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

Posted on: Monday, 31 July 2006, 06:00 CDT

Humana Inc. (NYSE: HUM):

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

-- Consolidated revenues up 52 percent to $5.41 billion

-- Medical membership exceeds 11 million

-- Full-year cash flow guidance raised

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

The company continues to estimate EPS for the year ending December 31, 2006 (FY06E) in the range of $2.82 to $2.88 versus $1.79 (a) for the year ended December 31, 2005 (FY05), a growth rate of approximately 60 percent. In addition to the impact of changes associated with second quarter performance, this forecast has been revised to reflect management's updated expectations for Medicare marketing costs in the latter half of 2006. In order to maximize 2007 Medicare growth opportunities, the company now anticipates its second-half 2006 Medicare marketing costs to be approximately $0.15 per share higher than it had previously forecast.

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

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

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

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

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

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

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

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

Government Segment Results Summary

Pretax results:

-- Government Segment pretax earnings were $98.0 million in 2Q06

compared to $102.5 million(a) in 2Q05. This decline was

anticipated because Medicare stand-alone PDP offerings changed

the company's quarterly pattern of earnings for 2006 given the

medical expense patterns associated with PDP benefit designs.

-- For 1H06, pretax earnings for the Government Segment of $119.6

million were $53.4 million, or 31 percent lower than 1H05

pretax earnings for the segment of $173.0 million(a) with the

first half results also impacted primarily by the new PDP

offerings in 2006.

Enrollment:

-- Medicare Advantage membership rose to 959,800 at June 30,

2006, an increase of 485,500, or 102 percent, from June 30,

2005 and 218,600, or 29 percent, from March 31, 2006. The

company's expanded participation in various Medicare products

and markets combined with the company's increased sales and

marketing efforts for these programs led to the higher

membership level.

-- July 2006 Medicare Advantage membership approximated 990,000.

The company now expects Medicare Advantage membership will

approximate 1 million at December 31, 2006.

-- Membership in the company's stand-alone PDPs totaled 3,458,800

at June 30, 2006, a sequential increase of 1.5 million, or 77

percent, primarily driven by strong sales during the final two

weeks of the open enrollment period which ended on May 15,

2006. The company now anticipates stand-alone PDP membership

of approximately 3.5 million at the end of 2006. The

significant PDP membership growth during May is not

anticipated to substantially increase the company's net

earnings for 2006. This is primarily due to the front-loaded

pattern of medical spend generally associated with PDP members

and the shortened time frame during which such spending would

occur for these members through the remainder of 2006 given

their enrollment timing.

-- As expected, TRICARE membership of 2,874,500 at June 30, 2006

was essentially unchanged from March 31, 2006. The company

also anticipates no material change in TRICARE membership

during 2006 compared to year-end 2005.

-- Medicaid membership of 418,500 at June 30, 2006 declined

59,400 from June 30, 2005 and 8,500 from March 31, 2006 due

primarily to the non-renewal of the Illinois Medicaid contract

in the third quarter of 2005 and a continuing shift of

eligible Puerto Rico Medicaid members to the Medicare program.

Revenues:

-- Medicare Advantage premiums of $2.11 billion in 2Q06 increased

93 percent compared to $1.09 billion in 2Q05, primarily the

result of higher enrollment, increases in per-member revenues

from CMS, and the expanded geography across which Medicare

Advantage products were offered. Medicare Advantage premiums

per member increased 2 percent year over year during 2Q06,

primarily resulting from the increase in per-member revenues

from CMS, combined with an increase in the percentage of

Medicare Advantage members in the company's Private

Fee-For-Service products together with a more diverse

geographic mix than in the prior year. At June 30, 2006,

approximately 46 percent of the company's Medicare Advantage

members were in Private Fee-For-Service plans versus 11

percent at June 30, 2005.

-- Medicare PDP premiums added $801.8 million in new revenues in

2Q06 versus 2Q05.

-- TRICARE premiums and administrative services fees during 2Q06

of $668.8 million compared to $626.6 million in 2Q05. The

year-over-year increase primarily reflects a higher

reimbursement for claims incurred in 2Q06 combined with

revenue from favorable performance for the second option

period which concluded on March 31, 2006.

Medical Expenses:

-- The Government Segment MER increased 220 basis points to 86.0

percent in 2Q06 compared to 83.8 percent in the prior year's

quarter. The increase is primarily the result of the

establishment of the stand-alone PDPs in January 2006. The MER

for the company's PDP business was 92.7 percent for 2Q06.

-- The MER for stand-alone PDP offerings over each of the interim

reporting periods is impacted by the recognition of benefit

costs as incurred under each plan's provisions. Different PDP

designs offered by the company result in varying levels of

coverage through each of the different layers of beneficiary

cost responsibility. The company now anticipates an MER for

the full year for its stand-alone PDPs in the range of 86

percent to 89 percent, with MER improvement expected in each

quarter sequentially throughout the remainder of the year.

Variables that may impact the quarterly MER for the

stand-alone PDPs primarily include: (1) the timing of member

enrollment, (2) the PDP offering chosen by the member, and (3)

the speed with which members move through their deductibles.

