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Humana Reports Fourth Quarter 2009 Financial Results, Updates 2010 Financial Guidance

Humana Reports Fourth Quarter 2009 Financial Results, Updates 2010 Financial Guidance

February 1, 2010 at 6:06 AM EST
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 Raised 2010 EPS guidance to $5.15 to $5.35
FY09 revenues approximated $31 billion, up 7 percent from prior year
FY09 cash flows from operations of over $1.4 billion

LOUISVILLE, Ky., Feb 01, 2010 (BUSINESS WIRE) -- Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended December 31, 2009 (4Q09) of $1.48, as compared to $1.03 per share for the quarter ended December 31, 2008 (4Q08), reflecting lower PDP claim expenses in 4Q09 than in 4Q08.

For the year ended December 31, 2009 (FY09) the company reported $6.15 in EPS compared to $3.83 for the year ended December 31, 2008 (FY08). The FY09 results reflected both substantially lower stand-alone PDP claim expenses than in FY08 and higher investment income due to significant realized losses on investments(a) during FY08.

"We completed a successful 2009 despite a challenging environment," said Michael B. McCallister, president and chief executive officer of Humana. "Looking ahead, we see multiple revenue growth opportunities across our spectrum of products for 2010."

The company now anticipates EPS for the year ending December 31, 2010 (FY10) in the range of $5.15 to $5.35 versus its previous estimate of $5.05 to $5.25. This increase in FY10 EPS guidance primarily reflects the expected retention of the company's South Region TRICARE contract for an additional quarter during FY10.

TRICARE Update

In December 2009, Humana Military Healthcare Services, Inc. (HMHS), a wholly-owned subsidiary of the company, was notified by the United States Department of Defense TRICARE Management Activity (TMA) that the TMA intends to exercise its options to extend HMHS's administration of the TRICARE program in TMA's South Region for Option Period VII and Option Period VIII. The exercise of these option periods would effectively extend the TRICARE contract through March 31, 2011.

Additionally in December 2009, the TMA notified the Government Accountability Office (GAO) of its intent to take corrective action in response to the GAO's decision to uphold the company's protest with respect to the July 2009 award of the third generation TRICARE program South Region contract to another contractor. The company is not able to determine whether the protest resolution will change the ultimate outcome of the contract award.

Consolidated Highlights

Revenues - 4Q09 consolidated revenues rose 2 percent to $7.63 billion from $7.49 billion in 4Q08, with total premium and administrative services fees up 2 percent compared to the prior year's quarter. The increase in premiums and administrative services fees primarily reflects an increase in both average Medicare Advantage membership and per-member premiums substantially offset by declines in average Commercial medical membership.

Consolidated revenues for FY09 rose 7 percent to $30.96 billion from $28.95 billion for FY08 with total premiums and administrative services fees up 7 percent compared to the prior year's period, also driven primarily by the increases in average Medicare Advantage enrollment and per-member premiums.

Benefit expenses - The 4Q09 consolidated benefit ratio (benefit expenses as a percent of premium revenues) of 81.8 percent decreased from 83.3 percent for the prior year's quarter. This 150 basis point decrease was primarily driven by a decrease of 240 basis points in the Government Segment benefit ratio, partially offset by a 130 basis point increase in the Commercial Segment benefit ratio.

The consolidated benefit ratio for FY09 of 82.8 percent was 170 basis points lower than the FY08 consolidated benefit ratio of 84.5 percent, reflecting a 240 basis point decrease in the Government Segment's benefit ratio year over year, partially offset by an increase in the Commercial Segment's benefit ratio of 30 basis points in FY09 compared to FY08.

Selling, general, & administrative (SG&A) expenses - The 4Q09 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 14.7 percent for 4Q09 compares to 14.8 percent in 4Q08 as the effect of a 60 basis point improvement in this ratio for the Government Segment was substantially offset by a 190 basis point increase for the Commercial Segment.

The SG&A expense ratio for FY09 of 13.8 percent was 10 basis points higher than that for FY08 of 13.7 percent primarily driven by a 30 basis point improvement in this ratio for the Government Segment being substantially offset by a 170 basis point increase in the Commercial Segment SG&A expense ratio.

Government Segment Results

Pretax results:

  • Government segment pretax income of $452.3 million in 4Q09 compares to $267.3 million in 4Q08. This increase was primarily driven by lower PDP claim expenses, a 6 percent increase in average Medicare Advantage membership, the implementation of member premiums for most of the company's Medicare Advantage products, and higher net investment income.
  • For FY09, pretax income for the Government Segment of $1.50 billion compares favorably to FY08 pretax income for the segment of $785.2 million. The net increase reflects improved stand-alone PDP operating results, higher operating earnings in the company's Medicare Advantage business and higher net investment income.

Enrollment:

  • Medicare Advantage membership grew to 1,508,500 at December 31, 2009, an increase of 72,600 members, or 5 percent from 1,435,900 at December 31, 2008, and relatively unchanged from 1,514,800 at September 30, 2009.
  • January 2010 Medicare Advantage membership approximated 1,729,000 with 71 percent of fully-insured members in network-based products, up from 63 percent of Medicare Advantage membership in such products at December 31, 2009 reflecting growth in both PPO and HMO products.
  • Membership in the company's stand-alone PDPs totaled 1,927,900 at December 31, 2009 compared to 3,066,600 at December 31, 2008 and 1,960,400 at September 30, 2009. Both the year-over-year and sequential membership declines resulted primarily from attrition associated with low-income senior members. For 2009, the company realigned its stand-alone PDP premium and benefit designs to correspond with its prescription drug claims experience.
  • January 2010 stand-alone PDP membership declined to approximately 1,780,000, a decrease of approximately 148,000 members from December 31, 2009. This decline resulted primarily from the company's competitive positioning as it continued to align stand-alone PDP premium and benefit structures to correspond with its pharmacy claims experience.
  • Military services membership at December 31, 2009 of 3,034,400 was up approximately 2 percent from 2,964,700 at December 31, 2008 and slightly up from 3,015,100 at September 30, 2009.

Premiums and administrative services fees:

  • Medicare Advantage premiums of $4.07 billion in 4Q09 increased 12 percent compared to $3.62 billion in 4Q08, primarily the combined result of a 6 percent increase in average Medicare Advantage membership and the introduction of member premiums for most of the company's Medicare Advantage products.
  • Medicare stand-alone PDP premiums of $514.8 million in 4Q09 decreased 37 percent compared to $817.5 million in 4Q08, reflecting a 37 percent decline in average membership year over year primarily due to members choosing competitor offerings given the premium and benefit design changes discussed above.
  • Military services premiums and administrative services fees during 4Q09 increased $12.1 million, or 1 percent, to $858.7 million compared to $846.5 million in 4Q08.

