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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended June 30, 2010
OR
 
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from              to             
Commission file number 1-5975

HUMANA INC.
(Exact name of registrant as specified in its charter)

 
 	 	 	
Delaware	 	61-0647538	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer
Identification Number)	
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	 	x	  	Accelerated filer	 	¨	
 	 	 	 	
Non-accelerated filer	 	¨	  	Smaller reporting company	 	¨	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class of Common Stock	 	Outstanding at June 30, 2010	
$0.16 2/3 par value	 	169,232,426 shares	

 

Table of Contents
Humana Inc.
FORM 10-Q
JUNE 30, 2010
INDEX

Part I: Financial Information	  	Page	
 	 	 	
Item 1.	 	Financial Statements	  	 	
 	 	 	
 	 	Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009	  	3	
 	 	 	
 	 	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009	  	4	
 	 	 	
 	 	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	  	5	
 	 	 	
 	 	Notes to Condensed Consolidated Financial Statements	  	6	
 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	22	
 	 	 	
Item 3.	 	Quantitative and Qualitative Disclosures about Market Risk	  	39	
 	 	 	
Item 4.	 	Controls and Procedures	  	39	
 	 	
Part II: Other Information	  	 	
 	 	 	
Item 1.	 	Legal Proceedings	  	40	
 	 	 	
Item 1A.	 	Risk Factors	  	40	
 	 	 	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	  	41	
 	 	 	
Item 3.	 	Defaults Upon Senior Securities	  	41	
 	 	 	
Item 4.	 	Removed and Reserved	  	41	
 	 	 	
Item 5.	 	Other Information	  	41	
 	 	 	
Item 6.	 	Exhibits	  	42	
 	 	 	
 	 	Signatures	  	43	
 	 	 	
 	 	Certifications	  	 	
 
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Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 	  	June 30,
2010	 	 	December 31,
2009	 	
 	  	(in thousands, except share amounts)	 	
ASSETS	  	 	 	 	 	 	 	 	
Current assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	1,998,982	  	 	$	1,613,588	  	
Investment securities	  	 	6,882,063	  	 	 	6,190,062	  	
Receivables, less allowance for doubtful accounts of $51,161 in 2010 and $50,832 in 2009:	  	 	 	 	 	 	 	 	
Premiums	  	 	1,310,269	  	 	 	811,800	  	
Administrative services fees	  	 	14,833	  	 	 	11,820	  	
Securities lending invested collateral	  	 	45,234	  	 	 	119,586	  	
Other current assets	  	 	535,708	  	 	 	505,960	  	
 	  	 	 	 	 	 	 	 	
Total current assets	  	 	10,787,089	  	 	 	9,252,816	  	
 	  	 	 	 	 	 	 	 	
Property and equipment, net	  	 	660,223	  	 	 	679,142	  	
Long-term investment securities	  	 	1,405,734	  	 	 	1,307,088	  	
Goodwill	  	 	1,994,593	  	 	 	1,992,924	  	
Other long-term assets	  	 	842,931	  	 	 	921,524	  	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	15,690,570	  	 	$	14,153,494	  	

LIABILITIESAND STOCKHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current liabilities:	  	 	 	 	 	 	 	 	
Benefits payable	  	$	3,829,723	  	 	$	3,222,574	  	
Trade accounts payable and accrued expenses	  	 	1,666,386	  	 	 	1,307,710	  	
Book overdraft	  	 	239,916	  	 	 	374,464	  	
Securities lending payable	  	 	51,618	  	 	 	126,427	  	
Unearned revenues	  	 	209,346	  	 	 	228,817	  	
 	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	5,996,989	  	 	 	5,259,992	  	
Long-term debt	  	 	1,673,565	  	 	 	1,678,166	  	
Future policy benefits payable	  	 	1,227,348	  	 	 	1,193,047	  	
Other long-term liabilities	  	 	313,843	  	 	 	246,286	  	
 	  	 	 	 	 	 	 	 	
Total liabilities	  	 	9,211,745	  	 	 	8,377,491	  	
 	  	 	 	 	 	 	 	 	
Commitments and contingencies	  	 	 	 	 	 	 	 	
Stockholders’ equity:	  	 	 	 	 	 	 	 	
Preferred stock, $1 par; 10,000,000 shares authorized; none issued	  	 	0	  	 	 	0	  	
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 190,046,852 shares issued at June 30, 2010 and 189,801,119 shares issued at December 31, 2009	  	 	31,674	  	 	 	31,634	  	
Capital in excess of par value	  	 	1,704,035	  	 	 	1,658,521	  	
Retained earnings	  	 	5,028,455	  	 	 	4,429,611	  	
Accumulated other comprehensive income	  	 	158,428	  	 	 	42,135	  	
Treasury stock, at cost, 20,814,426 shares at June 30, 2010 and 19,621,069 shares at December 31, 2009	  	 	(443,767	) 	 	 	(385,898	) 	
 	  	 	 	 	 	 	 	 	
Total stockholders’ equity	  	 	6,478,825	  	 	 	5,776,003	  	
 	  	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	  	$	15,690,570	  	 	$	14,153,494	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to condensed consolidated financial statements.
 
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Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 	  	Three months ended
June 30,	  	Six months ended
June 30,	
 	  	2010	  	2009	  	2010	  	2009	
 	  	(in thousands, except per share results)	
Revenues:	  	 	 	  	 	 	  	 	 	  	 	 	
Premiums	  	$	8,376,751	  	$	7,642,527	  	$	16,538,614	  	$	15,113,821	
Administrative services fees	  	 	126,744	  	 	118,694	  	 	252,626	  	 	234,576	
Investment income	  	 	79,790	  	 	75,340	  	 	165,245	  	 	144,884	
Other revenue	  	 	69,436	  	 	62,328	  	 	136,830	  	 	117,269	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total revenues	  	 	8,652,721	  	 	7,898,889	  	 	17,093,315	  	 	15,610,550	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Operating expenses:	  	 	 	  	 	 	  	 	 	  	 	 	
Benefits	  	 	6,859,565	  	 	6,367,545	  	 	13,667,120	  	 	12,636,855	
Selling, general and administrative	  	 	1,161,790	  	 	1,004,342	  	 	2,288,833	  	 	2,068,145	
Depreciation and amortization	  	 	69,290	  	 	60,478	  	 	132,046	  	 	118,492	

Total operating expenses	  	 	8,090,645	  	 	7,432,365	  	 	16,087,999	  	 	14,823,492	

Income from operations	  	 	562,076	  	 	466,524	  	 	1,005,316	  	 	787,058	
 	 	 	 	 	
Interest expense	  	 	26,222	  	 	26,574	  	 	52,536	  	 	53,346	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Income before income taxes	  	 	535,854	  	 	439,950	  	 	952,780	  	 	733,712	
 	 	 	 	 	
Provision for income taxes	  	 	195,778	  	 	158,170	  	 	353,936	  	 	246,215	

Net income	  	$	340,076	  	$	281,780	  	$	598,844	  	$	487,497	

Basic earnings per common share	  	$	2.02	  	$	1.68	  	$	3.56	  	$	2.92	

Diluted earnings per common share	  	$	2.00	  	$	1.67	  	$	3.52	  	$	2.89	
 	  	 	 	  	 	 	  	 	 	  	 	 	
See accompanying notes to condensed consolidated financial statements.
 
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Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 	  	For the six months ended
June 30,	 	
 	  	2010	 	 	2009	 	
 	  	(in thousands)	 	
Cash flows from operating activities	  	 	 	 	 	 	 	 	
Net income	  	$	598,844	  	 	$	487,497	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	
Net realized capital gains	  	 	(7,976	) 	 	 	(9,550	) 	
Stock-based compensation	  	 	39,627	  	 	 	33,022	  	
Depreciation and amortization	  	 	132,046	  	 	 	118,492	  	
Benefit for deferred income taxes	  	 	(81,267	) 	 	 	(34,825	) 	
Changes in operating assets and liabilities, net of effect of businesses acquired:	  	 	 	 	 	 	 	 	
Receivables	  	 	(501,482	) 	 	 	(494,139	) 	
Other assets	  	 	73,683	  	 	 	(18,827	) 	
Benefits payable	  	 	607,149	  	 	 	205,618	  	
Other liabilities	  	 	219,163	  	 	 	(98,447	) 	
Unearned revenues	  	 	(19,471	) 	 	 	6,757	  	
Other, net	  	 	19,646	  	 	 	11,782	  	
 	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	1,079,962	  	 	 	207,380	  	
 	  	 	 	 	 	 	 	 	
Cash flows from investing activities	  	 	 	 	 	 	 	 	
Acquisitions, net of cash acquired	  	 	(1,669	) 	 	 	(12,367	) 	
Purchases of property and equipment	  	 	(91,427	) 	 	 	(82,602	) 	
Purchases of investment securities	  	 	(2,759,168	) 	 	 	(2,839,775	) 	
Maturities of investment securities	  	 	1,014,032	  	 	 	604,535	  	
Proceeds from sales of investment securities	  	 	1,091,282	  	 	 	1,751,441	  	
Change in securities lending collateral	  	 	74,809	  	 	 	133,691	  	
 	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(672,141	) 	 	 	(445,077	) 	
 	  	 	 	 	 	 	 	 	
Cash flows from financing activities	  	 	 	 	 	 	 	 	
Receipts from CMS contract deposits	  	 	880,252	  	 	 	1,034,642	  	
Withdrawals from CMS contract deposits	  	 	(643,976	) 	 	 	(723,413	) 	
Repayments under credit agreement	  	 	0	  	 	 	(250,000	) 	
Change in securities lending payable	  	 	(74,809	) 	 	 	(133,691	) 	
Change in book overdraft	  	 	(134,548	) 	 	 	(70,689	) 	
Common stock repurchases	  	 	(57,869	) 	 	 	(5,999	) 	
Excess tax benefit from stock-based compensation	  	 	1,264	  	 	 	244	  	
Proceeds from stock option exercises and other	  	 	7,259	  	 	 	1,289	  	
 	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(22,427	) 	 	 	(147,617	) 	
 	  	 	 	 	 	 	 	 	
Increase (decrease) in cash and cash equivalents	  	 	385,394	  	 	 	(385,314	) 	
Cash and cash equivalents at beginning of period	  	 	1,613,588	  	 	 	1,970,423	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	  	$	1,998,982	  	 	$	1,585,109	  	
 	  	 	 	 	 	 	 	 	
Supplemental cash flow disclosures:	  	 	 	 	 	 	 	 	
Interest payments	  	$	55,855	  	 	$	56,635	  	
Income tax payments, net	  	$	356,390	  	 	$	260,380	  	
See accompanying notes to condensed consolidated financial statements.
 
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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or those normally made in an Annual Report on Form 10-K. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2009, that was filed with the Securities and Exchange Commission, or the SEC, on February 19, 2010. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, the impact of risk sharing provisions related to our Medicare and TRICARE contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2009 for information on accounting policies that the Company considers in preparing its consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued new guidance that expands and clarifies existing disclosures about fair value measurements. Under the new guidance, we are required to disclose additional information about movements of assets among the three-tier fair value hierarchy, present separately (that is, on a gross basis) information about purchases, sales, issuances, and settlements of financial instruments in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), and expand disclosures regarding the determination of fair value measurements. We adopted the new disclosure provisions for the quarter ended March 31, 2010, except for the gross disclosures regarding purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which will be effective for us beginning with the filing of our Form 10-Q for the three months ended March 31, 2011.
 
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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
3. INVESTMENT SECURITIES
Investment securities classified as current and long-term were as follows at June 30, 2010 and December 31, 2009, respectively:

 	  	Amortized
Cost	  	Gross
Unrealized
Gains	  	Gross
Unrealized
Losses	 	 	Fair Value	
 	  	(in thousands)	
June 30, 2010	  	 	 	  	 	 	  	 	 	 	 	 	 	
U.S. Treasury and other U.S. government corporations and agencies:	  	 	 	  	 	 	  	 	 	 	 	 	 	
U.S. Treasury and agency obligations	  	$	887,265	  	$	18,356	  	$	(90	) 	 	$	905,531	
Mortgage-backed securities	  	 	1,882,962	  	 	64,386	  	 	(878	) 	 	 	1,946,470	
Tax-exempt municipal securities	  	 	2,113,807	  	 	61,456	  	 	(10,816	) 	 	 	2,164,447	
Mortgage-backed securities:	  	 	 	  	 	 	  	 	 	 	 	 	 	
Residential	  	 	79,861	  	 	667	  	 	(5,792	) 	 	 	74,736	
Commercial	  	 	275,853	  	 	11,616	  	 	(159	) 	 	 	287,310	
Asset-backed securities	  	 	226,316	  	 	1,778	  	 	(194	) 	 	 	227,900	
Corporate debt securities	  	 	2,561,989	  	 	132,438	  	 	(18,024	) 	 	 	2,676,403	
Redeemable preferred stock	  	 	5,000	  	 	0	  	 	0	  	 	 	5,000	
 	  	 	 	  	 	 	  	 	 	 	 	 	 	
Total debt securities	  	$	8,033,053	  	$	290,697	  	$	(35,953	) 	 	$	8,287,797	

December 31, 2009	  	 	 	  	 	 	  	 	 	 	 	 	 	
U.S. Treasury and other U.S. government corporations and agencies:	  	 	 	  	 	 	  	 	 	 	 	 	 	
U.S. Treasury and agency obligations	  	$	1,005,203	  	$	6,683	  	$	(2,534	) 	 	$	1,009,352	
Mortgage-backed securities	  	 	1,675,667	  	 	24,324	  	 	(11,328	) 	 	 	1,688,663	
Tax-exempt municipal securities	  	 	2,195,077	  	 	52,381	  	 	(23,417	) 	 	 	2,224,041	
Mortgage-backed securities:	  	 	 	  	 	 	  	 	 	 	 	 	 	
Residential	  	 	106,191	  	 	220	  	 	(10,999	) 	 	 	95,412	
Commercial	  	 	285,014	  	 	3,252	  	 	(8,640	) 	 	 	279,626	
Asset-backed securities	  	 	106,471	  	 	824	  	 	(107	) 	 	 	107,188	
Corporate debt securities	  	 	2,043,721	  	 	57,173	  	 	(21,326	) 	 	 	2,079,568	
Redeemable preferred stock	  	 	8,400	  	 	4,900	  	 	0	  	 	 	13,300	
 	  	 	 	  	 	 	  	 	 	 	 	 	 	
Total debt securities	  	$	7,425,744	  	$	149,757	  	$	(78,351	) 	 	$	7,497,150	
 	  	 	 	  	 	 	  	 	 	 	 	 	 	
We participate in a securities lending program where we loan certain investment securities for short periods of time in exchange for collateral, consisting of cash or U.S. Government securities, initially equal to at least 102% of the fair value of the investment securities on loan. Investment securities with a fair value of $50.4 million at June 30, 2010 and $126.1 million at December 31, 2009 were on loan. At June 30, 2010, all collateral from lending our investment securities was in the form of cash which has been reinvested in money market funds and short-term asset-backed securities.
 
