Humana Reports Fourth Quarter and Full Year 2007 Financial Results
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- 2007 EPS of $4.91, ahead of company expectations
- Raising projected 2008 EPS to a range of $5.35 to $5.55
- Revenues of $25.3 billion in 2007
- Medical membership of 11.5 million at December 31, 2007
- Specialty membership of 6.8 million at December 31, 2007
- January 2008 Medicare Advantage membership of 1,243,000
- 2007 operating cash flows of $1.2 billion
LOUISVILLE, Ky., Feb 04, 2008 (BUSINESS WIRE) -- Humana Inc. (NYSE: HUM) today reported financial results for the quarter ended December 31, 2007 (4Q07) including diluted earnings per common share (EPS) of $1.43, significantly above the company's previous guidance for 4Q07 EPS of $1.27 to $1.32 primarily due to a lower income tax rate for 2007 than previously anticipated and a gain from the sale of a venture capital investment during 4Q07. The company earned $0.92 per share for the quarter ended December 31, 2006 (4Q06).
For the year ended December 31, 2007 (FY07), the company reported EPS of $4.91(a)(b) versus $2.90 for the year ended December 31, 2006 (FY06). The company's FY07 EPS included earnings of $0.25 per share(a) that are not anticipated to recur in future periods.
The company has raised its EPS projection for the year ending December 31, 2008 (FY08E) to reflect a lower tax rate than previously anticipated, with EPS now expected to be in the range of $5.35 to $5.55, an increase of 9 to 13 percent over FY07 EPS, or 15 to 19 percent(a)(b) versus the non-GAAP EPS for FY07.
"Our 2007 results show that Humana's unique value proposition resonates deeply with America's seniors," said Michael B. McCallister, the company's president and chief executive officer. "Treating members as actively engaged health-care consumers instead of passive health-care users is what we do across all our lines of business, and accounts for Humana's across-the-board growth and success."
Revenues - 4Q07 consolidated revenues rose 12 percent to $6.34 billion from $5.66 billion in 4Q06, with total premium and administrative services fees up 12 percent compared to the prior year's quarter. This year-over-year increase was primarily driven by higher average Medicare Advantage membership versus 4Q06.
FY07 consolidated revenues rose 18 percent to $25.29 billion from $21.42 billion in FY06 with total premium and administrative services fees up 18 percent compared to the prior year's period, also primarily driven by higher average enrollment in the company's Medicare Advantage and stand-alone Prescription Drug Plans (PDPs).
Benefit expenses(c) - The 4Q07 consolidated benefits ratio(c) (benefit expenses as a percent of premium revenues) of 80.3 percent was 290 basis points lower than the 4Q06 benefit ratio of 83.2 percent, the combined result of a 360 basis point decline in the Government Segment benefits ratio and a 110 basis point decline in the Commercial Segment benefits ratio.
The consolidated benefits ratio for FY07 of 83.0 percent was 100 basis points lower than the FY06 consolidated benefits ratio of 84.0 percent, substantially due to a 120 basis point decline in the Government Segment benefits ratio (including a 40 basis point benefit from favorable prior year claims development(a)) and a 120 basis point improvement in the benefits ratio for the Commercial Segment.
Selling, general, & administrative (SG&A) expenses - The 4Q07 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) increased 130 basis points to 16.0 percent for 4Q07 from 14.7 percent in 4Q06. The year-over-year increase was primarily the result of higher marketing and other administrative expenses associated with the Medicare selling season for 2008 enrollment, which began during 4Q07, as well as the acquisition of two specialty products companies in 4Q07.
The SG&A expense ratio for FY07 of 13.9 percent was 40 basis points lower than that for FY06 of 14.3 percent primarily driven by efficiency and productivity gains associated with higher average medical membership year to date, partially offset by the company's expanding mail-order pharmacy business as well as differences in the composition of the company's medical membership portfolio for 2007 versus 2006.
Income taxes - The effective income tax rate for 4Q07 of 32.2 percent was significantly lower than the September 30, 2007 year-to-date rate of 36.5 percent reflecting a revised estimate for the company's state tax rate and the favorable resolution of an Internal Revenue Service audit item.
The effective income tax rate for FY07 declined 70 basis points from the prior year, primarily reflecting the benefit from a lower state tax rate as the company's earnings became more geographically diverse in FY07.
Government Segment Results
Pretax results:
-- Government Segment pretax earnings were $304.6 million in 4Q07 compared to $187.3 million in 4Q06. As expected, the year-over-year improvement in fourth quarter pretax earnings for this segment primarily reflects a more normal benefits ratio pattern for the Part D benefit for 2007 as well as administrative cost efficiency associated with higher average Medicare Advantage membership. The extended enrollment period for the Part D benefit during 2006 distorted the claims pattern associated with the beneficiaries' progression through the Part D benefit stages in that year.
-- For FY07, pretax earnings for the Government Segment of $1.03 billion increased by $513.7 million, or 100 percent versus FY06 pretax earnings for the segment of $513.8 million, primarily reflecting the same factors impacting the year-over-year comparison for the fourth quarter. This segment's pretax earnings for FY07 on a non-GAAP basis were $958.7 million(a)(b).
Enrollment:
-- Medicare Advantage membership grew to 1,143,000 at December 31, 2007, an increase of 140,400, or 14 percent, from December 31, 2006 and was essentially unchanged versus September 30, 2007. Average Medicare Advantage membership for 4Q07 was up 14 percent compared to that for 4Q06. The company's expanded participation in various Medicare products and markets combined with the company's increased sales and marketing efforts for these programs led to the higher membership level year over year.
-- Membership in the company's stand-alone PDPs totaled 3,442,000 at December 31, 2007 compared to 3,536,600 at December 31, 2006 and 3,459,700 at September 30, 2007.
-- January 2008 membership in the company's Medicare Advantage plans approximated 1,243,000.
-- January 2008 Medicare stand-alone PDP membership approximated 3,180,000.
Premiums and administrative services fees:
-- Medicare Advantage premiums of $2.80 billion in 4Q07 increased 22 percent compared to $2.30 billion in 4Q06, primarily the result of higher average membership.
-- Medicare stand-alone PDP premiums of $820.3 million in 4Q07 decreased 7 percent compared to $882.0 million in 4Q06, primarily the result of a 2 percent decline in average membership versus that for 4Q06.
-- Military services(d) premiums and administrative services fees during 4Q07 increased $30.6 million to $691.0 million compared to $660.4 million in 4Q06.
Benefit Expenses(c):
-- The Government Segment benefits ratio decreased 360 basis points to 80.1 percent in 4Q07 compared to 83.7 percent in the prior year's quarter. This decrease reflects a more normalized benefits ratio pattern for the Medicare Part D benefit for 2007. The extended enrollment period for this benefit during the prior year distorted the claims pattern associated with the beneficiaries' progression through the Part D benefit stages in 2006.
