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Humana Inc. Reports Financial Results for Fourth Quarter and Full Year 2003

Humana Inc. Reports Financial Results for Fourth Quarter and Full Year 2003

February 2, 2004 at 5:00 AM EST
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LOUISVILLE, Ky., Feb. 2 /PRNewswire-FirstCall/ -- Humana Inc. (NYSE: HUM) today reported earnings per diluted share of $.41 for the fourth quarter ended December 31, 2003 ("4Q03") compared to a $.01 loss per diluted share for the fourth quarter ended December 31, 2002 ("4Q02"). Net income of $66,309,000 for 4Q03 compares favorably to a net loss of $1,705,000 in 4Q02. Pretax margin of 3.2 percent for 4Q03 increased 330 basis points from the loss in 4Q02.

The increase in year-over-year results for 4Q03 was driven by a significant improvement in operating earnings for the company's Commercial segment, growth in its Government segment operating earnings and the absence of unusual items and charges incurred in 4Q02.

Results for the year ended December 31, 2003 ("FY2003") also improved over those for the year ended December 31, 2002 ("FY2002"). Earnings per diluted share for FY2003 of $1.41 increased 66 percent compared to $.85 for FY2002. Net income of $228,934,000 increased 60 percent for FY2003 versus $142,755,000 in FY2002. The company's pretax margin of 2.8 percent in FY2003 increased 90 basis points over that for FY2002 of 1.9 percent.

"We are pleased that our results for 2003 show meaningful progress in each of our business segments, the result of our sustained commitment to a diversified customer base," said Michael B. McCallister, Humana's president and chief executive officer. "The growth in our Commercial segment results, with an ever-increasing interest in our innovative Smart products, positions us firmly as a leader in health benefits solutions for both employers and employees. In August 2003, the Department of Defense recognized Humana's leadership and dedication to customer service by awarding us the TRICARE South Region contract. In addition, with the Medicare Modernization Act, we anticipate exploring new opportunities to extend our long-term and successful relationship with our nation's seniors."

    Results for FY2003 included:
     * the writedown of building and equipment of $17,233,000 pretax
       ($10,529,000 net of income tax benefit, or $.07 per diluted share),
     * a gain on the sale of a venture capital investment of $15,200,000
       pretax ($10,108,000 net of income taxes, or $.06 per diluted share),
       and
     * software abandonment charges of $13,527,000 pretax ($8,265,000 net of
       income tax benefit, or $.05 per diluted share).

These items were recorded during the six months ended June 30, 2003. The net impact of these items reduced pretax income for FY2003 by $15,560,000 ($8,686,000 net of income taxes, or $.05 per diluted share).

    Results for 4Q02 and FY2002 included:
     * severance and related employee benefit charges of $32,105,000 pretax
       ($19,616,000 net of income taxes, or $.12 per diluted share),
     * long-lived asset impairment and lease discontinuance costs of
       $3,772,000 pretax ($2,305,000 net of income taxes, or $.01 per diluted
       share),
     * charges due to the impairment in the fair value of certain private debt
       and equity investments of $19,571,000 pretax ($17,863,000 net of income
       taxes, or $.11 per diluted share), and
     * the establishment of reserves for liabilities related to previous
       acquisitions of $30,140,000 pretax ($18,416,000 net of income taxes, or
       $.11 per diluted share).

The net impact of these items reduced pretax income for 4Q02 and FY2002 by $85,588,000 ($58,200,000 net of income taxes, or $.35 per diluted share).

Segment Results

Commercial segment pretax income increased to $14,062,000 in 4Q03 from a loss of $60,702,000 in 4Q02. Commercial segment pretax margin of 0.8 percent in 4Q03 was 470 basis points higher versus the loss in 4Q02.

The improvement in year-over-year Commercial segment results during 4Q03 was driven by incremental improvements in both the underwriting results and the percent of premiums and administrative services fees spent on selling, general and administrative expenses for the segment, as well as the absence of unusual items and charges incurred in 4Q02.

For FY2003, Commercial segment pretax income increased to $121,010,000 versus a loss of $15,174,000 in FY2002. Pretax margin for FY2003 in the Commercial segment was 1.8 percent, a 210 basis point increase from the loss in FY2002.

    Commercial segment pretax results for FY2003 included:
     * software abandonment charges of $13,527,000,
     * a gain on the sale of a venture capital investment of $12,423,000, and
     * the writedown of building and equipment of $4,325,000.

These items were recorded during the six months ended June 30, 2003. The net impact of these items reduced Commercial segment pretax income for FY2003 by $5,429,000.

    Commercial segment pretax results for 4Q02 and FY2002 included:
     * severance and related employee benefit charges of $21,838,000,
     * long-lived asset impairment and lease discontinuance costs of
       $2,441,000,
     * charges due to the impairment in the fair value of certain private debt
       and equity investments of $16,225,000, and
     * the establishment of reserves for liabilities related to previous
       acquisitions of $28,397,000.

