Humana Reports Third Quarter 2007 Financial Results
Humana Reports Third Quarter 2007 Financial Results
October 29, 2007 at 6:03 AM EDT
View Press Release in PDF format
LOUISVILLE, Ky.--(BUSINESS WIRE)--Oct. 29, 2007--Humana Inc. (NYSE: HUM):
-- EPS for third quarter 2007 of $1.78 including $0.25 per share
from items not expected to recur in future periods
-- 2007 EPS guidance revised to $4.75 to $4.80 including $0.25
per share described above
-- 2008 EPS projected to be $5.30 to $5.50
Humana Inc. (NYSE: HUM) today reported financial results for the quarter ended September 30, 2007 (3Q07) including diluted earnings per common share (EPS) of $1.78, significantly above the company's previous guidance for 3Q07 EPS of $1.45 to $1.50. The company earned $0.95 per share for the quarter ended September 30, 2006 (3Q06). The company's 3Q07 EPS included earnings of $0.25 per share(a) that are not anticipated to recur in future periods. The company's 3Q07 performance was also $0.05 per share better than expected due to ongoing improvements in the company's Commercial operations and stand-alone Medicare Prescription Drug Plans (PDPs) that are expected to positively impact fourth quarter 2007 and full-year 2008 results.
The company now estimates EPS for the year ending December 31, 2007 (FY07E) will be in the range of $4.75 to $4.80 versus $2.90 for the year ended December 31, 2006 (FY06). The company also projects its EPS for the year ending December 31, 2008 (FY08E) to be in the range of $5.30 to $5.50, an increase of 10 to 16 percent over FY07E EPS, or 16 to 22 percent(a)(c) versus the non-GAAP EPS for FY07E.
"Strong performance in both our business segments fueled a successful third quarter," said Michael B. McCallister, Humana's president and chief executive officer. "Most importantly, the quarter positioned us well to extend our industry-leading growth in both revenues and earnings through 2008 and beyond."
For the nine months ended September 30, 2007 (YTD07) the company reported $3.48 in EPS compared to $1.98 for the nine months ended September 30, 2006 (YTD06). Results for YTD07 on a non-GAAP basis were $3.23 per diluted share(a)(c). Results for YTD06 included approximately $0.19 per share of venture capital gains that did not recur in YTD07. The year-over-year increase in YTD07 financial results was primarily due to better operating performance in both business segments.
Revenues - 3Q07 consolidated revenues rose 12 percent to $6.32 billion from $5.65 billion in 3Q06, with total premium and administrative services fees up 11 percent compared to the prior year's quarter. This year-over-year increase was primarily driven by higher average Medicare membership versus 3Q06.
YTD07 consolidated revenues rose 20 percent to $18.95 billion from $15.76 billion in YTD06 with total premium and administrative services fees up 20 percent compared to the prior year's period, also primarily driven by higher average enrollment in the company's Medicare plans.
Medical costs - The 3Q07 consolidated medical expense ratio (medical expenses as a percent of premium revenues or MER) of 81.3 percent was 280 basis points lower than the 3Q06 MER of 84.1 percent, the combined result of a 360 basis point decline in the Government Segment MER (including a 150 basis point benefit from favorable prior year claims development(a)) and a 70 basis point decline in the Commercial Segment MER.
The consolidated MER for YTD07 of 83.8 percent was 50 basis points lower than the YTD06 consolidated MER of 84.3 percent, substantially due to the same factors driving the year-over-year improvement in 3Q07.
Selling, general, & administrative (SG&A) expenses - The 3Q07 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) increased 20 basis points to 13.3 percent for 3Q07 from 13.1 percent in 3Q06. The year-over-year increase was primarily the result of a higher SG&A expense ratio in both of the company's business segments.
The SG&A expense ratio for YTD07 of 13.2 percent was 100 basis points lower than that for YTD06 of 14.2 percent primarily driven by efficiency and productivity gains associated with higher average medical membership year to date.
Government Segment Results
Pretax results:
-- Government Segment pretax earnings were $416.3 million in 3Q07
compared to $207.0 million in 3Q06. This segment's pretax
earnings for 3Q07 on a non-GAAP basis were $347.4
million(a)(c). As expected, the year-over-year improvement in
segment pretax earnings primarily reflects a more normal MER
pattern for the Part D benefit for 2007 as well as
administrative cost efficiency associated with higher average
Medicare medical membership. The extended enrollment period
for this benefit during 2006 distorted the claims pattern
associated with the beneficiaries' progression through the
Part D benefit stages in the prior year.
-- For YTD07, pretax earnings for the Government Segment of
$723.0 million increased by $396.4 million, or 121 percent
versus YTD06 pretax earnings for the segment of $326.6
million, primarily reflecting the same factors impacting the
year-over-year comparison for the third quarter.
Enrollment:
-- Medicare Advantage membership grew to 1,138,000 at September
30, 2007, an increase of 145,000, or 15 percent, from
September 30, 2006 and less than 1 percent versus June 30,
2007. Average Medicare Advantage membership for 3Q07 was up 15
percent compared to that for 3Q06. 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 3,459,700
at September 30, 2007 compared to 3,521,000 at September 30,
2006 and 3,440,100 at June 30, 2007.
-- TRICARE membership of 2,857,400 at September 30, 2007 was
essentially unchanged from both September 30, 2006 and June
30, 2007.
-- Medicaid membership of 566,600 at September 30, 2007 increased
154,000 from September 30, 2006 due primarily to the award of
a new Puerto Rico regional ASO contract during the fourth
quarter of 2006, partially offset by eligible Puerto Rico
Medicaid members choosing to move into the Medicare Advantage
program. Medicaid membership was essentially unchanged
compared to the June 30, 2007 total of 567,600.
Premiums and administrative services fees:
-- Medicare Advantage premiums of $2.83 billion in 3Q07 increased
19 percent compared to $2.37 billion in 3Q06, primarily the
result of higher average membership.
-- Medicare stand-alone Part D premiums of $890.4 million in 3Q07
increased 5 percent compared to $851.4 million in 3Q06,
primarily the result of annual rate increases and changes in
premiums associated with Part D risk-share accruals.
-- TRICARE premiums and administrative services fees during 3Q07
increased $81.0 million to $731.8 million compared to $650.8
million in 3Q06.