SG&A Expenses:

-- The Government Segment's SG&A expense ratio for 2Q06 of 11.5

percent was 90 basis points higher than that for 2Q05 of 10.6

percent(a) primarily driven by expenses associated with the

infrastructure build out of the company's expanded Medicare

offerings. In particular, marketing expenses and service costs

per member were higher year over year. On a sequential basis,

the segment's SG&A ratio improved 230 basis points primarily

due to the administrative cost leverage provided by revenues

associated with higher average membership for this segment.

-- The company anticipates that its SG&A expense ratio for the

second half of 2006 will improve over that for 1H06 as

marketing expenses decline during the Medicare Advantage

lock-in period that began July 1, 2006, and the average

membership associated with the Medicare expansion increases

throughout the year, providing more leverage against

administrative costs.

Commercial Segment Results Summary

Pretax results:

-- Results for the Commercial Segment during 2Q06 reflect pretax

income of $42.3 million compared to $22.3 million(a) in 2Q05.

Commercial Segment operating earnings in 2Q06 primarily

reflect year-over-year improvements in medical cost

utilization trends and the company's commitment to

underwriting discipline.

-- For 1H06, pretax earnings for the Commercial Segment of $152.0

million were $83.5 million, or 122 percent higher than 1H05

pretax earnings for the segment of $68.5 million(a) primarily

reflecting the same drivers which impacted 2Q06 earnings

performance combined with higher-than-average capital gains in

the first quarter of 2006.

Enrollment:

-- Commercial Segment medical membership of 3,313,900 at June 30,

2006 increased approximately 114,200, or 4 percent, from June

30, 2005 and 54,500, or 2 percent, from March 31, 2006. The

sequential increase in Commercial Segment medical membership

was primarily the result of the company's acquisition of CHA

Health on May 1, 2006.

-- Membership in the company's Smart plans and other consumer

offerings increased year over year to 416,400 at June 30,

2006, representing approximately 13 percent of Commercial

medical membership compared to 11 percent at June 30, 2005 and

13 percent at March 31, 2006.

Revenues:

-- Premiums and administrative services fees for the Commercial

Segment decreased 1 percent to $1.64 billion in 2Q06 compared

to $1.66 billion in the prior year's quarter, as an increase

in administrative services fees resulting from a 21 percent

increase in ASO membership was more than offset by lower

premiums due to declines in at-risk enrollment.

-- Commercial Segment medical premiums for fully insured groups

increased approximately 5.5 percent on a per-member basis

during 2Q06 compared to 2Q05. This increase primarily includes

the effect of a greater percentage of the company's

fully-insured group block being weighted towards small groups,

as its large group business becomes more weighted towards ASO.

Premium yield and medical cost trends for the small group

business generally include a higher level of benefit buy-downs

versus larger employers. The company anticipates the FY06

range of increase in commercial premiums for fully insured

group membership to be in the range of the expected increase

in per-member medical costs.

Medical Expenses:

-- In 2Q06, the Commercial Segment MER of 82.9 percent was 90

basis points lower than the 2Q05 MER of 83.8 percent, again

primarily reflecting improving medical cost utilization trends

and the company's commitment to underwriting discipline.

-- Per-member medical costs for commercial fully insured group

accounts are now forecasted to rise in the range of 5.5 to 6.5

percent during 2006, including the effect of a greater

percentage of the company's fully-insured groups being

weighted towards small employers, as discussed above.

-- The company continues to project individual components of

commercial medical cost trend for 2006 will approximate as

follows: inpatient hospital utilization - flat to 1 percent;

inpatient and outpatient hospital rates - upper single digits;

outpatient hospital utilization - low to mid single digits;

physician - mid single digits; and pharmacy - high single

digits to low double digits.

SG&A Expenses:

-- The Commercial Segment SG&A expense ratio of 18.8 percent for

2Q06 compares to 17.7 percent(a) in 2Q05, primarily the

result of lower average fully-insured medical enrollment and

an increase in the percentage of commercial medical membership

related to ASO to 43 percent in 2Q06 versus 37 percent in the

prior year. On a sequential basis, the segment's SG&A ratio

improved 160 basis points primarily due to progressively

higher administrative cost leverage.

Cash Flows from Operations

Cash flows provided by operations for 2Q06 of $534.9 million compared to $179.3 million(a) in 2Q05. The company also evaluates operating cash flows on a non-GAAP basis(b)(c). Cash flows from operations ($ in millions) 2Q06 2Q05(a) 1H06 1H05(a) ---------------------------------------------------------------------- GAAP cash flows provided by operations $534.9 $179.3 $1,542.8 $274.9 ---------------------------------------------------------------------- Timing of premium payment from CMS (c) (257.2) -- (1,031.7) 19.8 ---------------------------------------------------------------------- Non-GAAP cash flows provided by operations (b)(c) $277.7 $179.3 $511.1 $294.7 ----------------------------------------------------------------------

Non-GAAP cash flows provided by operations rose to $277.7 million in 2Q06 from $179.3 million in 2Q05 driven by growth in the company's Medicare operations. The company now expects that cash flows from operations for 2006 will be in the range of $850 million to $950 million driven by expected higher earnings over the prior year together with anticipated changes in working capital. Footnotes --------- (a) In accordance with Generally Accepted Accounting Principles (GAAP), Humana adopted the retrospective method for implementing new stock option accounting rules on January 1, 2006. Consequently, prior period results in this news release have been adjusted to retrospectively reflect the expensing of stock options. (b) The Company has included certain financial measures that are not in accordance with GAAP within this news release. The company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses these non-GAAP financial measures as indicators of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP. (c) When reviewing and analyzing Humana's operating cash flows, company management applies the CMS premium payment in each month to match the corresponding disbursements. To do otherwise distorts meaningful analysis of the company's operating cash flow. Therefore, decisions such as management's forecasting and business plans regarding cash flow use this non-GAAP financial measure.