The net impact of these items reduced Commercial segment pretax income for 4Q02 and FY2002 by $68,901,000.

Government segment pretax income of $85,650,000 in 4Q03 compares to 4Q02 Government segment pretax income of $58,195,000. Pretax margin for the Government segment increased to 6.0 percent in 4Q03, a 160 basis point increase compared to 4.4 percent in 4Q02.

The increase in year-over-year Government segment results during 4Q03 was primarily driven by improvements in the operating performance of each of the company's governmental lines of business and the absence of unusual items and special charges incurred in 4Q02.

Government segment pretax income for FY2003 decreased to $223,706,000 from $225,108,000 in FY2002. Government segment pretax margin was 4.1 percent during FY2003 versus 4.3 percent in FY2002.

Government segment pretax results for FY2003 included:

* the writedown of building and equipment of $12,908,000 and

* a gain on the sale of a venture capital investment of $2,777,000.

These items were recorded during the six months ended June 30, 2003. The net impact of these items reduced Government segment pretax income for FY2003 by $10,131,000.

    Government segment pretax results for 4Q02 and FY2002 included:
     * severance and related employee benefit charges of $10,267,000,
     * long-lived asset impairment and lease discontinuance costs of
       $1,331,000,
     * charges due to the impairment in the fair value of certain private debt
       and equity investments of $3,346,000, and
     * the establishment of reserves for liabilities related to previous
       acquisitions of $1,743,000.

The net impact of these items reduced Government segment pretax income for FY2002 by $16,687,000.

Revenues and Membership

Consolidated revenues for 4Q03 totaled $3,152,872,000, compared to $2,855,032,000 in 4Q02, a 10.4 percent increase. Consolidated revenues for 4Q02 included charges due to the impairment in the fair value of certain private debt and equity investments of $19,571,000.

Medical membership as of December 31, 2003 totaled 6,769,600, an increase of 1.8 percent compared to the 6,647,100 medical members as of December 31, 2002.

For FY2003, consolidated revenues were $12,226,311,000 versus $11,261,181,000 in FY2002, an increase of 8.6 percent.

Consolidated revenues for FY2003 included a gain on the sale of a venture capital investment of $15,200,000 recorded during the six months ended June 30, 2003. Consolidated revenues for FY2002 included charges due to the impairment in the fair value of certain private debt and equity investments of $19,571,000.

Commercial segment premiums and administrative services fees totaled $1,698,284,000 during 4Q03 compared to a total of $1,534,463,000 during 4Q02, or 10.7 percent higher than in the prior year.

Commercial segment premiums and administrative services fees for FY2003 were $6,683,858,000 versus $5,939,531,000 in FY2002, an increase of 12.5 percent.

Commercial segment medical membership was 3,065,200 as of December 31, 2003, an increase of 28,800 members from September 30, 2003 and a growth of 72,700 members, or 2.4 percent from December 31, 2002. Per member premiums for the Commercial segment fully insured medical business, net of benefit changes, increased in the range of 12 to 14 percent during FY2003 compared to FY2002.

Government segment premiums and administrative services fees for 4Q03 totaled $1,426,235,000, or 8.7 percent higher than the related 4Q02 premiums and administrative services fees of $1,312,543,000.

Government segment premiums and administrative services fees for FY2003 were $5,413,101,000 versus $5,235,262,000 in FY2002, an increase of 3.4 percent.

Medicare+Choice membership totaled 328,600 at December 31, 2003, an increase of 4,000 members from September 30, 2003 and a decline of 15,500 members, or 4.5 percent from December 31, 2002. Per member premiums for the Medicare+Choice business, net of benefit changes, increased in the range of 4 to 6 percent during FY2003 compared to FY2002.

TRICARE's insured membership totaled 1,849,700 at December 31, 2003, versus comparable membership at December 31, 2002 of 1,755,800. TRICARE ASO membership was 1,057,200 at December 31, 2003, up 0.8 percent from December 31, 2002 membership of 1,048,700. TRICARE premium revenues and administrative services fees increased by 11.9 percent during FY2003 due primarily to a change in the monthly base revenue effective in July 2003 and additional reimbursement associated with reservist call-ups.

Medicaid membership of 468,900 at December 31, 2003 declined by 7.3 percent from December 31, 2002 due to the carve-out of three municipalities from one of our contracts in Puerto Rico. Approximately 84 percent of the company's Medicaid membership is in Puerto Rico. Per member premiums for the Medicaid business, net of benefit changes, increased in the range of 7 to 9 percent during FY2003 versus FY2002.

Medical and SG&A Expenses

The company's 4Q03 medical expense ratio (medical expenses as a percent of premiums) of 83.0 percent decreased 30 basis points compared to the 4Q02 medical expense ratio of 83.3 percent.

For FY2003, the medical expense ratio was 83.5 percent, a 10 basis point decline from that for FY2002.