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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at June 30, 2010 and December 31, 2009, respectively:

 	  	Less than 12 months	 	 	12 months or more	 	 	Total	 	
 	  	Fair
Value	  	Gross
Unrealized
Losses	 	 	Fair
Value	  	Gross
Unrealized
Losses	 	 	Fair
Value	  	Gross
Unrealized
Losses	 	
 	  	(in thousands)	 	
June 30, 2010	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
U.S. Treasury and other U.S. government corporations and agencies:	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
U.S. Treasury and agency obligations	  	$	43,795	  	$	(90	) 	 	$	0	  	$	0	  	 	$	43,795	  	$	(90	) 	
Mortgage-backed securities	  	 	98,349	  	 	(658	) 	 	 	5,982	  	 	(220	) 	 	 	104,331	  	 	(878	) 	
Tax-exempt municipal securities	  	 	329,984	  	 	(6,202	) 	 	 	134,478	  	 	(4,614	) 	 	 	464,462	  	 	(10,816	) 	
Mortgage-backed securities:	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Residential	  	 	251	  	 	(1	) 	 	 	49,143	  	 	(5,791	) 	 	 	49,394	  	 	(5,792	) 	
Commercial	  	 	0	  	 	0	  	 	 	3,551	  	 	(159	) 	 	 	3,551	  	 	(159	) 	
Asset-backed securities	  	 	49,432	  	 	(194	) 	 	 	0	  	 	0	  	 	 	49,432	  	 	(194	) 	
Corporate debt securities	  	 	346,290	  	 	(9,846	) 	 	 	69,934	  	 	(8,178	) 	 	 	416,224	  	 	(18,024	) 	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total debt securities	  	$	868,101	  	$	(16,991	) 	 	$	263,088	  	$	(18,962	) 	 	$	1,131,189	  	$	(35,953	) 	

December 31, 2009	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
U.S. Treasury and other U.S. government corporations and agencies:	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
U.S. Treasury and agency obligations	  	$	301,843	  	$	(2,425	) 	 	$	2,970	  	$	(109	) 	 	$	304,813	  	$	(2,534	) 	
Mortgage-backed securities	  	 	823,365	  	 	(11,005	) 	 	 	6,834	  	 	(323	) 	 	 	830,199	  	 	(11,328	) 	
Tax-exempt municipal securities	  	 	598,520	  	 	(14,286	) 	 	 	198,327	  	 	(9,131	) 	 	 	796,847	  	 	(23,417	) 	
Mortgage-backed securities:	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Residential	  	 	1,771	  	 	(5	) 	 	 	73,178	  	 	(10,994	) 	 	 	74,949	  	 	(10,999	) 	
Commercial	  	 	31,941	  	 	(359	) 	 	 	142,944	  	 	(8,281	) 	 	 	174,885	  	 	(8,640	) 	
Asset-backed securities	  	 	1,930	  	 	(19	) 	 	 	2,179	  	 	(88	) 	 	 	4,109	  	 	(107	) 	
Corporate debt securities	  	 	636,833	  	 	(9,354	) 	 	 	99,830	  	 	(11,972	) 	 	 	736,663	  	 	(21,326	) 	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total debt securities	  	$	2,396,203	  	$	(37,453	) 	 	$	526,262	  	$	(40,898	) 	 	$	2,922,465	  	$	(78,351	) 	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Approximately 97% of our debt securities were investment-grade quality, with an average credit rating of AA by S&P at June 30, 2010. Most of the debt securities that are below investment-grade are rated BB, the higher end of the below investment-grade rating scale. At June 30, 2010, 16% of our tax-exempt municipal securities were pre-refunded, generally with U.S. government and agency securities, and 27% of our tax-exempt securities were insured by bond insurers and have an equivalent S&P credit rating of AA- exclusive of the bond insurers’ guarantee. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
The recoverability of our residential and commercial mortgage-backed securities is supported by factors such as seniority, underlying collateral characteristics and credit enhancements. Residential and commercial mortgage-backed securities are primarily composed of senior tranches having high credit support, with 99% of the collateral consisting of prime loans. All commercial mortgage-backed securities are rated AAA at June 30, 2010.
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
All issuers of securities we own trading at an unrealized loss remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates and tighter liquidity conditions in the current markets than when the securities were purchased. As of June 30, 2010, we do not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis, and as a result, we believe that the securities with an unrealized loss are not other-than-temporarily impaired as of June 30, 2010.
The detail of realized gains (losses) related to investment securities and included with investment income was as follows for the three and six months ended June 30, 2010 and 2009:

 	  	For the three months  ended
June 30,	 	 	For the six months ended
June 30,	 	
 	  	2010	 	 	2009	 	 	2010	 	 	2009	 	
 	  	(in thousands)	 	
Gross realized gains	  	$	3,840	  	 	$	35,109	  	 	$	23,753	  	 	$	50,746	  	
Gross realized losses	  	 	(4,558	) 	 	 	(26,602	) 	 	 	(15,777	) 	 	 	(41,196	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net realized capital (losses) gains	  	$	(718	) 	 	$	8,507	  	 	$	7,976	  	 	$	9,550	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
There were no material other-than-temporary impairments for the three and six months ended June 30, 2010 or 2009.
The contractual maturities of debt securities available for sale at June 30, 2010, regardless of their balance sheet classification, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 	  	Amortized
Cost	  	Fair
Value	
 	  	(in thousands)	
Due within one year	  	$	208,266	  	$	208,805	
Due after one year through five years	  	 	2,148,213	  	 	2,201,282	
Due after five years through ten years	  	 	1,585,556	  	 	1,657,043	
Due after ten years	  	 	1,626,026	  	 	1,684,251	
Mortgage and asset-backed securities	  	 	2,464,992	  	 	2,536,416	
 	  	 	 	  	 	 	
Total debt securities	  	$	8,033,053	  	$	8,287,797	

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
4. FAIR VALUE
Assets and liabilities measured at fair value are categorized into a fair value hierarchy based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own assumptions about the assumptions market participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below.
Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments as well as debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting our own assumptions about the assumptions market participants would use as well as those requiring significant management judgment.
Fair value of actively traded debt securities are based on quoted market prices. Fair value of other debt securities are based on quoted market prices of identical or similar securities or based on observable inputs like interest rates generally using a market valuation approach, or, less frequently, an income valuation approach and are generally classified as Level 2. We generally obtain one quoted price for each security from a third party pricing service. These prices are generally derived from recently reported trades for identical or similar securities, including adjustments through the reporting date based upon observable market information. When quoted prices are not available, the third party pricing service may use quoted market prices of comparable securities or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include benchmark yields, reported trades, credit spreads, broker quotes, default rates and prepayment speeds. We are responsible for the determination of fair value and as such we perform analysis on the prices received from the third party pricing service to determine whether the prices are reasonable estimates of fair value. Our analysis includes a review of monthly price fluctuations as well as a quarterly comparison of the prices received from the pricing service to prices reported by our third party investment advisor. Based on our internal price verification procedures and review of fair value methodology documentation provided by the third party pricing service, there were no material adjustments to the prices obtained from the third party pricing service during the three and six months ended June 30, 2010 or 2009.
Fair value of privately held debt securities, including venture capital investments, as well as auction rate securities, are estimated using a variety of valuation methodologies, including both market and income approaches, where an observable quoted market does not exist and are generally classified as Level 3. For privately held debt securities, such methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in similar lines of business, and reviewing the underlying financial performance including estimating discounted cash flows. For auction rate securities, such methodologies include consideration of the quality of the sector and issuer, underlying collateral, underlying final maturity dates and liquidity.
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
The following table summarizes our fair value measurements at June 30, 2010 and December 31, 2009 for financial assets measured at fair value on a recurring basis:

 	  	 	  	Fair Value Measurements Using	
 	  	Fair Value	  	Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)	  	Significant Other
Observable  Inputs
(Level 2)	  	Significant
Unobservable
Inputs
(Level 3)	
 	  	(in thousands)	
June 30, 2010	  	 	 	  	 	 	  	 	 	  	 	 	
Cash equivalents	  	$	1,958,693	  	$	1,958,693	  	$	0	  	$	0	
Debt securities:	  	 	 	  	 	 	  	 	 	  	 	 	
U.S. Treasury and other U.S. government corporations and agencies:	  	 	 	  	 	 	  	 	 	  	 	 	
U.S. Treasury and agency obligations	  	 	905,531	  	 	0	  	 	905,531	  	 	0	
Mortgage-backed securities	  	 	1,946,470	  	 	0	  	 	1,946,470	  	 	0	
Tax-exempt municipal securities	  	 	2,164,447	  	 	0	  	 	2,112,974	  	 	51,473	
Mortgage-backed securities:	  	 	 	  	 	 	  	 	 	  	 	 	
Residential	  	 	74,736	  	 	0	  	 	74,736	  	 	0	
Commercial	  	 	287,310	  	 	0	  	 	287,310	  	 	0	
Asset-backed securities	  	 	227,900	  	 	0	  	 	225,986	  	 	1,914	
Corporate debt securities	  	 	2,676,403	  	 	0	  	 	2,668,776	  	 	7,627	
Redeemable preferred stock	  	 	5,000	  	 	0	  	 	0	  	 	5,000	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total debt securities	  	 	8,287,797	  	 	0	  	 	8,221,783	  	 	66,014	
Securities lending invested collateral	  	 	45,234	  	 	12,527	  	 	32,707	  	 	0	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total invested assets	  	$	10,291,724	  	$	1,971,220	  	$	8,254,490	  	$	66,014	

December 31, 2009	  	 	 	  	 	 	  	 	 	  	 	 	
Cash equivalents	  	$	1,507,490	  	$	1,507,490	  	$	0	  	$	0	
Debt securities:	  	 	 	  	 	 	  	 	 	  	 	 	
U.S. Treasury and other U.S. government corporations and agencies:	  	 	 	  	 	 	  	 	 	  	 	 	
U.S. Treasury and agency obligations	  	 	1,009,352	  	 	0	  	 	1,009,352	  	 	0	
Mortgage-backed securities	  	 	1,688,663	  	 	0	  	 	1,688,663	  	 	0	
Tax-exempt municipal securities	  	 	2,224,041	  	 	0	  	 	2,155,227	  	 	68,814	
Mortgage-backed securities:	  	 	 	  	 	 	  	 	 	  	 	 	
Residential	  	 	95,412	  	 	0	  	 	95,412	  	 	0	
Commercial	  	 	279,626	  	 	0	  	 	279,626	  	 	0	
Asset-backed securities	  	 	107,188	  	 	0	  	 	105,060	  	 	2,128	
Corporate debt securities	  	 	2,079,568	  	 	0	  	 	2,071,087	  	 	8,481	
Redeemable preferred stock	  	 	13,300	  	 	0	  	 	0	  	 	13,300	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total debt securities	  	 	7,497,150	  	 	0	  	 	7,404,427	  	 	92,723	
Securities lending invested collateral	  	 	119,586	  	 	53,569	  	 	66,017	  	 	0	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total invested assets	  	$	9,124,226	  	$	1,561,059	  	$	7,470,444	  	$	92,723	

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
During the six months ended June 30, 2010 and 2009, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:

 	  	For the six months ended June 30,	 	
 	  	2010	 	 	2009	 	
 	  	Auction
Rate
Securities	 	 	Privates
and
Venture
Capital	 	 	Total	 	 	Auction
Rate
Securities	 	 	Privates
and
Venture
Capital	 	 	Total	 	
 	  	(in thousands)	 	
 	 	 	 	 	 	 	
Beginning balance at January 1	  	$	68,814	  	 	$	23,909	  	 	$	92,723	  	 	$	73,654	  	 	$	18,272	  	 	$	91,926	  	
Total gains or losses:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Realized in earnings	  	 	16	  	 	 	6,178	  	 	 	6,194	  	 	 	16	  	 	 	23	  	 	 	39	  	
Unrealized in other comprehensive income	  	 	547	  	 	 	(4,775	) 	 	 	(4,228	) 	 	 	(210	) 	 	 	381	  	 	 	171	  	
Purchases, sales, issuances, and settlements, net	  	 	(5,475	) 	 	 	(13,392	) 	 	 	(18,867	) 	 	 	(25	) 	 	 	(777	) 	 	 	(802	) 	
Transfers into Level 3	  	 	0	  	 	 	0	  	 	 	0	  	 	 	0	  	 	 	605	  	 	 	605	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at March 31	  	 	63,902	  	 	 	11,920	  	 	 	75,822	  	 	 	73,435	  	 	 	18,504	  	 	 	91,939	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total gains or losses:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Realized in earnings	  	 	0	  	 	 	17	  	 	 	17	  	 	 	0	  	 	 	16	  	 	 	16	  	
Unrealized in other comprehensive income	  	 	821	  	 	 	570	  	 	 	1,391	  	 	 	184	  	 	 	38	  	 	 	222	  	
Purchases, sales, issuances, and settlements, net	  	 	(13,250	) 	 	 	2,034	  	 	 	(11,216	) 	 	 	(900	) 	 	 	(118	) 	 	 	(1,018	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 30	  	$	51,473	  	 	$	14,541	  	 	$	66,014	  	 	$	72,719	  	 	$	18,440	  	 	$	91,159	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Level 3 assets primarily include auction rate securities. Auction rate securities are debt instruments with interest rates that reset through periodic short-term auctions. The auction rate securities we own, which had a fair value of $51.5 million at June 30, 2010, or less than 1% of our total invested assets, primarily consist of tax-exempt bonds rated AAA and AA and are collateralized by federally guaranteed student loans. From time to time, liquidity issues in the credit markets have led to failed auctions. A failed auction is not a default of the debt instrument, but does set a new, generally higher, interest rate in accordance with the original terms of the debt instrument. Liquidation of auction rate securities results when (1) a successful auction occurs, (2) the securities are called or refinanced by the issuer, (3) a buyer is found outside the auction process, or (4) the security matures. We continue to receive income on all auction rate securities and periodic full and partial redemption calls. Given the liquidity issues, fair value could not be estimated based on observable market prices, and as such, unobservable inputs were used.
Our long-term debt is recorded at carrying value in our condensed consolidated balance sheets. The carrying value of our long-term debt outstanding was $1,673.6 million at June 30, 2010 and $1,678.2 million at December 31, 2009. The fair value of our long-term debt was $1,727.6 million at June 30, 2010 and $1,596.4 million at December 31, 2009. The fair value of our long-term debt is determined based on quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current rates estimated to be available to us for debt with similar terms and remaining maturities.
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
5. MEDICARE PART D
We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS. The condensed consolidated balance sheets include the following amounts associated with Medicare Part D as of June 30, 2010 and December 31, 2009. The risk corridor settlement includes amounts classified as long-term because settlement associated with the 2010 provision will exceed 12 months as of June 30, 2010.