Benefit Expenses:

  • The Government Segment benefit ratio decreased 240 basis points to 80.9 percent in 4Q09 compared to 83.3 percent in the prior year's quarter, primarily driven by a 320 basis point decline in the Medicare benefit ratio primarily from a decrease in the stand-alone PDP benefit ratio together with improved benefit ratios across the company's Medicare Advantage offerings.

SG&A Expenses:

  • The Government Segment SG&A expense ratio decreased 60 basis points to 11.2 percent in 4Q09 compared to 11.8 percent in the prior year's quarter primarily driven by increased operating leverage associated with higher average Medicare Advantage enrollment.

Commercial Segment Results

Pretax results:

  • The Commercial Segment had a pretax loss of $53.6 million in 4Q09 compared to a pretax loss of $6.3 million in 4Q08 primarily reflecting a higher benefit ratio and increased SG&A expenses year over year, partially offset by higher net investment income.
  • For FY09, pretax earnings for the Commercial Segment of $104.2 million were $103.4 million, or 50 percent lower than FY08 pretax earnings for the segment of $207.6 million driven by higher benefit expenses as a percent of premiums and lower average medical membership, partially offset by higher net investment income.

Enrollment:

  • Commercial Segment medical membership declined to 3,410,800 at December 31, 2009, a decrease of 210,000, or 6 percent, from 3,620,800 at December 31, 2008 and relatively unchanged from 3,426,900 at September 30, 2009. The year-over-year decline primarily reflected the impact of the economic recession and increased unemployment across various of the company's fully-insured group medical lines of business, a competitive environment including the loss of two large ASO accounts totaling approximately 95,400 members on January 1, 2009.
  • The company's individual medical product line has continued to grow steadily, with membership of 367,400, up 13 percent at December 31, 2009 compared to 325,100 at December 31, 2008 and up 2 percent from 358,800 at September 30, 2009.
  • January 2010 Commercial Segment medical membership declined approximately 88,000 from that at the end of 2009, with approximately 42 percent of the decline related to self-insured products.
  • Membership in Commercial Segment specialty products (b) of 7,200,100 at December 31, 2009 increased 7 percent from 6,713,200 at December 31, 2008 and was slightly higher than 7,163,700 at September 30, 2009.

Premiums and administrative services fees:

  • Premiums and administrative services fees for the Commercial Segment decreased 2 percent to $1.88 billion in 4Q09 compared to $1.92 billion in the prior year's quarter, reflecting a 5 percent decline in average medical membership year over year.
  • Commercial Segment medical premiums for fully-insured group accounts increased approximately 5 percent on a per-member basis during 4Q09 compared to 4Q08.

Benefit Expenses:

  • In 4Q09, as expected, the Commercial Segment benefits ratio of 84.4 percent increased 130 basis points versus the 4Q08 benefit ratio of 83.1 percent, as an increase in per-member premiums was more than offset by higher utilization primarily associated with the general economy (the average age of smaller group membership, higher utilization prior to termination, and increased COBRA participation) as well as the impact of the H1N1 virus.

SG&A Expenses:

  • The Commercial Segment SG&A expense ratio of 24.9 percent for 4Q09 compares to 23.0 percent in 4Q08, primarily driven by increases in certain of the segment's businesses that carry a higher administrative expense load such as mail-order pharmacy, individual medical products, and specialty benefit products.

Balance Sheet

  • At December 31, 2009, the company had cash, cash equivalents, and investment securities of $9.11 billion, up 5 percent from $8.67 billion at September 30, 2009 and up 27 percent from $7.19 billion at December 31, 2008.
  • Parent company cash and investments of $665.6 million at December 31, 2009 declined $27.8 million from $693.4 million at September 30, 2009, primarily reflecting subsidiary capital contributions during 4Q09. Cash and investments at the parent increased $415.1 million year over year compared to $250.5 million held at the parent at December 31, 2008 as dividends from subsidiaries more than offset debt repayments and subsidiary capital contributions.
  • Debt-to-total capitalization at December 31, 2009 was 22.5 percent, down 70 basis points from 23.2 percent at September 30, 2009, and was down 780 basis pointscompared to 30.3 percent at December 31, 2008.

Cash Flows from Operations

Cash flows provided by operations for 4Q09 of $274.1 million compared to cash flows provided by operations of $296.6 million in 4Q08 as higher net income was more than offset by uses of cash associated with changes in working capital accounts during 4Q09 compared to 4Q08. FY09 cash flows from operations improved to $1.42 billion versus $982.3 million for FY08 primarily due to higher net income year over year and the positive impact of changes in working capital accounts during FY09 versus those during FY08.

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

Cash flows from operations
($ in millions)

 4Q09 4Q08 2009 2008

GAAP cash flows provided by operations

 $274.1

$296.6

$1,421.6 $982.3

Timing of premium payment from CMS(d)(e)

 - 13.4 - 13.4
Non-GAAP cash flows provided by operations(d)(e) $274.1 $310.0 $1,421.6 $995.7

Share Repurchase Program

In December 2009, the company's Board of Directors renewed its authorization for the use of up to $250 million for the repurchase of Humana common shares. The previous share repurchase authorization was set to expire on December 31, 2009. The renewed authorization is effective until December 31, 2011.

Footnote

(a) Other-than-temporary investment impairments realized in the 2008 third and fourth quarters resulted from portfolio valuations associated with financial market conditions and do not primarily relate to the underwriting or servicing of the company's products.

(b) The Commercial Segment provides a full range of insured specialty products including dental, vision and other supplemental products. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products. Other supplemental benefits include life, disability, and fixed-benefit products including cancer and critical illness policies.

(c) GAAP is Generally Accepted Accounting Principles.

(d) The company believes that the non-GAAP measures included in this release, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses these non-GAAP financial measures as indicators of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

(e) 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 http://www.humana.com. The company suggests web participants sign on at least 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 at least ten minutes in advance of the call. For those unable to participate in the live event, the virtual presentation archive may be accessed via the Historical Webcasts & Presentations section of the Investor Relations page at http://www.humana.com.