The selling, general and administrative ("SG&A") expense ratio (SG&A expenses as a percent of premiums plus administrative services fees) for 4Q03 of 15.6 percent decreased by 180 basis points from the 4Q02 SG&A ratio of 17.4 percent.

For FY2003, the SG&A expense ratio was 15.4 percent compared to 15.9 percent in FY2002.

SG&A expenses for FY2003 included the writedown of building and equipment of $17,233,000 recorded during the six months ended June 30, 2003. This resulted in an increase to the FY2003 SG&A ratio of 10 basis points.

SG&A expenses for FY2002 included severance and related employee benefit charges of $32,105,000, long-lived asset impairment and lease discontinuance costs of $3,772,000, and the establishment of reserves for liabilities related to previous acquisitions of $30,140,000. These items resulted in an increase to the FY2002 SG&A ratio of 60 basis points.

Cash Flows from Operations

Cash flows provided by operations for 4Q03 of $290,220,000, included the positive impact of $211,899,000 from the timing of the receipt of the premium payment from the Centers for Medicare and Medicaid Services ("CMS").

The fixed monthly Medicare+Choice premium payment from CMS is due to Humana on the first day of each month. However, if the first of the month falls on a weekend or a holiday, the company receives that payment on the last business day of the prior month, often resulting in a significant impact on cash flows from operations.

Cash flows provided by operations for 4Q02 of $422,710,000 included a $205,755,000 benefit from the timing of the premium payment from CMS. The year-over-year decline in the quarter's cash flows is primarily a function of the timing of the collection of TRICARE receivables during 2002.

Cash flows provided by operations for FY2003 totaled $413,140,000 compared to cash flows provided by operations for FY2002 of $321,408,000. FY2003 cash flows from operations included a benefit of $6,144,000 from the timing of the receipt of the premium payment from CMS, while FY2002 cash flows from operations included a $10,873,000 negative impact from such timing.

Non-GAAP Financial Measures

The following is a reconciliation of the most directly comparable financial measures prepared in accordance with accounting principles generally accepted in the United States, or GAAP, to certain non-GAAP financial measures used by the company for 4Q03, 4Q02, FY2003, and FY2002.

                                     4Q03        4Q02       2003        2002
                                                  (in thousands)

    GAAP operating cash flows   $ 290,220   $ 422,710  $ 413,140   $ 321,408
      Timing of premium
      payment receipt
      from CMS                   (211,899)   (205,755)    (6,144)     10,873
    Non-GAAP operating cash
     flows(1)                   $  78,321   $ 216,955  $ 406,996   $ 332,281

    (1) Management believes the difference in timing of this cash event
        between periods may be so significant as to distort a particular
        period's trend in operating cash flows.  Management believes that
        meaningful analysis of our financial performance requires an
        understanding of the factors underlying that performance and our
        judgments about the relevance of a factor to normal operating results.
        In some cases, large factors or events may obscure short-term patterns
        and long-term trends. When reviewing and analyzing our cash flow
        position, management apportions the CMS premium payment in each month.
        To do otherwise would distort a meaningful analysis of our cash flow.
        Decisions such as management's forecast or business plans regarding
        cash flow, therefore, use this non-GAAP financial measure.

    Parent Company Cash and Investments

As of December 31, 2003, the parent company had $399,393,000 in cash, cash equivalents, and short-term investments. This compares to $187,008,000 at December 31, 2002.

Share Repurchase Program

During FY2003, the company acquired 3,670,500 of its common shares for an aggregate price of $44,147,000, or an average cost of $12.03 per share. 1,433,600 of these shares were purchased for $23,330,000 in connection with employee stock plans, at an average price of $16.27 per share and the remaining 2,236,900 shares were purchased in open market transactions for an aggregate purchase price of $20,817,000, or an average of $9.31 per share.

In July 2003, the company announced that its Board of Directors authorized the use of up to $100 million for the repurchase of its common shares, exclusive of shares repurchased in connection with employee stock plans. As of January 31, 2004, substantially all of the July 2003 authorization remains available for share repurchases.

Guidance

The company offers the GAAP guidance detailed below for the investor community. This guidance excludes the company's pending acquisition of Ochsner Health Plan of Louisiana.

    For the Quarter Ending March 31, 2004
     * Earnings per diluted share of $.40 to $.42.
     * A sequential increase in Commercial segment medical membership of over
       200 thousand members on a net basis (substantially all of which relates
       to Administrative Services Only or "ASO" accounts).