Medical Expenses:
-- The Government Segment MER decreased 360 basis points to 81.4
percent in 3Q07 compared to 85.0 percent in the prior year's
quarter. This decrease reflects a more normalized MER pattern
for the Medicare Part D benefit for 2007 as well as the impact
of favorable prior year claims development. 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.
-- During 3Q07 the company realized approximately $68.9 million
in favorable prior year claims development that it does not
anticipate recurring in future periods, with approximately
$54.0 million related to Medicare Part D claims and the
remainder associated with TRICARE 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
remainder of this favorable prior year claims development
primarily related to the adjustment of certain TRICARE
reserves as a result of the settlement of claims payment
accuracy provisions for prior option periods.
SG&A Expenses:
-- The Government Segment's SG&A expense ratio for 3Q07 of 10.2
percent was 10 basis points higher than that for 3Q06 of 10.1
percent. This segment's SG&A expense ratio increased 20 basis
points on a sequential basis as lower SG&A expenses were
slightly outpaced by adjustments to revenues associated with
risk adjustment and Part D risk-share accruals.
Commercial Segment Results
Pretax results:
-- Commercial Segment pretax earnings were $62.2 million in 3Q07
compared to $42.4 million in 3Q06. Commercial Segment
operating earnings in 3Q07 continue to reflect the company's
commitment to underwriting discipline and strategic growth in
select lines of business.
-- For YTD07, pretax earnings for the Commercial Segment of
$207.4 million were $13.1 million, or 7 percent higher than
YTD06 pretax earnings for the segment of $194.3 million
primarily reflecting the same factors driving year-over-year
improvement for 3Q07.
Enrollment:
-- Commercial Segment medical membership of 3,299,100 at
September 30, 2007 was essentially unchanged from both
September 30, 2006 and June 30, 2007.
-- Membership in strategic areas of commercial growth rose as
follows during 3Q07 compared to 3Q06: Individual product
membership increased 28 percent, Smart plans and other
consumer offerings grew 27 percent, Small Group business
membership was up 2 percent, and ASO business was 1 percent
higher than the prior year.
Premiums and administrative services fees:
-- Premiums and administrative services fees for the Commercial
Segment increased 2 percent to $1.61 billion in 3Q07 compared
to $1.58 billion in the prior year's quarter, primarily due to
the effect of per-member premium increases being partially
offset by lower average fully insured group membership.
-- Commercial Segment medical premiums for fully-insured groups
increased approximately 6 percent on a per-member basis during
3Q07 compared to 3Q06.
Medical Expenses:
-- In 3Q07, the Commercial Segment MER of 81.0 percent was 70
basis points lower than the 3Q06 MER of 81.7 percent,
primarily reflecting an increase in the percentage of
Individual and Small Group members comprising our fully
insured book, improving medical cost utilization trends, and
the company's continued commitment to underwriting discipline.
SG&A Expenses:
-- The Commercial Segment SG&A expense ratio of 21.8 percent for
3Q07 compares to 20.5 percent in 3Q06, primarily the combined
result of higher average Individual and ASO membership and
administrative costs associated with increased business for
the company's mail order pharmacy. Average Individual product
membership rose 25 percent and average ASO membership
increased 2 percent versus the prior year's quarter.
Balance Sheet
-- Cash and cash equivalents declined $1.14 billion or 31 percent
sequentially. The early receipt of the July Medicare premium
payment from the Centers for Medicare and Medicaid Services
(CMS) during June 2007 resulted in the receipt of only two
months of premium from CMS during the third quarter of 2007.
This timing also resulted in a corresponding sequential
decline in unearned premium revenues during 3Q07.
-- Unearned revenues of $177.1 million decreased 87 percent from
the June 30, 2007 balance of $1.36 billion also due to the
timing of the receipts of Medicare premiums from CMS.
-- Debt-to-total capitalization at September 30, 2007 was 25.7
percent, down 40 basis points from June 30, 2007 due primarily
to higher capitalization associated with 3Q07 earnings.
-- The company's working capital at September 30, 2007 included
approximately $721.8 million in net Part D risk-share payables
to CMS associated with the company's Medicare Advantage and
stand-alone PDP offerings. Approximately $725.5 million of
this net liability related to Part D plan offerings for the
year ended December 31, 2006.
-- Days in claims payable excluding the impact of Medicare
stand-alone PDPs were up slightly to 63.4 days at September
30, 2007 from 62.4 days at June 30, 2007.
Cash Flows from Operations
Cash flows used in operations for 3Q07 of $637.7 million compared to cash flows used in operations of $391.0 million in 3Q06.
Cash flows from operations ($ in millions) 3Q07 3Q06 YTD07 YTD06 ---------------------------------------------------------------------- Cash flows provided by operations in accordance with Generally Accepted Accounting Principles (GAAP) ($637.7) ($391.0) $1,414.1 $1,151.8 ---------------------------------------------------------------------- Timing of premium payment from CMS(b) 1,175.3 1,031.8 -- -- ---------------------------------------------------------------------- Non-GAAP cash flows provided by operations(b)(c) $537.6 $640.8 $1,414.1 $1,151.8 ----------------------------------------------------------------------
The company also evaluates operating cash flows on a non-GAAP basis(b)(c). Non-GAAP cash flows provided by operations declined to $537.6 million(b)(c) in 3Q07 from $640.8 million(b)(c) in 3Q06 driven primarily by changes in working capital more than offsetting the impact of higher operating earnings.
Footnotes
(a) As described more fully in the "Government Segment Results - Medical Expenses" section of this press release during 3Q07 the company realized pretax earnings of approximately $68.9 million ($0.25 per share) associated with the resolution of favorable claims development in its Government Segment related to prior year issues that are not anticipated to recur in future periods. A reconciliation of GAAP to non-GAAP amounts related to this favorable development and the company's reason for this non-GAAP disclosure are included in the statistical pages of this earnings press release.
(b) 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.
(c) 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. 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.
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 and June
30, 2007,
-- Form 8-Ks filed during 2007.
About Humana
Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health benefits companies, with approximately 11.3 million medical members. Humana offers a diversified portfolio of health insurance products and related services - through traditional and consumer-choice plans - to employer groups, government-sponsored plans, and individuals.