SG&A Expenses:
-- The Government Segment's SG&A expense ratio for 4Q07 of 13.7 percent was 140 basis points higher than that for 4Q06 of 12.3 percent and increased 350 basis points from the third quarter of 2007. Each of these changes was primarily the result of higher marketing and other administrative expenses associated with the Medicare selling season for 2008 enrollment which began during 4Q07.
Commercial Segment Results
Pretax results:
-- Commercial Segment pretax earnings were $54.4 million in 4Q07 compared to $53.9 million in 4Q06. Commercial Segment operating earnings in 4Q07 continue to reflect the company's commitment to underwriting discipline and strategic growth in select lines of business.
-- For FY07, pretax earnings for the Commercial Segment of $261.8 million were $13.5 million, or 5 percent higher than FY06 pretax earnings for the segment of $248.2 million. Operating earnings for this segment excluding venture capital gains reflect a full year of the company's commitment to underwriting discipline and strategic line-of-business growth. Venture capital gains included in this segment's results were $6.3 million in FY07 versus $56.0 million in FY06.
Enrollment:
-- Commercial Segment medical membership grew 167,800 members to 3,451,600 at December 31, 2007, an increase of 5 percent from December 31, 2006 and September 30, 2007. Approximately 95,900 of the increase in medical members related to members acquired via an acquisition completed during 4Q07 (primarily ASO members).
-- Membership in strategic areas of commercial growth rose organically as follows during 4Q07 compared to 4Q06: Individual product membership increased 35 percent, Smart plans and other consumer offerings membership grew 29 percent, Small Group business membership was up 2 percent, and total ASO members were 1 percent higher than the prior year.
-- Membership in Commercial Segment specialty products at December 31, 2007 rose to 6,783,800 compared to 1,902,800(e) at December 31, 2006, primarily driven by the addition of membership from two specialty-product companies acquired during 4Q07.
Premiums and administrative services fees:
-- Premiums and administrative services fees for the Commercial Segment increased 11 percent to $1.74 billion in 4Q07 compared to $1.57 billion in the prior year's quarter, primarily due to commitment to underwriting discipline, strategic line-of-business growth and the acquisition of two specialty products companies in 4Q07.
-- Commercial Segment medical premiums for fully-insured groups increased approximately 5 percent on a per-member basis during 4Q07 compared to 4Q06.
Benefit Expenses:
-- In 4Q07, the Commercial Segment benefits ratio of 81.0 percent was 110 basis points lower than the 4Q06 benefits ratio of 82.1 percent, primarily reflecting the acquisition of two specialty products companies in 4Q07, continued underwriting discipline and strategic medical membership line-of-business growth.
SG&A Expenses:
-- The Commercial Segment SG&A expense ratio of 21.8 percent for 4Q07 compares to 20.4 percent in 4Q06, primarily the combined result of higher average Individual and ASO membership, costs associated with increased business for the company's mail order pharmacy, and the acquisition of two specialty products companies in 4Q07. Average Individual product membership rose 32 percent and average ASO membership increased 3 percent versus the prior year's quarter.
Balance Sheet
-- Cash and cash equivalents declined $545.2 million or 21 percent sequentially due to the payment of Part D risk-share payable of approximately $726 million.
-- Parent company cash and investments increased $111.3 million to $535.7 million at December 31, 2007 from $424.4 million at December 31, 2006.
-- Debt-to-total capitalization at December 31, 2007 was 29.5 percent, up 380 basis points from September 30, 2007 due primarily to the completion of two acquisitions during 4Q07. This ratio was up 10 basis points compared to December 31, 2006.
Cash Flows from Operations
Cash flows used in operations for 4Q07 of $189.8 million compared to cash flows provided by operations of $534.9 million in 4Q06 primarily reflects the payment of Part D risk-share payable for the 2006 plan year of approximately $726 million.
FY07 cash flows from operations of $1.22 billion versus $1.69 billion for FY06 also reflect the same factors impacting 4Q07 year-over-year comparisons.
Acquisitions
During 4Q07, the company completed the acquisitions of CompBenefits Corporation and KMG America Corporation ("KMG") for total cash consideration of approximately $525 million plus the assumption of approximately $36 million of debt. CompBenefits is a leading full-service provider of dental and vision benefit plans and increased Humana's specialty membership by approximately 4.4 million(e). KMG offers supplemental life and health insurance products and services and increased Humana's specialty membership approximately 427,500(e)(f) and the company's medical membership by 95,900(f).
Footnotes
(a) During the quarter ended September 30, 2007, the company realized pretax income of approximately $68.9 million ($0.25 per share after tax) related to favorable prior-year claims development that it does not anticipate recurring in future periods, with approximately $54.0 million related to 2006 Medicare Part D claims and the remainder related to Military services claims. The Medicare Part D development primarily related to the resolution of first-year Part D implementation matters including enrollment discrepancies and the related impact on claim estimates. The claims development related to Military services resulted from the settlement of certain claims payment accuracy provisions for prior option periods. A reconciliation of GAAP to non-GAAP amounts related to this favorable development is included in the statistical pages of this earnings press release.
(b) The company believes that the non-GAAP measures included in this release, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses these non-GAAP financial measures as indicators of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP.
(c) The company has renamed "medical expenses" as "benefit expenses" and the related "medical expense ratio" as "benefits ratio" reflecting the expansion of its specialty offerings in 4Q07.
(d) The company has renamed "TRICARE" as "military services" reflecting the addition of contracts with the Department of Veteran Affairs in 4Q07.
(e) 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.
(f) Approximately 500,000 members in stand-alone stop loss, long-term care, and network access products previously reported by KMG have been excluded from Humana's membership statistics since the related business is not material to Humana's operations.
Conference Call & Virtual Slide Presentation
Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and the company's expectations for future earnings. A live virtual presentation (audio with slides) may be accessed via Humana's Investor Relations page at www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.
All parties interested in the audio-only portion of the conference call are invited to dial 888-625-7430. No password is required. The company suggests participants dial in approximately ten minutes in advance of the call. For those unable to participate in the live event, the virtual presentation archive may be accessed via the Historical Webcasts & Presentations section of the Investor Relations page at www.humana.com.
Cautionary Statement
This news release contains statements and earnings guidance points that are forward-looking. The forward-looking items herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking items may be significantly impacted by certain risks and uncertainties described in the following documents filed by Humana with the Securities and Exchange Commission:
-- Form 10-K for the year ended December, 31, 2006,
-- Form 10-Qs for the quarters ended March 31, 2007, June 30, 2007, and September 30, 2007,
-- Form 8-Ks filed during 2007 and 2008.
About Humana
Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health and supplemental benefits companies, with approximately 11.5 million medical members. Humana is a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government programs and individuals.