    For the Year Ending December 31, 2004
     * Earnings per diluted share of $1.60 to $1.65.
     * Consolidated revenues of approximately $13 billion.
     * Commercial segment pretax income of between $140 million and $170
       million.
     * Growth in Commercial segment medical membership of 6 to 9 percent for
       fully insured and ASO products combined.  (Approximately 80 to 90
       percent of the 2004 growth is anticipated to be in ASO products.)
     * Growth in per member premiums, net of benefit changes, in the range of
       8 to 10 percent for Commercial segment fully insured medical business.
     * Increases in per member Commercial segment fully insured medical costs
       in the range of 9 to 11 percent.
     * Commercial segment SG&A ratio of between 15.5 and 16.5 percent.
     * MedicareAdvantage (formerly Medicare+Choice) membership of between
       340,000 and 360,000 by year end.
     * Growth in per member premiums, net of benefit changes, in the range of
       8 to 10 percent for MedicareAdvantage business.
     * Increases in per member MedicareAdvantage medical costs in the range of
       8 to 10 percent.
     * TRICARE premiums and administrative services fees of approximately $2.1
       billion.
     * Pretax margin for the company's TRICARE business in the range of 2 to 4
       percent.
     * Government segment SG&A ratio of between 11 and 12 percent.
     * An effective tax rate of approximately 34 percent.
     * Cash flows from operating activities of $475 million to $525 million.
     * Capital expenditures of approximately $100 million.

    Conference Call

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 earnings guidance.

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.

A live virtual presentation (audio with slides) will be available and 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.

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, approximately two hours following the live web cast. An audio recording of the conference call will also be available in the Audio Archives located on the Investor Relations page at www.humana.com approximately two hours after the live call.

This news release contains forward-looking statements. The forward- looking statements made in the news release 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, as filed by Humana with the Securities and Exchange Commission:

     * Form 10-K for the year ended December 31, 2002;
     * Form 10-Qs for the quarters ended March 31, 2003, June 30, 2003, and
       September 30, 2003.

Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health benefits companies, with approximately 6.8 million medical members located primarily in 18 states and Puerto Rico. Humana offers coordinated health insurance coverage and related services -- through traditional and Internet-based plans -- to employer groups, government-sponsored plans, and individuals.

More information regarding Humana is available via the Internet at www.humana.com, including copies of:

     * Annual report to stockholders;
     * Securities and Exchange Commission filings;
     * Most recent investor conference presentation;
     * Quarterly earnings press releases;
     * Audio archive of most recent earnings release conference call;
     * Calendar of events (includes upcoming earnings conference call dates,
       times, and access number, as well as planned participation in investor
       conferences)


    Humana Inc.
    In thousands
                                     December 31,                     Percent
    Ending Medical Membership     2003         2002   Difference       Change

    Commercial:
     Fully insured             2,352.8      2,340.3         12.5          0.5
     ASO                         712.4        652.2         60.2          9.2
    Total Commercial           3,065.2      2,992.5         72.7          2.4

    Government:
     Medicare+Choice             328.6        344.1        (15.5)        (4.5)
     Medicaid                    468.9        506.0        (37.1)        (7.3)
     TRICARE                   1,849.7      1,755.8         93.9          5.3
     TRICARE ASO               1,057.2      1,048.7          8.5          0.8
    Total Government           3,704.4      3,654.6         49.8          1.4
     Total ending medical
      membership               6,769.6      6,647.1        122.5          1.8

                                     December 31,                     Percent
    Ending Specialty Membership   2003         2002   Difference       Change

    Commercial:
     Dental-fully insured        767.6        781.4        (13.8)        (1.8)
     Dental-ASO                  379.8        313.2         66.6         21.3
      Total Dental             1,147.4      1,094.6         52.8          4.8
     Group life                  502.4        523.3        (20.9)        (4.0)
     Short-term disability        18.3         22.1         (3.8)       (17.2)
     Total ending specialty
      membership               1,668.1      1,640.0         28.1          1.7

                                 Three months ended       Twelve months ended
                                     December 31,              December 31,
    Premiums                      2003         2002         2003         2002

    Commercial:
     Fully insured medical  $1,584,950   $1,422,602   $6,240,806   $5,499,033
     Specialty                  81,469       85,948      320,206      337,295
    Total Commercial         1,666,419    1,508,550    6,561,012    5,836,328

    Government:
     Medicare+Choice           634,332      647,666    2,527,446    2,629,597
     Medicaid                  129,367      119,609      487,100      462,998
     TRICARE                   622,513      516,685    2,249,725    2,001,474
    Total Government         1,386,212    1,283,960    5,264,271    5,094,069
    Total premiums          $3,052,631   $2,792,510  $11,825,283  $10,930,397

                                 Three months ended       Twelve months ended
                                     December 31,              December 31,
    Administrative services fees  2003        2002         2003         2002

    Commercial                 $31,865      $25,913     $122,846     $103,203
    Government                  40,023       28,583      148,830      141,193
    Total Administrative
     services fees             $71,888      $54,496     $271,676     $244,396


    Humana Inc.