Cautionary Statement

This news release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in investor presentations, press releases, Securities and Exchange Commission (SEC) filings, and in oral statements made by or with the approval of one of the company's executive officers, the words or phrases like "expects," "anticipates," "believes," "intends," "likely will result," "estimates," "projects" or variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions, including, among other things, information set forth in the "Risk Factors" section of the company's SEC filings, a summary of which includes but is not limited to the following:

  • Humana's business activities are subject to substantial government regulation. New laws or regulations, or changes in existing laws or regulations or their manner of application, could increase the company's cost of doing business and could materially affect its business, profitability and financial condition. In addition, as a government contractor, the company is exposed to additional risks that could adversely affect its business or its willingness to participate in government health care programs. The President of the United States and members of the U.S. Congress have proposed significant reforms to the U.S. health care system. Because of the unsettled nature of these initiatives and the numerous steps required to implement them, the company cannot predict what health insurance initiative, if any, will be implemented at the federal or state level, or the effect of any future legislation or regulation will have on Humana's business. However, an expansion in government's role in the U.S. health care industry may lower the company's Medicare payments and adversely affect its business and results of operations, possibly materially. In addition, new excise or income taxes imposed by such initiatives may affect the company's effective tax rate and could have a material adverse effect on Humana's results of operations.
  • If Humana does not design and price its products properly and competitively, if the premiums Humana charges are insufficient to cover the cost of health care services delivered to its members, or if its estimates of benefits payable or future policy benefits payable based upon its estimates of future benefit claims are inadequate, Humana's profitability could be materially adversely affected. Humana estimates the costs of its benefit expense payments, and designs and prices its products accordingly, using actuarial methods and assumptions based upon, among other relevant factors, claim payment patterns, medical cost inflation, and historical developments such as claim inventory levels and claim receipt patterns. These estimates, however, involve extensive judgment, and have considerable inherent variability that is extremely sensitive to payment patterns and changes in medical cost trends.
  • If Humana fails to effectively implement its operational and strategic initiatives, including its Medicare initiatives, the company's business could be materially adversely affected.
  • If Humana fails to properly maintain the integrity of its data, to strategically implement new information systems, or to protect Humana's proprietary rights to its systems, the company's business could be materially adversely affected.
  • Humana is involved in various legal actions, which, if resolved unfavorably to Humana, could result in substantial monetary damages. Increased litigation and negative publicity could increase the company's cost of doing business.
  • Any failure to manage administrative costs could hamper Humana's profitability.
  • Any failure by Humana to manage acquisitions and other significant transactions successfully could have a material adverse effect on its financial results, business and prospects.
  • If Humana fails to develop and maintain satisfactory relationships with the providers of care to its members, the company's business could be adversely affected.
  • Humana's mail order pharmacy business is highly competitive and subjects it to regulations in addition to those the company faces with its core health benefits businesses.
  • Humana's ability to obtain funds from its subsidiaries is restricted.
  • Downgrades in Humana's debt ratings, should they occur, may adversely affect its business, results of operations and financial condition.
  • Changes in economic conditions could adversely affect Humana's business and results of operations.
  • The securities and credit markets may experience volatility and disruption, which could adversely affect the company's business.
  • Given the current economic climate, Humana's stock and the stock of other companies in the insurance industry may be increasingly subject to stock price and trading volume volatility.

In making forward-looking statements, Humana is not undertaking to address or update them in future filings or communications regarding its business or results. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed herein may or may not occur. There also may be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward-looking statements.

Humana advises investors to read the following documents as filed by the company with the SEC for further discussion both of the risks it faces and its historical performance:

  • Form 10-K for the year ended December 31, 2008;
  • Form 10-Q for the quarters ended March 31, 2009, June 30, 2009, and September 30, 2009;
  • Form 8-Ks filed during 2009 and 2010.

About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health and supplemental benefits companies, with approximately 10.3 million medical members and approximately 7.2 million specialty-benefit members. Humana is a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government programs and individuals.

Over its 49-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 http://www.humana.com, including copies of:

  • Annual reports to stockholders;
  • Securities and Exchange Commission filings;
  • Most recent investor conference presentations;
  • Quarterly earnings news releases;
  • Replays of most recent earnings release conference calls;
  • Calendar of events (including upcoming earnings conference call dates and times, as well as planned interaction with research analysts and institutional investors);
  • Corporate Governance information.

Humana Inc. - Earnings Guidance Points as of February 1, 2010

(in accordance with
Generally Accepted
Accounting Principles
(GAAP))

For the year ending

December 31, 2010

Comments.

Diluted earnings per
common share (EPS)

Full year 2010: $5.15 to $5.35

First quarter 2010: $1.10 to $1.20

EPS estimates exclude impact of
potential future share repurchases and
any potential impact from pending
health reform legislation or
regulatory developments

Revenues

Consolidated revenues: $33
billion to $34 billion

Premiums and ASO fees:
Medicare Advantage: $18
billion to $19 billion
Medicare stand-alone PDPs:
$2.5 billion to $2.6 billion

Military services: $3.6 billion
to $3.7 billion

Commercial Segment: $7.3
billion to $7.5 billion

Consolidated investment income:
$320 million to $335 million

Consolidated other revenue: $340
million to $350 million



Assumes a 3/31/11 transition date for the
South Region TRICARE contract

Ending medical
membership

Medicare Advantage: up 240,000
to 260,000 from prior year

Medicare stand-alone PDPs:
down 50,000 to 100,000 from
prior year

Military services: relatively flat
with prior year

Medicaid: no material change
from prior year

Commercial: down 160,000 to
180,000 from prior year

Includes fully-insured group and
individual Medicare Advantage
members and approximately 29,000
ASO group Medicare Advantage members.





Fully-insured and ASO combined;
assumes 3/31/11 transition for the
South Region TRICARE contract




Fully-insured and ASO combined

Benefit ratios and benefit
expense trend
components

Government Segment benefit
ratio in the range of 85%
to 86%

Medicare benefit ratio in the
range of 84% to 85%

Commercial Segment benefit ratio
in the range of 80% to 81%

Commercial group fully
insured secular benefit
expense trend components:
inpatient hospital utilization
- low single digits; inpatient
and outpatient hospital rates
- upper single digits;
outpatient hospital utilization
- mid single digits; physician
- mid single digits;
pharmacy - mid single digits

Medicare, Medicaid, and Military
Services combined

Medicare Advantage and Stand-Alone
PDP combined

Medical and Specialty combined



Commercial group fully insured secular
trends of approximately 8% represent
the underlying percentage change in
total medical expenses which
excludes the impact of benefit
changes and business, product, and
demographic mix.

Selling, general &
administrative expense
ratio

13% to 13.5%

SG&A expenses as a percent of
premiums, administrative services
fees, and other revenue

Includes approximately $100 million in
administrative cost reductions from
prior year

Depreciation &
amortization

$260 million to $265 million
Interest expense $105 million to $110 million

Government Segment
operating results
(Line-of-business-level results
exclude the impact of
investment income and
interest expense)

Medicare operating margin:
approximately 5.0%

Military services: operating
earnings of $25 million to $50 million

Medicare Advantage & stand-alone PDP
combined

Military Services earnings include the
anticipated impact of the write-down
of goodwill and other charges of $50
million to $75 million related to the
termination of the South Region
contract

Commercial Segment
pretax earnings

$125 million to $175 million

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

Cash flows from operations $1.1 billion to $1.3 billion
Capital expenditures Approximately $200 million
Effective tax rate Approximately 36%

Shares used in computing
full-year EPS

Approximately 171 million

Excludes impact of potential future share
repurchases

Humana Inc.