Conference Call & Virtual Slide Presentation

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

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

Cautionary Statement

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

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

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

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

About Humana

Humana Inc., headquartered in Louisville, Ky., is one of the nation's largest publicly traded health benefits companies, with over 11 million medical members. Humana offers a diversified portfolio of health insurance products and related services - through traditional and consumer-choice plans - to employer groups, government-sponsored plans, and individuals.

Over its 45-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.

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

-- Annual report to stockholders;

-- Securities and Exchange Commission filings;

-- Most recent investor conference presentation;

-- Quarterly earnings news releases;

-- Replay of most recent earnings release conference call;

-- Calendar of events (includes upcoming earnings conference call

dates, times, and access number, as well as planned

interaction with research analysts and institutional

investors);

-- Corporate Governance information.

Humana Inc. GAAP Earnings Guidance Points For the year ending December 31, 2006 As of July 31, 2006 Diluted earnings per Full year: $2.82 to $2.88 common share Third quarter 2006: $0.95 to $1.00 ---------------------------------------------------------------------- Revenues Consolidated: $21 billion to $22 billion Medicare Advantage: $8.5 billion to $9.0 billion Medicare stand-alone PDPs: $2.8 billion to $3.2 billion TRICARE: $2.5 billion to $2.9 billion Commercial: $6.5 billion to $7.0 billion ---------------------------------------------------------------------- Year-end medical Medicare Advantage: approximately 1 membership million Medicare stand-alone PDPs: approximately 3.5 million TRICARE: No material change from prior year Medicaid: Down approximately 40,000 from prior year Commercial: Up approximately 140,000 to 150,000 from prior year including the benefit of members acquired via the CHA Health acquisition ---------------------------------------------------------------------- Medical costs Medicare stand-alone PDPs: MER in the range of 86% to 89% Commercial fully insured groups: Medical cost trends in the range of 5.5% to 6.5%; premium yields in line with medical cost trends ---------------------------------------------------------------------- Selling, general & Consolidated SG&A expense ratio of 13% to administrative expenses 14% ---------------------------------------------------------------------- Pretax results Medicare Advantage: 3% to 5% pretax (1) excluding allocation margin(1) of investment and other Medicare stand-alone PDPs: Approximately income and interest 1% pretax margin(1) expense TRICARE: Approximately 3% to 4% pretax margin(1) Commercial Segment: $200 million to $240 million ---------------------------------------------------------------------- Cash flows from $850 million to $950 million operations ---------------------------------------------------------------------- Capital expenditures $155 million to $165 million ---------------------------------------------------------------------- Effective tax rate Approximately 35% to 37% ---------------------------------------------------------------------- Weighted average shares Approximately 168 million outstanding used to compute diluted earnings per common share ---------------------------------------------------------------------- Humana Inc. Statistical Schedules And Supplementary Information 2Q06 Earnings Release Humana Inc. S-2 Statistical Schedules and Supplementary Information 2Q06 Earnings Release Contents Page Description ------------ ------------------------------------------------------- S-3 2Q06 Consolidated Statements of Income S-4 YTD Consolidated Statements of Income S-5 Consolidated Balance Sheets S-6 2Q06 Consolidated Statements of Cash Flows S-7 YTD Consolidated Statements of Cash Flows S-8 2005 Quarters Adjusted to Reflect Retrospective Application of Expensing Stock Options S-9 2003 Through 2005 Adjusted to Reflect Retrospective Application of Expensing Stock Options S-10 Key Income Statement Ratios and Segment Operating Results S-11 Membership Detail S-12 2Q06 Premiums and Administrative Services Fees Detail S-13 YTD Premiums and Administrative Services Fees Detail S-14 Percentage of Ending Membership under Capitation Arrangements S-15 Detail of Medical and Other Expenses Payable Balance and Year-to-Date Changes S-16-17 Medical Claims Reserves Statistics S-18 Footnotes Humana Inc. S-3 2Q06 Consolidated Statements of Income In thousands, except per common share