 	  	June 30, 2010	 	 	December 31, 2009	 	 	
 	  	Risk
Corridor
Settlement	 	 	CMS
Subsidies	 	 	Risk Corridor
Settlement	 	 	CMS
Subsidies	 	 	
 	  	(in thousands)	 	 	
Other current assets	  	$	2,774	  	 	$	16,015	  	 	$	2,165	  	 	$	11,660	  	 	
Trade accounts payable and accrued expenses	  	 	(212,821	) 	 	 	(643,485	) 	 	 	(146,750	) 	 	 	(402,854	) 	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net current liability	  	 	(210,047	) 	 	 	(627,470	) 	 	 	(144,585	) 	 	 	(391,194	) 	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other long-term assets	  	 	1,223	  	 	 	0	  	 	 	0	  	 	 	0	  	 	
Other long-term liabilities	  	 	(81,387	) 	 	 	0	  	 	 	0	  	 	 	0	  	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net long-term liability	  	 	(80,164	) 	 	 	0	  	 	 	0	  	 	 	0	  	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total net liability	  	$	(290,211	) 	 	$	(627,470	) 	 	$	(144,585	) 	 	$	(391,194	) 	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill, by reportable segment, for the six months ended June 30, 2010 were as follows:

 	  	Commercial	  	Government	  	Total	
 	  	(in thousands)	
Balance at December 31, 2009	  	$	1,281,625	  	$	711,299	  	$	1,992,924	
Contingent purchase price settlements related to 2008 acquisitions	  	 	0	  	 	1,669	  	 	1,669	
 	  	 	 	  	 	 	  	 	 	
Balance at June 30, 2010	  	$	1,281,625	  	$	712,968	  	$	1,994,593	
 	  	 	 	  	 	 	  	 	 	
The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at June 30, 2010 and December 31, 2009:

 	  	Weighted
Average
Life	  	June 30, 2010	  	December 31, 2009	 	
 	  	 	  	Cost	  	Accumulated
Amortization	  	Net	  	Cost	  	Accumulated
Amortization	  	Net	 	
 	  	(in thousands)	 	
Other intangible assets:	  	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	
Customer contracts	  	11.2 yrs	  	$	314,885	  	$	133,425	  	$	181,460	  	$	314,885	  	$	117,748	  	$	197,137	 	
Provider contracts	  	16.0 yrs	  	 	42,753	  	 	9,969	  	 	32,784	  	 	42,753	  	 	8,281	  	 	34,472	 	
Trade names and other	  	13.4 yrs	  	 	15,075	  	 	3,982	  	 	11,093	  	 	16,986	  	 	5,127	  	 	11,859	 	
 	  	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	
Total other intangible assets	  	11.8 yrs	  	$	372,713	  	$	147,376	  	$	225,337	  	$	374,624	  	$	131,156	  	$	243,468	 	

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Unaudited
 
Amortization expense for other intangible assets was approximately $18.1 million for the six months ended June 30, 2010 and $19.1 million for the six months ended June 30, 2009. The following table presents our estimate of amortization expense for 2010 and each of the five next succeeding fiscal years:

 	  	(in thousands)	
For the years ending December 31,:	  	 	 	
2010	  	$	34,945	
2011	  	 	31,501	
2012	  	 	29,959	
2013	  	 	27,035	
2014	  	 	24,298	
2015	  	 	18,966	
7. INDIVIDUAL MAJOR MEDICAL DEFERRED ACQUISITION COSTS
Due to contractual and regulatory requirements, our guaranteed renewable major medical policies sold to individuals in the commercial market are accounted for as long-duration insurance products because they are expected to remain in force for an extended period beyond one year. As a result, we defer policy acquisition costs and amortize them over the estimated life of the policies in proportion to premiums earned, subject to a recoverability analysis. Further, reserves for future policy benefits are established for the portion of premium received in the earlier years that are intended to pay anticipated benefits to be incurred in future years.
In light of significant reforms to the U.S. health insurance industry, including mandating that 80% of premium revenues be expended on medical costs for individual major medical policies beginning in 2011, we completed a deferred acquisition cost recoverability analysis for our individual major medical policies at June 30, 2010. Our recoverability test indicated that a substantial portion of unamortized deferred acquisition costs associated with the individual major medical block of business were not recoverable from future income. As a result, we recorded a write-down of deferred acquisition costs of $147.5 million with a corresponding charge to selling, general and administrative expense during the three months ended June 30, 2010. Deferred acquisition costs included in other long-term assets in the consolidated balance sheets were $67.1 million and $201.4 million at June 30, 2010 and December 31, 2009, respectively, including $24.3 million and $165.7 million associated with our individual major medical policies at June 30, 2010 and December 31, 2009, respectively. Future policy benefits payable associated with our individual major medical policies were $132.4 million at June 30, 2010 and $128.3 million at December 31, 2009.
8. COMPREHENSIVE INCOME
The following table presents details supporting the computation of comprehensive income, net of tax, for the three and six months ended June 30, 2010 and 2009:

 	  	Three months ended
June 30,	  	Six months ended
June 30,	
 	  	2010	  	2009	  	2010	  	2009	
 	  	(in thousands)	
 	 	 	 	 	
Net income	  	$	340,076	  	$	281,780	  	$	598,844	  	$	487,497	
Net unrealized investment gains and other, net of tax	  	 	88,434	  	 	88,368	  	 	116,293	  	 	88,687	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Comprehensive income, net of tax	  	$	428,510	  	$	370,148	  	$	715,137	  	$	576,184	

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9. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and six months ended June 30, 2010 and 2009:

 	  	Three months ended
June 30,	  	Six months ended
June 30,	
 	  	2010	  	2009	  	2010	  	2009	
 	  	(in thousands, except per common share results)	
 	 	 	 	 	
Net income available for common stockholders	  	$	340,076	  	$	281,780	  	$	598,844	  	$	487,497	

Weighted average outstanding shares of common stock used to compute basic earnings per common share	  	 	168,472	  	 	167,301	  	 	168,336	  	 	167,172	
Dilutive effect of:	  	 	 	  	 	 	  	 	 	  	 	 	
Employee stock options	  	 	533	  	 	588	  	 	566	  	 	610	
Restricted stock	  	 	1,224	  	 	780	  	 	1,252	  	 	882	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Shares used to compute diluted earnings per common share	  	 	170,229	  	 	168,669	  	 	170,154	  	 	168,664	

Basic earnings per common share	  	$	2.02	  	$	1.68	  	$	3.56	  	$	2.92	

Diluted earnings per common share	  	$	2.00	  	$	1.67	  	$	3.52	  	$	2.89	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Number of antidilutive stock options and restricted stock excluded from computation	  	 	4,770	  	 	6,635	  	 	4,904	  	 	6,850	
10. STOCK REPURCHASE AUTHORIZATION
In December 2009, the Board of Directors authorized the repurchase of up to $250 million of our common shares exclusive of shares repurchased in connection with employee stock plans. Under this share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions, subject to certain restrictions on volume, pricing and timing. During the six months ended June 30, 2010, we repurchased 1.03 million shares in open market transactions for $50.0 million at an average price of $48.76. As of August 1, 2010, the remaining authorized amount totaled $200.0 million and the authorization expires on December 31, 2011.
In connection with employee stock plans, we acquired 0.2 million common shares for $7.9 million and 0.2 million common shares for $6.0 million during the six months ended June 30, 2010 and 2009, respectively.
11. INCOME TAXES
The effective income tax rate was 36.5% and 37.1% for the three and six months ended June 30, 2010, respectively, compared to 36.0% and 33.6% for the three and six months ended June 30, 2009, respectively. The effective income tax rate was reduced by 2.3% during the first half of 2009 due to the reduction of the $16.8 million liability for unrecognized tax benefits as a result of settlements associated with the completion of the audit of our U.S. income tax returns for 2005 and 2006. In addition, the tax rates for the three and six months ended June 30, 2010 reflect the estimated impact of new limitations on the deductibility of annual employee compensation in excess of $500,000 as mandated by recent health insurance reforms.
 
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12. GUARANTEES AND CONTINGENCIES
Government Contracts
Our Medicare business, which accounted for approximately 65% of our total premiums and administrative services only, or ASO, fees for the six months ended June 30, 2010, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a one-year term each December 31 unless CMS notifies us of its decision not to renew by August 1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare business have been renewed for 2011.
CMS is continuing to perform audits of selected Medicare Advantage plans of various companies to validate the provider coding practices and resulting economics under the actuarial risk-adjustment model used to calculate the individual member capitation paid to Medicare Advantage plans. Several Humana contracts have been selected by CMS for audit, and we expect that CMS will continue conducting audits for the 2007 contract year and beyond.
We generally rely on providers to appropriately document all medical data including risk-adjustment data in their medical records and appropriately code their claim submissions, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. The CMS audits involve a review of a sample of provider medical records for the contracts being audited. Rates paid to Medicare Advantage plans are established under a bid model, the actuarial process whereby our premium is based on a comparison of our beneficiaries’ risk scores, derived from medical diagnoses, to those enrolled in the government’s original Medicare program. As a result, we believe that an actuarially sound adjustment of payments from these audits would need to take into account the level of coding accuracy and provider medical record documentation completeness under the government’s original Medicare program, since the risk adjustment system, bids, benefit structures and payment rates were premised on that data. This would help to ensure that the audit methodology applied to Medicare Advantage plans accurately calculates the economic impact of the audit findings. Additionally, our payment received from CMS, as well as benefits offered and premiums charged to members, is based on bids that did not, by CMS design, include any assumption of retroactive audit payment adjustments. We believe that applying a retroactive audit adjustment after CMS acceptance of bids would improperly alter this process of establishing member benefits and premiums.
CMS has not formally announced its audit payment adjustment methodology, nor has CMS formally indicated whether the audit payment adjustment methodology will be based on a comparison to original Medicare coding accuracy. CMS has further indicated that it may make retroactive contract-level payment adjustments. Any such payment adjustments could occur as early as this year, and could be effected prior to our, or other Medicare Advantage plans, having the opportunity to appeal the underlying payment adjustment methodology. We are unable to estimate the financial impact of any audits that may be conducted related to 2007 revenue and beyond or whether any findings would cause a change to our method of estimating future premium revenue in bid submissions made to CMS for future contract years, or compromise premium rate assumptions made in our bids for prior contract years. At this time, we do not know whether CMS will require payment adjustments to be made using an audit methodology without comparison to original Medicare coding, and using its method of extrapolating findings to the entire contract. However, if CMS requires payment adjustments to be made using an audit methodology without comparison to original Medicare coding, and using a method of extrapolating findings to the entire contract, and if we are unable to obtain any relief preventing the payment adjustments from being implemented, we believe that such adjustments would have a material adverse effect on our results of operations, financial position, and cash flows.
Our Medicaid business, which accounted for approximately 2% of our total premiums and ASO fees for the six months ended June 30, 2010, consists of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico.
 
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We have been informed by the Puerto Rico Health Insurance Administration, or PRHIA, that our current Medicaid contracts for the East and Southeast regions will be extended through the end of September 2010, with the specific terms and conditions of that extension pending discussion. PRHIA has issued a request for proposals for new contracts to become effective as of October 1, 2010.
The loss of any of the contracts above or significant changes in these programs as a result of legislative action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.
Our military services business, which accounted for approximately 11% of our total premiums and ASO fees for the six months ended June 30, 2010, primarily consists of the TRICARE South Region contract. The original 5-year South Region contract expired March 31, 2009 and was extended through March 31, 2010. On March 3, 2010, we were notified that the Department of Defense TRICARE Management Activity, or TMA, exercised its options to extend the TRICARE South Region contract for Option Period VII and Option Period VIII. The exercise of these option periods extends the TRICARE South Region contract through March 31, 2011. The contract’s transition provisions require the continuation of certain activities, primarily claims processing, during a wind-down period lasting approximately six months following the expiration date. Claims incurred on or prior to the expiration date would continue to be processed during the wind-down period under the terms existing prior to the expiration date.
As required under the current contract, the target underwritten health care cost and underwriting fee amounts for each option period are negotiated. Any variance from the target health care cost is shared with the federal government. Accordingly, events and circumstances not contemplated in the negotiated target health care cost amount may have a material adverse effect on us. These changes may include an increase or reduction in the number of persons enrolled or eligible to enroll due to the federal government’s decision to increase or decrease U.S. military deployments. In the event government reimbursements were to decline from projected amounts, our failure to reduce the health care costs associated with these programs may have a material adverse effect on our results of operations, financial position, and cash flows.
In July 2009, we were notified by the Department of Defense, or DOD, that we were not awarded the third generation TRICARE program contract for the South Region which had been subject to competing bids. We filed a protest with the Government Accountability Office, or GAO, in connection with the award to another contractor citing discrepancies between the award criteria and procedures prescribed in the request for proposals issued by the DoD and those that appear to have been used by the DoD in making its contractor selection. In October 2009, we learned that the GAO had upheld our protest, determining that the TMA evaluation of our proposal had unreasonably failed to fully recognize and reasonably account for the likely cost savings associated with our record of obtaining network provider discounts from our established network in the South Region. On December 22, 2009, we were advised that TMA notified the GAO of its intent to implement corrective action consistent with the discussion contained within the GAO’s decision with respect to our protest. On July 15, 2010, TMA issued its latest amendment to the request for proposal requesting from offerors final proposal revisions to address health care cost savings resulting from provider network discounts in the South Region. On July 30, 2010, we submitted our proposal revisions.
Legal Proceedings
Securities Litigation
In March and April of 2008, Humana’s directors and certain of its officers (collectively, the “Derivative Defendants”) were named as defendants in two substantially similar shareholder derivative actions filed in the Circuit Court for Jefferson County, Kentucky ( Del Gaizo v. McCallister et al. , No. 08-CI-003527, filed on March 27, 2008; and  Regiec v. McCallister et al. , No. 08-CI-04236, filed on April 16, 2008). Humana was named as a nominal defendant. On May 12, 2008, the Circuit Court entered an order that consolidated the state court
 
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derivative actions into a single action captioned In re Humana Inc. Derivative Litigation, No. 08-CI-003527 (the “Consolidated Derivative Action”), and stayed the Consolidated Derivative Action pending the outcome of a motion to dismiss a federal securities class action, which was premised on the same allegations. Those allegations asserted that Humana and certain of its officers and directors made materially false and misleading statements regarding Humana’s anticipated earnings per share for the first quarter of 2008 and for the fiscal year of 2008. The federal case, styled In re Humana Inc. Securities Litigation,  No. 3:08-CV-162-JHM-DW, was dismissed with prejudice on June 23, 2009, and no appeal was filed. On September 21, 2009, the plaintiffs (the “Derivative Plaintiffs”) filed in the state court action a consolidated shareholder derivative complaint (the “Consolidated Derivative Complaint”), which, as noted above, is premised on the same events underlying the related federal securities class action. The Consolidated Derivative Complaint alleges, among other things, that some or all of the Derivative Defendants (i) failed to correct Humana’s allegedly inadequate controls relating to its bids filed with respect to its stand-alone Medicare Part D prescription drug plans (PDPs) for 2008, (ii) caused Humana to misrepresent its business prospects, (iii) failed to correct Humana’s earnings guidance, and (iv) caused Humana to charge co-payments for its PDPs that were based on incorrect estimates. The Consolidated Derivative Complaint asserts claims against the Derivative Defendants for breach of fiduciary duty, corporate waste, and unjust enrichment. The Consolidated Derivative Complaint also asserts claims against certain directors and officers of Humana for allegedly breaching their fiduciary duties by engaging in insider sales of Humana common stock and misappropriating Humana information. The Consolidated Derivative Complaint seeks the following relief, among other things: (i) damages in favor of Humana; (ii) an order directing Humana to take actions to reform and improve its internal governance and procedures, including holding shareholder votes on certain corporate governance policies and resolutions to amend Humana’s Bylaws or Articles of Incorporation; (iii) restitution and disgorgement of the Derivative Defendants’ alleged profits, benefits, and other compensation; (iv) an award of plaintiffs’ legal costs and expenses; and (v) other relief that the court deems just and proper. Neither Humana nor the Derivative Defendants have answered or otherwise responded to the Consolidated Derivative Complaint.
On June 25, 2010, the Derivative Plaintiffs, Humana, and the Derivative Defendants entered into a Stipulation of Settlement (the “Stipulation”), pursuant to which they have agreed to settle the Consolidated Derivative Action. As part of the Stipulation, Humana has agreed to implement certain governance measures, including with respect to its PDP program, and to pay the Derivative Plaintiffs’ attorneys fees up to $325,000. The Stipulation is subject to court approval, and upon such approval, the Consolidated Derivative Action will be dismissed. On July 22, 2010, the Derivative Plaintiffs filed a motion seeking court approval of the Stipulation. On July 26, 2010, the Court granted that motion and set a hearing date of September 21, 2010 to consider the fairness of the terms of the Stipulation.
Provider Litigation
Humana Military Healthcare Services, Inc. (“Humana Military”) was named as a defendant in Sacred Heart Health System, Inc., et al. v. Humana Military Healthcare Services Inc. , Case No. 3:07-cv-00062 MCR/EMT (the “Sacred Heart” Complaint), a class action lawsuit filed on February 5, 2007 in the U.S. District Court for the Northern District of Florida asserting contract and fraud claims against Humana Military. The Sacred Heart Complaint alleged, among other things, that, Humana Military breached its network agreements with a class of hospitals in six states, including the seven named plaintiffs, that contracted for reimbursement of outpatient services provided to beneficiaries of the DoD’s TRICARE health benefits program (“TRICARE”). The Complaint alleged that Humana Military breached its network agreements when it failed to reimburse the hospitals based on negotiated discounts for non-surgical outpatient services performed on or after October 1, 1999, and instead reimbursed them based on published CHAMPUS Maximum Allowable Charges (so-called “CMAC rates”). Humana Military denied that it breached the network agreements with the hospitals and asserted a number of defenses to these claims. The Complaint sought, among other things, the following relief for the purported class members: (i) damages as a result of the alleged breach of contract by Humana Military, (ii) taxable costs of the litigation, (iii) attorneys fees, and (iv) any other relief the court deems just and proper. Separate and apart from the class relief, named plaintiff Sacred Heart Health System Inc. requested damages and other relief for its individual claim against Humana Military for fraud in the inducement to contract. On September 25, 2008, the district court certified a class consisting of all institutional healthcare service providers in TRICARE former Regions 3 and 4 which had network agreements with
 
