EX-99 2 a5258157ex99.htm EXHIBIT 99 Exhibit 99  
Exhibit 99
 
 n e w s r e l e a s e Humana Inc.
 
500 West Main Street
 
P.O. Box 1438
 
Louisville, KY 40201-1438
 
http://www.humana.com
 
FOR MORE INFORMATION CONTACT:

Regina Nethery
Humana Investor Relations
(502) 580-3644
e-mail: Rnethery@humana.com
  
 
     
Tom Noland
Humana Corporate Communications
(502) 580-3674
e-mail: Tnoland@humana.com
    
 
 

Humana Inc. Reports Third Quarter 2006 Financial Results
including Earnings per Share of $0.95

·      
EPS for third quarter compares to $0.28 in the prior-year quarter
·      
Consolidated revenues up 48 percent to $5.65 billion
·      
Medical membership up 57 percent year to date
·      
Year-to-date cash flows from operations of over $1.1 billion
·      
2006 cash flow guidance raised to $1.6 billion to $1.8 billion
·      
2007 EPS guidance of $3.90 to $4.10

LOUISVILLE, KY (October 30, 2006) - Humana Inc. (NYSE:HUM) today reported $0.95 in diluted earnings per common share (EPS) for the quarter ended September 30, 2006 (3Q06), within the range of the company’s previous guidance of $0.95 to $1.00. The 3Q06 EPS compares to $0.28(a)(d)(e) EPS for the quarter ended September 30, 2005 (3Q05). Excluding 3Q05 expenses related to the settlement of class action litigation(d) and Hurricane Katrina(e), EPS for 3Q06 is up 64 percent(b) versus the prior year. The year-over-year improvement in the quarter results from substantial earnings increases in both of the company’s business segments.

The company continues to estimate EPS for the year ending December 31, 2006 (FY06E) in the range of $2.82 to $2.88(f) versus $1.79(a)(d)(e)(g) for the year ended December 31, 2005 (FY05), a growth rate of approximately 60 percent. The company also anticipates significant growth in its earnings for the year ending December 31, 2007 (FY07E) with EPS projected to be in the range of $3.90 to $4.10, a growth rate of 35 to 45 percent.
 
“Our third-quarter results kept us on track to increase earnings per share by approximately 60 percent over 2005,” said Michael B. McCallister, Humana’s president and chief executive officer. “With year-to-date revenues up nearly 50 percent, 2006 is playing out as planned and positioning us for another year of robust earnings and revenue growth in 2007.”
 
1
 
For the nine months ended September 30, 2006 (YTD06) the company reported $1.98(f) in EPS compared to $1.42(a)(d)(e)(g) for the nine months ended September 30, 2005 (YTD05), a growth rate of 39 percent. Excluding 1Q06 excess net investment gains(f), the first quarter 2005 favorable tax contingency(g) and 3Q05 expenses related to the settlement of class action litigation(d) and Hurricane Katrina(e), EPS for YTD06 is up 18 percent(b) versus the prior year driven by improvement in operating results in both of the company’s business segments.

Revenues - 3Q06 consolidated revenues rose 48 percent to $5.65 billion from $3.82 billion in 3Q05, with total premium and administrative services fees up 47 percent compared to the prior year’s quarter. These increases were primarily the result of higher enrollment in the company’s Medicare Advantage plans and new 2006 revenues from stand-alone Prescription Drug Plans (PDPs) for Medicare beneficiaries.

YTD06 consolidated revenues rose 47 percent to $15.76 billion from $10.76 billion YTD05 with total premium and administrative services fees up 46 percent compared to the prior year’s period, also primarily driven by enrollment in the company’s Medicare Advantage plans and stand-alone PDPs.

Medical costs - The company’s medical expense ratio (medical expenses as a percent of premium revenue or MER) of 84.1 percent in 3Q06 was 70 basis points higher than the 3Q05 MER of 83.4 percent(e) due to an increase in the Government Segment MER outweighing an improvement in that for the Commercial Segment. The change in MER in the Government Segment primarily results from the introduction of the stand-alone PDP results in 2006, as described more fully in the Government Segment results discussion below.

The consolidated MER for YTD06 of 84.3 percent was 70 basis points higher than the YTD05 consolidated MER of 83.6 percent(e), driven by the same factors impacting the third quarter year-over-year comparison.

Selling, general, & administrative (SG&A) expenses - The company’s consolidated SG&A expense ratio (SG&A expenses as a percent of premiums plus administrative services fees) decreased to 13.1 percent for 3Q06 from 16.3 percent(a)(d)(e) in 3Q05. This resulted primarily from litigation(d) and hurricane charges(e) incurred in 3Q05 that did not recur in 3Q06. Further, the 3Q06 growth in revenues continued to outpace the related increase in administrative spending on a consolidated basis leading to a 60 basis-point improvement in the SG&A expense ratio compared to the second quarter of 2006.