results Three Months Ended June 30, ----------------------- Dollar Percentage 2006 2005 (A) Change Change ----------------------- ---------------------- Revenues: Premiums $5,264,475 $3,446,019 $1,818,456 52.8% Administrative services fees 83,711 66,655 17,056 25.6% Investment income 50,567 31,131 19,436 62.4% Other income 8,416 2,556 5,860 229.3% ----------------------- ----------- Total revenues 5,407,169 3,546,361 1,860,808 52.5% ----------------------- ----------- Operating expenses: Medical 4,479,501 2,888,509 1,590,992 55.1% Selling, general and administrative 733,863 490,919 242,944 49.5% Depreciation 31,613 24,815 6,798 27.4% Other intangible amortization 4,983 6,948 (1,965) -28.3% ----------------------- ----------- Total operating expenses 5,249,960 3,411,191 1,838,769 53.9% ----------------------- ----------- Income from operations 157,209 135,170 22,039 16.3% Interest expense 16,887 10,322 6,565 63.6% ----------------------- ----------- Income before income taxes 140,322 124,848 15,474 12.4% Provision for income taxes 50,833 43,436 7,397 17.0% ----------------------- ----------- Net income $89,489 $81,412 $8,077 9.9% ======================= =========== Basic earnings per common share $0.55 $0.50 $0.05 10.0% Diluted earnings per common share $0.53 $0.49 $0.04 8.2% Shares used in computing basic earnings per common share 163,706 161,492 Shares used in computing diluted earnings per common share 167,536 165,149 Humana Inc. S-4 YTD Consolidated Statements of Income In thousands, except per common share results Six Months Ended June 30, ----------------------- Dollar Percentage 2006 2005 (A) Change Change ----------------------- ---------------------- Revenues: Premiums $9,785,961 $6,736,834 $3,049,127 45.3% Administrative services fees 162,389 130,168 $32,221 24.8% Investment income 149,469 61,342 $88,127 143.7% Other income 13,715 5,242 $8,473 161.6% ----------------------- ----------- Total revenues 10,111,534 6,933,586 $3,177,948 45.8% ----------------------- ----------- Operating expenses: Medical 8,263,427 5,642,242 $2,621,185 46.5% Selling, general and administrative 1,474,749 969,959 $504,790 52.0% Depreciation 61,465 49,621 $11,844 23.9% Other intangible amortization 10,037 11,391 ($1,354) -11.9% ----------------------- ----------- Total operating expenses 9,809,678 6,673,213 $3,136,465 47.0% ----------------------- ----------- Income from operations 301,856 260,373 $41,483 15.9% Interest expense 30,326 18,845 $11,481 60.9% ----------------------- ----------- Income before income taxes 271,530 241,528 $30,002 12.4% Provision for income taxes 98,326 53,381 $44,945 84.2% ----------------------- ----------- Net income $173,204 $188,147 ($14,943) -7.9% ======================= =========== Basic earnings per common share $1.06 $1.17 ($0.11) -9.4% Diluted earnings per common share $1.03 $1.14 ($0.11) -9.6% Shares used in computing basic earnings per common share 163,411 161,202 Shares used in computing diluted earnings per common share 167,430 164,823 Humana Inc. S-5 Consolidated Balance Sheets Dollars in thousands, except share amounts Sequential Change June 30, March 31, December 31, ----------------- 2006 2006 2005 (A) Dollar Percent ---------------------------------- ----------------- Assets Current assets: Cash and cash equivalents $2,258,464 $1,843,405 $732,016 Investment securities 2,998,440 2,623,009 2,354,904 Receivables, net: Premiums 767,610 763,061 723,190 Administrative services fees 14,842 21,652 15,462 Securities lending collateral 240,849 250,322 47,610 Other 778,821 517,877 333,004 ---------------------------------- Total current assets 7,059,026 6,019,326 4,206,186 $1,039,700 17.3% Property and equipment 505,721 498,267 484,412 Other assets: Long-term investment securities 387,362 374,583 391,035 Goodwill 1,307,650 1,265,176 1,264,575 Other 576,841 540,668 523,406 ---------------------------------- Total other assets 2,271,853 2,180,427 2,179,016 ---------------------------------- Total assets $9,836,600 $8,698,020 $6,869,614 $1,138,580 13.1% ================================== Liabilities and Stockholders' Equity Current liabilities: Medical and other expenses payable $2,457,643 $2,169,489 $1,909,682 Trade accounts payable and accrued expenses 1,102,919 871,231 560,550 Book overdraft 271,824 275,587 280,005 Securities lending payable 240,849 250,322 47,610 Unearned revenues 1,170,278 920,678 120,489 Current portion of long-term debt 299,941 300,231 301,254 ---------------------------------- Total current liabilities 5,543,454 4,787,538 3,219,590 $755,916 15.8% Long-term debt 784,399 601,225 513,790 Other long-term liabilities 849,952 741,498 627,360 ---------------------------------- Total liabilities 7,177,805 6,130,261 4,360,740 $1,047,544 17.1% ---------------------------------- Commitments and contingencies Stockholders' equity: Preferred stock, $1 