Over its 47-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.
More information regarding Humana is available to investors via the Investor Relations page of the company's web site at www.humana.com, including copies of:
-- Annual reports to stockholders;
-- Securities and Exchange Commission filings;
-- Most recent investor conference presentations;
-- Quarterly earnings news releases;
-- Replay of most recent earnings release conference calls;
-- Calendar of events (includes 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 4, 2008
(in accordance with For the year ending Comments
Generally Accepted December 31, 2008
Accounting Principles)
---------------------- --------------------------- -------------------
Diluted earnings per Full year 2008: $5.35 to
common share $5.55
First quarter 2008: $0.80
to $0.85
---------------------- --------------------------- -------------------
Revenues Consolidated revenues: $28
billion to $30 billion
Premiums and ASO fees:
Medicare Advantage: $13
billion to $14 billion;
Medicare stand-alone
PDPs: Approximately
$3.4 billion;
Military services: $3.2
billion to $3.4
billion;
Commercial Segment: $7.2
billion to $7.7 billion
Consolidated investment
income: $350 million to
$370 million
Consolidated other revenue: Other revenue
$200 million to $250 primarily relates
million to revenues
associated with
the company's mail
order pharmacy
---------------------- --------------------------- -------------------
Ending medical Medicare Advantage: Up
membership (fully- 200,000 to 250,000 from
insured and ASO prior year
combined)
Medicare stand-alone PDPs:
3.15 million to 3.20
million
Military services: No
material change from prior
year
Medicaid: No material
change from prior year
Commercial: Up
approximately 65,000 to
95,000 from prior year
---------------------- --------------------------- -------------------
Benefit expenses Medicare products: benefits Medicare Advantage
ratio in the range of 83% and stand-alone
to 84% PDP combined
Commercial fully-insured
groups: Same-store net
benefit expense trends and
premium yields of 6% to 7%
(3.5% to 4.5% including
the impact of changes in
the company's business
mix)
Secular Commercial benefit Secular trends
expense trend components exclude the impact
as follows: inpatient of benefit buy-
hospital utilization - downs
flat to 1 percent;
inpatient and outpatient
hospital rates - mid to
upper single digits;
outpatient hospital
utilization - low to mid
single digits; physician -
mid single digits; and
pharmacy - mid to upper
single digits.
---------------------- --------------------------- -------------------
Selling, general & 13.5% to 14% SG&A expenses as a
administrative percent of
expense ratio premiums,
administrative
costs, and other
revenue
---------------------- --------------------------- -------------------
Depreciation & $230 million to $240
amortization million
---------------------- --------------------------- -------------------
Interest expense $75 million to $80 million
---------------------- --------------------------- -------------------
Government Segment Medicare products: Medicare Advantage
operating margins approximately 5% and stand-alone
PDP combined
Military services: 2.5% to
3.5%
---------------------- --------------------------- -------------------
Commercial Segment $280 million to $300
pretax earnings million
---------------------- --------------------------- -------------------
Cash flows from $1.5 billion to $1.8
operations billion
---------------------- --------------------------- -------------------
Capital expenditures Approximately $275 million
---------------------- --------------------------- -------------------
Effective tax rate 35.5% to 36%
---------------------- --------------------------- -------------------
Shares used in Approximately 173 million
computing
full-year EPS
---------------------- --------------------------- -------------------
Humana Inc.
Statistical Schedules
And
Supplementary Information
4Q07 Earnings Release
Humana Inc.
Statistical Schedules and Supplementary Information
4Q07 Earnings Release
Contents
Page Description
------- ------------------------------------------------------------
S-3-4 Consolidated Statements of Income
S-5 Consolidated Balance Sheets
S-6-7 Consolidated Statements of Cash Flows
S-8 Key Income Statement Ratios and Segment Operating Results
S-9 Membership Detail
S-10-11 Premiums and Administrative Services Fees Detail
S-12 Percentage of Ending Membership under Capitation
Arrangements
S-13-15 Benefits Payable
S-16 GAAP to Non-GAAP Reconciliation
S-17-18 Footnotes
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
-----------------------
Three Months Ended
December 31,
-----------------------
Dollar Percentage
2007 2006 Change Change
------------ ---------- ---------- ----------
Revenues:
Premiums $6,113,693 $5,456,853 $656,840 12.0%
Administrative
services fees 97,027 92,490 4,537 4.9%
Investment income 86,298 79,937 6,361 8.0%
Other revenue 41,777 25,939 15,838 61.1%
------------ ---------- ----------
Total revenues 6,338,795 5,655,219 683,576 12.1%
------------ ---------- ----------
Operating expenses:
Benefits 4,912,251 4,541,775 370,476 8.2%
Selling, general and
administrative 1,000,376 817,038 183,338 22.4%
Depreciation 40,297 34,607 5,690 16.4%
Other intangible
amortization 7,937 4,812 3,125 64.9%
------------ ---------- ----------
Total operating
expenses 5,960,861 5,398,232 562,629 10.4%
------------ ---------- ----------
Income from operations 377,934 256,987 120,947 47.1%
Interest expense 18,947 15,806 3,141 19.9%
------------ ---------- ----------
Income before income
taxes 358,987 241,181 117,806 48.8%
Provision for income
taxes 115,768 86,160 29,608 34.4%
------------ ---------- ----------
Net income $243,219 $155,021 $88,198 56.9%
============ ========== ==========
Basic earnings per
common share $1.45 $0.94 $0.51 54.3%
Diluted earnings per
common share $1.43 $0.92 $0.51 55.4%
Shares used in computing
basic earnings per
common share 167,871 165,338
Shares used in computing
diluted earnings per
common share 170,677 168,748
------------
S-3
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
-----------------------
Twelve Months Ended
December 31,
-----------------------
Dollar Percentage
2007 2006 Change Change
----------- ----------- ---------- ----------
Revenues:
Premiums $24,434,347 $20,729,182 $3,705,165 17.9%
Administrative
services fees 391,515 341,211 50,304 14.7%
Investment income 314,239 291,880 22,359 7.7%
Other revenue 149,888 54,264 95,624 176.2%
----------- ----------- ----------
Total revenues 25,289,989 21,416,537 3,873,452 18.1%