Statistical Schedules

And

Supplementary Information

4Q09 Earnings Release

S-1

Humana Inc.
Statistical Schedules and Supplementary Information
4Q09 Earnings Release

Contents

Page

Description

S-3-4 Consolidated Statements of Income
S-5 Consolidated Balance Sheets
S-6-7 Consolidated Statements of Cash Flows
S-8 Key Income Statement Ratios and Segment Operating Results
S-9 Membership Detail
S-10-11 Premiums and Administrative Services Fees Detail
S-12 Percentage of Ending Membership under Capitation Arrangements
S-13 Investments
S-14-16 Benefits Payable
S-17 Footnotes

S-2

Humana Inc.

Consolidated Statements of Income

In thousands, except per common share results

Three Months Ended December 31,
Dollar Percentage
2009 2008 Change Change
Revenues:
Premiums $7,368,808 $7,253,922 $114,886 1.6 %
Administrative services fees 127,827 112,535 15,292 13.6 %
Investment income 76,572 66,208 10,364 15.7 %
Other revenue 59,838 54,971 4,867 8.9 %
Total revenues 7,633,045 7,487,636 145,409 1.9 %
Operating expenses:
Benefits 6,026,796 6,041,104 (14,308 ) -0.2 %
Selling, general and administrative 1,111,617 1,098,943 12,674 1.2 %
Depreciation 60,764 49,788 10,976 22.0 %
Other intangible amortization 8,930 10,020 (1,090 ) -10.9 %
Total operating expenses 7,208,107 7,199,855 8,252 0.1 %
Income from operations 424,938 287,781 137,157 47.7 %
Interest expense 26,238 26,735 (497 ) -1.9 %
Income before income taxes 398,700 261,046 137,654 52.7 %
Provision for income taxes 148,041 86,966 61,075 70.2 %
Net income $250,659 $174,080 $76,579 44.0 %
Basic earnings per common share $1.49 $1.04 $0.45 43.3 %
Diluted earnings per common share $1.48 $1.03 $0.45 43.7 %
Shares used in computing basic earnings per common share 167,706 166,704
Shares used in computing diluted earnings per common share 169,711 168,569

S-3

Humana Inc.

Consolidated Statements of Income

In thousands, except per common share results
Twelve Months Ended December 31,
Dollar Percentage
2009 2008 Change Change
Revenues:
Premiums $29,926,751 $28,064,844 $1,861,907 6.6 %
Administrative services fees 496,135 451,879 44,256 9.8 %
Investment income 296,317 220,215 76,102 34.6 %
Other revenue 241,211 209,434 31,777 15.2 %
Total revenues 30,960,414 28,946,372 2,014,042 7.0 %
Operating expenses:
Benefits 24,775,002 23,708,233 1,066,769 4.5 %
Selling, general and administrative 4,227,535 3,944,652 282,883 7.2 %
Depreciation 213,014 183,257 29,757 16.2 %
Other intangible amortization 37,260 37,093 167 0.5 %
Total operating expenses 29,252,811 27,873,235 1,379,576 4.9 %
Income from operations 1,707,603 1,073,137 634,466 59.1 %
Interest expense 105,843 80,289 25,554 31.8 %
Income before income taxes 1,601,760 992,848 608,912 61.3 %
Provision for income taxes 562,085 345,694 216,391 62.6 %
Net income $1,039,675 $647,154 $392,521 60.7 %
Basic earnings per common share $6.21 $3.87 $2.34 60.5 %
Diluted earnings per common share $6.15 $3.83 $2.32 60.6 %
Shares used in computing basic earnings per common share 167,364 167,172
Shares used in computing diluted earnings per common share 169,071 169,187

S-4

Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
December 31, September 30, December 31, Sequential Change
2009 2009 2008 Dollar Percent
Assets
Current assets:
Cash and cash equivalents $1,613,588 $1,452,006 $1,970,423
Investment securities 6,190,062 5,899,385 4,203,538
Receivables, net:
Premiums 811,800 765,039 777,672
Administrative services fees 11,820 11,489 12,010
Securities lending invested collateral 119,586 176,692 402,399
Other 505,960 936,217 1,030,000
Total current assets 9,252,816 9,240,828 8,396,042 $11,988 0.1 %
Property and equipment, net 679,142 679,010 711,492
Other assets:
Long-term investment securities 1,307,088 1,319,319 1,011,904
Goodwill 1,992,924 1,992,924 1,963,111
Other 921,524 969,706 959,211
Total other assets 4,221,536 4,281,949 3,934,226
Total assets $14,153,494 $14,201,787 $13,041,760 ($48,293 ) -0.3 %
Liabilities and Stockholders' Equity
Current liabilities:
Benefits payable $3,222,574 $3,365,481 $3,205,579
Trade accounts payable and accrued expenses 1,307,710 1,532,810 1,077,027
Book overdraft 374,464 199,384 224,542
Securities lending payable 126,427 189,774 438,699
Unearned revenues 228,817 219,789 238,098
Total current liabilities 5,259,992 5,507,238 5,183,945 ($247,246 ) -4.5 %
Long-term debt 1,678,166 1,680,424 1,937,032
Future policy benefits payable 1,193,047 1,171,904 1,164,758
Other long-term liabilities 246,286 294,018 298,835
Total liabilities 8,377,491 8,653,584 8,584,570 ($276,093 ) -3.2 %
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;
189,801,119 issued at December 31, 2009 31,634 31,517 31,309
Capital in excess of par value 1,658,521 1,625,525 1,574,245
Retained earnings 4,429,611 4,178,952 3,389,936
Accumulated other comprehensive income (loss) 42,135 83,536 (175,243 )
Treasury stock, at cost, 19,621,069 shares at December 31, 2009 (385,898 ) (371,327 ) (363,057 )
Total stockholders' equity 5,776,003 5,548,203 4,457,190 $227,800 4.1 %
Total liabilities and stockholders' equity $14,153,494 $14,201,787 $13,041,760 ($48,293 ) -0.3 %
Debt-to-total capitalization ratio 22.5 % 23.2 % 30.3 %

S-5

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
Three Months Ended December 31,
Dollar Percentage
2009 2008 Change Change
Cash flows from operating activities
Net income $250,659 $174,080