Over its 46-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 October 29, 2007
(in accordance with For the year For the year Comments
Generally Accepted ending ending
Accounting Principles) December 31, December 31,
2007 2008(1)
(1)assumes
closing of
pending KMG
America
("KMG")
acquisition
in late 2007
----------------------------------------------------------------------
Diluted earnings per Full year Full year 2007 EPS
common share (EPS) 2007: $4.75 2008: $5.30 includes $0.25
to $4.80 to $5.50 per share of
4Q07: $1.27 to earnings that
$1.32 are not
anticipated to
recur in 2008
----------------------------------------------------------------------
Revenues Consolidated Consolidated
revenues: revenues: $28
Approximately billion to
$25 billion $30 billion
Premiums and Premiums and
ASO fees: ASO fees:
Medicare Medicare
Advantage: Advantage:
Approximately $13 billion
$11 billion; to $14
billion;
Medicare Medicare
stand-alone stand-alone
PDPs: PDPs:
Approximately Approximately
$3.5 billion; $3.4 billion;
TRICARE: TRICARE: $3.1
Approximately billion to
$3 billion; $3.3 billion;
Commercial: Commercial: 2008 includes
Approximately $7.2 billion $200 million
$6.5 billion to $7.7 for KMG
billion premiums &
fees
Investment Investment 2008 includes
income: income: $360 $20 million
Approximately million to for KMG
$305 million $380 million investment
income
Other revenue: Other revenue: Other revenue
$150 million $200 million primarily
to $155 to $250 relates to
million million revenues
associated
with the
company's mail
order
pharmacy;
related
administrative
costs are in
SG&A expenses
----------------------------------------------------------------------
Ending medical Medicare Medicare
membership (fully- Advantage: Up Advantage: Up
insured and ASO approximately 200,000 to
combined) 130,000 from 250,000 from
prior year prior year
Medicare Medicare
stand-alone stand-alone
PDPs: 3.4 PDPs: 3.1
million to million to
3.5 million 3.2 million
TRICARE: No TRICARE: No
material material
change from change from
prior year prior year
Medicaid: No Medicaid: No
material material
change from change from
prior year prior year
Commercial: Up Commercial: Up
approximately approximately
50,000 from 50,000 to
prior year 75,000 from
prior year
----------------------------------------------------------------------
Medical costs Total Medicare Total Medicare Medicare
products: MER products: MER Advantage and
of in the range stand-alone
approximately of 83% to 84% PDP combined
83%
Commercial Commercial
fully-insured fully-insured
groups: groups:
Medical cost Medical cost
trends in the trends and
range of 4.5% premium
to 5.0%; yields in
premium line with
yields in prior year
line with
medical cost
trends
Secular Secular
Commercial Commercial
medical cost medical cost
trend trend
components as components:
follows: no material
inpatient change from
hospital 2007
utilization -
flat to 1
percent;
inpatient and
outpatient
hospital
rates - mid
to upper
single
digits;
outpatient
hospital
utilization -
low to mid
single
digits;
physician -
mid single
digits; and
pharmacy -
high single
to low double
digits.
----------------------------------------------------------------------
Selling, general & Consolidated Consolidated SG&A expenses
administrative expenses SG&A expense SG&A expense as a percent
ratio of ratio of of premiums,
13.5% to 14% 13.5% to 14% administrative
costs, and
other revenue
----------------------------------------------------------------------
Depreciation & Approximately $215 million
amortization $180 million to $220
million
----------------------------------------------------------------------
Interest expense Approximately $85 million to
$70 million $90 million
----------------------------------------------------------------------
Pretax results Total Medicare Total Medicare Medicare
products: products: Advantage and
Operating Operating stand-alone
margin of margin of PDP combined
approximately approximately
5% 5%
TRICARE: TRICARE:
Operating Operating
margin of margin of
approximately 2.5% to 3.5%
4%
Commercial Commercial Net investment
Segment: Segment: income is
Pretax Pretax included in
earnings of earnings of segment-level
$240 million $280 million totals only
to $250 to $300
million million
----------------------------------------------------------------------
Cash flows from $1.2 billion $1.5 billion
operations to $1.4 to $1.8
billion billion
----------------------------------------------------------------------
Capital expenditures Approximately Approximately
$220 million $225 million
----------------------------------------------------------------------
Effective tax rate 36% to 37% 36% to 37%
----------------------------------------------------------------------
Shares used in computing Approximately Approximately
full-year EPS 170 million 173 million
----------------------------------------------------------------------
S-1
Humana Inc.
Statistical Schedules
And
Supplementary Information
3Q07 Earnings Release
S-2
Humana Inc.
Statistical Schedules and Supplementary Information
3Q07 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 Medical Claims Reserves
S-16 GAAP to Non-GAAP Reconciliation
S-17 Footnotes
S-3
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
---------------------
Three Months Ended
September 30,
---------------------
---------- Dollar Percentage
2007 2006 Change Change
--------------------- -------------------
Revenues:
Premiums $6,092,841 $5,486,368 $606,473 11.1%
Administrative services
fees 101,531 86,332 15,199 17.6%
Investment income 82,362 62,474 19,888 31.8%
Other revenue 42,850 14,610 28,240 193.3%
--------------------- --------
Total revenues 6,319,584 5,649,784 669,800 11.9%
--------------------- --------
Operating expenses:
Medical 4,953,862 4,616,002 337,860 7.3%
Selling, general and
administrative 829,023 729,722 99,301 13.6%
Depreciation 37,771 32,562 5,209 16.0%
Other intangible
amortization 4,479 5,115 (636) -12.4%
--------------------- --------
Total operating
expenses 5,825,135 5,383,401 441,734 8.2%
--------------------- --------
Income from operations 494,449 266,383 228,066 85.6%
Interest expense 15,947 17,009 (1,062) -6.2%
--------------------- --------
Income before income taxes 478,502 249,374 229,128 91.9%
Provision for income taxes 176,124 90,176 85,948 95.3%
--------------------- --------
Net income $302,378 $159,198 $143,180 89.9%
===================== ========
Basic earnings per common
share $1.81 $0.97 $0.84 86.6%
Diluted earnings per common
share $1.78 $0.95 $0.83 87.4%
Shares used in computing
basic earnings per common
share 167,188 164,387
Shares used in computing
diluted earnings per common
share 170,051 168,376
----------
S-4
Humana Inc.