----------- ----------- ----------
Operating expenses:
Benefits 20,270,531 17,421,204 2,849,327 16.4%
Selling, general and
administrative 3,476,468 3,021,509 454,959 15.1%
Depreciation 162,397 128,634 33,763 26.2%
Other intangible
amortization 22,415 19,964 2,451 12.3%
----------- ----------- ----------
Total operating
expenses 23,931,811 20,591,311 3,340,500 16.2%
----------- ----------- ----------
Income from operations 1,358,178 825,226 532,952 64.6%
Interest expense 68,878 63,141 5,737 9.1%
----------- ----------- ----------
Income before income
taxes 1,289,300 762,085 527,215 69.2%
Provision for income
taxes 455,616 274,662 180,954 65.9%
----------- ----------- ----------
Net income $833,684 $487,423 $346,261 71.0%
=========== =========== ==========
Basic earnings per
common share $5.00 $2.97 $2.03 68.4%
Diluted earnings per
common share $4.91 $2.90 $2.01 69.3%
Shares used in computing
basic earnings per
common share 166,871 164,137
Shares used in computing
diluted earnings per
common share 169,820 167,996
-----------
S-4
Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
December 31, September 30, December 31,
2007 2007 2006
------------ --------------------------
Assets
Current assets:
Cash and cash equivalents $2,040,453 $2,585,670 $1,740,304
Investment securities 3,635,317 3,475,300 3,192,273
Receivables, net:
Premiums 592,761 685,242 667,657
Administrative services
fees 12,780 12,556 13,284
Securities lending
collateral 1,337,049 830,589 627,990
Other 1,114,486 1,579,610 1,062,455
------------ --------------------------
Total current assets 8,732,846 9,168,967 7,303,963
Property and equipment, net 637,241 570,798 545,004
Other assets:
Long-term investment
securities 1,015,050 420,769 414,877
Goodwill 1,663,939 1,330,585 1,310,631
Other 829,998 548,530 524,011
------------ --------------------------
Total other assets 3,508,987 2,299,884 2,249,519
------------ --------------------------
Total assets $12,879,074 $12,039,649 $10,098,486
============ ==========================
Liabilities and Stockholders'
Equity
Current liabilities:
Benefits payable(A) $2,696,833 $2,790,463 $2,410,407
Trade accounts payable and
accrued expenses 1,268,963 2,237,630 1,626,658
Book overdraft 269,226 253,356 293,605
Securities lending payable 1,337,049 830,589 627,990
Unearned revenues 219,780 177,080 155,298
------------ --------------------------
Total current
liabilities 5,791,851 6,289,118 5,113,958
Long-term debt 1,687,823 1,292,858 1,269,100
Future policy benefits
payable(A) 980,686 325,396 320,573
Other long-term
liabilities(A) 389,777 393,400 340,969
------------ --------------------------
Total liabilities 8,850,137 8,300,772 7,044,600
------------ --------------------------
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; 186,738,885
issued at December 31,
2007 31,123 30,995 30,491
Capital in excess of par
value 1,497,998 1,462,953 1,357,077
Retained earnings 2,742,782 2,499,563 1,909,098
Accumulated other
comprehensive income
(loss) 14,021 (11,042) (13,205)
Treasury stock, at cost,
16,720,528 shares at
December 31, 2007 (256,987) (243,592) (229,575)
------------ --------------------------
Total stockholders'
equity 4,028,937 3,738,877 3,053,886
------------ --------------------------
Total liabilities and
stockholders' equity $12,879,074 $12,039,649 $10,098,486
============ ==========================
Debt-to-total capitalization
ratio 29.5% 25.7% 29.4%
Sequential Change
--------------------------
Dollar Percent
--------------------------
Assets
Current assets:
Cash and cash equivalents
Investment securities
Receivables, net:
Premiums
Administrative services fees
Securities lending collateral
Other
Total current assets ($436,121) -4.8%
Property and equipment, net
Other assets:
Long-term investment securities
Goodwill
Other
Total other assets
Total assets $839,425 7.0%
Liabilities and Stockholders' Equity
Current liabilities:
Benefits payable(A)
Trade accounts payable and accrued
expenses
Book overdraft
Securities lending payable
Unearned revenues
Total current liabilities ($497,267) -7.9%
Long-term debt
Future policy benefits payable(A)
Other long-term liabilities(A)
Total liabilities $549,365 6.6%
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;
186,738,885 issued at December 31,
2007
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income
(loss)
Treasury stock, at cost, 16,720,528
shares at December 31, 2007
Total stockholders' equity $290,060 7.8%
Total liabilities and stockholders' equity $839,425 7.0%
Debt-to-total capitalization ratio
S-5
Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
-----------------------
Three Months Ended
December 31,
-----------------------
Dollar Percentage
2007 2006 Change Change
----------- ----------- ------------ ----------
Cash flows from
operating activities
Net income $243,219 $155,021
Adjustments to
reconcile net
income to net cash
provided by
operating
activities:
Depreciation and
amortization 48,234 39,419
Stock-based
compensation 11,264 8,157
Provision for
deferred income
taxes 443 47,793
Changes in
operating
assets and
liabilities
excluding the
effects of
acquisitions:
Receivables 106,524 64,063
Other assets 162,761 23,559
Benefits
payable (134,659) (78,840)
Other
liabilities (666,022) 272,883
Unearned
revenues 42,700 8,978
Other (4,296) (6,132)
----------- -----------
Net cash (used in)
provided by operating
activities (189,832) 534,901 ($724,733) -135.5%
----------- -----------
Cash flows from
investing activities
Acquisitions, net
of cash acquired (465,987) (1,700)
Purchases of
property and
equipment (83,188) (56,549)
Proceeds from sales
of property and
equipment 10,580 171
Purchases of
investment
securities (856,641) (763,830)
Proceeds from
maturities of
investment
securities 296,707 186,315
Proceeds from sales
of investment
securities 415,677 523,238
Change in
securities lending
collateral (506,460) 289,335
----------- -----------
Net cash (used in)
provided by investing
activities (1,189,312) 176,980 ($1,366,292) -772.0%
----------- -----------
Cash flows from
financing activities
Receipts from CMS
contract deposits 918,108 574,602
Withdrawals from
CMS contract
deposits (941,718) (753,855)
Borrowings under
credit agreement 500,000 300,000
Repayments under
credit agreement (175,000) -
Debt issue costs - (184)
Change in book
overdraft 15,870 12,361
Change in
securities lending
payable 506,460 (289,335)
Common stock
repurchases (13,395) (10,641)
Tax benefit from
stock-based
compensation 10,617 8,048
Proceeds from stock
option exercises
and other 12,985 6,193
----------- -----------
Net cash provided by
(used in) financing