Adjustments to reconcile net income to net cash provided
by operating activities:

Depreciation and amortization 69,694 59,808
Net realized capital (gains) losses (5,749 ) 5,981
Stock-based compensation 17,052 13,534
Benefit from deferred income taxes (4,039 ) (594 )
Changes in operating assets and liabilities excluding
the effects of acquisitions:
Receivables (47,159 ) (54,175 )
Other assets 100,755 66,044
Benefits payable (142,907 ) 75,093
Other liabilities 24,363 (45,772 )
Unearned revenues 9,028 (1,182 )
Other 2,394 3,756
Net cash provided by operating activities 274,091 296,573 ($22,482 ) -7.6 %
Cash flows from investing activities
Acquisitions, net of cash acquired - (160,568 )
Purchases of property and equipment (63,308 ) (82,025 )
Proceeds from sales of property and equipment 1,502 4
Purchases of investment securities (1,906,188 ) (598,962 )
Proceeds from maturities of investment securities 468,194 80,087
Proceeds from sales of investment securities 1,047,390 385,289
Change in securities lending collateral 63,347 70,163
Net cash used in investing activities (389,063 ) (306,012 ) ($83,051 ) -27.1 %
Cash flows from financing activities
Receipts from CMS contract deposits 819,609 986,895
Withdrawals from CMS contract deposits (656,212 ) (764,672 )
Borrowings under credit agreement - 750,000
Repayments under credit agreement - (500,000 )
Debt issue costs - (34 )
Proceeds from swap termination - 93,008
Change in book overdraft 175,080 (33,138 )
Change in securities lending payable (63,347 ) (96,832 )
Common stock repurchases (14,571 ) (303 )
Excess tax benefit from stock-based compensation 3,622 118
Proceeds from stock option exercises and other 12,373 1,920
Net cash provided by financing activities 276,554 436,962 ($160,408 ) -36.7 %
Increase in cash and cash equivalents 161,582 427,523
Cash and cash equivalents at beginning of period 1,452,006 1,542,900
Cash and cash equivalents at end of period $1,613,588 $1,970,423

S-6

Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
Twelve Months Ended December 31,
Dollar Percentage
2009 2008 Change Change
Cash flows from operating activities
Net income $1,039,675 $647,154

Adjustments to reconcile net income to net cash
provided by operating activities:

Depreciation and amortization 250,274 220,350
Net realized capital (gains) losses (19,483 ) 79,417
Stock-based compensation 65,870 55,369
Benefit from deferred income taxes (26,792 ) (22,005 )
Changes in operating assets and liabilities excluding
the effects of acquisitions:
Receivables (40,912 ) (147,495 )
Other assets 112,473 (100,887 )
Benefits payable 16,995 412,725
Other liabilities 13,682 (170,140 )
Unearned revenues (9,281 ) (10,280 )
Other 19,081 18,102
Net cash provided by operating activities 1,421,582 982,310 $439,272 44.7 %
Cash flows from investing activities
Acquisitions, net of cash acquired (12,436 ) (422,915 )
Purchases of property and equipment (185,450 ) (261,572 )
Proceeds from sales of property and equipment 1,509 6
Purchases of investment securities (7,197,007 ) (5,681,103 )
Proceeds from maturities of investment securities 1,270,525 498,650
Proceeds from sales of investment securities 3,951,326 4,496,929
Change in securities lending collateral 312,272 871,681
Net cash used in investing activities (1,859,261 ) (498,324 ) ($1,360,937 ) -273.1 %
Cash flows from financing activities
Receipts from CMS contract deposits 2,354,238 2,761,276
Withdrawals from CMS contract deposits (1,860,748 ) (2,572,624 )
Borrowings under credit agreement - 1,175,000
Repayments under credit agreement (250,000 ) (1,725,000 )
Proceeds from issuance of senior notes - 749,247
Debt issue costs - (6,696 )
Proceeds from swap termination - 93,008
Change in book overdraft 149,922 (44,684 )
Change in securities lending payable (312,272 ) (898,350 )
Common stock repurchases (22,841 ) (106,070 )
Excess tax benefit from stock-based compensation 5,339 9,912
Proceeds from stock option exercises and other 17,206 10,965
Net cash provided by (used in) financing activities 80,844 (554,016 ) $634,860 114.6 %
Decrease in cash and cash equivalents (356,835 ) (70,030 )
Cash and cash equivalents at beginning of period 1,970,423 2,040,453
Cash and cash equivalents at end of period $1,613,588 $1,970,423

S-7

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

Three Months Ended December 31,

 Twelve Months Ended December 31,
Percentage Percentage
2009 2008 Difference Change 2009 2008 Difference Change
Benefit ratio
Government Segment 80.9 % 83.3 % -2.4 % 83.5 % 85.9 % -2.4 %
Commercial Segment 84.4 % 83.1 % 1.3 % 80.6 % 80.3 % 0.3 %
Consolidated 81.8 % 83.3 % -1.5 % 82.8 % 84.5 % -1.7 %
Selling, general, and administrative
expense ratio (A)
Government Segment 11.2 % 11.8 % -0.6 % 10.3 % 10.6 % -0.3 %
Commercial Segment 24.9 % 23.0 % 1.9 % 24.1 % 22.4 % 1.7 %
Consolidated 14.7 % 14.8 % -0.1 % 13.8 % 13.7 % 0.1 %
Investment income
Government Segment $46,247 $34,232 $12,015 35.1 % $179,141 $115,162 $63,979 55.6 %
Commercial Segment 30,325 31,976 (1,651 ) -5.2 % 117,176 105,053 12,123 11.5 %
Consolidated $76,572 $66,208 $10,364 15.7 % $296,317 $220,215 $76,102 34.6 %
Interest expense
Government Segment $18,852 $12,538 $6,314 50.4 % $69,012 $30,622 $38,390 125.4 %
Commercial Segment 7,386 14,197 (6,811 ) -48.0 % 36,831 49,667 (12,836 ) -25.8 %
Consolidated $26,238 $26,735 ($497 ) -1.9 % $105,843 $80,289 $25,554 31.8 %
Detail of pretax income (loss)
Government Segment $452,329 $267,327 $185,002 69.2 % $1,497,606 $785,240 $712,366 90.7 %
Commercial Segment (53,629 ) (6,281 ) (47,348 )

-753.8

% 104,154 207,608 (103,454 ) -49.8 %
Consolidated $398,700 $261,046 $137,654 52.7 % $1,601,760 $992,848 $608,912 61.3 %
Detail of pretax margins
Government Segment 8.0 % 4.9 % 3.1 % 6.5 % 3.7 % 2.8 %
Commercial Segment -2.7 % -0.3 % -2.4 % 1.3 % 2.7 % -1.4 %
Consolidated 5.2 % 3.5 % 1.7 % 5.2 % 3.4 % 1.8 %