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Humana Military to provide outpatient non-surgical services to CHAMPUS/TRICARE beneficiaries as of November 18, 1999, excluding those network providers who contractually agreed with Humana Military to submit any such disputes with Humana Military to arbitration. On March 3, 2010, the Court of Appeals reversed the district court’s class certification order and remanded the case to the district court for further proceeding. On June 28, 2010, the plaintiffs sought leave of the court to amend their complaint to join additional hospital plaintiffs. Humana Military filed its response to the motion on July 28, 2010.
On March 2, 2009, in a case styled Southeast Georgia Regional Medical Center, et al. v. Humana Military Healthcare Services, Inc., the named plaintiffs filed an arbitration demand, seeking relief on the same grounds as the plaintiffs in the  Sacred Heart  litigation. The arbitration plaintiffs originally sought certification of a class consisting of all institutional healthcare service providers that had contracts with Humana Military to provide outpatient non-surgical services and whose agreements provided for dispute resolution through arbitration. Humana Military submitted its response to the demand for arbitration on May 1, 2009. The plaintiffs have subsequently withdrawn their motion for class certification. On June 18, 2010, plaintiffs submitted their amended arbitration complaint. Humana Military’s answer to the complaint was submitted on July 9, 2010. On June 24, 2010, the arbitrators issued a case management order and scheduled a hearing to begin on May 23, 2011.
Humana intends to defend each of these actions vigorously.
Other Lawsuits and Regulatory Matters
Our current and past business practices are subject to review by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, competitive practices, commission payments, privacy issues, utilization management practices, and sales practices. Some of these reviews have historically resulted in fines imposed on us and some have required changes to some of our practices. We continue to be subject to these reviews, which could result in additional fines or other sanctions being imposed on us or additional changes in some of our practices. In addition, we have responded and are continuing to respond to requests for information regarding certain provider-payment practices from various states’ attorneys general and departments of insurance.
On September 10, 2009, the Office of Inspector General, or OIG, of the United States Department of Health and Human Services issued subpoenas to us and our subsidiary, Humana Pharmacy, Inc., seeking documents related to our Medicare Part D prescription plans and the operation of Right SourceRx SM , our mail order pharmacy in Phoenix, Arizona. The government has informed us that no additional materials will be sought pursuant to the subpoena.
We also are involved in various other lawsuits that arise, for the most part, in the ordinary course of our business operations, including employment litigation, claims of medical malpractice, bad faith, nonacceptance termination of providers, anticompetitive practices, improper rate setting, failure to disclose network discounts and various other provider arrangements, general contractual matters, intellectual property matters, and challenges to subrogation practices. We also are subject to claims relating to performance of contractual obligations to providers, members, and others, including failure to properly pay claims, improper policy terminations, challenges to our implementation of the new Medicare prescription drug program and other litigation.
Personal injury claims and claims for extracontractual damages arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.
 
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The outcome of any current or future litigation or governmental investigations cannot be accurately predicted with certainty, and it is reasonably possible that their outcomes may have a material adverse effect on our results of operations, financial position, and cash flows.
13. SEGMENT INFORMATION
We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. When identifying our segments, we aggregated products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer.
The accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2009. The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same provider networks, in some instances enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent.
Our segment results were as follows for the three and six months ended June 30, 2010 and 2009:

 	  	Government Segment	
 	  	Three months ended June 30,	  	Six months ended June 30,	
 	  	2010	  	2009	  	2010	  	2009	
 	  	(in thousands)	
Revenues:	  	 	 	  	 	 	  	 	 	  	 	 	
Premiums:	  	 	 	  	 	 	  	 	 	  	 	 	
Medicare Advantage	  	$	4,885,209	  	$	4,145,129	  	$	9,702,189	  	$	8,205,588	
Medicare stand-alone PDP	  	 	700,222	  	 	638,813	  	 	1,279,247	  	 	1,234,496	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total Medicare	  	 	5,585,431	  	 	4,783,942	  	 	10,981,436	  	 	9,440,084	
Military services	  	 	885,368	  	 	924,308	  	 	1,730,362	  	 	1,795,479	
Medicaid	  	 	168,055	  	 	160,529	  	 	332,758	  	 	317,189	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total premiums	  	 	6,638,854	  	 	5,868,779	  	 	13,044,556	  	 	11,552,752	
Administrative services fees	  	 	27,251	  	 	23,155	  	 	54,779	  	 	43,488	
Investment income	  	 	51,519	  	 	47,176	  	 	107,688	  	 	87,958	
Other revenue	  	 	1,694	  	 	522	  	 	3,140	  	 	1,716	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total revenues	  	 	6,719,318	  	 	5,939,632	  	 	13,210,163	  	 	11,685,914	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Operating expenses:	  	 	 	  	 	 	  	 	 	  	 	 	
Benefits	  	 	5,584,797	  	 	4,934,617	  	 	11,090,625	  	 	9,868,530	
Selling, general and administrative	  	 	549,059	  	 	550,939	  	 	1,198,936	  	 	1,148,150	
Depreciation and amortization	  	 	37,507	  	 	33,176	  	 	73,693	  	 	65,745	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total operating expenses	  	 	6,171,363	  	 	5,518,732	  	 	12,363,254	  	 	11,082,425	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Income from operations	  	 	547,955	  	 	420,900	  	 	846,909	  	 	603,489	
Interest expense	  	 	19,586	  	 	16,225	  	 	39,367	  	 	32,713	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Income before income taxes	  	$	528,369	  	$	404,675	  	$	807,542	  	$	570,776	

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 	  	Commercial Segment	
 	  	Three months ended June 30,	  	Six months ended June 30,	
 	  	2010	  	2009	  	2010	  	2009	
 	  	(in thousands)	
Revenues:	  	 	 	  	 	 	  	 	 	  	 	 	
Premiums:	  	 	 	  	 	 	  	 	 	  	 	 	
Fully-insured	  	 	 	  	 	 	  	 	 	  	 	 	
PPO	  	$	729,766	  	$	797,027	  	$	1,472,247	  	$	1,617,666	
HMO	  	 	754,254	  	 	747,066	  	 	1,518,591	  	 	1,485,096	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total fully-insured	  	 	1,484,020	  	 	1,544,093	  	 	2,990,838	  	 	3,102,762	
Specialty	  	 	253,877	  	 	229,655	  	 	503,220	  	 	458,307	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total premiums	  	 	1,737,897	  	 	1,773,748	  	 	3,494,058	  	 	3,561,069	
Administrative services fees	  	 	99,493	  	 	95,539	  	 	197,847	  	 	191,088	
Investment income	  	 	28,271	  	 	28,164	  	 	57,557	  	 	56,926	
Other revenue	  	 	67,742	  	 	61,806	  	 	133,690	  	 	115,553	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total revenues	  	 	1,933,403	  	 	1,959,257	  	 	3,883,152	  	 	3,924,636	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Operating expenses:	  	 	 	  	 	 	  	 	 	  	 	 	
Benefits	  	 	1,274,768	  	 	1,432,928	  	 	2,576,495	  	 	2,768,325	
Selling, general and administrative	  	 	612,731	  	 	453,403	  	 	1,089,897	  	 	919,995	
Depreciation and amortization	  	 	31,783	  	 	27,302	  	 	58,353	  	 	52,747	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Total operating expenses	  	 	1,919,282	  	 	1,913,633	  	 	3,724,745	  	 	3,741,067	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Income from operations	  	 	14,121	  	 	45,624	  	 	158,407	  	 	183,569	
Interest expense	  	 	6,636	  	 	10,349	  	 	13,169	  	 	20,633	
 	  	 	 	  	 	 	  	 	 	  	 	 	
Income before income taxes	  	$	7,485	  	$	35,275	  	$	145,238	  	$	162,936	

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The condensed consolidated financial statements of Humana Inc. in this document present the Company’s financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the SEC, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward–looking statements. These forward–looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A. – Risk Factors in our Form 10-K for the year ended December 31, 2009 that was filed with the SEC on February 19, 2010, as modified by the changes to those risk factors included in this document and in other reports we filed subsequent to February 19, 2010, in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update these factors in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward–looking statements.
Overview
Headquartered in Louisville, Kentucky, Humana is one of the nation’s largest publicly traded health and supplemental benefits companies, based on our 2009 revenues of approximately $31.0 billion. We are a full-service benefits solutions company, offering a wide array of health and supplemental benefit products for employer groups, government benefit programs, and individuals. As of June 30, 2010, we had approximately 10.3 million members in our medical benefit plans, as well as approximately 7.3 million members in our specialty products.
We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. When identifying our segments, we aggregated products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer.
The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same provider networks, in some instances enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent.
Our results are impacted by many factors, but most notably are influenced by our ability to establish and maintain a competitive and efficient cost structure and to accurately and consistently establish competitive premium, ASO fee, and plan benefit levels that are commensurate with our benefit and administrative costs. Benefit costs are subject to a high rate of inflation due to many forces, including new higher priced technologies and medical procedures, new prescription drugs and therapies, an aging population, lifestyle challenges including diet and smoking, the tort liability system, and government regulation.
Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking total benefit expenses as a percentage of premium revenues, represents a statistic used to measure underwriting profitability. The selling, general, and administrative expense ratio, or SG&A expense ratio, which is computed by taking total selling, general and administrative expenses as a percentage of premium revenues, administrative services fees and other revenues, represents a statistic used to measure administrative spending efficiency.
 
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Health Insurance Reform
In March 2010, the President signed into law The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Insurance Reform Legislation) which enact significant reforms to various aspects of the U.S. health insurance industry. Due to its complexity and the lack of comprehensive interpretive guidance or implementing regulations by The Department of Health and Human Services (HHS), the Department of Labor, the Treasury Department, and the National Association of Insurance Commissioners, the full impact of the Health Insurance Reform Legislation is not yet fully known.
Implementation dates of the Health Insurance Reform Legislation vary from as early as six months from the date of enactment, or September 23, 2010, to as late as 2018. The following outlines certain provisions of the Health Insurance Reform Legislation that will take effect in 2010 through 2014:
 
 	•	 	Changes effective for plan years beginning on or after September 23, 2010 include: elimination of pre-existing condition limits for enrollees under age 19, elimination of certain annual and lifetime caps on the dollar value of benefits, expansion of dependent coverage to include adult children until age 26, a requirement to provide coverage for preventive services without cost to members, new claim appeal requirements, and the establishment of an interim high risk program for those unable to obtain coverage due to a pre-existing condition or health status.	
 
 	•	 	Effective January 1, 2011, minimum benefit ratios will be mandated for all commercial fully-insured health plans in the large group (85%), small group (80%), and individual (80%) markets, with rebates to policyholders if the actual benefit ratios do not meet these minimums. While there have been regulatory discussions, HHS has not yet issued formal regulations addressing several important aspects of measuring and applying these benefit ratios, including: distinguishing medical from non-medical expenses for purposes of the calculation; the exclusion of certain taxes, fees and assessments from premium calculations; the definition of large and small groups; the level of aggregation for these calculations; and how often and to which period the tests should be applied. Depending on the results of the calculation, there could be a broad range of potential business impacts both in the near and long term, and there could be meaningful disruption in local health care markets. Given the breadth of possible changes and the lack of comprehensive guidance from HHS, we are unable to fully project the impact these minimum benefit ratios will have on our results of operations, financial position, and cash flows.	
 
 	•	 	As part of the Health Insurance Reform Legislation, Medicare Advantage payment benchmarks for 2011 were frozen at 2010 levels. Beginning in 2012, additional cuts to Medicare Advantage plans will take effect (plans will receive 95% in high-cost areas to 115% in low-cost areas of Medicare fee-for-service rates), with changes being phased-in over two to six years, depending on the level of payment reduction in a county.	
 