activities 833,927 (152,811) $986,738 645.7%
----------- -----------
(Decrease)/increase in
cash and cash
equivalents (545,217) 559,070
Cash and cash
equivalents at
beginning of period 2,585,670 1,181,234
----------- -----------
Cash and cash
equivalents at end of
period $2,040,453 $1,740,304
=========== ===========
S-6
Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
-----------------------
Twelve Months Ended
December 31,
-----------------------
Dollar Percentage
2007 2006 Change Change
----------- ----------- ---------------------
Cash flows from
operating activities
Net income $833,684 $487,423
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization 184,812 148,598
Stock-based
compensation 42,132 32,558
(Benefit)
provision for
deferred income
taxes (32,736) 70,062
Changes in
operating assets
and liabilities
excluding the
effects of
acquisitions:
Receivables 89,667 58,554
Other assets 105,689 (365,454)
Benefits
payable 245,397 540,067
Other
liabilities (317,855) 752,032
Unearned
revenues 64,482 29,870
Other 8,990 (66,998)
----------- -----------
Net cash provided by
operating activities 1,224,262 1,686,712 ($462,450) -27.4%
----------- -----------
Cash flows from
investing activities
Acquisitions, net of
cash acquired (493,493) (28,062)
Purchases of property
and equipment (239,244) (193,151)
Proceeds from sales
of property and
equipment 26,514 9,623
Purchases of
investment
securities (3,488,631) (4,269,221)
Proceeds from
maturities of
investment
securities 1,387,967 1,664,332
Proceeds from sales
of investment
securities 1,670,555 1,742,793
Change in securities
lending collateral (709,059) (580,380)
----------- -----------
Net cash used in
investing activities (1,845,391) (1,654,066) ($191,325) -11.6%
----------- -----------
Cash flows from
financing activities
Receipts from CMS
contract deposits 2,866,170 2,002,451
Withdrawals from CMS
contract deposits (3,051,241) (2,124,717)
Borrowings under
credit agreement 1,685,000 550,000
Repayments under
credit agreement (1,335,000) (300,000)
Proceeds from
issuance of senior
notes - 498,545
Repayment of senior
notes - (300,000)
Debt issue costs - (5,980)
Change in book
overdraft (24,379) 13,600
Change in securities
lending payable 709,059 580,380
Common stock
repurchases (27,412) (26,211)
Tax benefit from
stock-based
compensation 37,443 38,839
Proceeds from stock
option exercises and
other 61,638 48,735
----------- -----------
Net cash provided by
financing activities 921,278 975,642 ($54,364) -5.6%
----------- -----------
Increase in cash and
cash equivalents 300,149 1,008,288
Cash and cash
equivalents at
beginning of period 1,740,304 732,016
----------- -----------
Cash and cash
equivalents at end of
period $2,040,453 $1,740,304
=========== ===========
S-7
Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
---------------------
Three Months Ended
December 31,
---------------------
Percentage
2007 2006 Difference Change
----------- --------- ---------- ----------
Benefits ratio(B)
Government Segment 80.1% 83.7% -3.6%
Commercial Segment 81.0% 82.1% -1.1%
Consolidated 80.3% 83.2% -2.9%
Selling, general, and
administrative expense
ratio(C)
Government Segment 13.7% 12.3% 1.4%
Commercial Segment 21.8% 20.4% 1.4%
Consolidated 16.0% 14.7% 1.3%
Detail of Pretax Income
Government Segment $304,577 $187,288 $117,289 62.6%
Commercial Segment 54,410 53,893 517 1.0%
----------- --------- ----------
Consolidated $358,987 $241,181 $117,806 48.8%
=========== ========= ==========
Detail of Pretax Margins
Government Segment 6.7% 4.6% 2.1%
Commercial Segment 3.0% 3.3% -0.3%
Consolidated 5.7% 4.3% 1.4%
---------------------
Twelve Months Ended
December 31,
---------------------
Percentage
2007 2006 Difference Change
----------- --------- ---------- ----------
Benefits ratio(B)
Government Segment 83.8% 85.0% -1.2%
Commercial Segment 80.5% 81.7% -1.2%
Consolidated 83.0% 84.0% -1.0%
Selling, general, and
administrative expense
ratio(C)
Government Segment 11.2% 11.8% -0.6%
Commercial Segment 21.5% 20.0% 1.5%
Consolidated 13.9% 14.3% -0.4%
Detail of Pretax Income
Government Segment $1,027,531 $513,845 $513,686 100.0%
Commercial Segment 261,769 248,240 13,529 5.4%
----------- --------- ----------
Consolidated $1,289,300 $762,085 $527,215 69.2%
=========== ========= ==========
Detail of Pretax Margins
Government Segment 5.6% 3.5% 2.1%
Commercial Segment 3.9% 3.7% 0.2%
Consolidated 5.1% 3.6% 1.5%
S-8
Humana Inc.
Membership Detail
In thousands
Ending Ending
December 31, December 31,
2007 Average - 4Q07 2006
------------ ---------------------------
Medical Membership:
Government Segment:
Medicare Advantage - HMO 453.1 452.6 457.9
Medicare Advantage - PPO 74.1 73.2 71.7
Medicare Advantage - PFFS 615.8 615.1 473.0
------------ ---------------------------
Total Medicare
Advantage 1,143.0 1,140.9 1,002.6
------------ ---------------------------
Medicare - PDP - Standard 2,131.9 2,141.9 2,097.2
Medicare - PDP - Enhanced 1,091.5 1,089.8 1,025.4
Medicare - PDP - Complete 218.6 221.0 414.0
------------ ---------------------------
Total Medicare stand-
alone PDPs 3,442.0 3,452.7 3,536.6
------------ ---------------------------
Total Medicare 4,585.0 4,593.6 4,539.2
------------ ---------------------------
Military services
insured(B) 1,719.1 1,722.6 1,716.4
Military services ASO(B) 1,146.8 1,145.3 1,163.6
------------ ---------------------------
Total military
services(B) 2,865.9 2,867.9 2,880.0
------------ ---------------------------
Medicaid insured 384.4 384.3 390.7
Medicaid ASO 180.6 183.6 178.4
------------ ---------------------------
Total Medicaid 565.0 567.9 569.1
------------ ---------------------------
Total Government Segment 8,015.9 8,029.4 7,988.3
------------ ---------------------------
Commercial Segment:
Fully-insured medical:
Group 1,547.0 1,541.7 1,563.9
Individual 246.9 238.7 182.6
Medicare supplement 14.7 13.0 7.7
------------ ---------------------------
Total fully-insured
medical 1,808.6 1,793.4 1,754.2
ASO 1,643.0 1,574.0 1,529.6
------------ ---------------------------
Total Commercial Segment 3,451.6 3,367.4 3,283.8
------------ ---------------------------
Total medical membership 11,467.5 11,396.8 11,272.1
============ ===========================
Specialty Membership
Dental - fully-insured 2,649.3 2,642.6 959.8
Dental - ASO 990.5 990.1 492.2
------------ -------------- ------------
Total dental 3,639.8 3,632.7 1,452.0
Vision 2,272.8 2,264.7 -
Other supplemental
benefits(D) 871.2 597.8 450.8
------------ -------------- ------------
Total specialty membership 6,783.8 6,495.2 1,902.8
============ ============== ============
---------------- ----------------
Year-over-year Sequential