S-8

Humana Inc.
Membership Detail
In thousands
Ending

Average

 Ending

Year-over-year Change

Ending

Sequential Change

December 31, 2009

4Q09

 December 31, 2008 Amount Percent September 30, 2009 Amount Percent
Medical Membership:
Government Segment:
Medicare Advantage - HMO 591.9 591.6 557.3 34.6 6.2 % 591.0 0.9 0.2 %
Medicare Advantage - PPO 352.4 351.1 181.1 171.3 94.6 % 348.0 4.4 1.3 %
Medicare Advantage - PFFS 564.2 566.0 697.5 (133.3 ) -19.1 % 575.8 (11.6 ) -2.0 %
Total Medicare Advantage 1,508.5 1,508.7 1,435.9 72.6 5.1 % 1,514.8 (6.3 ) -0.4 %
Medicare - PDP - Standard 733.3 739.4 1,471.8 (738.5 ) -50.2 % 751.8 (18.5 ) -2.5 %
Medicare - PDP - Enhanced 1,077.1 1,080.7 1,439.8 (362.7 ) -25.2 % 1,087.3 (10.2 ) -0.9 %
Medicare - PDP - Complete 117.5 118.7 155.0 (37.5 ) -24.2 % 121.3 (3.8 ) -3.1 %
Total Medicare stand-alone PDPs 1,927.9 1,938.8 3,066.6 (1,138.7 ) -37.1 % 1,960.4 (32.5 ) -1.7 %
Total Medicare 3,436.4 3,447.5 4,502.5 (1,066.1 ) -23.7 % 3,475.2 (38.8 ) -1.1 %
Military services insured 1,756.0 1,753.6 1,736.4 19.6 1.1 % 1,754.3 1.7 0.1 %
Military services ASO 1,278.4 1,270.4 1,228.3 50.1 4.1 % 1,260.8 17.6 1.4 %
Total military services 3,034.4 3,024.0 2,964.7 69.7 2.4 % 3,015.1 19.3 0.6 %
Medicaid insured 401.7 402.0 385.4 16.3 4.2 % 399.8 1.9 0.5 %
Medicaid ASO - - 85.7 (85.7 ) -100.0 % - - 0.0 %
Total Medicaid 401.7 402.0 471.1 (69.4 ) -14.7 % 399.8 1.9 0.5 %
Total Government Segment 6,872.5 6,873.5 7,938.3 (1,065.8 ) -13.4 % 6,890.1 (17.6 ) -0.3 %
Commercial Segment:
Fully-insured medical:
Group 1,442.1 1,451.7 1,633.6 (191.5 ) -11.7 % 1,474.1 (32.0 ) -2.2 %
Individual 367.4 363.8 325.1 42.3 13.0 % 358.8 8.6 2.4 %
Medicare supplement 30.0 29.5 20.1 9.9 49.3 % 27.8 2.2 7.9 %
Total fully-insured medical 1,839.5 1,845.0 1,978.8 (139.3 ) -7.0 % 1,860.7 (21.2 ) -1.1 %
ASO 1,571.3 1,571.3 1,642.0 (70.7 ) -4.3 % 1,566.2 5.1 0.3 %
Total Commercial Segment 3,410.8 3,416.3 3,620.8 (210.0 ) -5.8 % 3,426.9 (16.1 ) -0.5 %
Total medical membership 10,283.3 10,289.8 11,559.1 (1,275.8 ) -11.0 % 10,317.0 (33.7 ) -0.3 %
Specialty Membership
Dental - fully-insured 2,635.7 2,641.8 2,552.7 83.0 3.3 % 2,650.9 (15.2 ) -0.6 %
Dental - ASO 1,197.2 1,198.5 1,080.7 116.5 10.8 % 1,197.4 (0.2 ) 0.0 %
Total dental 3,832.9 3,840.3 3,633.4 199.5 5.5 % 3,848.3 (15.4 ) -0.4 %
Vision 2,459.6 2,450.3 2,233.0 226.6 10.1 % 2,427.3 32.3 1.3 %
Other supplemental benefits (B) 907.6 903.3 846.8 60.8 7.2 % 888.1 19.5 2.2 %
Total specialty membership 7,200.1 7,193.9 6,713.2 486.9 7.3 % 7,163.7 36.4 0.5 %

S-9

Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
Per Member per Month (C)
Three Months Ended December 31, Three Months Ended December 31,
Dollar Percentage
2009 2008 Change Change 2009 2008
Premium revenues
Government Segment:
Medicare Advantage $4,072,515 $3,620,890 $451,625 12.5 % $900 $850
Medicare stand-alone PDPs 514,780 817,475 (302,695 ) -37.0 % $89 $88
Total Medicare 4,587,295 4,438,365 148,930 3.4 %
Military services insured (D) 835,134 829,075 6,059 0.7 % $159 $159
Medicaid insured 166,110 153,810 12,300 8.0 % $138 $134
Total Government Segment premiums 5,588,539 5,421,250 167,289 3.1 %
Commercial Segment:
Fully-insured medical 1,541,954 1,602,771 (60,817 ) -3.8 % $279 $272
Specialty 238,315 229,901 8,414 3.7 % $12 $12
Total Commercial Segment premiums 1,780,269 1,832,672 (52,403 ) -2.9 %
Total premium revenues $7,368,808 $7,253,922 $114,886 1.6 %
Administrative services fees
Military services ASO (D) $23,524 $17,462 $6,062 34.7 % $6 $5
Other government ASO 3,483 5,075 (1,592 ) -31.4 %
Commercial Segment 100,820 89,998 10,822 12.0 % $12 $11
Total administrative services fees $127,827 $112,535 $15,292 13.6 %

S-10

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

Twelve Months Ended December 31,

 Twelve Months Ended December 31,
Dollar Percentage
2009 2008 Change Change 2009 2008
Premium revenues
Government Segment:
Medicare Advantage $16,413,301 $13,777,999 $2,635,302 19.1% $917 $858
Medicare stand-alone PDPs 2,327,418 3,380,400 (1,052,982) -31.1% $97 $91
Total Medicare 18,740,719 17,158,399 1,582,320 9.2%
Military services insured (D) 3,426,739 3,218,270 208,469 6.5% $163 $155
Medicaid insured 646,195 591,535 54,660 9.2% $137 $128
Total Government Segment premiums 22,813,653 20,968,204 1,845,449 8.8%
Commercial Segment:
Fully-insured medical 6,185,158 6,169,403 15,755 0.3% $275 $269
Specialty 927,940 927,237 703 0.1% $12 $12
Total Commercial Segment premiums 7,113,098 7,096,640 16,458 0.2%
Total premium revenues $29,926,751 $28,064,844 $1,861,907 6.6%
Administrative services fees
Military services ASO (D) $86,664 $69,044 $17,620 25.5% $6 $5
Other government ASO 21,778 16,824 4,954 29.4%
Commercial Segment 387,693 366,011 21,682 5.9% $12 $11
Total administrative services fees $496,135 $451,879 $44,256 9.8%