par; 10,000,000 shares authorized, none issued - - - Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 181,012,456 issued at June 30, 2006 30,170 30,085 29,843 Capital in excess of par value 1,285,399 1,264,161 1,235,888 Retained earnings 1,594,879 1,505,390 1,421,675 Accumulated other comprehensive (loss) income (43,352) (28,408) 24,832 Treasury stock, at cost, 15,948,235 shares at June 30, 2006 (208,301) (203,469) (203,364) ---------------------------------- Total stockholders' equity 2,658,795 2,567,759 2,508,874 $91,036 3.5% ---------------------------------- Total liabilities and stockholders' equity $9,836,600 $8,698,020 $6,869,614 $1,138,580 13.1% ================================== Debt to total capitalization ratio 29.0% 26.0% 24.5% Humana Inc. S-6 2Q06 Consolidated Statements of Cash Flows Dollars in thousands Three Months Ended June 30, ----------------------- Dollar Percentage 2006 2005 (A) Change Change ----------------------- ---------------------- Cash flows from operating activities Net income $89,489 $81,412 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36,596 31,763 Stock-based compensation 8,471 7,646 Provision for deferred income taxes 2,479 3,124 Changes in operating assets and liabilities excluding the effects of acquisitions: Receivables 3,104 (19,825) Other assets (174,050) (20,154) Medical and other expenses payable 266,956 131,501 Other liabilities 57,967 (13,949) Unearned revenues 244,661 (22,535) Other (818) 304 ----------------------- Net cash provided by operating activities 534,855 179,287 $355,568 198.3% ----------------------- Cash flows from investing activities Acquisitions, net of cash acquired (25,818) (4,627) Purchases of property and equipment (36,712) (31,034) Proceeds from sales of property and equipment 18 30 Purchases of investment securities (594,890) (531,234) Proceeds from maturities of investment securities 100,289 131,947 Proceeds from sales of investment securities 152,855 325,329 Change in securities lending collateral 9,473 49,680 ----------------------- Net cash used in investing activities (394,785) (59,909) ($334,876) -559.0% ----------------------- Cash flows from financing activities Receipts from CMS contract deposits 550,868 - Withdrawals from CMS contract deposits (462,981) - Repayments under credit agreement (300,000) (25,000) Proceeds from issuance of senior notes 498,545 - Debt issue costs (3,825) - Change in book overdraft (3,763) (10,248) Change in securities lending payable (9,473) (49,680) Common stock repurchases (4,832) (315) Tax benefit from stock-based compensation 5,252 2,570 Proceeds from stock option exercises and other 5,198 6,821 ----------------------- Net cash provided by (used in) financing activities 274,989 (75,852) $350,841 462.5% ----------------------- Increase in cash and cash equivalents 415,059 43,526 Cash and cash equivalents at beginning of period 1,843,405 560,264 ----------------------- Cash and cash equivalents at end of period $2,258,464 $603,790 ======================= Humana Inc. S-7 YTD Consolidated Statements of Cash Flows Dollars in thousands Six Months Ended June 30, ----------------------- Dollar Percentage 2006 2005 (A) Change Change ----------------------- ---------------------- Cash flows from operating activities Net income $173,204 $188,147 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 71,502 61,012 Stock-based compensation 15,051 14,370 (Benefit) provision for deferred income taxes (1,226) 11,186 Changes in operating assets and liabilities excluding the effects of acquisitions: Receivables (42,957) (26,250) Other assets (359,300) (28,514) Medical and other expenses payable 526,763 218,166 Other liabilities 172,719 (117,906) Unearned revenues 1,044,850 (44,951) Other (57,778) (400) ----------------------- Net cash provided by operating activities 1,542,828 274,860 $1,267,968 461.3% ----------------------- Cash flows from investing activities Acquisitions, net of cash acquired (25,931) (352,726) Purchases of property and equipment (81,973) (67,227) Proceeds from sales of property and equipment 2,156 38 Purchases of investment securities (2,258,548) (1,245,605) Proceeds from maturities of investment securities 1,010,397 393,612 Proceeds from sales of investment securities 712,685 759,835 Change in securities lending collateral (193,239) 842 ----------------------- Net cash used in investing activities (834,453) (511,231) ($323,222) -63.2% ----------------------- Cash flows from financing activities Receipts from CMS contract deposits 1,045,062 - Withdrawals from CMS contract deposits (736,425) - Borrowings under credit agreement 100,000 294,000 Repayments under credit agreement (300,000) (50,000) Proceeds from issuance of senior notes 498,545 - Debt issue costs (3,825) - Change in book overdraft (8,181) (9,567) Change in securities lending payable 193,239 (842) Common