Change Ending Change
---------------- ----------------
September 30,
Amount Percent 2007 Amount Percent
---------------- ------------- ----------------
Medical Membership:
Government Segment:
Medicare Advantage
- HMO (4.8) -1.0% 451.7 1.4 0.3%
Medicare Advantage
- PPO 2.4 3.3% 71.1 3.0 4.2%
Medicare Advantage
- PFFS 142.8 30.2% 615.2 0.6 0.1%
-------- ------------- --------
Total Medicare
Advantage 140.4 14.0% 1,138.0 5.0 0.4%
-------- ------------- --------
Medicare - PDP -
Standard 34.7 1.7% 2,148.9 (17.0) -0.8%
Medicare - PDP -
Enhanced 66.1 6.4% 1,085.1 6.4 0.6%
Medicare - PDP -
Complete (195.4) -47.2% 225.7 (7.1) -3.1%
-------- ------------- --------
Total Medicare
stand-alone
PDPs (94.6) -2.7% 3,459.7 (17.7) -0.5%
-------- ------------- --------
Total
Medicare 45.8 1.0% 4,597.7 (12.7) -0.3%
-------- ------------- --------
Military services
insured(B) 2.7 0.2% 1,720.4 (1.3) -0.1%
Military services
ASO(B) (16.8) -1.4% 1,137.0 9.8 0.9%
-------- ------------- --------
Total military
services(B) (14.1) -0.5% 2,857.4 8.5 0.3%
-------- ------------- --------
Medicaid insured (6.3) -1.6% 383.8 0.6 0.2%
Medicaid ASO 2.2 1.2% 182.8 (2.2) -1.2%
-------- ------------- --------
Total Medicaid (4.1) -0.7% 566.6 (1.6) -0.3%
-------- ------------- --------
Total Government
Segment 27.6 0.3% 8,021.7 (5.8) -0.1%
-------- ------------- --------
Commercial Segment:
Fully-insured
medical:
Group (16.9) -1.1% 1,530.2 16.8 1.1%
Individual 64.3 35.2% 223.7 23.2 10.4%
Medicare
supplement 7.0 90.9% 11.3 3.4 30.1%
-------- ------------- --------
Total fully-
insured medical 54.4 3.1% 1,765.2 43.4 2.5%
ASO 113.4 7.4% 1,533.9 109.1 7.1%
-------- ------------- --------
Total Commercial
Segment 167.8 5.1% 3,299.1 152.5 4.6%
-------- ------------- --------
Total medical
membership 195.4 1.7% 11,320.8 146.7 1.3%
======== ============= ========
Specialty Membership
Dental - fully-
insured 1,689.5 176.0% 974.7 1,674.6 171.8%
Dental - ASO 498.3 101.2% 499.3 491.2 98.4%
-------- ------------- --------
Total dental 2,187.8 150.7% 1,474.0 2,165.8 146.9%
Vision 2,272.8 100.0% - 2,272.8 100.0%
Other supplemental
benefits(D) 420.4 93.3% 456.1 415.1 91.0%
-------- ------------- --------
Total specialty
membership 4,881.0 256.5% 1,930.1 4,853.7 251.5%
======== ============= ========
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.
Approximately 500,000 members in stand-alone stop loss, long-term
care, and network access products previously reported by KMG America
(acquired in 4Q07) have been excluded from Humana's membership
statistics since the related business is not material to Humana's
operations.
S-9
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
---------------------
Three Months Ended
December 31,
---------------------
Dollar Percentage
2007 2006 Change Change
---------- ---------- --------- ----------
Premium revenues
Government Segment:
Medicare Advantage $2,800,681 $2,302,609 $498,072 21.6%
Medicare stand-alone
PDPs 820,320 881,994 (61,674) -7.0%
---------- ---------- ---------
Total Medicare 3,621,001 3,184,603 436,398 13.7%
Military services
insured(B)(F) 673,362 645,892 27,470 4.3%
Medicaid insured 158,174 133,877 24,297 18.1%
---------- ---------- ---------
Total Government
Segment premiums 4,452,537 3,964,372 488,165 12.3%
---------- ---------- ---------
Commercial Segment:
Fully-insured medical 1,451,229 1,387,855 63,374 4.6%
Specialty 209,927 104,626 105,301 100.6%
---------- ---------- ---------
Total Commercial
Segment premiums 1,661,156 1,492,481 168,675 11.3%
---------- ---------- ---------
Total premium revenues $6,113,693 $5,456,853 $656,840 12.0%
========== ========== =========
Administrative services
fees
Military services
ASO(B)(F) $17,599 $14,548 $3,051 21.0%
Medicaid ASO 2,159 1,423 736 51.7%
Commercial Segment 77,269 76,519 750 1.0%
---------- ---------- ---------
Total administrative
services fees $97,027 $92,490 $4,537 4.9%
========== ========== =========
-------------------------
Per Member per Month (E)
Three Months Ended
December 31,
-------------------------
2007 2006
------------ ------------
Premium revenues
Government Segment:
Medicare Advantage $818 $766
Medicare stand-alone PDPs $79 $83
Total Medicare
Military services insured(B)(F) $130 $125
Medicaid insured $137 $112
Total Government Segment premiums
Commercial Segment:
Fully-insured medical $270 $264
Specialty $12 $21
Total Commercial Segment premiums
Total premium revenues
Administrative services fees
Military services ASO(B)(F) $5 $4
Medicaid ASO $4 $4
Commercial Segment $10 $13
Total administrative services fees
S-10
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
-----------------------
Twelve Months Ended
December 31,
-----------------------
Dollar Percentage
2007 2006 Change Change
----------- ----------- ----------------------
Premium revenues
Government Segment:
Medicare Advantage $11,173,417 $8,499,064 $2,674,353 31.5%
Medicare stand-
alone PDPs 3,668,425 3,050,304 618,121 20.3%
----------- ----------- -----------
Total Medicare 14,841,842 11,549,368 3,292,474 28.5%
Military services
insured(B)(F) 2,839,790 2,543,930 295,860 11.6%
Medicaid insured 555,594 520,520 35,074 6.7%
----------- ----------- -----------
Total Government
Segment premiums 18,237,226 14,613,818 3,623,408 24.8%
----------- ----------- -----------
Commercial Segment:
Fully-insured
medical 5,663,000 5,704,378 (41,378) -0.7%
Specialty 534,121 410,986 123,135 30.0%
----------- ----------- -----------
Total Commercial
Segment premiums 6,197,121 6,115,364 81,757 1.3%
----------- ----------- -----------
Total premium revenues $24,434,347 $20,729,182 $3,705,165 17.9%
=========== =========== ===========
Administrative
services fees
Military services
ASO(B)(F) $65,103 $48,019 $17,084 35.6%
Medicaid ASO 8,556 1,423 7,133 501.3%
Commercial Segment 317,856 291,769 26,087 8.9%
----------- ----------- -----------
Total administrative
services fees $391,515 $341,211 $50,304 14.7%
=========== =========== ===========
-------------------------
Per Member per Month (E)
Twelve Months Ended
December 31,
-------------------------
2007 2006
-------------------------
Premium revenues
Government Segment:
Medicare Advantage $826 $794
Medicare stand-alone PDPs $88 $88
Total Medicare
Military services insured(B)(F) $138 $123
Medicaid insured $120 $104
Total Government Segment premiums
Commercial Segment:
Fully-insured medical $269 $260
Specialty $16 $21
Total Commercial Segment premiums
Total premium revenues
Administrative services fees
Military services ASO(B)(F) $5 $3
Medicaid ASO $4 $4
Commercial Segment $12 $12
Total administrative services fees
S-11
Humana Inc.