    Dollars in thousands, except per share results

                                Three months ended       Twelve months ended
    Consolidated Statements         December 31,            December 31,
     of Operations                2003     2002 (a)     2003 (a)     2002 (a)

    Revenues:
     Premiums               $3,052,631   $2,792,510  $11,825,283  $10,930,397
     Administrative
      services fees             71,888       54,496      271,676      244,396
     Investment income          26,777        6,138      122,041       78,833
     Other income                1,576        1,888        7,311        7,555
      Total revenues         3,152,872    2,855,032   12,226,311   11,261,181
    Operating expenses:
     Medical                 2,534,887    2,326,448    9,879,421    9,138,196
     Selling, general
      and administrative       486,832      496,553    1,858,028    1,775,069
     Depreciation               24,158       26,243      115,167      105,006
     Other intangible
      amortization               2,389        3,931       11,612       15,724
      Total operating
       expenses              3,048,266    2,853,175   11,864,228   11,033,995
    Income from operations     104,606        1,857      362,083      227,186
     Interest expense            4,894        4,364       17,367       17,252
    Income (loss) before
     income taxes               99,712       (2,507)     344,716      209,934
     Provision (benefit)
      for income taxes          33,403         (802)     115,782       67,179
    Net income (loss)          $66,309      ($1,705)    $228,934     $142,755

    Basic earnings (loss)
     per common share            $0.41       ($0.01)       $1.44        $0.87
    Diluted earnings (loss)
     per common share            $0.41       ($0.01)       $1.41        $0.85

    Shares used in computing
     basic earnings per
     common share (000's)      161,225      160,943      158,968      163,489
    Shares used in computing
     diluted earnings per
     common share (000's)      163,724      160,943      161,960      167,801

    Operating Results by Segment

     Commercial pretax
      income (loss)             14,062      (60,702)     121,010      (15,174)
     Government pretax income   85,650       58,195      223,706      225,108
      Consolidated pretax
       income (loss)            99,712       (2,507)     344,716      209,934

    Key Ratios

    Medical expense ratio
     Commercial                  83.6%        83.7%        82.9%        83.5%
     Government                  82.3%        82.8%        84.3%        83.8%
      Total                      83.0%        83.3%        83.5%        83.6%

    Selling, general, and
     administrative expense
     ratio
     Commercial                  17.3%        20.7%        16.9%        18.0%
     Government                  13.5%        13.6%        13.4%        13.5%
      Total                      15.6%        17.4%        15.4%        15.9%

    (a) Refer to the Summary of Unusual Items and Charges of these statistical
        pages within this press release for detail of unusual items and
        charges included in these results of operations.


    Humana Inc.

    Dollars in thousands, except per share results

    Summary of Unusual Items and Charges

                                For the twelve months ended December 31, 2003

                                       Pretax Impact         After-   Diluted
                                Commer-  Govern-  Consoli-      tax       EPS
                                   cial     ment     dated   Impact    Impact
    Investment Income:
      Gain on sale of venture
       capital investment       $12,423   $2,777   $15,200  $10,108     $0.06

    Selling, general, and
     administrative expense:
     Write-down of building
      and equipment              (4,325) (12,908)  (17,233) (10,529)    (0.07)

    Depreciation:
     Software abandonment
      charges                   (13,527)      --   (13,527)  (8,265)    (0.05)

      Total 2003 unusual
       items and charges        ($5,429)($10,131) ($15,560) ($8,686)   ($0.05)


    Impact of unusual items
     and charges on the SG&A
     expense ratio                0.06%    0.24%     0.14%

                      For the three and twelve months ended December 31, 2002

                                       Pretax Impact         After-   Diluted
                                Commer-  Govern-  Consoli-      tax       EPS
                                   cial     ment     dated   Impact    Impact
    Investment Income:
     Impairment in the fair
      value of certain
      private debt and equity
      Investments              ($16,225) ($3,346) ($19,571)($17,863)   ($0.11)

    Selling, general, and
     administrative expense:
     Severance and related
      employee benefit charges  (21,838) (10,267)  (32,105) (19,616)    (0.12)
     Long-lived asset
      impairment and lease
      discontinuance costs       (2,441)  (1,331)   (3,772)  (2,305)    (0.01)
     Reserves for liabilities
      related to previous
      acquisitions              (28,397)  (1,743)  (30,140) (18,416)    (0.11)
      Total impact on selling,
       general and
       administrative expense   (52,676) (13,341)  (66,017) (40,337)    (0.24)

      Total 2002 unusual items
       and charges             ($68,901)($16,687) ($85,588)($58,200)   ($0.35)


    Impact of unusual items
     and charges on the SG&A
     expense ratio:

      For the three months
       ended December 31, 2002    3.43%    1.02%     2.32%

      For the twelve months
       ended December 31, 2002    0.89%    0.25%     0.59%


    Humana Inc.