Consolidated Statements of Income
In thousands, except per common share results
-----------------------
Nine Months Ended
September 30,
-----------------------
----------- Dollar Percentage
2007 2006 Change Change
----------------------- ---------------------
Revenues:
Premiums $18,320,654 $15,272,329 $3,048,325 20.0%
Administrative services
fees 294,488 248,721 45,767 18.4%
Investment income 227,941 211,943 15,998 7.5%
Other revenue 108,111 28,325 79,786 281.7%
----------------------- ----------
Total revenues 18,951,194 15,761,318 3,189,876 20.2%
----------------------- ----------
Operating expenses:
Medical 15,358,280 12,879,429 2,478,851 19.2%
Selling, general and
administrative 2,476,092 2,204,471 271,621 12.3%
Depreciation 122,100 94,027 28,073 29.9%
Other intangible
amortization 14,478 15,152 (674) -4.4%
----------------------- ----------
Total operating
expenses 17,970,950 15,193,079 2,777,871 18.3%
----------------------- ----------
Income from operations 980,244 568,239 412,005 72.5%
Interest expense 49,931 47,335 2,596 5.5%
----------------------- ----------
Income before income
taxes 930,313 520,904 409,409 78.6%
Provision for income
taxes 339,848 188,502 151,346 80.3%
----------------------- ----------
Net income $590,465 $332,402 $258,063 77.6%
======================= ==========
Basic earnings per
common share $3.55 $2.03 $1.52 74.9%
Diluted earnings per
common share $3.48 $1.98 $1.50 75.8%
Shares used in computing
basic earnings per
common share 166,538 163,736
Shares used in computing
diluted earnings per
common share 169,535 167,746
-----------
S-5
Humana Inc.
Consolidated Balance Sheets
Dollars in thousands, except share amounts
September 30, June 30, December 31,
2007 2007 2006
--------------------------------------
Assets
Current assets:
Cash and cash equivalents $2,585,670 $3,720,769 $1,740,304
Investment securities 3,475,300 3,323,536 3,192,273
Receivables, net:
Premiums 685,242 685,479 667,657
Administrative services
fees 12,556 12,074 13,284
Securities lending collateral 830,589 1,346,065 627,990
Other 1,612,467 1,318,003 1,091,465
--------------------------------------
Total current assets 9,201,824 10,405,926 7,332,973
Property and equipment, net 570,798 569,412 545,004
Other assets:
Long-term investment
securities 420,769 400,775 414,877
Goodwill 1,330,585 1,330,585 1,310,631
Other 548,530 628,267 524,011
--------------------------------------
Total other assets 2,299,884 2,359,627 2,249,519
--------------------------------------
Total assets $12,072,506 $13,334,965 $10,127,496
======================================
Liabilities and Stockholders'
Equity
Current liabilities:
Medical and other expenses
payable $2,881,329 $2,954,146 $2,488,261
Trade accounts payable and
accrued expenses 2,253,504 2,084,463 1,626,658
Book overdraft 253,356 289,646 293,605
Securities lending payable 830,589 1,346,065 627,990
Unearned revenues 177,080 1,355,017 155,298
--------------------------------------
Total current liabilities 6,395,858 8,029,337 5,191,812
Long-term debt 1,292,858 1,189,570 1,269,100
Other long-term liabilities 644,913 740,560 612,698
------------- ----------- ------------
Total liabilities 8,333,629 9,959,467 7,073,610
--------------------------------------
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; 185,973,713
issued at September 30, 2007 30,995 30,833 30,491
Capital in excess of par value 1,462,953 1,422,370 1,357,077
Retained earnings 2,499,563 2,197,185 1,909,098
Accumulated other
comprehensive loss (11,042) (38,112) (13,205)
Treasury stock, at cost,
16,541,384 shares at
September 30, 2007 (243,592) (236,778) (229,575)
--------------------------------------
Total stockholders' equity 3,738,877 3,375,498 3,053,886
--------------------------------------
Total liabilities and
stockholders' equity $12,072,506 $13,334,965 $10,127,496
======================================
Debt-to-total capitalization
ratio 25.7% 26.1% 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 ($1,204,102) -11.6%
Property and equipment, net
Other assets:
Long-term investment securities
Goodwill
Other
Total other assets
Total assets ($1,262,459) -9.5%
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable
Trade accounts payable and accrued expenses
Book overdraft
Securities lending payable
Unearned revenues
Total current liabilities ($1,633,479) -20.3%
Long-term debt
Other long-term liabilities
Total liabilities ($1,625,838) -16.3%
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; 185,973,713 issued at September 30,
2007
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost, 16,541,384 shares at
September 30, 2007
Total stockholders' equity $363,379 10.8%
Total liabilities and stockholders' equity ($1,262,459) -9.5%
Debt-to-total capitalization ratio
S-6
Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
----------------------------------------------------------------------
Three Months Ended
September 30,
------------------------
----------- Dollar Percentage
2007 2006 Change Change
----------------------- -----------------------
Cash flows from
operating activities
Net income $302,378 $159,198
Adjustments to
reconcile net income
to net cash used in
operating
activities:
Depreciation and
amortization 42,250 37,677
Stock-based
compensation 10,604 9,350
(Benefit)
provision for
deferred income
taxes (9,168) 23,495
Changes in
operating assets
and liabilities
excluding the
effects of
acquisitions:
Receivables (245) 37,448
Other assets 69,395 (29,713)
Medical and
other
expenses
payable (72,817) 105,300
Other
liabilities 200,732 293,274
Unearned
revenues (1,177,937) (1,023,958)
Other (2,845) (3,088)
-----------------------
Net cash used in
operating activities (637,653) (391,017) ($246,636) -63.1%
-----------------------
Cash flows from
investing activities
Acquisitions, net of
cash acquired (501) (431)
Purchases of property
and equipment (41,339) (54,629)
Proceeds from sales
of property and
equipment 11,862 7,296
Purchases of
investment
securities (758,695) (1,246,843)
Proceeds from
maturities of
investment
securities 321,304 467,620
Proceeds from sales
of investment
securities 328,275 506,870
Change in securities
lending collateral 515,476 (676,476)
-----------------------
Net cash provided by
(used in) investing
activities 376,382 (996,593) $1,372,975 137.8%
-----------------------
Cash flows from
financing activities
Receipts from CMS
contract deposits 464,703 382,787
Withdrawals from CMS
contract deposits (885,541) (634,437)
Borrowings under
credit agreement 475,000 150,000
Repayments under
credit agreement (400,000) -
Repayment of senior
notes - (300,000)
Debt issue costs - (1,971)
Change in book
overdraft (36,290) 9,420
Change in securities
lending payable (515,476) 676,476
Common stock
repurchases (6,814) (10,633)
Tax benefit from
stock-based
compensation 12,272 17,135
Proceeds from stock
option exercises and
other 18,318 21,603
-----------------------
Net cash (used in)
provided by financing
activities (873,828) 310,380 ($1,184,208) -381.5%
-----------------------
Decrease in cash and
cash equivalents (1,135,099) (1,077,230)
Cash and cash
equivalents at
beginning of period 3,720,769 2,258,464
-----------------------
Cash and cash
equivalents at end of
period $2,585,670 $1,181,234
=======================
S-7
Humana Inc.