stock repurchases (4,937) (1,691) Tax benefit from stock-based compensation 13,656 6,225 Proceeds from stock option exercises and other 20,939 21,957 ----------------------- Net cash provided by financing activities 818,073 260,082 $557,991 214.5% ----------------------- Increase in cash and cash equivalents 1,526,448 23,711 Cash and cash equivalents at beginning of period 732,016 580,079 ----------------------- Cash and cash equivalents at end of period $2,258,464 $603,790 ======================= Humana Inc. S-8 2005 Quarters Adjusted to Reflect Retrospective Application of Expensing Stock Options In thousands, except per common share results ------------------------- ------------------------- 1Q05 2Q05 ------------------------- ------------------------- Reported Adjusted (A) Reported Adjusted (A) ------------ ------------ ------------ ------------ Revenues $3,387,225 $3,387,225 $3,546,361 $3,546,361 Pretax income (loss): Government $72,224 $70,472 $104,092 $102,531 Commercial 49,463 46,208 25,215 22,317 ------------ ------------ ------------ ------------ Consolidated $121,687 $116,680 $129,307 $124,848 Net income $109,795 $106,735 $84,137 $81,412 Diluted earnings per common share $0.67 $0.65 $0.51 $0.49 Shares used in computing diluted earnings per common share 164,179 164,496 164,908 165,149 SG&A expense ratio: Government 10.8% 10.9% 10.6% 10.6% Commercial 17.6% 17.8% 17.5% 17.7% Consolidated 14.1% 14.3% 13.8% 14.0% Total assets $6,149,593 $6,149,593 $6,277,907 $6,277,907 Total liabilities $3,949,788 $3,916,471 $3,961,719 $3,927,862 Total stockholders' equity $2,199,805 $2,233,122 $2,316,188 $2,350,045 Net cash provided by (used in) operating activities $99,228 $95,573 $181,857 $179,287 Net cash used in investing activities ($451,322) ($451,322) ($59,909) ($59,909) Net cash provided by (used in) financing activities $332,279 $335,934 ($78,422) ($75,852) ------------------------- ------------------------- 3Q05 4Q05 ------------------------- ------------------------- Reported Adjusted (A) Reported Adjusted (A) ------------ ------------ ------------ ------------ Revenues $3,821,461 $3,821,461 $3,663,080 $3,663,080 Pretax income (loss): Government $89,557 $87,868 $57,395 $55,805 Commercial (18,053) (21,190) 41,821 38,869 ------------ ------------ ------------ ------------ Consolidated $71,504 $66,678 $99,216 $94,674 Net income $49,944 $46,807 $64,607 $61,776 Diluted earnings per common share $0.30 $0.28 $0.39 $0.37 Shares used in computing diluted earnings per common share 166,037 166,076 166,371 166,521 SG&A expense ratio: Government 13.1% 13.2% 15.5% 15.6% Commercial 20.0% 20.2% 18.1% 18.3% Consolidated 16.2% 16.3% 16.7% 16.9% Total assets $6,832,421 $6,832,421 $6,869,614 $6,869,614 Total liabilities $4,466,451 $4,432,166 $4,395,509 $4,360,740 Total stockholders' equity $2,365,970 $2,400,255 $2,474,105 $2,508,874 Net cash provided by (used in) operating activities $591,039 $586,006 ($246,497) ($250,784) Net cash used in investing activities ($96,395) ($96,395) ($159,650) ($159,650) Net cash provided by (used in) financing activities ($119,498) ($114,465) $159,227 $163,514 Humana Inc. S-9 2003 Through 2005 Adjusted to Reflect Retrospective Application of Expensing Stock Options In thousands, except per common share results For the year ended For the year ended December 31, 2005 December 31, 2004 ------------------------- ------------------------- Reported Adjusted (A) Reported Adjusted (A) ------------ ------------ ------------ ------------ Revenues $14,418,127 $14,418,127 $13,104,325 $13,104,325 Pretax income: Government $323,268 $316,676 $273,840 $269,063 Commercial 98,446 86,204 142,010 130,315 ------------ ------------ ------------ ------------ Consolidated $421,714 $402,880 $415,850 $399,378 Net income $308,483 $296,730 $280,012 $269,947 Diluted earnings per common share $1.87 $1.79 $1.72 $1.66 Shares used in computing diluted earnings per common share 165,374 165,560 162,456 162,905 SG&A expense ratio: Government 12.6% 12.7% 12.2% 12.3% Commercial 18.3% 18.5% 16.4% 16.5% Consolidated 15.3% 15.4% 14.5% 14.6% Total assets $6,869,614 $6,869,614 $5,657,617 $5,657,617 Total liabilities $4,395,509 $4,360,740 $3,567,493 $3,533,369 Total stockholders' equity $2,474,105 $2,508,874 $2,090,124 $2,124,248 Net cash provided by operating activities $625,627 $610,082 $347,809 $344,061 Net cash used in investing activities ($767,276) ($767,276) ($624,081) ($624,081) Net cash provided by (used in) financing activities $293,586 $309,131 ($75,053) ($71,305) For the year ended December 31, 2003 ------------------------ Reported Adjusted (A) ------------ ----------- Revenues $12,226,311 $12,226,311 Pretax income: Government $223,706 $221,240 Commercial 121,010 114,973 ------------ ------------ Consolidated $344,716 $336,213 Net income $228,934 $223,739 Diluted earnings per common share $1.41 $1.38 Shares used in computing diluted earnings per common share 161,960 162,406 SG&A expense ratio: Government 13.4% 13.5% Commercial 16.9% 17.0% Consolidated 15.4% 15.4% Total assets $5,379,814 $5,379,814 Total liabilities $3,543,865 $3,510,842 Total stockholders' equity $1,835,949 $1,868,972 Net cash provided by operating activities $413,140 $397,921 Net cash used in investing activities ($382,837) ($382,837) Net cash provided by (used in) financing activities $179,744 $194,963 Humana Inc. S-10 Key Income Statement Ratios and Segment Operating Results Dollars in thousands Three Months Ended June 30, ------------------- Percentage 2006 2005 (A) Difference Change ------------------- ---------- ---------- Medical expense ratio Government Segment 86.0% 83.8% 2.2% Commercial Segment 82.9% 83.8% -0.9% Consolidated 85.1% 83.8% 1.3% Selling, general, and administrative expense ratio Government Segment 11.5% 10.6% 0.9% Commercial Segment 18.8% 17.7% 1.1% Consolidated 13.7% 14.0% -0.3% Detail of Pretax Income Government Segment $97,981 $102,531 ($4,550) -4.4% Commercial Segment 42,341 22,317 20,024 89.7% ------------------- ---------- Consolidated $140,322 $124,848 $15,474 12.4% =================== ========== Detail of Pretax Margins Government Segment 2.6% 5.5% -2.9% Commercial Segment 2.5% 1.3% 1.2% Consolidated 2.6% 3.5% -0.9% Six Months Ended June 30, ------------------- Percentage 2006 2005 (A) Difference Change ------------------- --------------------- Medical expense ratio Government Segment 85.8% 84.4% 1.4% Commercial Segment 81.5% 83.0% -1.5% Consolidated 84.4% 83.8% 0.6% Selling, general, and administrative expense ratio Government Segment 12.5% 10.8% 1.7% Commercial Segment 19.6% 17.7% 1.9% Consolidated 14.8% 14.1% 0.7% Detail of Pretax Income Government Segment $119,553 $173,003 ($53,450) -30.9% Commercial Segment 151,977 68,525 83,452 121.8% ------------------- ---------- Consolidated $271,530 $241,528 $30,002 12.4% =================== ========== Detail of Pretax Margins Government Segment 1.8% 4.9% -3.1% Commercial Segment 4.5% 2.0% 2.5% Consolidated 2.7% 3.5% -0.8% Humana Inc. S-11 Membership Detail In thousands Ending Ending June 30, 2006 Average - 2Q06 June 30, 2005 ------------------------------------------ Medical Membership: Government Segment: Medicare Advantage - HMO 457.0 453.8 418.0 Medicare Advantage - PPO 64.6 54.7 3.7 Medicare Advantage - PFFS 438.2 379.7 52.6 ------------------------------------------ Total Medicare Advantage 959.8 888.2 474.3 ------------------------------------------ Medicare - PDP - Standard 2,066.5 1,755.4 - Medicare - PDP - Enhanced 977.2 743.8 - Medicare - PDP - Complete 415.1 355.0 - ------------------------------------------ Total Medicare stand- alone PDPs 3,458.8 2,854.2 - ------------------------------------------ Total Medicare 4,418.6 3,742.4 474.3 ------------------------------------------ TRICARE insured 1,732.6 1,732.0 1,733.6 TRICARE ASO 1,141.9 1,141.8 1,142.8 ------------------------------------------ Total TRICARE 2,874.5 2,873.8 2,876.4 Medicaid 418.5 422.2 477.9 ------------------------------------------ Total Government Segment 7,711.6 7,038.4 3,828.6 ------------------------------------------ Commercial Segment: Fully insured medical: Group 1,716.4 1,707.9 1,873.7 Individual 170.0 167.7 144.0 Medicare supplement 6.7 6.4 3.6 ------------------------------------------ Total fully insured medical 1,893.1 1,882.0 2,021.3 ASO 1,420.8 1,411.5 1,178.4 ------------------------------------------ Total Commercial Segment 3,313.9 3,293.5 3,199.7 ------------------------------------------ Total medical membership 11,025.5 10,331.9 7,028.3 ========================================== Specialty Membership (all Commercial Segment) Dental - fully insured 955.6 954.2 893.7 Dental - ASO 496.5 496.8 488.9 ------------------------------------------ Total dental 1,452.1 1,451.0 1,382.6 Group life 427.2 427.0 437.1 Short-term disability 15.6 15.7 16.4 ------------------------------------------ Total specialty membership 1,894.9 1,893.7 1,836.1 ========================================== Year-over-year Sequential Change Ending Change ---------------- March 31, ---------------- Amount Percent 2006 Amount Percent -------- ------- ---------- -------- ------- Medical Membership: Government Segment: Medicare Advantage - HMO 39.0 9.3% 443.7 13.3 3.0% Medicare Advantage - PPO 60.9 1645.9% 35.4 29.2 82.5% Medicare Advantage - PFFS 385.6 733.1% 262.1 176.1 67.2% -------- ---------- -------- Total Medicare Advantage 485.5 102.4% 741.2 218.6 29.5% -------- ---------- -------- Medicare - PDP - Standard 2,066.5 100.0% 1,289.2 777.3 60.3% Medicare - PDP - Enhanced 977.2 100.0% 421.0 556.2 132.1% Medicare - PDP - Complete 415.1 100.0% 248.8 166.3 66.8% -------- ---------- -------- Total Medicare stand-alone PDPs 3,458.8 100.0% 1,959.0 1,499.8 