 	•	 	Beginning in 2014, the Health Insurance Reform Legislation requires: all individual and group health plans to guarantee issuance and renew coverage without pre-existing condition exclusions or health-status rating adjustments; the elimination of annual limits on coverage on certain plans; the establishment of state-based exchanges for individuals and small employers (with up to 100 employees); the introduction of standardized plan designs based on set actuarial values; the establishment of a minimum benefit ratio of 85% for Medicare Advantage plans; and an annual insurance industry assessment ($8 billion levied on the insurance industry in 2014 with increasing annual amounts thereafter), which is not deductible for income tax purposes. If the new non-deductible federal premium tax is imposed as enacted, and if we are unable to adjust our business model to address this new tax, there can be no assurance that the non-deductible federal premium tax would not have a material adverse effect on our results of operations, financial position, and cash flows.	
The Health Insurance Reform Legislation also specifies required benefit designs, limits rating and pricing practices, encourages additional competition (including potential incentives for new market entrants) and expands eligibility for Medicaid programs. In addition, the law has created a new federal Health Insurance Rate Authority that will significantly increase federal oversight of health plan premium rates beginning in 2010 and could adversely affect our ability to appropriately adjust health plan premiums on a timely basis. Financing for these reforms will
 
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come, in part, from material additional fees and taxes on us and other health insurers, health plans and individuals beginning in 2014, as well as reductions in certain levels of payments to us and other health plans under Medicare as described above.
Our current period’s results of operations have been affected by the Health Insurance Reform Legislation. During the three months ended June 30, 2010, we recorded a charge to write-down deferred acquisition costs associated with our guaranteed renewable individual major medical policies since these costs will not be recoverable from our estimates of future cash flows based on an analysis that considered, among others, our current understanding of the pertinent provisions of the Health Insurance Reform Legislation, including the 80% minimum benefit ratio requirement. In addition, our effective tax rate increased due to the limitation of deductible annual compensation over $500,000 per employee. Due to the complexity and the lack of comprehensive interpretive guidance or implementing regulations, we are unable to fully predict the ultimate impact these reforms will have on our results of operations, financial position, and cash flows. It is reasonably possible that the Health Insurance Reform Legislation and related regulations, as well as future legislative changes, in the aggregate could have a material adverse effect on our results of operations, including restricting revenue, enrollment and premium growth in certain products and market segments, increasing our medical and administrative costs, lowering our Medicare payment rates and increasing our expenses associated with the non-deductible federal premium tax; our financial position, including our ability to maintain the value of our goodwill; and our cash flows.
For additional information regarding our risks related to health insurance reforms, see “Item 1A. Risk Factors” in Part II of this Form 10-Q.
Government Segment
Our strategy and commitment to the Medicare programs have led to significant growth. Medicare Advantage fully-insured membership increased to 1,732,400 members at June 30, 2010, up 232,600 members, or 15.5% from 1,499,800 members at June 30, 2009 and up 223,900 members, or 14.8%, since December 31, 2009, primarily due to sales of group Medicare Advantage products and preferred provider organization, or PPO, products. Average fully-insured Medicare Advantage membership increased 16.5% in the first half of 2010 compared to the first half of 2009. Likewise, Medicare Advantage premium revenues have increased 18.2% to $9.7 billion for the six months ended June 30, 2010 from $8.2 billion for the six months ended June 30, 2009. The mix of sales has continued to shift increasingly to our network-based PPO offerings, which is particularly important given the enactment of the Medicare Improvements for Patients and Providers Act of 2008, or the Improvements Act, discussed more fully below. Approximately 72% of our fully-insured Medicare Advantage members were enrolled in network-based products at June 30, 2010 compared to 63% at December 31, 2009 and 62% at June 30, 2009, with our PPO membership increasing 82% from June 30, 2009 to June 30, 2010.
Due to the enactment of the Improvements Act in July 2008, beginning in 2011, sponsors of Medicare Advantage Private Fee-For-Service, or PFFS, plans will be required to contract with providers to establish adequate networks, except in geographic areas that CMS determines have fewer than two network-based Medicare Advantage plans. We have 479,300 PFFS members, which represent approximately 27% of our total Medicare Advantage membership at June 30, 2010, down from 37% at December 31, 2009. Approximately 85% of our PFFS members at June 30, 2010 resided in geographies where we have developed a provider network and offer a networked plan. We are continuing to implement various operational and strategic initiatives, including further developing our networks and building network-based plan offerings to address the adequate network requirement. We anticipate these initiatives, together with certain counties’ exemption from the network requirement, to result in more than 95% of our PFFS members having the choice of remaining in a Humana plan in 2011.
On April 5, 2010, CMS announced that Medicare Advantage payment rates will remain flat in 2011. Based on the information available at the time we filed our 2011 bids in June 2010, we believe we effectively designed Medicare Advantage products that address the flat rates while continuing to remain competitive compared to both the combination of original Medicare with a supplement policy as well as other Medicare Advantage competitors within our industry. In addition, we will continue to pursue our cost-reduction and outcome-enhancing strategies, including care coordination and disease management, which we believe will mitigate the adverse effects of the rates on our Medicare Advantage members. Nonetheless, there can be no assurance that we will be able to successfully execute operational and strategic initiatives with respect to changes in the Medicare Advantage program. Failure to
 
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execute these strategies may result in a material adverse effect on our results of operations, financial position, and cash flows.
We also offer Medicare stand-alone prescription drug plans, or PDPs, under the Medicare Part D program. These plans provide varying degrees of coverage. Our Medicare stand-alone PDP membership declined to 1,793,400 members at June 30, 2010, down 134,500 members, or 7.0%, from December 31, 2009 and down 198,600 members, or 10.0%, from June 30, 2009, resulting primarily from our competitive positioning as we realigned stand-alone PDP premium and benefit designs to correspond with our historical prescription drug claims experience.
Our quarterly Government segment earnings and operating cash flows are impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D benefit design results in coverage that varies as a member’s cumulative out-of-pocket costs pass through successive stages of a member’s plan period which begins annually on January 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total prescription drug costs in the early stages and less in the latter stages. As a result, the Government segment’s benefit ratio generally decreases as the year progresses. In addition, the number of low-income senior members as well as year-over-year changes in the mix of membership in our stand-alone PDP products affect the quarterly benefit ratio pattern.
Our military services business primarily consists of the TRICARE South Region contract. For the six months ended June 30, 2010, premiums and ASO fees associated with the TRICARE South Region contract were $1,725.5 million, or 10.3% of our total premiums and ASO fees.
On March 3, 2010, the TMA exercised its options to extend the TRICARE South Region contract for Option Period VII and Option Period VIII. The exercise of these option periods extends the TRICARE South Region contract through March 31, 2011. In July 2009, we were notified by the DoD that we were not awarded the third generation TRICARE program contract for the South Region which had been subject to competing bids. We filed a protest with the GAO in connection with the award to another contractor citing discrepancies between the award criteria and procedures prescribed in the request for proposals issued by the DoD and those that appear to have been used by the DoD in making its contractor selection. In October 2009, we learned that the GAO had upheld our protest, determining that the TMA evaluation of our proposal had unreasonably failed to fully recognize and reasonably account for the likely cost savings associated with our record of obtaining network provider discounts from our established network in the South Region. On December 22, 2009, we were advised that TMA notified the GAO of its intent to implement corrective action consistent with the discussion contained within the GAO’s decision with respect to our protest. On July 15, 2010, TMA issued its latest amendment to the request for proposal requesting from offerors final proposal revisions to address health care cost savings resulting from provider network discounts in the South Region. On July 30, 2010, we submitted our proposal revisions.
We are continuing to evaluate issues associated with our military services businesses such as potential impairment of certain assets primarily consisting of goodwill, which had a carrying value of $49.8 million at June 30, 2010, potential exit costs, possible asset sales, and a strategic assessment of ancillary businesses. Military services goodwill was not impaired at June 30, 2010. We expect that as the ultimate March 31, 2011 contract end date nears, if our current contract is not extended further and we are not awarded the new third generation TRICARE program contract for the South Region, future cash flows will not be sufficient to warrant recoverability of all or a portion of the military services goodwill. In this event, we expect a goodwill impairment could occur during the fourth quarter of 2010.
Commercial Segment
Commercial segment pretax earnings decreased $17.7 million, or 10.9%, for the six months ended June 30, 2010 compared to the same period in 2009 primarily due to a $147.5 million write-down of deferred acquisition costs associated with our individual major medical policies in the 2010 period as well as a decline in fully-insured medical membership, partially offset by decreased utilization year-over-year and prior year favorable reserve releases not in the ordinary course of business in the first half of 2010. As a result of significant reforms to the U.S. health insurance industry discussed previously, a substantial portion of deferred acquisition costs associated with our individual major medical block of business were not recoverable from future income and we recorded a charge to selling, general, and administrative expense of $147.5 million during the three months ended June 30, 2010 as
 
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discussed in Note 7 to the condensed consolidated financial statements. Commercial segment fully-insured medical membership at June 30, 2010 of 1,702,500 decreased 169,200 members, or 9.0% from June 30, 2009. The decline in membership primarily was a result of continued pricing discipline, the highly competitive environment, and economic conditions including high levels of unemployment. Due to the economic conditions, small groups have been dropping coverage and we have experienced increased in-group member attrition as employers reduce their workforce levels. The decreased utilization year-over-year coupled with the favorable reserve releases in the 2010 period led to a lower Commercial segment benefit ratio for the three and six months ended June 30, 2010. The write-down of deferred acquisition costs, together with administrative costs associated with increased specialty and mail-order pharmacy business, led to a higher Commercial segment SG&A expense ratio for the three and six months ended June 30, 2010.
Financial Position
At June 30, 2010, cash, cash equivalents and our investment securities totaled $10.3 billion, or 65.6% of total assets, with 19.4% of the $10.3 billion invested in cash and cash equivalents. Investment securities consist of debt securities of investment-grade quality with an average credit rating by S&P of AA at June 30, 2010 and an average duration of approximately 4.2 years. Including cash and cash equivalents, the average duration of our investment portfolio was approximately 3.4 years. We had no collateralized debt obligations and $3.8 million of mortgage-backed securities associated with Alt-A or subprime loans at June 30, 2010.
Our net unrealized position improved $183.3 million from a net unrealized gain position of $71.4 million at December 31, 2009, to a net unrealized gain position of $254.7 million at June 30, 2010. Gross unrealized losses were $36.0 million at June 30, 2010 compared to $78.4 million at December 31, 2009. Gross unrealized gains were $290.7 million at June 30, 2010 compared to $149.8 million at December 31, 2009. All issuers of securities we own trading at an unrealized loss remain current on all contractual payments. We believe these unrealized losses primarily were caused by an increase in market interest rates and tighter liquidity conditions in the current markets than when the securities were purchased. As of June 30, 2010, we do not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income and it is not likely that we will be required to sell these securities before recovery of their amortized costs basis. As a result, we believe that the securities with an unrealized loss are not other-than-temporarily impaired as of June 30, 2010.
We continuously review our investment portfolios. There were no material other-than-temporary impairments for the six months ended June 30, 2010 or 2009. There is a continuing risk that future declines in fair value may occur and material realized losses from sales or other-than-temporary impairments may be recorded in future periods.
In addition, in the fall of 2008 we terminated all fixed-to-variable interest-rate swap agreements outstanding associated with our senior notes based on changes in the credit market environment. In exchange for terminating these interest-rate swap agreements, we received cash of $93.0 million representing the fair value of the swap assets. This transaction also fixed the interest rate on our senior notes to a weighted-average rate of 6.08%. We may re-enter into swap agreements in the future depending on market conditions and other factors.
We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt and repurchase shares. Our long-term debt, consisting primarily of senior notes, of $1,673.6 million represented 20.5% of total capitalization at June 30, 2010 declining from 22.5% at December 31, 2009. The earliest maturity of our senior notes is in June 2016. We have available a 5-year, $1.0 billion unsecured revolving credit agreement which expires in July 2011. As of June 30, 2010, there were no borrowings outstanding under this credit agreement.
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required.
 
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Based on the most recently filed statutory financial statements as of March 31, 2010, we maintained aggregate statutory capital and surplus of $4.0 billion in our state regulated subsidiaries, $1.6 billion above the aggregate $2.4 billion in applicable statutory requirements which would trigger any regulatory action by the respective states.
Other Highlights
 
 	•	 	As more fully described on page 59 of our Form 10-K for the year ended December 31, 2009, actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant. When we recognize a release of the redundancy, we disclose the amount that is not in the ordinary course of business. We experienced prior year favorable reserve releases not in the ordinary course of business in both our Government and Commercial segments of approximately $37.5 million in the aggregate, or $0.14 per diluted common share, for the three months ended June 30, 2010 and $137.5 million in the aggregate, or $0.51 per diluted common share, for the six months ended June 30, 2010. This favorable reserve development primarily resulted from improvements in the claims processing environment and to a lesser extent, better than originally estimated utilization. In addition, during the three months ended June 30, 2010, we experienced first quarter 2010 favorable reserve releases not in the ordinary course of business in both our Government and Commercial segments of approximately $79.5 million in the aggregate, or $0.30 per diluted common share, that did not affect year-to-date results, primarily as a result of better than originally estimated utilization. We believe we have consistently applied our methodology in determining our best estimate of benefits payable.	
 
 	•	 	Operating cash flows increased $872.6 million to $1,080.0 million for the six months ended June 30, 2010 compared to $207.4 million for the six months ended June 30, 2009. The increase primarily was due to earnings improvement, enrollment activity, and the timing of working capital items.	
 
 	•	 	The number of employees decreased by 1,200, or 4.3%, to 26,900 at June 30, 2010 from 28,100 at December 31, 2009, as we align the size of our workforce with our membership. We expect continued workforce attrition during the remainder of 2010.	
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued new guidance that expands and clarifies existing disclosures about fair value measurements. Under the new guidance, we are required to disclose additional information about movements of assets among the three-tier fair value hierarchy, present separately (that is, on a gross basis) information about purchases, sales, issuances, and settlements of financial instruments in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), and expand disclosures regarding the determination of fair value measurements. We adopted the new disclosure provisions for the quarter ended March 31, 2010, except for the gross disclosures regarding purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which will be effective for us beginning with the filing of our Form 10-Q for the three months ended March 31, 2011.
We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes.
 
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Comparison of Results of Operations for 2010 and 2009
The following discussion primarily deals with our results of operations for the three months ended June 30, 2010, or the 2010 quarter, the three months ended June 30, 2009, or the 2009 quarter, the six months ended June 30, 2010, or the 2010 period, and the six months ended June 30, 2009, or the 2009 period.
The following table presents certain financial data for our two segments:

 	  	For the three months ended June 30,	 	 	Change	 	
 	  	2010	 	 	2009	 	 	Dollars	 	 	Percentage	 	
 	  	(in thousands, except ratios)	 	
Premium revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Medicare Advantage	  	$	4,885,209	  	 	$	4,145,129	  	 	$	740,080	  	 	17.9	% 	
Medicare stand-alone PDP	  	 	700,222	  	 	 	638,813	  	 	 	61,409	  	 	9.6	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Medicare	  	 	5,585,431	  	 	 	4,783,942	  	 	 	801,489	  	 	16.8	% 	
Military services	  	 	885,368	  	 	 	924,308	  	 	 	(38,940	) 	 	(4.2	)% 	
Medicaid	  	 	168,055	  	 	 	160,529	  	 	 	7,526	  	 	4.7	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Government	  	 	6,638,854	  	 	 	5,868,779	  	 	 	770,075	  	 	13.1	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fully-insured	  	 	1,484,020	  	 	 	1,544,093	  	 	 	(60,073	) 	 	(3.9	)% 	
Specialty	  	 	253,877	  	 	 	229,655	  	 	 	24,222	  	 	10.5	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Commercial	  	 	1,737,897	  	 	 	1,773,748	  	 	 	(35,851	) 	 	(2.0	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	8,376,751	  	 	$	7,642,527	  	 	$	734,224	  	 	9.6	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Administrative services fees:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	27,251	  	 	$	23,155	  	 	$	4,096	  	 	17.7	% 	
Commercial	  	 	99,493	  	 	 	95,539	  	 	 	3,954	  	 	4.1	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	126,744	  	 	$	118,694	  	 	$	8,050	  	 	6.8	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	528,369	  	 	$	404,675	  	 	$	123,694	  	 	30.6	% 	
Commercial	  	 	7,485	  	 	 	35,275	  	 	 	(27,790	) 	 	(78.8	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	535,854	  	 	$	439,950	  	 	$	95,904	  	 	21.8	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit ratios(a):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	84.1	% 	 	 	84.1	% 	 	 	 	 	 	0.0	% 	
Commercial	  	 	73.4	% 	 	 	80.8	% 	 	 	 	 	 	(7.4	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	81.9	% 	 	 	83.3	% 	 	 	 	 	 	(1.4	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SG&A expense ratios(b):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	8.2	% 	 	 	9.3	% 	 	 	 	 	 	(1.1	)% 	
Commercial	  	 	32.2	% 	 	 	23.5	% 	 	 	 	 	 	8.7	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	13.6	% 	 	 	12.8	% 	 	 	 	 	 	0.8	% 	