Consolidated Statements of Cash Flows
Dollars in thousands
Nine Months Ended
September 30,
------------------------
----------- Dollar Percentage
2007 2006 Change Change
----------------------- -----------------------
Cash flows from
operating activities
Net income $590,465 $332,402
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization 136,578 109,179
Stock-based
compensation 30,868 24,401
(Benefit)
provision for
deferred income
taxes (33,179) 22,269
Changes in
operating assets
and liabilities
excluding the
effects of
acquisitions:
Receivables (16,857) (5,509)
Other assets (57,072) (389,013)
Medical and
other
expenses
payable 393,068 632,063
Other
liabilities 335,155 465,993
Unearned
revenues 21,782 20,892
Other 13,286 (60,866)
-----------------------
Net cash provided by
operating activities 1,414,094 1,151,811 $262,283 22.8%
-----------------------
Cash flows from
investing activities
Acquisitions, net of
cash acquired (27,506) (26,362)
Purchases of property
and equipment (156,056) (136,602)
Proceeds from sales
of property and
equipment 15,934 9,452
Purchases of
investment
securities (2,631,990) (3,505,391)
Proceeds from
maturities of
investment
securities 1,091,260 1,478,017
Proceeds from sales
of investment
securities 1,254,878 1,219,555
Change in securities
lending collateral (202,599) (869,715)
-----------------------
Net cash used in
investing activities (656,079) (1,831,046) $1,174,967 64.2%
-----------------------
Cash flows from
financing activities
Receipts from CMS
contract deposits 1,948,062 1,427,849
Withdrawals from CMS
contract deposits (2,109,523) (1,370,862)
Borrowings under
credit agreement 1,185,000 250,000
Repayments under
credit agreement (1,160,000) (300,000)
Proceeds from
issuance of senior
notes - 498,545
Repayment of senior
notes - (300,000)
Debt issue costs - (5,796)
Change in book
overdraft (40,249) 1,239
Change in securities
lending payable 202,599 869,715
Common stock
repurchases (14,017) (15,570)
Tax benefit from
stock-based
compensation 26,826 30,791
Proceeds from stock
option exercises and
other 48,653 42,542
-----------------------
Net cash provided by
financing activities 87,351 1,128,453 ($1,041,102) -92.3%
-----------------------
Increase in cash and
cash equivalents 845,366 449,218
Cash and cash
equivalents at
beginning of period 1,740,304 732,016
-----------------------
Cash and cash
equivalents at end of
period $2,585,670 $1,181,234
=======================
S-8
Humana Inc.
Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
--------------------------------
Three Months Ended September 30,
--------------------------------
----------------------
Percentage
2007 2006 Difference Change
------------------------------- ---------------------
Medical expense
ratio
Government
Segment 81.4% 85.0% -3.6%
Commercial
Segment 81.0% 81.7% -0.7%
Consolidated 81.3% 84.1% -2.8%
Selling,
general, and
administrative
expense ratio
Government
Segment 10.2% 10.1% 0.1%
Commercial
Segment 21.8% 20.5% 1.3%
Consolidated 13.3% 13.1% 0.2%
Detail of Pretax
Income
Government
Segment $416,299 $207,004 $209,295 101.1%
Commercial
Segment 62,203 42,370 19,833 46.8%
------------------------------- ----------
Consolidated $478,502 $249,374 $229,128 91.9%
=============================== ==========
Detail of Pretax
Margins
Government
Segment 9.0% 5.1% 3.9%
Commercial
Segment 3.7% 2.6% 1.1%
Consolidated 7.6% 4.4% 3.2%
-------------------------------
Nine Months Ended September 30,
-------------------------------
---------------------
Percentage
2007 2006 Difference Change
------------------------------ ---------------------
Medical expense
ratio
Government
Segment 85.0% 85.5% -0.5%
Commercial
Segment 80.4% 81.6% -1.2%
Consolidated 83.8% 84.3% -0.5%
Selling,
general, and
administrative
expense ratio
Government
Segment 10.3% 11.6% -1.3%
Commercial
Segment 21.4% 19.8% 1.6%
Consolidated 13.2% 14.2% -1.0%
Detail of Pretax
Income
Government
Segment $722,954 $326,557 $396,397 121.4%
Commercial
Segment 207,359 194,347 13,012 6.7%
------------------------------ ----------
Consolidated $930,313 $520,904 $409,409 78.6%
============================== ==========
Detail of Pretax
Margins
Government
Segment 5.2% 3.0% 2.2%
Commercial
Segment 4.2% 3.9% 0.3%
Consolidated 4.9% 3.3% 1.6%
S-9
Humana Inc.