S-11

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

December 31, 2009

Medicare
Advantage

Medicare
stand-alone
PDPs

Military
Services

Medicaid

Total Govt.
Segment

Fully-insured

ASO

Total Comm.
Segment

Total Medical
Membership

Capitated HMO hospital system based (E) 2.1 % - - - 0.5 % 1.2 % - 0.6 % 0.5 %
Capitated HMO physician group based (E) 3.3 % - - 29.3 % 2.4 % 1.5 % - 0.8 % 1.9 %
Risk-sharing (F) 18.9 % - - 69.5 % 8.2 % 1.2 % - 0.7 % 5.7 %
All other membership 75.7 % 100.0 % 100.0 % 1.2 % 88.9 % 96.1 % 100.0 % 97.9 % 91.9 %
Total medical membership 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

December 31, 2008
Capitated HMO hospital system based (E) 1.8 % - - - 0.3 % 1.2 % - 0.7 % 0.4 %
Capitated HMO physician group based (E) 3.4 % - - 31.1 % 2.5 % 1.4 % - 0.8 % 1.9 %
Risk-sharing (F) 19.1 % - - 50.0 % 6.4 % 1.3 % - 0.7 % 4.7 %
All other membership 75.7 % 100.0 % 100.0 % 18.9 % 90.8 % 96.1 % 100.0 % 97.8 % 93.0 %
Total medical membership 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

S-12

Humana Inc. Fair value
Investments
Dollars in thousands
12/31/2009 9/30/2009 12/31/2008
Investment Portfolio:
Cash & cash equivalents $ 1,613,588 $ 1,452,006 $ 1,970,423
Investment securities 6,190,062 5,899,385 4,203,538
Long-term investment securities 1,307,088 1,319,319 1,011,904
Total investment portfolio $ 9,110,738 $ 8,670,710 $ 7,185,865
Duration (G) 3.78 3.55 3.39
Average Credit Rating AA+ AA+ AA+
Securities Lending Invested Collateral Portfolio:
Cash & cash equivalents $ 53,569 $ 40,975 $ 46,693
Certificates of deposit / bank notes - 52,275 167,973
Corporate floating rate 32,375 24,978 55,341
Asset-backed securities 33,642 58,464 132,392
$ 119,586 $ 176,692 $ 402,399
Average Credit Rating

AAA-

AA+ AA+
Investment Portfolio Detail:
Cash and cash equivalents $ 1,613,588 $ 1,452,006 $ 1,970,423
U.S. Government and agency obligations
U.S. Treasury and agency obligations $ 1,009,352 $ 1,253,636 $ 599,898
U.S. Government residential mortgage-backed 1,662,246 1,420,491 1,283,482
U.S. Government commercial mortgage-backed 26,417 27,554 14,223
Total U.S. Government and agency obligations 2,698,015 2,701,681 1,897,603
Tax-exempt municipal securities
Pre-refunded 346,937 416,694 694,797
Insured 587,203 575,417 452,427
Other 1,221,087 1,001,409 468,585
Auction rate securities 68,814 71,792 73,653
Total tax-exempt municipal securities 2,224,041 2,065,312 1,689,462
Residential mortgage-backed
Prime residential mortgages 89,956 132,043 339,665
Alt-A residential mortgages 3,856 3,895 5,939
Sub-prime residential mortgages 1,600 1,564 1,704
Total residential mortgage-backed 95,412 137,502 347,308
Commercial mortgage-backed 279,626 275,963 260,299
Asset-backed securities 107,188 155,234 144,370
Corporate securities
Financial services 775,990 686,256 356,816
Other 1,286,382 1,170,002 484,581
Total corporate securities 2,062,372 1,856,258 841,397
Redeemable preferred stocks 25,258 21,643 19,702
Non-redeemable preferred stocks 696 706 11,228
Common stocks 4,542 4,405 4,073
Total investment portfolio $ 9,110,738 $ 8,670,710 $ 7,185,865

S-13

Humana Inc.
Detail of Benefits Payable Balance and Year-to-Date Changes
Dollars in thousands
December 31, September 30, December 31,
2009 2009 2008
Detail of benefits payable
IBNR and other benefits payable (H) $2,377,324 $2,436,947 $2,216,909
Unprocessed claim inventories (I) 323,000 317,100 247,200
Processed claim inventories (J) 48,358 112,790 190,445
Payable to pharmacy benefit administrator (K) 194,697 187,771 244,228
Benefits payable, excluding military services 2,943,379 3,054,608 2,898,782
Military services benefits payable (L) 279,195 310,873 306,797
Total Benefits Payable $3,222,574 $3,365,481 $3,205,579
Year Ended Nine Months Ended Year Ended
December 31, 2009 September 30, 2009 December 31, 2008
Year-to-date changes in benefits payable,
excluding military services (M)
Balances at January 1 $2,898,782 $2,898,782 $2,355,461
Acquisitions - - 96,021
Incurred related to:
Current year 21,934,973 16,639,799 21,092,135
Prior years (N) (252,756 ) (221,887 ) (268,027 )
Total incurred 21,682,217 16,417,912 20,824,108
Paid related to:
Current year (20,059,254 ) (14,707,443 ) (18,832,301 )
Prior years (1,578,366 ) (1,554,643 ) (1,544,507 )
Total paid (21,637,620 ) (16,262,086 ) (20,376,808 )
Balances at end of period $2,943,379 $3,054,608 $2,898,782
Year Ended Nine Months Ended Year Ended
December 31, 2009 September 30, 2009 December 31, 2008
Summary of Consolidated Benefit Expense:
Total benefit expense incurred, per above $21,682,217 $16,417,912 $20,824,108
Military services benefit expense 3,019,655 2,279,918 2,819,787
Future policy benefit expense (O) 73,130 50,376 64,338
Consolidated Benefit Expense $24,775,002 $18,748,206 $23,708,233

S-14

Humana Inc.
Benefits Payable Statistics (P)
Receipt Cycle Time (Q)
2009 2008 Change