    Dollars in thousands, except per share results

                                    December 31,   September 30,  December 31,
    Consolidated Balance Sheets            2003            2003          2002

    Assets
    Current assets:
     Cash and cash equivalents         $931,404        $635,837      $721,357
     Investment securities            1,676,642       1,688,679     1,395,068
     Receivables, net:
      Premiums                          452,404         461,684       321,135
      Administrative services fees       13,583          10,952        68,316
    Other                               247,298         288,836       250,857
      Total current assets            3,321,331       3,085,988     2,756,733

    Property and equipment, net         416,472         413,402       459,842

    Other assets:
     Long-term investment securities    319,167         314,187       299,489
     Goodwill                           776,874         776,874       776,874
     Other                              459,479         431,360       586,999
      Total other assets              1,555,520       1,522,421     1,663,362
     Total assets                    $5,293,323      $5,021,811    $4,879,937
    Liabilities and Stockholders'
     Equity
    Current liabilities:
     Medical and other
      expenses payable               $1,272,156      $1,296,566    $1,142,131
     Trade accounts payable
      and accrued expenses              440,340         438,926       552,689
     Book overdraft                     219,054         218,751        94,882
     Unearned premium revenues          333,071         108,161       335,757
     Short-term debt                         --              --       265,000
      Total current liabilities       2,264,621       2,062,404     2,390,459
     Long-term debt                     642,638         644,440       339,913
     Other long-term liabilities        550,115         555,843       543,091
      Total liabilities               3,457,374       3,262,687     3,273,463
    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;
      173,909,127 shares issued at
      December 31, 2003                  28,984          28,854        28,556
     Capital in excess of par value     974,975         961,015       931,089
     Retained earnings                  949,811         883,502       720,877
     Accumulated other comprehensive
      income                             16,909          20,086        22,455
     Unearned stock compensation           (754)           (357)       (6,516)
     Treasury stock, at cost,
      12,018,281 shares at December
      31, 2003                         (133,976)       (133,976)      (89,987)
      Total stockholders' equity      1,835,949       1,759,124     1,606,474
     Total liabilities and
      stockholders' equity           $5,293,323      $5,021,811    $4,879,937


    Debt to total capitalization ratio    25.9%           26.8%         27.4%


    Humana Inc.

    Dollars in thousands

                                    Three months ended   Twelve months ended
                                         December 31,          December 31,
    Consolidated Statements
     of Cash Flows                     2003       2002        2003      2002

    Cash flows from operating
     activities
     Net income (loss)              $66,309    ($1,705)   $228,934   $142,755
     Adjustments to reconcile
      net income to net cash
      provided by operating
      activities:
      Building and equipment writedown   --      2,448      17,233      2,448
      Depreciation and amortization  26,547     30,174     126,779    120,730
      Provision for deferred
       income taxes                   2,038     15,340      32,251     49,561
      Changes in operating assets
       and liabilities:
       Receivables                  (28,736)    53,931     (15,220)  (177,081)
       Other assets                 (17,325)    (2,732)     25,110     (2,464)
       Medical and other
        expenses payable            (24,410)   (22,300)    130,025     55,745
       Other liabilities             43,931     79,605    (107,432)    84,347
       Unearned revenues            224,910    245,780      (2,686)    10,717
      Other                          (3,044)    22,169     (21,854)    34,650
      Net cash provided by
       operating activities         290,220    422,710     413,140    321,408

    Cash flows from investing
     activities
      Purchases of property
       and equipment                (36,288)   (28,243)   (101,268)  (112,136)
      Proceeds from sales of
       property and equipment         8,699        428      11,182      1,849
      Purchases of investment
       securities                  (913,183)  (929,275) (4,572,577)(2,569,078)
      Proceeds from maturities
       of investment securities     183,975    219,736     769,436    492,935
      Proceeds from sales of
       investment securities        751,618    719,149   3,520,064  2,058,273
      Net cash used in investing
       activities                    (5,179)   (18,205)   (373,163)  (128,157)

    Cash flows from financing activities
      Proceeds from swap exchange        --          --     31,556         --
      Proceeds from issuance of
       senior notes                      --          --    299,139         --
      Net commercial paper conduit
       (repayments) borrowings           --          --   (265,000)     2,000
      Change in book overdraft          303      (9,520)   124,172    (57,875)
      Common stock repurchases           --     (48,596)   (44,147)   (74,035)
      Debt issue costs                 (648)       (990)    (3,331)    (1,549)
      Other                          10,871         222     27,681      8,145
      Net cash provided by (used
       in) financing activities      10,526     (58,884)   170,070   (123,314)

      Increase in cash and
       cash equivalents             295,567     345,621    210,047     69,937
      Cash and cash equivalents
       at beginning of period       635,837     375,736    721,357    651,420
      Cash and cash equivalents
       at end of period            $931,404    $721,357   $931,404   $721,357


    Humana Inc.