Membership Detail
In thousands
---------
Ending Ending
September Average September
30, 2007 - 3Q07 30, 2006
----------------------------
Medical Membership:
Government Segment:
Medicare Advantage - HMO 451.7 452.4 455.4
Medicare Advantage - PPO 71.1 69.5 71.1
Medicare Advantage - PFFS 615.2 616.5 466.5
----------------------------
Total Medicare Advantage 1,138.0 1,138.4 993.0
----------------------------
Medicare - PDP - Standard 2,148.9 2,146.9 2,081.7
Medicare - PDP - Enhanced 1,085.1 1,081.5 1,021.6
Medicare - PDP - Complete 225.7 228.0 417.7
----------------------------
Total Medicare stand-alone PDPs 3,459.7 3,456.4 3,521.0
----------------------------
Total Medicare 4,597.7 4,594.8 4,514.0
----------------------------
TRICARE insured 1,720.4 1,720.4 1,721.3
TRICARE ASO 1,137.0 1,137.2 1,141.4
----------------------------
Total TRICARE 2,857.4 2,857.6 2,862.7
----------------------------
Medicaid insured 383.8 383.8 412.6
Medicaid ASO 182.8 184.0 -
----------------------------
Total Medicaid 566.6 567.8 412.6
----------------------------
Total Government Segment 8,021.7 8,020.2 7,789.3
----------------------------
Commercial Segment:
Fully-insured medical:
Group 1,530.2 1,530.1 1,597.1
Individual 223.7 216.5 175.4
Medicare supplement 11.3 10.2 7.4
----------------------------
Total fully-insured medical 1,765.2 1,756.8 1,779.9
ASO 1,533.9 1,546.1 1,512.0
----------------------------
Total Commercial Segment 3,299.1 3,302.9 3,291.9
----------------------------
Total medical membership 11,320.8 11,323.1 11,081.2
============================
Specialty Membership (all Commercial
Segment)
---------
Dental - fully-insured 974.7 975.6 960.5
Dental - ASO 499.3 503.9 488.2
----------------------------
Total dental 1,474.0 1,479.5 1,448.7
Group life 444.3 442.7 436.1
Short-term disability 11.8 11.9 14.9
----------------------------
Total specialty membership 1,930.1 1,934.1 1,899.7
============================
--------------- --------------
Year-over-year Sequential
Change Ending Change
--------------- June 30, --------------
Amount Percent 2007 Amount Percent
--------------- -------- --------------
Medical Membership:
Government Segment:
Medicare Advantage - HMO (3.7) -0.8% 452.4 (0.7) -0.2%
Medicare Advantage - PPO 0.0 0.0% 66.9 4.2 6.3%
Medicare Advantage - PFFS 148.7 31.9% 614.4 0.8 0.1%
------- -------- ------
Total Medicare
Advantage 145.0 14.6% 1,133.7 4.3 0.4%
------- -------- ------
Medicare - PDP - Standard 67.2 3.2% 2,131.0 17.9 0.8%
Medicare - PDP - Enhanced 63.5 6.2% 1,075.9 9.2 0.9%
Medicare - PDP - Complete (192.0) -46.0% 233.2 (7.5) -3.2%
------- -------- ------
Total Medicare stand-
alone PDPs (61.3) -1.7% 3,440.1 19.6 0.6%
------- -------- ------
Total Medicare 83.7 1.9% 4,573.8 23.9 0.5%
------- -------- ------
TRICARE insured (0.9) -0.1% 1,717.6 2.8 0.2%
TRICARE ASO (4.4) -0.4% 1,150.6 (13.6) -1.2%
------- -------- ------
Total TRICARE (5.3) -0.2% 2,868.2 (10.8) -0.4%
------- -------- ------
Medicaid insured (28.8) -7.0% 384.9 (1.1) -0.3%
Medicaid ASO 182.8 100.0% 182.7 0.1 0.1%
------- -------- ------
Total Medicaid 154.0 37.3% 567.6 (1.0) -0.2%
------- -------- ------
Total Government Segment 232.4 3.0% 8,009.6 12.1 0.2%
------- -------- ------
Commercial Segment:
Fully-insured medical:
Group (66.9) -4.2% 1,533.0 (2.8) -0.2%
Individual 48.3 27.5% 205.0 18.7 9.1%
Medicare supplement 3.9 52.7% 8.3 3.0 36.1%
------- -------- ------
Total fully-insured
medical (14.7) -0.8% 1,746.3 18.9 1.1%
ASO 21.9 1.4% 1,532.4 1.5 0.1%
------- -------- ------
Total Commercial Segment 7.2 0.2% 3,278.7 20.4 0.6%
------- -------- ------
Total medical membership 239.6 2.2% 11,288.3 32.5 0.3%
======= ======== ======
Specialty Membership (all
Commercial Segment)
Dental - fully-insured 14.2 1.5% 978.1 (3.4) -0.3%
Dental - ASO 11.1 2.3% 499.9 (0.6) -0.1%
------- -------- ------
Total dental 25.3 1.7% 1,478.0 (4.0) -0.3%
Group life 8.2 1.9% 439.8 4.5 1.0%
Short-term disability (3.1) -20.8% 12.2 (0.4) -3.3%
------- -------- ------
Total specialty membership 30.4 1.6% 1,930.0 0.1 0.0%
======= ======== ======
S-10
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
----------
Per Member
per Month
(A)
Three
Months
Ended
Three Months Ended September
September 30, 30,
--------------------- ----------
---------- Dollar Percentage
2007 2006 Change Change 2007 2006
--------------------- ------------------- ----------
Premium revenues
Government
Segment:
Medicare
Advantage $2,825,587 $2,366,206 $459,381 19.4% $827 $799
Medicare stand-
alone PDPs 890,420 851,398 39,022 4.6% $86 $82
--------------------- --------
Total
Medicare 3,716,007 3,217,604 498,403 15.5%
TRICARE insured
(B) 714,173 639,657 74,516 11.6% $138 $124
Medicaid insured 135,609 128,018 7,591 5.9% $118 $103
--------------------- --------
Total Government
Segment
premiums 4,565,789 3,985,279 580,510 14.6%
--------------------- --------
Commercial
Segment:
Fully-insured
medical 1,418,884 1,397,945 20,939 1.5% $269 $260
Specialty 108,168 103,144 5,024 4.9% $22 $21
--------------------- --------
Total Commercial
Segment
premiums 1,527,052 1,501,089 25,963 1.7%
--------------------- --------
Total premium
revenues $6,092,841 $5,486,368 $606,473 11.1%
===================== ========
Administrative
services fees
TRICARE ASO (B) $17,675 $11,136 $6,539 58.7% $5 $3
Medicaid ASO 2,165 - 2,165 100.0% $4 -
--------------------- --------
Total Government
Segment 19,840 11,136 8,704 78.2%
Commercial
Segment 81,691 75,196 6,495 8.6% $13 $12
--------------------- --------
Total
administrative
services fees $101,531 $86,332 $15,199 17.6%
===================== ========
S-11
Humana Inc.
Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
-----------------------
Nine Months Ended
September 30,
-----------------------
----------- Dollar Percentage
2007 2006 Change Change
----------------------- ----------------------
Premium revenues
Government Segment:
Medicare Advantage $8,372,736 $6,196,455 $2,176,281 35.1%
Medicare stand-alone
PDPs 2,848,105 2,168,310 679,795 31.4%
----------------------- -----------
Total Medicare 11,220,841 8,364,765 2,856,076 34.1%
TRICARE insured (B) 2,166,428 1,898,038 268,390 14.1%
Medicaid insured 397,420 386,643 10,777 2.8%
----------------------- -----------
Total Government
Segment premiums 13,784,689 10,649,446 3,135,243 29.4%
----------------------- -----------
Commercial Segment:
Fully-insured medical 4,211,771 4,316,523 (104,752) -2.4%
Specialty 324,194 306,360 17,834 5.8%
----------------------- -----------
Total Commercial
Segment premiums 4,535,965 4,622,883 (86,918) -1.9%
----------------------- -----------
Total premium revenues $18,320,654 $15,272,329 $3,048,325 20.0%
======================= ===========
Administrative services
fees
TRICARE ASO (B) $47,504 $33,471 $14,033 41.9%
Medicaid ASO 6,397 - 6,397 100.0%
----------------------- -----------
Total Government
Segment 53,901 33,471 20,430 61.0%
Commercial Segment 240,587 215,250 25,337 11.8%
----------------------- -----------
Total administrative
services fees $294,488 $248,721 $45,767 18.4%
======================= ===========
-------------------------------
Per Member per Month (A)
Nine Months Ended September 30,
-------------------------------
2007 2006
-------------------------------
Premium revenues
Government Segment:
Medicare Advantage $828 $805
Medicare stand-alone PDPs $91 $90
Total Medicare
TRICARE insured (B) $140 $122
Medicaid insured $115 $101
Total Government Segment premiums
Commercial Segment:
Fully-insured medical $269 $259
Specialty $22 $21
Total Commercial Segment premiums
Total premium revenues
Administrative services fees
TRICARE ASO (B) $5 $3
Medicaid ASO $4 -
Total Government Segment
Commercial Segment $13 $12
Total administrative services fees
S-12
Humana Inc.
Percentage of Ending Membership under Capitation
Arrangements
---------------------------------------------
Government Segment
---------------------------------------------
Medicare
stand- Total
Medicare alone Govt.
September 30, 2007 Advantage PDPs TRICARE Medicaid Segment
------------------------ ---------------------------------------------
Capitated HMO hospital
system based (C) 2.4% - - - 0.3%
Capitated HMO physician
group based (C) 2.0% - - 26.5% 2.2%
Risk-sharing (D) 24.2% - - 40.8% 6.3%
All other membership 71.4% 100.0% 100.0% 32.7% 91.2%
---------------------------------------------
Total medical
membership 100.0% 100.0% 100.0% 100.0% 100.0%
=============================================
September 30, 2006
------------------------
Capitated HMO hospital
system based (C) 3.1% - - - 0.4%
Capitated HMO physician
group based (C) 2.4% - - 34.8% 2.2%
Risk-sharing (D) 27.8% - - 64.5% 7.0%
All other membership 66.7% 100.0% 100.0% 0.7% 90.4%
---------------------------------------------
Total medical
membership 100.0% 100.0% 100.0% 100.0% 100.0%
=============================================
-------------------------
Commercial Segment
-------------------------
Total Total
Fully- Comm. Medical
September 30, 2007 insured ASO Segment Membership
-------------------------------- -------------------------------------
Capitated HMO hospital system
based (C) 1.4% - 0.8% 0.5%
Capitated HMO physician group
based (C) 1.5% - 0.8% 1.8%
Risk-sharing (D) 1.5% - 0.8% 4.7%
All other membership 95.6% 100.0% 97.6% 93.0%
-------------------------------------
Total medical membership 100.0% 100.0% 100.0% 100.0%
=====================================
September 30, 2006
--------------------------------
Capitated HMO hospital system
based (C) 1.9% - 1.0% 0.6%
Capitated HMO physician group
based (C) 1.8% - 1.0% 1.8%
Risk-sharing (D) 1.4% - 0.8% 5.1%
All other membership 94.9% 100.0% 97.2% 92.5%
-------------------------------------
Total medical membership 100.0% 100.0% 100.0% 100.0%
=====================================
S-13
Humana Inc.
Detail of Medical and Other Expenses Payable Balance and Year-to-Date
Changes
Dollars in thousands
-------------
September 30, June 30, December 31,
2007 2007 2006
---------------------------------------
Detail of medical and other
expenses payable
IBNR and other medical
expenses payable (E) $2,017,742 $2,028,722 $1,686,051
TRICARE IBNR (F) 323,667 308,112 318,583
TRICARE other medical
expenses payable (G) 89,447 100,975 94,699
Unprocessed claim inventories
(H) 224,000 211,300 218,400
Processed claim inventories
(I) 108,593 142,171 115,424
Payable to pharmacy benefit
administrator (J) 117,880 162,866 55,104
---------------------------------------
Total medical and other
expenses payable $2,881,329 $2,954,146 $2,488,261
=======================================
-------------
Nine Months Nine Months
Ended Ended Year Ended
September 30, September December 31,
2007 30, 2006 2006
---------------------------------------
Year-to-date changes in
medical and other
expenses payable
Balances at January 1 $2,488,261 $1,909,682 $1,909,682
Acquisitions - 21,198 21,198
Incurred related to:
Current year (K) 15,656,377 13,163,725 17,696,654
Prior years - non-TRICARE
(K) (215,747) (173,223) (178,998)
Prior years - TRICARE (L) (82,350) (111,073) (96,452)
---------------------------------------
Total incurred 15,358,280 12,879,429 17,421,204
---------------------------------------
Paid related to:
Current year (13,310,165) (11,193,784) (15,532,079)
Prior years (1,655,047) (1,053,582) (1,331,744)
---------------------------------------
Total paid (14,965,212) (12,247,366) (16,863,823)
---------------------------------------
Balances at end of period $2,881,329 $2,562,943 $2,488,261
=======================================
S-14
Humana Inc.