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 	  	For the six months ended June 30,	 	 	Change	 	
 	  	2010	 	 	2009	 	 	Dollars	 	 	Percentage	 	
 	  	(in thousands, except ratios)	 	 	 	 	
Premium revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Medicare Advantage	  	$	9,702,189	  	 	$	8,205,588	  	 	$	1,496,601	  	 	18.2	% 	
Medicare stand-alone PDP	  	 	1,279,247	  	 	 	1,234,496	  	 	 	44,751	  	 	3.6	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Medicare	  	 	10,981,436	  	 	 	9,440,084	  	 	 	1,541,352	  	 	16.3	% 	
Military services	  	 	1,730,362	  	 	 	1,795,479	  	 	 	(65,117	) 	 	(3.6	)% 	
Medicaid	  	 	332,758	  	 	 	317,189	  	 	 	15,569	  	 	4.9	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Government	  	 	13,044,556	  	 	 	11,552,752	  	 	 	1,491,804	  	 	12.9	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fully-insured	  	 	2,990,838	  	 	 	3,102,762	  	 	 	(111,924	) 	 	(3.6	)% 	
Specialty	  	 	503,220	  	 	 	458,307	  	 	 	44,913	  	 	9.8	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Commercial	  	 	3,494,058	  	 	 	3,561,069	  	 	 	(67,011	) 	 	(1.9	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	16,538,614	  	 	$	15,113,821	  	 	$	1,424,793	  	 	9.4	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Administrative services fees:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	54,779	  	 	$	43,488	  	 	$	11,291	  	 	26.0	% 	
Commercial	  	 	197,847	  	 	 	191,088	  	 	 	6,759	  	 	3.5	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	252,626	  	 	$	234,576	  	 	$	18,050	  	 	7.7	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	807,542	  	 	$	570,776	  	 	$	236,766	  	 	41.5	% 	
Commercial	  	 	145,238	  	 	 	162,936	  	 	 	(17,698	) 	 	(10.9	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	952,780	  	 	$	733,712	  	 	$	219,068	  	 	29.9	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit ratios(a):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	85.0	% 	 	 	85.4	% 	 	 	 	 	 	(0.4	)% 	
Commercial	  	 	73.7	% 	 	 	77.7	% 	 	 	 	 	 	(4.0	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	82.6	% 	 	 	83.6	% 	 	 	 	 	 	(1.0	)% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SG&A expense ratios(b):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	9.2	% 	 	 	9.9	% 	 	 	 	 	 	(0.7	)% 	
Commercial	  	 	28.5	% 	 	 	23.8	% 	 	 	 	 	 	4.7	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	13.5	% 	 	 	13.4	% 	 	 	 	 	 	0.1	% 	

(a)	Represents total benefit expenses as a percentage of premium revenues. Also known as the benefit ratio.	
(b)	Represents total selling, general, and administrative expenses (SG&A) as a percentage of premium revenues, administrative services fees, and other revenues. Also known as the SG&A expense ratio.	
 
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Ending medical membership was as follows at June 30, 2010 and 2009:

 	  	June 30,	  	Change	 	
 	  	2010	  	2009	  	Members	 	 	Percentage	 	
Medical Membership:	  	 	  	 	  	 	 	 	 	 	
Government segment:	  	 	  	 	  	 	 	 	 	 	
Medicare Advantage	  	1,732,400	  	1,499,800	  	232,600	  	 	15.5	% 	
Medicare Advantage ASO	  	28,700	  	0	  	28,700	  	 	100.0	% 	
 	  	 	  	 	  	 	 	 	 	 	
Total Medicare Advantage	  	1,761,100	  	1,499,800	  	261,300	  	 	17.4	% 	
 	  	 	  	 	  	 	 	 	 	 	
Medicare stand-alone PDP	  	1,793,400	  	1,992,000	  	(198,600	) 	 	(10.0	)% 	
 	  	 	  	 	  	 	 	 	 	 	
Total Medicare	  	3,554,500	  	3,491,800	  	62,700	  	 	1.8	% 	
 	  	 	  	 	  	 	 	 	 	 	
Military services	  	1,759,800	  	1,753,400	  	6,400	  	 	0.4	% 	
Military services ASO	  	1,270,900	  	1,254,900	  	16,000	  	 	1.3	% 	
 	  	 	  	 	  	 	 	 	 	 	
Total military services	  	3,030,700	  	3,008,300	  	22,400	  	 	0.7	% 	
 	  	 	  	 	  	 	 	 	 	 	
Medicaid	  	404,000	  	393,600	  	10,400	  	 	2.6	% 	
 	  	 	  	 	  	 	 	 	 	 	
Total Government	  	6,989,200	  	6,893,700	  	95,500	  	 	1.4	% 	

Commercial segment:	  	 	  	 	  	 	 	 	 	 	
Fully-insured	  	1,702,500	  	1,871,700	  	(169,200	) 	 	(9.0	)% 	
ASO	  	1,582,600	  	1,576,200	  	6,400	  	 	0.4	% 	
 	  	 	  	 	  	 	 	 	 	 	
Total Commercial	  	3,285,100	  	3,447,900	  	(162,800	) 	 	(4.7	)% 	
 	  	 	  	 	  	 	 	 	 	 	
Total medical membership	  	10,274,300	  	10,341,600	  	(67,300	) 	 	(0.7	)% 	

Specialty Membership:	  	 	  	 	  	 	 	 	 	 	
Commercial segment(a)	  	7,297,000	  	6,585,800	  	711,200	  	 	10.8	% 	

(a)	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.	
These tables of financial data should be reviewed in connection with the discussion that follows.
Summary
Net income was $340.1 million, or $2.00 per diluted common share, in the 2010 quarter compared to $281.8 million, or $1.67 per diluted common share, in the 2009 quarter. Net income was $598.8 million, or $3.52 per diluted common share, in the 2010 period compared to $487.5 million, or $2.89 per diluted common share, in the 2009 period. The increase primarily was due to improved operating performance in the Government segment as a result of an increase in average Medicare Advantage membership as well as prior year favorable reserve releases not in the ordinary course of business in the first half of 2010 in both our Government and Commercial segments, partially offset by a $147.5 million ($0.55 per diluted common share) write-down of deferred acquisition costs associated with our individual major medical policies in our Commercial Segment in the 2010 quarter as discussed in Note 7 to the condensed consolidated financial statements. The prior year favorable reserve development (approximately $0.14 per diluted common share in the 2010 quarter and $0.51 per diluted common share in the 2010 period) primarily resulted from improvements in the claims processing environment and to a lesser extent, better than originally estimated utilization. The 2010 quarter also included first quarter 2010 favorable reserve releases not in the ordinary course of business in both our Government and Commercial segments ($0.30 per diluted common share) primarily as a result of better than originally estimated utilization. Net income for the 2009 period also included the favorable impact of the reduction of the liability for unrecognized tax benefits ($0.10 per diluted common share) as a result of audit settlements.
Premium Revenues and Medical Membership
Premium revenues increased $734.2 million, or 9.6%, to $8.4 billion for the 2010 quarter, compared to $7.6 billion for the 2009 quarter. For the 2010 period, premium revenues were $16.5 billion, an increase of $1.4 billion, or 9.4%, compared to $15.1 billion for the 2009 period. These increases primarily were due to higher premium revenues in the Government segment. Premium revenues reflect changes in membership and increases in average per member premiums. Items impacting average per member premiums include changes in premium rates as well as
 
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changes in the geographic mix of membership, the mix of product offerings, and the mix of benefit plans selected by our membership.
Government segment premium revenues increased $770.1 million, or 13.1%, to $6.6 billion for the 2010 quarter compared to $5.9 billion for the 2009 quarter. For the 2010 period, Government segment premium revenues were $13.0 billion, an increase of $1.4 billion, or 12.9%, compared to $11.6 billion for the 2009 period. The increase primarily was attributable to higher average Medicare Advantage membership and an increase in per member premiums. Average membership is calculated by summing the ending membership for each month in a period and dividing the result by the number of months in a period. Average fully-insured Medicare Advantage membership increased 15.9% for the 2010 quarter and 16.5% for the 2010 period compared to the 2009 quarter and period, respectively. Of the 232,600 increase in fully-insured Medicare Advantage members since June 30, 2009, approximately 108,000 members were associated with a new group Medicare Advantage contract added during the first quarter of 2010, with sales of our PPO products driving the majority of the increase in individual Medicare Advantage membership. Total fully-insured group Medicare Advantage membership was 269,500 at June 30, 2010, an increase of 171,400 members from 98,100 at June 30, 2009. Medicare Advantage per member premiums increased approximately 1.7% during the 2010 quarter and 1.5% during the 2010 period compared to the 2009 quarter and period, respectively. Medicare stand-alone PDP premium revenues increased $61.4 million, or 9.6%, during the 2010 quarter compared to the 2009 quarter and $44.8 million, or 3.6%, during the 2010 period compared to the 2009 period. These increases primarily were due to increases in Medicare stand-alone PDP per member premiums of 17.4% during the 2010 quarter and 14.8% during the 2010 period compared to the 2009 quarter and period, respectively, partially offset by declines in average PDP membership of 6.7% for the 2010 quarter and 9.7% for the 2010 period compared to the 2009 quarter and period, respectively. The decline in stand-alone PDP membership principally resulted from our competitive positioning as we realigned stand-alone PDP premium and benefit designs to correspond with our historical prescription drug claims experience.
Commercial segment premium revenues decreased $35.9 million, or 2.0%, to $1.7 billion for the 2010 quarter. For the 2010 period, Commercial segment premium revenues decreased $67.0 million, or 1.9% to $3.5 billion compared to $3.6 billion for the 2009 period. The decreases primarily were due to a decline in fully-insured membership, partially offset by an increase in per member premiums. Fully-insured membership decreased 9.0%, or 169,200 members, to 1,702,500 at June 30, 2010 compared to 1,871,700 at June 30, 2009 primarily due to the impact of the highly competitive environment and economic conditions including high levels of unemployment which have led to small groups dropping coverage and increased in-group member attrition as employers reduce their workforce levels. Per member premiums for fully-insured group accounts increased 8.0% during the 2010 quarter and 7.7% during the 2010 period compared to the 2009 quarter and period, respectively.
Administrative Services Fees
Our administrative services fees were $126.7 million for the 2010 quarter, an increase of $8.0 million, or 6.7%, from $118.7 million for the 2009 quarter. For the 2010 period, administrative services fees were $252.6 million, an increase of $18.0 million, or 7.7%, from $234.6 million for the 2009 period. The increases primarily were due to an increase in membership. Our ASO membership declined by approximately 114,000 members on July 1, 2010 due to the loss of a large group account.
Investment Income
Investment income totaled $79.8 million for the 2010 quarter, an increase of $4.5 million from $75.3 million for the 2009 quarter. For the 2010 period, investment income totaled $165.2 million, an increase of $20.3 million from the $144.9 million for the 2009 period. These increases primarily are reflecting higher average invested balances as a result of the reinvestment of operating cash flows, partially offset by lower interest rates.
Other Revenue
Other revenue totaled $69.4 million for the 2010 quarter, an increase of $7.1 million from $62.3 million for the 2009 quarter. Other revenue totaled $136.8 million for the 2010 period, an increase of $19.5 million from $117.3 million for the 2009 period. The increases primarily were attributable to increased revenue from growth related to  Right SourceRx SM , our mail-order pharmacy.
 
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Benefit Expense
Consolidated benefit expense was $6.9 billion for the 2010 quarter, an increase of $492.0 million, or 7.7%, from $6.4 billion for the 2009 quarter. For the 2010 period, consolidated benefit expense was $13.7 billion, an increase of $1.1 billion, or 8.2%, from $12.6 billion for the 2009 period. The increases primarily were driven by an increase in the average number of Medicare Advantage members, as described below.
The consolidated benefit ratio for the 2010 quarter was 81.9%, a 140 basis points decrease from 83.3% for the 2009 quarter. For the 2010 period, the consolidated benefit ratio was 82.6%, a 100 basis point decrease from 83.6% for the 2009 period. The decreases primarily were attributable to a decline in the Commercial segment benefit ratio, as described below.
The Government segment’s benefit expenses increased $650.2 million, or 13.2%, in the 2010 quarter compared to the 2009 quarter. For the 2010 period, the Government segment’s benefit expenses increased $1.2 billion, or 12.4%, from the 2009 period. The increases primarily were due to an increase in the average number of Medicare Advantage members. The Government segment’s benefit ratio for the 2010 quarter was 84.1%, equivalent to the benefit ratio for the 2009 quarter. For the 2010 period, the Government segment’s benefit ratio was 85.0%, a 40 basis point decrease from the 2009 period of 85.4%, primarily driven by a 40 basis point decline in the Medicare benefit ratio. The decline in the Medicare benefit ratio primarily resulted from prior year favorable reserve releases not in the ordinary course of business of an estimated $24.8 million in the 2010 quarter and $110.7 million in the 2010 period, as well as first quarter 2010 reserve releases not in the ordinary course of business of an estimated $52.4 million in the 2010 quarter. These favorable reserve releases decreased the Government segment benefit ratio by approximately 120 basis points in the 2010 quarter and 90 basis points in the 2010 period. Excluding the impact of these favorable reserve releases, the increase in the benefit ratio resulted from growth in our Medicare Advantage group business which generally carries a higher benefit ratio than our individual Medicare Advantage business.
The Commercial segment’s benefit expenses decreased $158.2 million, or 11.0%, during the 2010 quarter compared to the 2009 quarter. For the 2010 period, the Commercial segment’s benefit expenses decreased $191.8 million, or 6.9%, from the 2009 period. The decreases primarily were due to a decline in fully-insured membership and prior year favorable reserve releases not in the ordinary course of business of an estimated $12.7 million in the 2010 quarter and $26.8 million in the 2010 period, as well as first quarter 2010 reserve releases not in the ordinary course of business of an estimated $27.1 million in the 2010 quarter. Fully-insured membership decreased 9.0%, or 169,200 members, to 1,702,500 at June 30, 2010 compared to 1,871,700 at June 30, 2009 primarily due to continued pricing discipline as well as the impact of the highly competitive environment and economic conditions including high levels of unemployment which have led to small groups dropping coverage and increased in-group member attrition as employers reduce their workforce levels. The benefit ratio for the Commercial segment of 73.4% for the 2010 quarter decreased 740 basis points from the 2009 quarter benefit ratio of 80.8%. For the 2010 period, the Commercial segment’s benefit ratio of 73.7% decreased 400 basis points from the 2009 period’s benefit ratio of 77.7%. The decreases primarily were due to lower utilization year-over-year, prior period favorable reserve releases not in the ordinary course of business in the first half of 2010, and continued pricing discipline. Utilization trend levels were higher in the prior periods primarily from the effects of the economy including, for example, members utilizing more benefits ahead of actual or perceived layoffs, as well as the impact of the H1N1 virus. The favorable reserve releases decreased the Commercial segment benefit ratio by approximately 220 basis points in the 2010 quarter and 80 basis points in the 2010 period.
SG&A Expense
Consolidated SG&A expenses increased $157.4 million, or 15.7%, during the 2010 quarter compared to the 2009 quarter. For the 2010 period, consolidated SG&A expenses increased $220.7 million, or 10.7%, from the 2009 period. The increases primarily were due to the $147.5 million write-down of deferred acquisition costs associated with our individual major medical policies in the 2010 quarter, as well as administrative costs associated with servicing higher average Medicare Advantage membership, partially offset by a decrease in the number of employees as a result of our administrative cost reduction strategies including planned workforce reductions in 2010. The number of employees decreased by 1,700 to 26,900 at June 30, 2010 from 28,600 at June 30, 2009, or 5.9%, and decreased by 1,200, or 4.3%, from 28,100 at December 31, 2009, as we align the size of our workforce with our membership. We expect continued workforce attrition during the remainder of 2010.
The consolidated SG&A expense ratio for the 2010 quarter was 13.6%, increasing 80 basis points from 12.8% for the 2009 quarter. For the 2010 period, the consolidated SG&A expense ratio was 13.5% compared to 13.4% for
 