    Percentage of Ending Membership Under Capitation Arrangements

                                             Commercial Segment
                                        Fully                  Total
                                       Insured        ASO     Segment
    December 31, 2003

    Capitated HMO
     hospital system based A              5.4%         --       4.2%
    Capitated HMO
     physician group based A              3.0%         --       2.3%
    Risk-sharing B                        2.9%         --       2.2%
    All other membership                 88.7%     100.0%      91.3%
         Total                          100.0%     100.0%     100.0%

    December 31, 2002

    Capitated HMO
     hospital system based A              6.3%         --       4.9%
    Capitated HMO
     physician group based A              3.2%         --       2.5%
    Risk-sharing B                        2.9%         --       2.3%
    All other membership                 87.6%     100.0%      90.3%
         Total                          100.0%     100.0%     100.0%

                                     Government Segment               Consol.
                         Medicare                   TRICARE  Total     Total
                         +Choice  Medicaid  TRICARE   ASO   Segment   Medical

    December 31, 2003

    Capitated HMO
     hospital system
     based A               11.8%     2.9%     --       --     1.4%     2.7%
    Capitated HMO
     physician group
     based A                1.8%    46.9%     --       --     6.1%     4.4%
    Risk-sharing B         47.9%    43.7%     --       --     9.8%     6.4%
    All other membership   38.5%     6.5%  100.0%   100.0%   82.7%    86.5%
         Total            100.0%   100.0%  100.0%   100.0%  100.0%   100.0%


    December 31, 2002

    Capitated HMO
     hospital system
     based A               13.7%     2.4%     --       --     1.6%      3.1%
    Capitated HMO
     physician group
     based A                3.1%    57.9%     --       --     8.3%      5.7%
    Risk-sharing B         46.6%    32.4%     --       --     8.9%      5.9%
    All other membership   36.6%     7.3%  100.0%   100.0%   81.2%     85.3%
         Total            100.0%   100.0%  100.0%   100.0%  100.0%    100.0%

     A - In a limited number of circumstances, we contract with hospitals and
         physicians to accept financial risk for a defined set of HMO
         membership. In transferring this risk, we prepay 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, we generally agree to Reimbursement
         rates that target a medical expense ratio ranging from 82% to 89%.
         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 hospitals and physicians for services rendered to
         their HMO membership.

     B - In some circumstances, we contract with physicians under risk-sharing
         arrangements whereby physicians have assumed some level of risk for
         all or a portion of the medical costs of their HMO membership.
         Although these arrangements do include capitation payments for
         services rendered, we process substantially all of the claims under
         these arrangements.


    Humana Inc.

    Medical Claim Reserves - Details and Statistics

    Change in medical and other expenses payable:

    The change in medical and other expenses payable is summarized as follows:

                                          For the Twelve      For the Twelve
                                            Months Ended        Months Ended
                                       December 31, 2003   December 31, 2002

    Balances at January 1                     $1,142,131          $1,086,386

    Incurred related to:
      Current year                             9,955,491           9,125,915
      Prior years - non-TRICARE (1)              (33,432)            (13,404)
      Prior years - TRICARE (2)                  (42,638)             25,685
    Total incurred                             9,879,421           9,138,196

    Paid related to:
      Current year                            (8,710,393)         (8,002,610)
      Prior years                             (1,039,003)         (1,079,841)
    Total paid                                (9,749,396)         (9,082,451)

    Balances at end of period                 $1,272,156          $1,142,131

        The impact of any reduction of "incurred related to prior years"
        claims may be offset as we re-establish the "incurred related to
        current year." Our reserving practice is to consistently recognize the
        actuarial best estimate of our ultimate liability for our claims
        within a level of confidence required to meet actuarial Standards.
        Thus, only when the release of a prior year reserve is not offset with
        the same level of conservatism in estimating the current year reserve
        will the redundancy reduce medical expense. We have consistently
        applied this methodology in determining our best estimate for unpaid
        claims liability in each period.

    (1) Changes in estimates of non-TRICARE incurred claims for prior years
        recognized during 2003 and 2002 related primarily to our commercial
        lines of business.

    (2) Changes in estimates of TRICARE incurred claims for prior years
        recognized during 2003 resulted primarily from utilization levels
        developing favorably from the levels originally estimated for the
        second half of 2002. As a result of substantial risk-sharing
        provisions with the Department of Defense and with subcontractors,
        any resulting impact on current period operations is substantially
        mitigated. Changes in estimates of medical Expenses payable for
        TRICARE also may result from issues that entitle us to additional
        revenues derived from change orders or the bid price adjustment
        process, which was the case with substantially all of the unfavorable
        Development for prior periods recognized during 2002.


    Humana Inc.