Percentage of Ending Membership under Capitation Arrangements
--------------------------------------------------
Government Segment
--------------------------------------------------
Medicare Total
Medicare stand-alone Military Govt.
December 31, 2007 Advantage PDPs Services(B) Medicaid Segment
------------------ --------- ----------- ----------- -------- -------
Capitated HMO
hospital system
based(G) 2.4% - - - 0.3%
Capitated HMO
physician group
based(G) 2.0% - - 26.6% 2.2%
Risk-sharing(H) 24.1% - - 40.9% 6.3%
All other
membership 71.5% 100.0% 100.0% 32.5% 91.2%
--------- ----------- ----------- -------- -------
Total medical
membership 100.0% 100.0% 100.0% 100.0% 100.0%
========= =========== =========== ======== =======
December 31, 2006
------------------
Capitated HMO
hospital system
based(G) 3.0% - - - 0.4%
Capitated HMO
physician group
based(G) 2.4% - - 26.1% 2.2%
Risk-sharing(H) 27.9% - - 42.1% 6.4%
All other
membership 66.7% 100.0% 100.0% 31.8% 91.0%
--------- ----------- ----------- -------- -------
Total medical
membership 100.0% 100.0% 100.0% 100.0% 100.0%
========= =========== =========== ======== =======
--------------------------------
Commercial Segment
--------------------------------
Total
Total Comm. Medical
December 31, 2007 Fully-insured ASO Segment Membership
------------------------- ------------- ------ ----------- ----------
Capitated HMO hospital
system based(G) 1.4% - 0.7% 0.5%
Capitated HMO physician
group based(G) 1.4% - 0.8% 1.8%
Risk-sharing(H) 1.4% - 0.8% 4.7%
All other membership 95.8% 100.0% 97.7% 93.0%
------------- ------ ----------- ----------
Total medical
membership 100.0% 100.0% 100.0% 100.0%
============= ====== =========== ==========
December 31, 2006
-------------------------
Capitated HMO hospital
system based(G) 1.9% - 1.0% 0.6%
Capitated HMO physician
group based(G) 1.7% - 0.9% 1.8%
Risk-sharing(H) 1.5% - 0.8% 4.8%
All other membership 94.9% 100.0% 97.3% 92.8%
------------- ------ ----------- ----------
Total medical
membership 100.0% 100.0% 100.0% 100.0%
============= ====== =========== ==========
S-12
Humana Inc.
Detail of Benefits Payable Balance and Year-to-Date Changes
Dollars in thousands
December 31, September 30, December 31,
2007 2007 2006
------------ ------------- ------------
Detail of benefits payable(A)
IBNR and other benefits
payable(I) $1,918,460 $1,926,876 $1,608,196
Unprocessed claim
inventories(J) 213,400 224,000 218,400
Processed claim
inventories(K) 91,938 108,593 98,033
Payable to pharmacy benefit
administrator(L) 131,663 117,880 55,104
------------ ------------- ------------
Benefits payable,
excluding military
services(B) 2,355,461 2,377,349 1,979,733
Military services
IBNR(B)(M) 265,178 323,667 318,583
Other military services
benefits payable(B)(N) 76,194 89,447 112,091
------------ ------------- ------------
Military services
benefits payable(B) 341,372 413,114 430,674
------------ ------------- ------------
Total Benefits Payable $2,696,833 $2,790,463 $2,410,407
============ ============= ============
Nine Months
Year Ended Ended Year Ended
December 31, September 30, December 31,
2007 2007 2006
------------ ------------- ------------
Year-to-date changes in
benefits payable, excluding
military services(B)(O)
Balances at January 1 $1,979,733 $1,979,733 $1,334,716
Acquisitions 41,030 - 21,198
Incurred related to:
Current year 18,015,246 13,655,982 15,374,855
Prior years(P) (242,922) (215,747) (178,998)
------------ ------------- ------------
Total incurred 17,772,324 13,440,235 15,195,857
------------ ------------- ------------
Paid related to:
Current year (16,012,828) (11,636,269) (13,532,139)
Prior years (1,424,798) (1,406,350) (1,039,899)
------------ ------------- ------------
Total paid (17,437,626) (13,042,619) (14,572,038)
------------ ------------- ------------
Balances at end of period $2,355,461 $2,377,349 $1,979,733
============ ============= ============
Nine Months
Year Ended Ended Year Ended
December 31, September 30, December 31,
2007 2007 2006
------------ ------------- ------------
Summary of Consolidated
Benefits Expense:
Total benefits expense
incurred, per above $17,772,324 $13,440,235 $15,195,857
Military services
benefits(B) 2,481,815 1,905,033 2,208,033
Future policy reserve
expense(Q) 16,392 13,012 17,314
------------ ------------- ------------
Consolidated Benefits
Expense 20,270,531 15,358,280 17,421,204
============ ============= ============
S-13
Humana Inc.
Benefits Reserves Statistics(R)
Receipt Cycle Time(S)
Percentage
2007 2006 Change Change
-----------------------------------------------
1st Quarter Average 15.6 16.1 (0.5) -3.1%
2nd Quarter Average 15.6 15.8 (0.2) -1.3%
3rd Quarter Average 15.9 16.0 (0.1) -0.6%
4th Quarter Average 15.1 15.8 (0.7) -4.4%
----------- ----------- ------------
Full Year Average 15.6 15.9 (0.3) -1.9%
=========== ========================
Unprocessed Claims Inventories
Estimated
Valuation Claim Item Number of
Date (000s) Counts Days on Hand
-----------------------------------------------------------
12/31/2005 $148,200 498,400 4.6
3/31/2006 $185,300 683,900 5.6
6/30/2006 $193,700 702,000 4.8
9/30/2006 $187,900 623,900 5.4
12/31/2006 $218,400 757,700 6.1
3/31/2007 $222,300 747,200 5.5
6/30/2007 $211,300 751,600 4.9
9/30/2007 $224,000 819,100 6.1
-----------------------------------------------------------
12/31/2007 $213,400 683,500 5.0
-----------------------------------------------------------
S-14
Humana Inc.
