision 2,188.9 2,181.9 - 2,188.9 100.0% 2,160.9 28.0 1.3%
Other supplemental benefits (B) 897.2   900.1   456.1 441.1 96.7% 897.3 (0.1) 0.0%
Total specialty membership 6,727.4   6,739.2   1,930.1 4,797.3 248.6% 6,744.4 (17.0) -0.3%

Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
 
          Per Member per Month (C)
Three Months Ended September 30, Three Months Ended September 30,
2008   2007

Dollar

Change

 

Percentage

Change

2008   2007
Premium revenues  
Government Segment:
Medicare Advantage $3,497,568 $2,825,587 $671,981 23.8 % $858 $827
Medicare stand-alone PDPs 782,855   890,420 (107,565 ) -12.1 % $84 $86
Total Medicare 4,280,423 3,716,007 564,416 15.2 %
Military services insured (D) 771,560 714,173 57,387 8.0 % $148 $138
Medicaid insured 152,069   135,609 16,460   12.1 % $131 $118
Total Government Segment premiums 5,204,052   4,565,789 638,263   14.0 %
Commercial Segment:
Fully-insured medical 1,559,120 1,418,884 140,236 9.9 % $269 $269
Specialty 228,397   108,168 120,229   111.2 % $12 $22
Total Commercial Segment premiums 1,787,517   1,527,052 260,465   17.1 %
Total premium revenues $6,991,569   $6,092,841 $898,728   14.8 %
 
Administrative services fees
Military services ASO (D) $19,066 $17,675 $1,391 7.9 % $5 $5
Medicaid ASO 2,103 2,165 (62 ) -2.9 % $4 $4
Commercial Segment 93,232   81,691 11,541   14.1 % $12 $13
Total administrative services fees $114,401   $101,531 $12,870   12.7 %

Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
 
          Per Member per Month (C)
Nine Months Ended September 30, Nine Months Ended September 30,
2008   2007

Dollar

Change

 

Percentage

Change

2008   2007
Premium revenues  
Government Segment:
Medicare Advantage $10,157,109 $8,372,736 $1,784,373 21.3 % $860 $828
Medicare stand-alone PDPs 2,562,925   2,848,105 (285,180 ) -10.0 % $91 $91
Total Medicare 12,720,034 11,220,841 1,499,193 13.4 %
Military services insured (D) 2,389,195 2,166,428 222,767 10.3 % $153 $140
Medicaid insured 437,725   397,420 40,305   10.1 % $126 $115
Total Government Segment premiums 15,546,954   13,784,689 1,762,265   12.8 %
Commercial Segment:
Fully-insured medical 4,566,632 4,211,771 354,861 8.4 % $267 $269
Specialty 697,336   324,194 373,142   115.1 % $13 $22
Total Commercial Segment premiums 5,263,968   4,535,965 728,003   16.0 %
Total premium revenues $20,810,922   $18,320,654 $2,490,268   13.6 %
 
Administrative services fees
Military services ASO (D) $56,993 $47,504 $9,489 20.0 % $5 $5
Medicaid ASO 6,338 6,397 (59 ) -0.9 % $4 $4
Commercial Segment 276,013   240,587 35,426   14.7 % $11 $13
Total administrative services fees $339,344   $294,488 $44,856   15.2 %

Humana Inc.
Percentage of Ending Membership under Capitation Arrangements
 
  Government Segment   Commercial Segment  

September 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) 3.5% - - 26.3% 2.5% 1.4% - 0.8% 1.9%
Risk-sharing (F) 20.0% - - 41.6% 6.4% 1.3% - 0.7% 4.7%
All other membership 74.6%   100.0%   100.0%   32.1%   90.8%   96.0%   100.0%   97.8%   93.0%
Total medical membership 100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%
 

September 30, 2007

 
Capitated HMO hospital system based (E) 2.4% - - - 0.3% 1.4% - 0.8% 0.5%
Capitated HMO physician group based (E) 2.0% - - 26.5% 2.2% 1.5% - 0.8% 1.8%
Risk-sharing (F) 24.2% - - 40.8% 6.3% 1.5% - 0.8% 4.7%
All other membership 71.4%   100.0%   100.0%   32.7%   91.2%   95.6%   100.0%   97.6%   93.0%
Total medical membership 100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%   100.0%

Humana Inc.
Detail of Benefits Payable Balance and Year-to-Date Changes
Dollars in thousands
     
September 30, June 30, December 31,
2008   2008   2007
Detail of benefits payable
IBNR and other benefits payable (G) $2,170,971 $2,196,494 $1,918,460
Unprocessed claim inventories (H) 293,600 228,700 213,400
Processed claim inventories (I) 83,574 127,707 91,938
Payable to pharmacy benefit administrator (J) 164,709     141,984     131,663  
Benefits payable, excluding military services 2,712,854 2,694,885 2,355,461
 