    Dollars in thousands

    Medical Claim Reserves - Details and Statistics

    Medical and Other Expenses Payable Detail:

                                     December 31,  September 30,  December 31,
                                            2003           2003          2002
    A  IBNR and other medical
       expenses payable                 $767,712       $788,124      $650,606
    B  TRICARE IBNR                      267,146        280,429       212,826
    C  TRICARE other medical
       expenses payable                   37,849         25,941        37,793
    D  Unprocessed claim inventories     109,700        106,800        92,300
    E  Processed claim inventories        74,262         47,515       105,422
    F  Payable to pharmacy benefit
       administrator                      15,487         47,757        43,184
       Total medical and other
       expenses payable               $1,272,156     $1,296,566    $1,142,131


    A  IBNR represents an estimate of medical expenses payable for claims
       incurred but not reported (IBNR) at the balance sheet date. The level
       of IBNR is primarily impacted by membership levels, medical claim
       trends and the receipt cycle time, which represents the length of time
       between when a claim is initially incurred and when the claim form is
       received (i.e. a shorter time span results in lower reserves for claims
       IBNR).
    B  TRICARE IBNR has increased from 2002 primarily due to an increase in
       claim inventories at our third party claim administrator for claims not
       submitted electronically.
    C  TRICARE other medical expense 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 our balance sheet).
    D  Unprocessed claim inventories represent the estimated valuation of
       claims received but not yet fully processed. TRICARE claim inventories
       are not included in this amount as an independent third party
       administrator processes all TRICARE medical claims on our
       behalf. Reserves for TRICARE claims inventory are included in TRICARE
       IBNR.
    E  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.
    F  The balance due to our pharmacy benefit administrator fluctuates due to
       bi-weekly payments and the month-end cutoff.

    Receipt Cycle Time:

Due to increasing electronic connectivity and other efficiencies gained by our providers with regards to the claim submission process, the average length of time between when a claim was initially incurred and when the claim form was received has generally shortened over the past several years. Below is a summary:

                      Average # of Days from Incurred Date to Receipt Date (1)
                              2003         2002       Change     % Change

    1st Quarter Average       17.1         19.0        (1.9)       -10.0%
    2nd Quarter Average       16.7         18.1        (1.4)        -7.7%
    3rd Quarter Average       16.6         17.3        (0.7)        -4.0%
    4th Quarter Average       16.6         16.9        (0.3)        -1.8%
    Full Year Average         16.7         17.8        (1.1)        -6.2%

    (1) Receipt cycle time data for our 3 largest claim processing platforms
        representing approximately 90% of our claims volume.


    Humana Inc.

    Medical Claim Reserves - Details and Statistics

    Unprocessed Claim Inventories:

The estimated valuation and number of claims on hand that are yet to be processed are as follows:

                           Estimated                         Number
                           Valuation       Claim Item       of Days
           Date                (000)           Counts       On Hand

     12/31/2001             $125,400         518,100            5.0
      3/31/2002             $121,000         559,600            5.2
      6/30/2002             $110,300         513,100            4.8
      9/30/2002             $108,800         496,200            4.8
     12/31/2002              $92,300         424,200            4.5
      3/31/2003              $99,000         421,700            4.4
      6/30/2003              $92,100         446,600            4.7
      9/30/2003             $106,800         528,400            5.8
     12/31/2003             $109,700         443,000            4.9

    Days in Claims Payable (Quarterly):

A common metric for monitoring medical claim reserve levels relative to the medical claim expenses is days in claims payable, or DCP, which represents the medical claim liabilities at the end of the period divided by average medical expenses per day in the quarterly period. Since we have some providers under capitation payment arrangements (which do not require a medical claim IBNR reserve), we have also summarized this metric excluding capitation expenses.

                         Days                           DCP
        Quarter     in Claims   Annual            Excluding  Annual
          Ended  Payable (DCP)  Change % Change  Capitation  Change  % Change

     12/31/2001          47.4     (3.9)   -7.6%        57.1    (4.4)    -7.2%
      3/31/2002          47.2     (2.3)   -4.6%        56.2    (3.4)    -5.7%
      6/30/2002          46.8     (3.1)   -6.2%        55.3    (4.7)    -7.8%
      9/30/2002          46.6     (2.5)   -5.1%        55.3    (3.9)    -6.6%
     12/31/2002          45.2     (2.2)   -4.6%        53.3    (3.8)    -6.7%
      3/31/2003          46.5     (0.7)   -1.5%        54.7    (1.5)    -2.7%
      6/30/2003          47.9      1.1     2.4%        56.2     0.9      1.6%
      9/30/2003          47.2      0.6     1.3%        54.5    (0.8)    -1.4%
     12/31/2003          46.2      1.0     2.2%        53.2    (0.1)    -0.2%

This metric fluctuates due to all of the issues reviewed above, including the change in the receipt cycle time, the change in medical claim inventories, the change in TRICARE liability balances, and the timing of our bi-weekly payment to our pharmacy benefits administrator. An annual recap follows:

                                                         2003           2002
    4th quarter-prior year                               45.2           47.4
     Impact of change in claim receipt cycle time        (0.5)          (2.6)
     Impact of change in unprocessed claim inventories    0.6           (1.3)
     Impact of change in processed claim inventories     (1.1)           0.2
     Impact of changing TRICARE reserve balances          2.0            0.3
     Impact of change in pharmacy payment cutoff         (1.0)           0.7
     All other                                            1.0            0.5
    Year to date-current year                            46.2           45.2

SOURCE Humana Inc.