Benefits Reserves Statistics (Continued)(R)
Days in Claims Payable(A)(T)
Days in
Claim DCP
Payable Annual Percentage Excluding Annual Percentage
Quarter Ended (DCP) Change Change Capitation Change Change
----------------------------------------------------------------------
12/31/2005 50.3 10.8 27.3% 56.6 12.6 28.6%
3/31/2006 53.5 11.4 27.2% 60.5 12.5 26.1%
6/30/2006 55.8 9.7 21.0% 62.0 9.6 18.3%
9/30/2006 57.5 7.2 14.2% 64.3 5.5 9.4%
12/31/2006 56.3 6.0 11.9% 64.0 7.4 13.1%
3/31/2007 59.3 5.8 10.8% 66.0 5.5 9.0%
6/30/2007 60.0 4.2 7.5% 68.5 6.5 10.5%
9/30/2007 61.8 4.3 7.5% 70.2 5.9 9.2%
----------------------------------------------------------------------
12/31/2007 60.2 3.9 6.9% 68.3 4.3 6.7%
----------------------------------------------------------------------
Year-to-Date Change in Days in
Claims Payable(A)(U)
2007 2006
---------- ----------
DCP - 4th quarter of prior
year 56.3 50.3
Components of year-to-date
change in DCP:
Change in claims receipt
cycle time (1.0) (1.5)
Change in unprocessed
claims inventories (0.1) 2.0
Change in processed
claims inventories (0.1) 0.4
Change in pharmacy
payment cutoff 0.3 0.0
Change in provider
payables under risk
arrangements 3.4 3.0
All other 1.4 2.1 (V)
---------- ----------
DCP - current quarter 60.2 56.3
========== ==========
S-15
Humana Inc.
GAAP to non-GAAP Reconciliation
In thousands, except per common share results
-------------------- ----------------------
2007 2008
-------------------- ----------------------
Forecasted EPS and
Pretax Income EPS Growth Rate
------------- ------ ----------------------
Consolidated
GAAP $1,289,300 $4.91 $5.35 to $5.55 9%-13%
Non GAAP adjustment for
favorable prior year
claims development (68,878) (0.25) -
------------- ------ --------------
Non-GAAP(W) $1,220,422 $4.66 $5.35 to $5.55 15%-19%
============= ====== ==============
2007
-------------
Government Segment Pretax Income
-------------
GAAP $1,027,531
Non GAAP adjustment for
favorable prior year
claims development (68,878)
-------------
Non-GAAP(W) $958,653
=============
S-16
Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information
4Q07 Earnings Release
Footnotes
----------------------------------------------------------------------
(A) Prior period amount associated with future policy benefits payable
have been reclassified to conform with the current period
classification. Future policy benefits payable includes long-term
individual product reserves previously classified with benefits
payable and reinsurance liabilities previously classified with
other long-term liabilities. See also Note Q.
(B) The company has renamed "medical expenses" as "benefit expenses"
and the related "medical expense ratio" as "benefits ratio"
reflecting the expansion of its specialty offerings in 4Q07. The
company has also renamed "TRICARE" as "military services"
reflecting the addition of contracts with the Department of
Veteran Affairs in 4Q07.
(C) 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.
(D) Other supplemental benefits include life, disability, and fixed
benefit health plans including cancer and critical illness
policies.
(E) 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).
(F) Military services revenues are not contracted on a per-member
basis.
(G) 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 benefits 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.
(H) 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 medical costs 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.
(I) 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.
(J) Unprocessed claim inventories represent the estimated valuation of
claims received but not yet fully processed.
(K) 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.
(L) 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.
(M) Military services IBNR primarily fluctuates due to benefit expense
inflation and changes in the utilization of benefits. Amount
includes unprocessed claim inventories as an independent third
party administrator processes all military services benefit
claims on the company's behalf.
(N) Other military benefits payable may include liabilities to
subcontractors and/or risk share payables to the Department of
Defense. The level of these balances may fluctuate from period to
period due to the timing of payment (cutoff) and whether or not
the balances are payables or receivables (receivables from the
Department of Defense are classified as receivables in the
company's balance sheet).
(O) The table excludes activity associated with military services
benefits payable, because the federal government bears a
substantial portion of the risk associated with financing the
cost of health benefits. More specifically, the risk-sharing
provisions of the military services contracts with the federal
government and with subcontractors effectively limit profits and
losses when actual claim experience varies from the targeted
claim amount negotiated annually. As a result of these contract
provisions, the impact of changes in estimates for prior year
military services benefits payable are substantially offset by
the associated changes in estimates of revenue from health care
services reimbursements. As such, any impact on our results of
operations is reduced substantially, whether positive or
negative.
(P) Amounts incurred related to prior years vary from previously
estimated liabilities as the claims ultimately are settled.
Negative amounts reported for incurred related to prior years
result from claims being ultimately settled for amounts less than
originally estimated (favorable development). There were no
changes in the approach used to determine our estimate of claim
reserves during the quarter.
(Q) Future policy reserve expense has a related liability classified
as a long-term liability on the balance sheet.
(R) Benefits reserves statistics represents fully insured medical
claims data and excludes military services claims data and
specialty benefits.
(S) The receipt cycle time measures the average length of time between
when a claim was initially incurred and when the claim form was
received. Receipt cycle time data for our largest claim
processing platforms represent 70% to 75% of the company's fully-
insured claims volume. Pharmacy and specialty claims, including
dental, vision and other supplemental benefits, are excluded from
this measurement.
(T) 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-17
Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information
(Continued)
4Q07 Earnings Release
Footnotes (Continued)
----------------------------------------------------------------------
(U) DCP fluctuates due to a number of issues, the more significant of
which are detailed in the rollforward of DCP from the fourth
quarter of the prior year. 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.
(V) Increase primarily relates to growth in the Medicare Advantage
private fee-for-service product membership and related reserves
during the year.
(W) These non-GAAP numbers exclude favorable development in the
Government Segment related to prior year matters of approximately
$68.9 million, or $0.25 per diluted share, that are not expected
to recur in future periods. The favorable claims development
resulted from 1) the resolution of first year (2006) Part D
implementation matters including enrollment discrepancies and the
related impact on claims estimates ($54.0 million, or $0.20 per
share) and 2) the adjustment of military services reserves as a
result of the settlement of the claims payment accuracy provision
for prior option periods under the South contract ($14.9 million,
or $0.05 per share). The company believes that these non-GAAP
measures, when presented in conjunction with the 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. These 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.
S-18
SOURCE: Humana Inc.
Humana Inc. Investor Relations Regina Nethery, 502-580-3644 Rnethery@humana.com or Corporate Communications Tom Noland, 502-580-3674 Tnoland@humana.com