Military services IBNR (K) 327,828 320,172 265,178
Other military services benefits payable (L) 27,905     90,634     76,194  
Military services benefits payable 355,733     410,806     341,372  
Total Benefits Payable $3,068,587     $3,105,691     $2,696,833  
 
 
Nine Months Ended Nine Months Ended Year Ended
September 30, 2008   September 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 34,122 - 41,030
 
Incurred related to:
Current year 15,769,075 13,655,981 18,015,246
Prior years (N) (230,461 )   (215,747 )   (242,922 )
Total incurred 15,538,614     13,440,234     17,772,324  
 
Paid related to:
Current year (13,692,050 ) (11,636,269 ) (16,012,828 )
Prior years (1,523,293 )   (1,406,350 )   (1,424,798 )
Total paid (15,215,343 )   (13,042,619 )   (17,437,626 )
 
Balances at end of period $2,712,854     $2,377,348     $2,355,461  
 
 
Nine Months Ended Nine Months Ended Year Ended
September 30, 2008   September 30, 2007   December 31, 2007
Summary of Consolidated Benefits Expense:
Total benefits expense incurred, per above $15,538,614 $13,440,234 $17,772,324
Military services benefits 2,098,059 1,905,034 2,481,815
Future policy benefit expense (O) 30,456     13,012     16,392  
Consolidated Benefits Expense $17,667,129     $15,358,280     $20,270,531  

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 15.2 15.9 (0.7 ) -4.4%
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 (000's)   Claim Item Counts   Number of Days on Hand
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  
9/30/2008   $293,600   946,500   6.0  

Humana Inc.
Benefits Payable Statistics (Continued) (P)
 
 
Days in Claims Payable (R)
Quarter Ended  

Days in Claims Payable (DCP)

  Change Last 4 Quarters   Percentage Change   DCP Excluding Capitation   Change Last 4 Quarters   Percentage Change
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 %
9/30/2008   58.1   (3.7 )   -6.0 %   65.1     (5.1 )   -7.3 %
 
Year-to-Date Change in Days in Claims Payable (S)
2008   2007
DCP - beginning of period 60.2 56.3
Components of change in DCP:
Internal versus outsourced claims processing cycle times (3.2 ) (0.2 )
Increase in the Part D component of MAPD expense (2.0 ) (0.5 )
Increase in Medicare PPO business (0.7 ) 0.2
Change in unprocessed claims inventories 1.5 (0.1 )
Change in processed claims inventories (0.3 ) (0.1 )
Change in pharmacy payment cutoff (0.2 ) 0.3
Change in provider payables under risk arrangements 2.5 3.4
All other 0.3     0.9  
DCP - end of period 58.1     60.2  

Humana Inc.
Investments
Dollars in thousands
  Fair value   Average Duration (T)   Average Credit Rating
9/30/2008   12/31/2007   9/30/2008   9/30/2008
Investment Portfolio:      
Cash & cash equivalents $1,542,900 $2,040,453
Investment Securities 3,982,564 3,635,317
Long-term investments 930,450   1,015,050
Total investment portfolio $6,455,914   $6,690,820 ~3.5 years AA+
 
Securities Lending Collateral Portfolio:
Cash & cash equivalents $79,032 $686,096
Certificates of deposit 118,710 145,588
Bank notes 67,650 98,789
Corporate Floating Rate 59,011 147,256
Repurchase Agreements - 4,563
Asset-backed securities 164,028   254,757
$488,431   $1,337,049 AA+
 
Fair value
9/30/2008   12/31/2007
Investment Portfolio Detail:
Cash and cash equivalents $1,542,900   $2,040,453
U.S. Government and agency obligations
U.S. Treasury obligations $171,889 $192,185
Federal National Mortgage Association (Fannie Mae) bonds 796,555 534,468
Federal Home Loan Mortgage Corporation (Freddie Mac) bonds 241,988 157,544
Government National Mortgage Association (Ginnie Mae) bonds 274,834 29,695
Other 156,909   70,111

Total U.S. Government and agency obligations

1,642,175   984,003
Tax-exempt municipal securities
Guaranteed by monoline insurers 907,052 745,995
Other 656,830   1,118,996

Total tax-exempt municipal securities

1,563,882   1,864,991
Mortgage and asset-backed securities
Commercial mortgages 306,280 495,301
Prime residential mortgages 401,165 333,715
Alt-A residential mortgages 5,345 15,077
Sub-prime residential mortgages 3,053 6,888
Other Asset-backed 154,965   59,681

Total mortgage and asset-backed securities

870,808   910,662
Corporate Securities
Financial services 341,568 417,944
Other 458,529   445,922

Total commercial securities

800,097 863,866
Redeemable preferred stocks 19,207 15,558
Non-redeemable preferred stocks 12,384 7,208
Common stocks 4,461   4,079

Total investment portfolio

$6,455,914   $6,690,820

Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information
3Q08 Earnings Release
 
(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 the companys 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 the companys 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 the companys largest claim processing platforms represent 90% to 95% 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.
(T) Duration is the time-weighted average of the present value of the bond portfolio cash flow.

Contact:

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