76.6% -------- ---------- -------- Total Medicare 3,944.3 831.6% 2,700.2 1,718.4 63.6% -------- ---------- -------- TRICARE insured (1.0) -0.1% 1,724.7 7.9 0.5% TRICARE ASO (0.9) -0.1% 1,149.3 (7.4) -0.6% -------- ---------- -------- Total TRICARE (1.9) -0.1% 2,874.0 0.5 0.0% Medicaid (59.4) -12.4% 427.0 (8.5) -2.0% -------- ---------- -------- Total Government Segment 3,883.0 101.4% 6,001.2 1,710.4 28.5% -------- ---------- -------- Commercial Segment: Fully insured medical: Group (157.3) -8.4% 1,695.1 21.3 1.3% Individual 26.0 18.1% 163.1 6.9 4.2% Medicare supplement 3.1 86.1% 6.0 0.7 11.7% -------- ---------- -------- Total fully insured medical (128.2) -6.3% 1,864.2 28.9 1.6% ASO 242.4 20.6% 1,395.2 25.6 1.8% -------- ---------- -------- Total Commercial Segment 114.2 3.6% 3,259.4 54.5 1.7% -------- ---------- -------- Total medical membership 3,997.2 56.9% 9,260.6 1,764.9 19.1% ======== ========== ======== Specialty Membership (all Commercial Segment) Dental - fully insured 61.9 6.9% 950.6 5.0 0.5% Dental - ASO 7.6 1.6% 494.7 1.8 0.4% -------- ---------- -------- Total dental 69.5 5.0% 1,445.3 6.8 0.5% Group life (9.9) -2.3% 421.3 5.9 1.4% Short-term disability (0.8) -4.9% 15.7 (0.1) -0.6% -------- ---------- -------- Total specialty membership 58.8 3.2% 1,882.3 12.6 0.7% ======== ========== ======== Humana Inc. S-12 2Q06 Premiums and Administrative Services Fees Detail Dollars in thousands, except per member per month Three Months Ended June 30, ----------------------- Dollar Percentage 2006 2005 Change Change ----------------------- --------------------- Premium revenues Government Segment: Medicare Advantage $2,109,406 $1,092,442 $1,016,964 93.1% Medicare stand-alone PDPs 801,755 - 801,755 100.0% ----------------------- ----------- Total Medicare 2,911,161 1,092,442 1,818,719 166.5% TRICARE insured (C) 657,627 611,179 46,448 7.6% Medicaid 129,158 134,730 (5,572) -4.1% ----------------------- ----------- Total Government Segment premiums 3,697,946 1,838,351 1,859,595 101.2% ----------------------- ----------- Commercial Segment: Fully insured medical 1,464,646 1,512,278 (47,632) -3.1% Specialty 101,883 95,390 6,493 6.8% ----------------------- ----------- Total Commercial Segment premiums 1,566,529 1,607,668 (41,139) -2.6% ----------------------- ----------- Total premium revenues $5,264,475 $3,446,019 $1,818,456 52.8% ======================= =========== Administrative services fees Government segment (TRICARE-related) (C) $11,144 $15,392 ($4,248) -27.6% Commercial segment 72,567 51,263 21,304 41.6% ----------------------------------- Total administrative services fees $83,711 $66,655 $17,056 25.6% =================================== Per Member per Month (B) Three Months Ended June 30, --------------------------- 2006 2005 --------------------------- Premium revenues Government Segment: Medicare Advantage $792 $780 Medicare stand-alone PDPs $94 - TRICARE insured (C) $127 $117 Medicaid $102 $94 Commercial Segment: Fully insured medical $259 $249 Specialty $21 $20 Administrative services fees Government segment (TRICARE-related) (C) $3 $4 Commercial segment $13 $10 Humana Inc. S-13 YTD Premiums and Administrative Services Fees Detail Dollars in thousands, except per member per month Six Months Ended June 30, ----------------------- Dollar Percentage 2006 2005 Change Change ----------------------- --------------------- Premium revenues Government Segment: Medicare Advantage $3,830,249 $2,075,583 $1,754,666 84.5% Medicare stand-alone PDPs 1,316,912 - 1,316,912 100.0% ----------------------- ----------- Total Medicare 5,147,161 2,075,583 3,071,578 148.0% TRICARE insured (C) 1,258,381 1,173,507 84,874 7.2% Medicaid 258,625 269,144 (10,519) -3.9% ----------------------- ----------- Total Government Segment premiums 6,664,167 3,518,234 3,145,933 89.4% ----------------------- ----------- Commercial Segment: Fully insured medical 2,918,578 3,029,672 (111,094) -3.7% Specialty 203,216 188,928 14,288 7.6% ----------------------- ----------- Total Commercial Segment premiums 3,121,794 3,218,600 (96,806) -3.0% ----------------------- ----------- Total premium revenues $9,785,961 $6,736,834 $3,049,127 45.3% ======================= =========== Administrative services fees Government segment (TRICARE-related) (C) $22,335 $28,794 ($6,459) -22.4% Commercial segment 140,054 101,374 38,680 38.2% ----------------------- ----------- Total administrative services fees $162,389 $130,168 $32,221 24.8% ======================= =========== Per Member per Month (B) Six Months Ended June 30, --------------------------- 2006 2005 --------------------------- Premium revenues Government Segment: Medicare Advantage $808 $783 Medicare stand-alone PDPs $6 - TRICARE insured (C) $121 $112 Medicaid $101 $94 Commercial Segment: Fully insured medical $259

Source: Business Wire

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