Percentage
Change

1st Quarter Average 14.8 15.1 (0.3) -2.0%
2nd Quarter Average 14.0 15.0 (1.0) -6.7%
3rd Quarter Average 13.7 15.2 (1.5) -9.9%
4th Quarter Average 13.6 14.6 (1.0) -6.8%
Full Year Average 14.0 15.0 (1.0) -6.7%
Unprocessed Claims Inventories
Date

Estimated Valuation
(000's)

Claim Item
Counts

Number of Days
on Hand
12/31/2007 $213,400 683,500 5.0
3/31/2008 $212,000 673,000 4.4
6/30/2008 $228,700 742,800 4.6
9/30/2008 $293,600 946,500 6.0
12/31/2008 $247,200 745,500 4.3
3/31/2009 $258,800 740,600 4.2
6/30/2009 $258,000 709,900 4.0
9/30/2009 $317,100 856,500 4.9
12/31/2009 $323,000 775,500 4.3

S-15

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

Days in Claims
Payable (DCP)

Change Last 4
Quarters

Percentage
Change

DCP Excluding
Capitation

Change Last 4
Quarters

Percentage
Change

12/31/2007 60.2 3.9 6.9 % 68.3 4.3 6.7 %
3/31/2008 56.9 (2.4 ) -4.0 % 63.3 (2.7 ) -4.1 %
6/30/2008 57.2 (2.8 ) -4.7 % 63.3 (5.2 ) -7.6 %
9/30/2008 58.1 (3.7 ) -6.0 % 65.1 (5.1 ) -7.3 %
12/31/2008 59.4 (0.8 ) -1.3 % 66.5 (1.8 ) -2.6 %
3/31/2009 54.6 (2.3 ) -4.0 % 60.9 (2.4 ) -3.8 %
6/30/2009 56.1 (1.1 ) -1.9 % 61.5 (1.8 ) -2.8 %
9/30/2009 56.2 (1.9 ) -3.3 % 62.7 (2.4 ) -3.7 %
12/31/2009 55.4 (4.0 ) -6.7 % 62.1 (4.4 ) -6.6 %
Year-to-Date Change in Days in Claims Payable (S)
2009 2008
DCP - beginning of period 59.4 60.2
Components of change in DCP:
Internal versus outsourced claims processing cycle times - (4.6 )
Change in unprocessed claims inventories 0.6 0.9
Change in processed claims inventories (2.7 ) 2.0
Change in pharmacy payment cutoff (1.1 ) 0.6
Impact of Cariten acquisition in 4Q08 (0.9 ) -
All other 0.1 0.3
DCP - end of period 55.4 59.4

S-16

Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information
4Q09 Earnings Release
(A) The selling, general and administrative (SG&A) expense ratio is defined as SG&A expenses as a percent of premiums, administrative services fees and other revenue.
(B) Other supplemental benefits include life, disability, and fixed benefit products including cancer and critical illness policies.
(C) Computed based on average membership for the period (i.e., monthly ending membership during the period divided by the number of months in the period).
(D) Military services revenues are generally not contracted on a per-member basis.
(E) In a limited number of circumstances, the company contracts with hospitals and physicians to accept financial risk for a defined set of HMO membership. In transferring this risk, the company prepays these providers a monthly fixed-fee per member to coordinate substantially all of the medical care for their capitated HMO membership, including some health benefit administrative functions and claims processing. For these capitated HMO arrangements, the company generally agrees to reimbursement rates that target a benefit expense ratio. Providers participating in hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within their system for their HMO membership. Providers participating in physician-based capitated HMO arrangements generally have subcontracted specialist physicians and are responsible for reimbursing such physicians and hospitals for services rendered to their HMO membership.
(F) In some circumstances, the company contracts with physicians under risk-sharing arrangements whereby physicians have assumed some level of risk for all or a portion of the benefit expenses of their HMO membership. Although these arrangements do include capitation payments for services rendered, the company processes substantially all of the claims under these arrangements.
(G) Duration is the time-weighted average of the present value of the bond portfolio cash flows.
(H) IBNR represents an estimate of benefit expenses payable for claims incurred but not reported (IBNR) at the balance sheet date. The level of IBNR is primarily impacted by membership levels, benefit claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received (i.e. a shorter time span results in lower reserves for claims IBNR). Other benefits payable includes amounts payable to providers under capitation arrangements.
(I) Unprocessed claim inventories represent the estimated valuation of claims received but not yet fully processed.
(J) 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.
(K) The balance due to the company's pharmacy benefit administrator fluctuates as a result of the number of business days in the last payment cycle of the month. Payment cycles are every 10 days (10th & 20th of month) and the last day of the month.
(L)

Military services benefits payable primarily consist of IBNR and to a lesser extent risk share payables to the Department of Defense and liabilities to subcontractors.

(M) The table excludes activity associated with military services benefits payable, because the federal government bears a substantial portion of the risk associated with financing the cost of health benefits. More specifically, the risk-sharing provisions of the military services contracts with the federal government and with subcontractors effectively limit profits and losses when actual claim experience varies from the targeted claim amount negotiated annually. As a result of these contract provisions, the impact of changes in estimates for prior year military services benefits payable are substantially offset by the associated changes in estimates of revenue from health care services reimbursements. As such, any impact on the company's results of operations is reduced substantially, whether positive or negative.
(N) Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development). There were no changes in the approach used to determine the company's estimate of claim reserves during the quarter.
(O) Future policy benefit expense has a related liability classified as a long-term liability on the balance sheet.
(P) Benefits reserves statistics represents fully-insured medical claims data and excludes military services claims data and specialty benefits.
(Q) The receipt cycle time measures the average length of time between when a claim was initially incurred and when the claim form was received. Receipt cycle time data for the company's largest claim processing platforms represent approximately 95% of the company's fully-insured claims volume. Pharmacy and specialty claims, including dental, vision and other supplemental benefits, are excluded from this measurement.
(R) A common metric for monitoring benefits payable levels relative to the benefit expense is days in claims payable, or DCP, which represents the benefits payable at the end of the period divided by average benefit expenses per day in the quarterly period. Since the company has some providers under capitation payment arrangements (which do not require a benefits payable IBNR reserve), the company has also summarized this metric excluding capitation expense. In addition, this calculation excludes the impact of the company's military services and stand-alone PDP business.
(S) DCP fluctuates due to a number of issues, the more significant of which are detailed in this rollforward. Growth in certain product lines can also impact DCP for the quarter since a provision for claims would not have been recorded for members that had not yet enrolled earlier in the quarter, yet those members would have a provision and corresponding reserve recorded upon enrollment later in the quarter. This analysis excludes the impact of military services and Medicare stand-alone PDPs upon DCP.

S-17

SOURCE: Humana Inc. 

Humana Inc.
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