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the 2009 period. The increases primarily were due to an increase in the Commercial segment SG&A expense ratio, as described below.
Our Government and Commercial segments incur both direct and shared indirect overhead SG&A expenses. We allocate the indirect overhead expenses shared by the two segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.
SG&A expenses in the Government segment decreased $1.9 million, or 0.3%, during the 2010 quarter compared to the 2009 quarter. For the 2010 period, the SG&A expenses of $1,198.9 million increased $50.8 million, or 4.4%, from the 2009 period. The increase primarily was due to administrative costs associated with servicing higher average Medicare Advantage membership. The Government segment SG&A expense ratio decreased 110 basis points from 9.3% for the 2009 quarter to 8.2% for the 2010 quarter. For the 2010 period, the Government segment SG&A expense ratio of 9.2% decreased 70 basis points from 9.9% for the 2009 period. The decreases primarily resulted from efficiency gains associated with servicing higher average Medicare Advantage membership as well as our continued focus on administrative cost reductions.
The Commercial segment SG&A expenses increased $159.3 million, or 35.1%, during the 2010 quarter compared to the 2009 quarter. Commercial segment SG&A expenses increased $169.9 million, or 18.5%, during the 2010 period compared to the 2009 period. The Commercial segment SG&A expense ratio increased 870 basis points from 23.5% for the 2009 quarter to 32.2% for the 2010 quarter. For the 2010 period, the Commercial segment SG&A expense ratio of 28.5% increased 470 basis points from 23.8% for the 2009 period. The increases primarily were due to a $147.5 million write-down of deferred acquisition costs associated with our individual major medical policies in the 2010 quarter, as well as administrative costs associated with increased specialty and mail-order pharmacy business, partially offset by our continued focus on administrative cost reductions. The $147.5 million write-down of deferred acquisition costs increased the SG&A expense ratio 780 basis points in the 2010 quarter and 390 basis points in the 2010 period.
Depreciation and Amortization
Depreciation and amortization for the 2010 quarter totaled $69.3 million compared to $60.5 million for the 2009 quarter, an increase of $8.8 million, or 14.5%. Depreciation and amortization for the 2010 period totaled $132.0 million compared to $118.5 million for the 2009 period. The increases primarily reflect depreciation expense associated with capital expenditures.
Interest Expense
Interest expense was $26.2 million for the 2010 quarter, compared to $26.6 million for the 2009 quarter, a decrease of $0.4 million, or 1.5%. Interest expense was $52.5 million for the 2010 period compared to $53.3 million for the 2009 period, a decrease of $0.8 million, or 1.5%. The decreases primarily were due to lower average outstanding debt, partially offset by higher interest rates.
Income Taxes
Our effective tax rate during the 2010 quarter of 36.5% compared to the effective tax rate of 36.0% in the 2009 quarter. The effective tax rate for the 2010 period of 37.1% was higher than the 2009 period of 33.6%. The increase from the 2009 period to the 2010 period primarily was due to the reduction of the $16.8 million liability for unrecognized tax benefits as a result of audit settlements which reduced the effective income tax rate by 2.3% during the 2009 period. In addition, the tax rates for the 2010 quarter and period reflect the estimated impact of new limitations on the deductibility of annual employee compensation in excess of $500,000 as mandated by recent health insurance reforms.
 
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Membership
The following table presents our medical and specialty membership at June 30, 2010, March 31, 2010, and at the end of each quarter in 2009:

 	  	2010	  	2009	
 	  	June 30	  	March 31	  	Dec. 31	  	Sept. 30	  	June 30	  	March 31	
Medical Membership:	  	 	  	 	  	 	  	 	  	 	  	 	
Government segment:	  	 	  	 	  	 	  	 	  	 	  	 	
Medicare Advantage	  	1,732,400	  	1,713,300	  	1,508,500	  	1,514,800	  	1,499,800	  	1,468,900	
Medicare Advantage ASO	  	28,700	  	29,000	  	0	  	0	  	0	  	0	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Total Medicare Advantage	  	1,761,100	  	1,742,300	  	1,508,500	  	1,514,800	  	1,499,800	  	1,468,900	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Medicare stand-alone PDP	  	1,793,400	  	1,917,100	  	1,927,900	  	1,960,400	  	1,992,000	  	2,078,900	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Total Medicare	  	3,554,500	  	3,659,400	  	3,436,400	  	3,475,200	  	3,491,800	  	3,547,800	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Military services	  	1,759,800	  	1,756,800	  	1,756,000	  	1,754,300	  	1,753,400	  	1,746,600	
Military services ASO	  	1,270,900	  	1,274,600	  	1,278,400	  	1,260,800	  	1,254,900	  	1,244,000	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Total military services	  	3,030,700	  	3,031,400	  	3,034,400	  	3,015,100	  	3,008,300	  	2,990,600	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Medicaid	  	404,000	  	398,600	  	401,700	  	399,800	  	393,600	  	385,200	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Total Government	  	6,989,200	  	7,089,400	  	6,872,500	  	6,890,100	  	6,893,700	  	6,923,600	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Commercial segment:	  	 	  	 	  	 	  	 	  	 	  	 	
Fully-insured	  	1,702,500	  	1,743,000	  	1,839,500	  	1,860,700	  	1,871,700	  	1,893,700	
ASO	  	1,582,600	  	1,588,500	  	1,571,300	  	1,566,200	  	1,576,200	  	1,577,800	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Total Commercial	  	3,285,100	  	3,331,500	  	3,410,800	  	3,426,900	  	3,447,900	  	3,471,500	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Total medical members	  	10,274,300	  	10,420,900	  	10,283,300	  	10,317,000	  	10,341,600	  	10,395,100	
 	  	 	  	 	  	 	  	 	  	 	  	 	
Specialty Membership:	  	 	  	 	  	 	  	 	  	 	  	 	
Commercial segment(a)	  	7,297,000	  	7,237,900	  	7,109,900	  	7,073,700	  	6,585,800	  	6,535,100	

(a)	The Commercial segment provides a full range of insured specialty products including dental, vision, and other supplemental products. Members could be counted more than once since members have the ability to choose multiple products.	
Liquidity
Our primary sources of cash include receipts of premiums, ASO fees, and investment income, as well as proceeds from the sale or maturity of our investment securities and from borrowings. Our primary uses of cash include disbursements for claims payments, SG&A expenses, interest on borrowings, taxes, purchases of investment securities, capital expenditures, acquisitions, repayments on borrowings, and share repurchases. Because premiums generally are collected in advance of claim payments by a period of up to several months, our business normally should produce positive cash flows during periods of increasing premiums and enrollment. Conversely, cash flows would be negatively impacted during periods of decreasing premiums and enrollment. The use of operating cash flows may be limited by regulatory requirements which require, among other items, that our regulated subsidiaries maintain minimum levels of capital.
Cash and cash equivalents increased to $1,999.0 million at June 30, 2010 from $1,613.6 million at December 31, 2009. The change in cash and cash equivalents for the six months ended June 30, 2010 and 2009 is summarized as follows:

 	  	2010	 	 	2009	 	
 	  	(in thousands)	 	
Net cash provided by operating activities	  	$	1,079,962	  	 	$	207,380	  	
Net cash used in investing activities	  	 	(672,141	) 	 	 	(445,077	) 	
Net cash used in financing activities	  	 	(22,427	) 	 	 	(147,617	) 	
 	  	 	 	 	 	 	 	 	
Increase (decrease) in cash and cash equivalents	  	$	385,394	  	 	$	(385,314	) 	

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Cash Flow from Operating Activities
The increase in operating cash flows from the 2009 period to the 2010 period primarily results from earnings improvement, enrollment activity, and the timing of working capital items. Cash flows were positively impacted by Medicare enrollment gains in the 2010 period because premiums generally are collected in advance of claim payments by a period of up to several months. Conversely, during the 2009 period, cash flows were negatively impacted by the payment of run-off claims associated with enrollment losses in our stand-alone PDP business.
Comparisons of our operating cash flows also are impacted by other changes in our working capital. The most significant drivers of changes in our working capital are typically the timing of payments of benefit expenses and receipts for premiums and ASO fees. We illustrate these changes with the following summaries of benefits payable and receivables.
The detail of benefits payable was as follows at June 30, 2010 and December 31, 2009:

 	  	June 30,
2010	  	December 31,
2009	  	2010 Period
Change	  	2009 Period
Change	 	
 	  	(in thousands)	 	
IBNR(1)	  	$	2,141,137	  	$	1,902,700	  	$	238,437	  	$	96,574	  	
Military services benefits payable(2)	  	 	301,731	  	 	279,195	  	 	22,536	  	 	36,589	  	
Reported claims in process(3)	  	 	376,340	  	 	357,718	  	 	18,622	  	 	(60,490	) 	
Other benefits payable(4)	  	 	1,010,515	  	 	682,961	  	 	327,554	  	 	132,945	  	
 	  	 	 	  	 	 	  	 	 	  	 	 	 	
Total benefits payable	  	$	3,829,723	  	$	3,222,574	  	$	607,149	  	$	205,618	  	

(1)	IBNR represents an estimate of benefits 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 a lower IBNR).	
(2)	Military services benefits payable primarily results from the timing of the cost of providing health care services to beneficiaries and the payment to the provider. A corresponding receivable for reimbursement by the federal government is included in the base receivable in the receivables table on the following page.	
(3)	Reported claims in process represents 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, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff.	
(4)	Other benefits payable include amounts owed to providers under capitated and risk sharing arrangements.	
The increases in benefits payable from December 31, 2009 to June 30, 2010 and from December 31, 2008 to June 30, 2009 primarily were due to an increase in amounts owed to providers under capitated and risk sharing arrangements as well as an increase in IBNR, both primarily as a result of Medicare Advantage membership growth.
 
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The detail of total net receivables was as follows at June 30, 2010 and December 31, 2009:

 	  	June 30,
2010	 	 	December 31,
2009	 	 	2010 Period
Change	 	 	2009 Period
Change	 	
 	  	(in thousands)	 	
Military services:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base receivable	  	$	468,812	  	 	$	451,248	  	 	$	17,564	  	 	$	86,513	  	
Change orders	  	 	1,851	  	 	 	2,024	  	 	 	(173	) 	 	 	961	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Military services subtotal	  	 	470,663	  	 	 	453,272	  	 	 	17,391	  	 	 	87,474	  	
 	 	 	 	 	
Medicare	  	 	638,100	  	 	 	238,056	  	 	 	400,044	  	 	 	397,881	  	
Commercial and other	  	 	267,500	  	 	 	183,124	  	 	 	84,376	  	 	 	4,840	  	
Allowance for doubtful accounts	  	 	(51,161	) 	 	 	(50,832	) 	 	 	(329	) 	 	 	(2,963	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total net receivables	  	$	1,325,102	  	 	$	823,620	  	 	 	501,482	  	 	 	487,232	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reconciliation to cash flow statement:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Receivables from acquisition	  	 	 	 	 	 	 	 	 	 	0	  	 	 	6,907	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in receivables per cash flow statement	  	 	 	 	 	 	 	 	 	$	501,482	  	 	$	494,139	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Military services base receivables consist of estimated claims owed from the federal government for health care services provided to beneficiaries and underwriting fees. The claim reimbursement component of military services base receivables is generally collected over a three to four month period. The timing of claim reimbursements resulted in the $17.6 million increase in base receivables from December 31, 2009 to June 30, 2010 and the $86.5 million increase in base receivables from December 31, 2008 to June 30, 2009.
Medicare receivables increased $400.0 million from December 31, 2009 to June 30, 2010 compared to an increase of $397.9 million from December 31, 2008 to June 30, 2009. Medicare receivables are impacted by the timing of accruals and related collections associated with the CMS risk-adjustment model, contractually scheduled for mid-year collection. In connection with the July 2010 CMS receipt, we collected $418.6 million associated with the CMS risk-adjustment model. This is consistent with the collection pattern in 2009.
The timing of reimbursements from the Puerto Rico Health Insurance Administration for our Medicaid business resulted in the $84.4 million increase in commercial and other receivables from December 31, 2009 to June 30, 2010 and the $4.8 million increase from December 31, 2008 to June 30, 2009.
In addition to the timing of receipts for premiums and ASO fees and payments of benefit expenses, other working capital items impacting operating cash flows primarily resulted from the timing of payments for the Medicare Part D risk corridor provisions of our contracts with CMS. Payment under the risk corridor provisions is made in the fourth quarter.
Cash Flow from Investing Activities
We reinvested a portion of our operating cash flows in investment securities, primarily fixed income securities, totaling $653.9 million in the 2010 period and $483.8 in the 2009 period. Our ongoing capital expenditures primarily relate to our information technology initiatives and administrative facilities necessary for activities such as claims processing, billing and collections, medical utilization review, and customer service. Total capital expenditures, excluding acquisitions, were $91.4 million in the 2010 period compared to $82.6 million in the 2009 period. Excluding acquisitions, we expect total capital expenditures in 2010 of approximately $200 million.
Cash Flow from Financing Activities
Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were $236.3 million higher than claims payments during the 2010 period and $311.2 million higher than claim payments during the 2009 period.
 
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During the 2010 period, we repurchased approximately 1.03 million shares for $50.0 million under the stock repurchase plan authorized by the Board of Directors in December 2009. During the 2009 period, there were no repurchases of common shares under the stock repurchase plan authorized by the Board of Directors.
Net borrowings under our credit agreement decreased $250.0 million in the 2009 period primarily from the repayment of amounts borrowed to fund a 2008 acquisition.
The remainder of the cash used in or provided by financing activities in the 2010 and 2009 periods primarily resulted from the change in the securities lending payable. The decrease in securities lending since 2008 resulted from lower margins earned under the program.
Future Sources and Uses of Liquidity
Stock Repurchase Authorization
In December 2009, the Board of Directors authorized the repurchase of up to $250 million of our common shares exclusive of shares repurchased in connection with employee stock plans. Under this share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions, subject to certain restrictions on volume, pricing, and timing. During the 2010 period, we repurchased 1.03 million shares in open market transactions for $50.0 million at an average price of $48.76. As of August 1, 2010, the remaining authorized amount totaled $200.0 million and the authorization expires on December 31, 2011.
Senior Notes
We previously issued $500 million of 6.45% senior notes due June 1, 2016, $500 million of 7.20% senior notes due June 15, 2018, $300 million of 6.30% senior notes due August 1, 2018, and $250 million of 8.15% senior notes due June 15, 2038. The 7.20% and 8.15% senior notes are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded (or subsequently upgraded) and contain a change of control provision that may require us to purchase the notes under certain circumstances. All four series of our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. Concurrent with the senior notes issuances, we entered into interest-rate swap agreements to exchange the fixed interest rate under these senior notes for a variable interest rate based on LIBOR. During 2008, we terminated all of our swap agreements. We may re-enter into interest rate swap agreements in the future depending on market conditions and other factors.
Credit Agreement
Our 5-year, $1.0 billion unsecured revolving credit agreement expires in July 2011. Under the credit agreement, at our option, we can borrow on either a revolving credit basis or a competitive advance basis. The revolving credit portion bears interest at either a fixed rate or floating rate based on LIBOR plus a spread. The spread, currently 50 basis points, varies depending on our credit ratings ranging from 27 to 80 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 12.5 basis points, may fluctuate between 8 and 20 basis points, depending upon our credit ratings. In addition, a utilization fee of 10 basis points is payable for each day in which borrowings under the facility exceed 50% of the total $1.0 billion commitment. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate based on LIBOR, at our option.
The terms of the credit agreement include standard provisions related to conditions of borrowing, including a customary material adverse event clause which could limit our ability to borrow additional funds. In addition, the credit agreement contains customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of a minimum level of net worth of $3,687.4 million at June 30, 2010 and a maximum leverage ratio of 3.0:1. We are in compliance with the financial covenants, with actual net worth of $6,478.8 million and a leverage ratio of 0.7:1, as measured in accordance with the credit agreement as of June 30, 2010.
 