Medical Claims Reserves Statistics
Receipt Cycle Time (M)
----------
Change Percentage
2007 2006 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 - 15.8 N/A N/A
-------------------------
Full Year Average 15.7 15.9 (0.2) -1.3%
=========================
Unprocessed Claims Inventories
Number
of
Estimated Claim Days
Valuation Item on
Date (000's) Counts Hand
----------------------------------------------------------
9/30/2005 $136,700 512,800 4.7
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
----------------------------------------------------------
S-15
Humana Inc.
Medical Claims Reserves Statistics (Continued)
Days in Claims Payable (N)
Days
in
Claim DCP
Quarter Payable Annual Percentage Excluding Annual Percentage
Ended (DCP) Change Change Capitation Change Change
----------------------------------------------------------------------
9/30/2005 54.0 2.2 4.2% 60.8 1.7 2.9%
12/31/2005 60.3 10.8 21.8% 66.6 11.8 21.5%
3/31/2006 59.1 8.6 17.0% 65.5 9.4 16.8%
6/30/2006 59.5 6.7 12.7% 65.5 6.9 11.8%
9/30/2006 61.2 7.2 13.3% 67.1 6.3 10.4%
12/31/2006 60.2 (0.1) -0.2% 66.5 (0.1) -0.2%
3/31/2007 62.0 2.9 4.9% 67.8 2.3 3.5%
6/30/2007 62.4 2.9 4.9% 69.7 4.2 6.4%
----------------------------------------------------------------------
9/30/2007 63.4 2.2 3.6% 70.5 3.4 5.1%
----------------------------------------------------------------------
Year-to-Date Change in Days
in Claims Payable (O)
----------
2007 2006
----------------------
DCP - 4th quarter of prior
year 60.2 60.3
Components of year-to-date
change in DCP:
Change in claims
receipt cycle time (0.6) (1.6)
Change in unprocessed
claims inventories 0.1 1.7
Change in processed
claims inventories (0.2) 0.8
Change in TRICARE
reserve balances - (2.1)
Change in pharmacy
payment cutoff - (1.3)
Change in provider
payables under risk
arrangements 2.7 1.9
All other 1.2 0.5
----------------------
DCP - current quarter 63.4 60.2
======================
S-16
Humana Inc.
GAAP to non-GAAP Reconcilation
In thousands, except per common share results
----------------- ---------------- ----------------------
Forecasted EPS and
3Q07 3Q07 YTD Growth Rate
----------------- ---------------- ----------------------
Pretax Pretax Growth
Income EPS Income EPS 2007 2008 Rate
----------------- ---------------- ----------------------
Consolidated
GAAP $4.75 $5.30
to to
$478,502 $1.78 $930,313 $3.48 $4.80 $5.50 10%-16%
Non-GAAP
adjustment
for
favorable
prior year
claims
development ($68,878) ($0.25) ($68,878)($0.25) ($0.25) -
----------------- ---------------- ------- ------
Non-GAAP (P) $4.50 $5.30
to to
$409,624 $1.53 $861,435 $3.23 $4.55 $5.50 16%-22%
================= ======== ======= ======= ======
--------- ---------
3Q07 3Q07 YTD
--------- ---------
Government Segment Pretax Pretax
Income Income
--------- ---------
GAAP $416,299 $722,954
Non-GAAP adjustment for favorable prior year
claims development ($68,878) ($68,878)
--------- ---------
Non-GAAP (P) $347,421 $654,076
========= =========
S-17
Humana Inc.
Footnotes to Statistical Schedules and Supplementary Information
3Q07 Earnings Release
Footnote
----------------------------------------------------------------------
(A) 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).
(B) TRICARE revenues are not contracted on a per-member basis.
(C) 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 medical 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.
(D) 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.
(E) IBNR represents an estimate of medical expenses payable for claims
incurred but not reported (IBNR) at the balance sheet date. The
level of IBNR is primarily impacted by membership levels, medical
claim trends and the receipt cycle time, which represents the
length of time between when a claim is initially incurred and
when the claim form is received (i.e. a shorter time span results
in lower reserves for claims IBNR). Other medical expenses
payable includes amounts payable to providers under capitation
arrangements.
(F) TRICARE IBNR primarily fluctuates due to medical expense inflation
and changes in the utilization of benefits.
(G) TRICARE other medical expenses 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).
(H) Unprocessed claim inventories represent the estimated valuation of
claims received but not yet fully processed. TRICARE claim
inventories are not included in this amount as an independent
third party administrator processes all TRICARE medical claims on
the company's behalf. Reserves for TRICARE unprocessed claims
inventory are included in TRICARE IBNR.
(I) Processed claim inventories represent the estimated valuation of
processed claims that are in the post-claim-adjudication process,
which consists of administrative functions such as audit and
check batching and handling.
(J) The balance due to the company's pharmacy benefit administrator
fluctuates as a result of the number of business days in the last
payment cycle of the month. Payment cycles are every 10 days
(10th & 20th of month) and the last day of the month.
(K) 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.
(L) Changes in estimates of TRICARE incurred claims for prior years
result primarily from claim costs and utilization levels
developing favorably from the levels originally estimated for the
second half of the prior year. As a result of substantial risk-
sharing provisions with the Department of Defense and with
subcontractors, any resulting impact on operations from the
change in estimates of incurred related to prior years is
substantially reduced, whether positive or negative.
(M) 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 represents 70% to 75% of the company's
fully-insured claims volume. Pharmacy claims are excluded from
this measurement.
(N) A common metric for monitoring medical claim reserve levels
relative to the medical claims expense is days in claims payable,
or DCP, which represents the medical claim liabilities at the end
of the period divided by average medical expenses per day in the
quarterly period. Since the company has some providers under
capitation payment arrangements (which do not require a medical
claim IBNR reserve), the company has also summarized this metric
excluding capitation expense. In addition, this calculation
excludes the impact of the company's stand-alone PDP business.
(O) 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
Medicare stand-alone PDPs upon DCP.
(P) 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 TRICARE 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.
MULTIMEDIA AVAILABLE:
http://www.businesswire.com/cgi-bin/mmg.cgi?eid=5529801
CONTACT: Humana Inc.
Investor Relations:
Regina Nethery, 502-580-3644
Rnethery@humana.com
or
Corporate Communications
Tom Noland, 502-580-3674
Tnoland@humana.com
SOURCE: Humana Inc.