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At June 30, 2010, we had no borrowings outstanding under the credit agreement. We have outstanding letters of credit of $3.5 million secured under the credit agreement. No amounts have ever been drawn on these letters of credit. Accordingly, as of June 30, 2010, we had $996.5 million of remaining borrowing capacity under the credit agreement, none of which would be restricted by our financial covenant compliance requirement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.
Other Long-Term Borrowings
Other long-term borrowings of $37.3 million at June 30, 2010 represent junior subordinated debt assumed in an acquisition of $36.1 million and financing for the renovation of a building of $1.2 million. The junior subordinated debt, which is due in 2037, may be called by us in 2012 and bears a fixed annual interest rate of 8.02% payable quarterly until 2012, and then payable at a floating rate based on LIBOR plus 310 basis points. The debt associated with the building renovation bears interest at 2.00%, is collateralized by the building, and is payable in various installments through 2014.
Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt and repurchase shares.
Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating at June 30, 2010 was BBB- according to Standard & Poor’s Rating Services, or S&P, and Baa3 according to Moody’s Investors Services, Inc., or Moody’s. A downgrade by S&P to BB+ or by Moody’s to Ba1 triggers an interest rate increase of 25 basis points with respect to $750 million of our senior notes. Successive one notch downgrades increase the interest rate an additional 25 basis points, or annual interest expense by $1.9 million, up to a maximum 100 basis points, or annual interest expense by $7.5 million.
In addition, we operate as a holding company in a highly regulated industry. The parent company is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. Cash, cash equivalents and short-term investments at the parent company increased $335.9 million to $1,001.5 million at June 30, 2010 compared to $665.6 million at December 31, 2009. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries.
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required.
Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly at the state level. Based on the most recently filed statutory financial statements as of March 31, 2010, we maintained aggregate statutory capital and surplus of $4.0 billion in our state regulated subsidiaries, $1.6 billion above the aggregate $2.4 billion in applicable statutory requirements which would trigger any regulatory action by the respective states.
 
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
Our earnings and financial position are exposed to financial market risk, including those resulting from changes in interest rates.
The level of our pretax earnings is subject to market risk due to changes in interest rates and the resulting impact on investment income and interest expense. Until October 7, 2008, we exchanged the fixed interest rate under all of our senior notes for a variable interest rate based on LIBOR using interest rate swap agreements. As a result, changes in interest rates generally resulted in an increase or decrease to investment income partially offset by a corresponding decrease or increase to interest expense, partially hedging our exposure to interest rate risk. However, due to extreme volatility in the securities and credit markets, LIBOR increased while the interest rate we would earn on invested assets like cash and cash equivalents decreased. As a result, we terminated all of our interest rate swap agreements, fixing the average interest rate under our senior notes at 6.08%. In exchange for terminating our rights under the interest rate swap agreements, we received $93.0 million in cash from the counterparties representing the fair value of the swap assets. We may re-enter into interest rate swap agreements in the future depending on market conditions and other factors. Amounts borrowed under the revolving credit portion of our $1.0 billion unsecured revolving credit agreement bear interest at either a fixed rate or floating rate based on LIBOR plus a spread. There were no borrowings outstanding under our credit agreement at June 30, 2010.
Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality with an average S&P credit rating of AA at June 30, 2010. Our net unrealized position improved $183.3 million from a net unrealized gain position of $71.4 million at December 31, 2009 to a net unrealized gain position of $254.7 million at June 30, 2010. As of June 30, 2010, we had gross unrealized losses of $36.0 million on our investment portfolio primarily due to an increase in market interest rates and tighter liquidity conditions in the current markets than when the securities were purchased, and as such, there were no material other-than-temporary impairments during the six months ended June 30, 2010. While we believe that these impairments are temporary and we currently do not have the intent to sell such securities, given the current market conditions and the significant judgments involved, there is a continuing risk that future declines in fair value may occur and material realized losses from sales or other-than-temporary impairments may be recorded in future periods.
Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is indicative of the relationship between changes in fair value and changes in interest rates, providing a general indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates. However, actual fair values may differ significantly from estimates based on duration. The average duration of our investment portfolio, including cash and cash equivalents, was approximately 3.4 years as of June 30, 2010. Based on the duration including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately $344 million.
Item 4. Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer, or CEO, our Chief Financial Officer, or CFO, and our Principal Accounting Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the quarter ended June 30, 2010.
Based on our evaluation, our CEO, CFO, and Principal Accounting Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in its reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including, without limitation, ensuring that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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Part II. Other Information
Item 1. Legal Proceedings
For a description of the legal proceedings pending against us, see “Legal Proceedings” in Note 12 to the condensed consolidated financial statements beginning on page 17 of this Form 10-Q.
Item 1A. Risk Factors
Except as set forth below, there have been no changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC on February 19, 2010, as modified by the changes to those risk factors included in other reports we filed with the SEC subsequent to February 19, 2010:
 
 	•	 	Recently enacted health insurance reform, including The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010, could have a material adverse effect on our results of operations, including restricting revenue, enrollment and premium growth in certain products and market segments, increasing our medical and administrative costs by, among other things, requiring a minimum benefit ratio, lowering our Medicare payment rates and increasing our expenses associated with a non-deductible federal premium tax; financial position, including our ability to maintain the value of our goodwill; and cash flows. In addition, if the new non-deductible federal premium tax is imposed as enacted, and if we are unable to adjust our business model to address this new tax, there can be no assurance that the non-deductible federal premium tax would not have a material adverse effect on our results of operations, financial position, and cash flows.	
In March 2010, the President signed into law The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Insurance Reform Legislation) which enact significant reforms to various aspects of the U.S. health insurance industry. Due to its complexity and the lack of comprehensive interpretive guidance or implementing regulations by The Department of Health and Human Services (HHS), the Department of Labor, the Treasury Department, and the National Association of Insurance Commissioners, the full impact of the Health Insurance Reform Legislation is not yet fully known.
The provisions of the Health Insurance Reform Legislation include, among others, imposing significant new non-deductible federal premium taxes and other assessments on health insurers, limiting Medicare Advantage payment rates, stipulating a prescribed minimum ratio for the amount of premium revenues to be expended on medical costs, additional mandated benefits and guarantee issuance associated with Commercial medical insurance, requirements that limit the ability of health plans to vary premiums based on assessments of underlying risk, heightened scrutiny by state and federal regulators of our business practices, including our Medicare bid and pricing practices, and additional regulations governing premium rate increase requests. Implementation dates of the provisions of the Health Insurance Reform Legislation generally vary from as early as six months from the date of enactment, or September 23, 2010, to as late as 2018.
There are numerous steps required to implement the Health Insurance Reform Legislation including, for example, additional regulations to be promulgated by HHS to address important aspects of measuring and applying the minimum required benefit ratios. Further, various health insurance reform proposals are also emerging at the state level. Because of the unsettled nature of these reforms and numerous steps required to implement them, we cannot predict what additional health insurance reforms will be implemented at the federal or state level, or the effect that any future legislation or regulation will have on our business. However, it is reasonably possible that the Health Insurance Reform Legislation and related regulations, as well as future legislative changes, in the aggregate could have a material adverse affect on our results of operations, including restricting revenue, enrollment and premium growth in certain products and market segments, increasing our medical and administrative costs, lowering our Medicare payment rates and increasing our expenses associated with the non-deductible federal premium tax; financial position, including our ability to maintain the value of our goodwill; and cash flows. If we fail to effectively implement our operational and strategic initiatives with respect to the implementation of the Health Insurance Reform Legislation, our business may be materially adversely affected. In addition, if the new non-deductible federal premium tax is imposed as enacted, and if we are unable to adjust our business model to address this new tax, there can be no assurance that the non-deductible federal premium tax
 
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would not have a material adverse effect on our results of operations, financial position, and cash flows. For more information on the Health Insurance Reform Legislation, please refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this Form 10-Q.
This list of important factors is not intended to be exhaustive, and should be read in conjunction with the more detailed description of these risks that may be found in our reports filed with the SEC from time to time, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
 
 	(a)	None.	
 
 	(b)	N/A	
 
 	(c)	The following table provides information about purchases by us during the three months ended June 30, 2010 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:	

Period	  	Total Number
of Shares
Purchased(1)	  	Average
Price Paid
per Share	  	Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)(2)	  	Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(1)	
April 2010	  	—  	  	$	—  	  	—  	  	$	—  	
May 2010	  	—  	  	 	—  	  	—  	  	 	—  	
June 2010	  	1,025,000	  	 	48.7589	  	1,025,000	  	 	200,052,918	
 	  	 	  	 	 	  	 	  	 	 	
Total	  	1,025,000	  	$	48.7589	  	1,025,000	  	$	200,052,918	

 	(1)	As announced on December 11, 2009, in December 2009, the Board of Directors authorized the repurchase of up to $250 million of our common stock shares exclusive of shares repurchased in connection with employee stock plans. Under this share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions, subject to certain restrictions on volume, pricing, and timing. As of August 1, 2010 the remaining authorized amount totaled $200.0 million and the authorization expires on December 31, 2011.	
 	(2)	Excludes 168,357 shares repurchased in connection with employee stock plans.	
Item 3: Defaults Upon Senior Securities
None.
Item 4: Removed and Reserved
None.
Item 5: Other Information
None.
 
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Item 6: Exhibits

3(i)	 	Restated Certificate of Incorporation of Humana Inc. filed with the Secretary of State of Delaware on November 9, 1989, as restated to incorporate the amendment of January 9, 1992, and the correction of March 23, 1992 (incorporated herein by reference to Exhibit 4(i) to Humana Inc.’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Reg. No. 33-49305) filed February 2, 1994).	
 	 	
3(ii)	 	By-Laws of Humana Inc., as amended on January 4, 2007 (incorporated herein by reference to Exhibit 3 to Humana Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006).	
 	 	
12	 	Computation of ratio of earnings to fixed charges.	
 	 	
31.1	 	Principal Executive Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.	
 	 	
31.2	 	Principal Financial Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.	
 	 	
32	 	Principal Executive Officer and Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	
101.INS**	 	XBRL Instance Document	
 	 	
101.SCH**	 	XBRL Taxonomy Extension Schema Document	
 	 	
101.CAL**	 	XBRL Taxonomy Calculation Linkbase Document	
 	 	
101.DEF**	 	XBRL Taxonomy Definition Linkbase Document	
 	 	
101.LAB**	 	XBRL Taxonomy Label Linkbase Document	
 	 	
101.PRE**	 	XBRL Taxonomy Presentation Linkbase Document	
 
**	Submitted electronically with this report.	
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009; (ii) the Condensed Consolidated Statements of Income for the three months ended June 30, 2010 and June 30, 2009, respectively, and for the six months ended June 30, 2010 and June 30, 2009, respectively; (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and June 30, 2009, respectively; and (iv) Notes to Condensed Consolidated Financial Statements. Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	 	 	HUMANA INC.	
 	 	 	 	(Registrant)	
 	 	 	 	
Date:	 	August 2, 2010	 	By:	 	/S/    JAMES H. BLOEM        	
 	 	 	 	 	 	James H. Bloem
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)	
 	 	 	 	
Date:	 	August 2, 2010	 	By:	 	/S/    STEVEN E. MCCULLEY        	
 	 	 	 	 	 	Steven E. McCulley
Vice President and Controller
(Principal Accounting Officer)	
 
43

Humana Inc.
Computation of Ratio of Earnings to Fixed Charges	 	Exhibit 12	

 	  	For the six
months ended
June 30,
2010	  	For the twelve months ended December 31,	 	
 	  	 	  	 	 	 	
 	  	 	  	2009	  	2008	  	2007	  	2006	  	2005	 	 	 	
 	  	(Dollars in thousands)	 	 	 	
Income before income taxes	  	$	952,780	  	$	1,601,760	  	$	992,848	  	$	1,289,300	  	$	762,085	  	$	402,880	 	 	 	
Fixed charges	  	 	78,416	  	 	159,485	  	 	127,917	  	 	109,266	  	 	98,045	  	 	66,434	 	 	 	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Total earnings	  	$	1,031,196	  	$	1,761,245	  	$	1,120,765	  	$	1,398,566	  	$	860,130	  	$	469,314	 	 	 	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Interest charged to expense	  	$	52,536	  	$	105,843	  	$	80,289	  	$	68,878	  	$	63,141	  	$	39,315	 	 	 	
One-third of rent expense	  	 	25,880	  	 	53,642	  	 	47,628	  	 	40,388	  	 	34,904	  	 	27,119	 	 	 	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Total fixed charges	  	$	78,416	  	$	159,485	  	$	127,917	  	$	109,266	  	$	98,045	  	$	66,434	 	 	 	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Ratio of earnings to fixed charges (1)(2)	  	 	13.2x	  	 	11.0x	  	 	8.8x	  	 	12.8x	  	 	8.8x	  	 	7.1x	 	 	 	

Notes
(1)	For the purposes of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and fixed charges. Fixed charges include gross interest expense, amortization of deferred financing expenses and an amount equivalent to interest included in rental charges. One-third of rental expense represents a reasonable approximation of the interest amount.	
(2)	There are no shares of preferred stock outstanding.	

Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Michael B. McCallister, principal executive officer of Humana Inc., certify that:
1. I have reviewed this Quarterly Report of Humana Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2010;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:         August 2, 2010	
 	 	
Signature:	 	/s/ Michael B. McCallister	
 	 	Michael B. McCallister	
 	 	Principal Executive Officer	

Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, James H. Bloem, principal financial officer of Humana Inc., certify that:
1. I have reviewed this Quarterly Report of Humana Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2010;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:         August 2, 2010	
 	 	
Signature:	 	/s/ James H. Bloem	
 	 	James H. Bloem	
 	 	Principal Financial Officer	

Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Humana Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Humana Inc., that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Michael B. McCallister	
Michael B. McCallister	
Principal Executive Officer	
August 2, 2010

/s/ James H. Bloem	
James H. Bloem	
Principal Financial Officer	
August 2, 2010
A signed original of this written statement required by Section 906 has been provided to Humana Inc. and will be retained by Humana Inc. and furnished to the Securities and Exchange Commission or its staff upon request.