The SG&A expense ratio for YTD06 of 14.2 percent was 70 basis points lower than the YTD05 ratio of 14.9 percent(a)(d)(e), primarily due to the benefit of administrative costs YTD05 for the settlement of class action litigation(d) and Hurricane Katrina(e) which did not recur in YTD06. Partially offsetting that benefit was the increase in the YTD06 Medicare administrative costs associated with the build out of infrastructure and support functions in advance of the escalation in enrollment during the first half of 2006, as well as sales and marketing spending occurring in a more concentrated 2006 Medicare selling season.
 
2
 
Government Segment Results Summary

Pretax results:
·      
Government Segment pretax earnings were $207.0 million in 3Q06 compared to $87.9 million(a)(d)(e) in 3Q05. This increase reflects higher earnings in the company’s Medicare Advantage plans resulting from significantly higher membership, partially offset by results for new Medicare PDP offerings in 2006, and approximately $34.9 million in 3Q05 expenses related to the settlement of class action litigation (d) and Hurricane Katrina(e) that did not recur in 3Q06.
·      
For YTD06, pretax earnings for the Government Segment of $326.6 million(f) were $65.7 million higher than YTD05 pretax earnings for the segment of $260.9 million(a)(d)(e) with the YTD06 results also impacted primarily by the same factors driving the 3Q06 year-over-year improvement.

Enrollment:
·      
Medicare Advantage membership grew to 993,000 at September 30, 2006, an increase of 489,900, or 97 percent, from September 30, 2005 and 33,200, or 3 percent, from June 30, 2006. The company’s expanded participation in various Medicare products and markets combined with the company’s increased sales and marketing efforts for these programs led to the higher membership level year over year.
·      
Membership in the company’s stand-alone PDPs totaled 3,521,000 at September 30, 2006, a sequential increase of 62,200, or 2 percent.
·      
As expected, TRICARE membership of 2,862,700 at September 30, 2006 was essentially unchanged from both September 30, 2005 and June 30, 2006.
·      
Medicaid membership of 412,600 at September 30, 2006 declined 46,800 from September 30, 2005 and 5,900 from June 30, 2006 due primarily to eligible Puerto Rico Medicaid members opting into the Medicare Advantage program.

Revenues:
·      
Medicare Advantage premiums of $2.37 billion in 3Q06 increased 82 percent compared to $1.30 billion in 3Q05, primarily the result of higher enrollment and the expanded geography across which Medicare Advantage products were offered. Medicare Advantage premiums per member decreased 9 percent year over year during 3Q06, primarily due to an increase in the percentage of Medicare Advantage members in the company’s lower per-member premium Private Fee-for-Service products and a more diverse geographic mix than in the prior year. At September 30, 2006 approximately 47 percent of the company’s Medicare Advantage members were in Private Fee-For-Service plans versus 15 percent at September 30, 2005.
·      
Medicare PDP premiums added $851.4 million in new revenues in 3Q06 versus 3Q05.
·      
TRICARE premiums and administrative services fees during 3Q06 of $650.8 million compared to $670.1 million in 3Q05. The 3 percent year-over-year decrease primarily reflects 3Q06 premiums associated with lower incurred claims.

Medical Expenses:
·      
The Government Segment MER increased 250 basis points to 85.0 percent in 3Q06 compared to 82.5 percent(e) in the prior year’s quarter. The change is primarily the result of the establishment of the stand-alone PDPs in January 2006. The MER for the company’s PDP business was 93.0 percent for 3Q06, primarily driven by an MER of 133.0 percent in the company’s Complete PDP offering.
 
3
 
SG&A Expenses:
·     
The Government Segment’s SG&A expense ratio for 3Q06 of 10.1 percent was 310 basis points lower than that for 3Q05 of 13.2 percent(a)(d)(e) primarily driven by the favorable comparison against litigation(d) and hurricane expenses(e) in 3Q05 that did not recur in 3Q06 together with expense leverage provided by revenues associated with higher average membership for this segment. On a sequential basis, the segment’s SG&A expense ratio improved 140 basis points, primarily driven by the expense leverage associated with higher average membership.


Commercial Segment Results Summary

Pretax results:
·      
Results for the Commercial Segment during 3Q06 reflect pretax income of $42.4 million compared to a pretax loss of $21.2 million(a)(d)(e) in 3Q05. Commercial Segment operating earnings in 3Q06 primarily reflect year-over-year improvements in medical cost utilization trends and the company’s commitment to underwriting discipline. Additionally, 3Q05 results reflected approximately $43.7 million in expenses related to the settlement of class action litigation(d) and Hurricane Katrina(e) that did not recur in 3Q06.
·      
For YTD06, pretax earnings for the Commercial Segment of $194.3 million(f) were $147.0 million higher than YTD05 pretax earnings for the segment of $47.3 million(a)(d)(e) primarily reflecting the same drivers which impacted 3Q06 earnings improvement year over year combined with higher-than-average capital gains in the first quarter of 2006(f).

Enrollment:
·      
Commercial Segment medical membership of 3,291,900 at September 30, 2006 increased approximately 114,000, or 4 percent, from September 30, 2005 and declined 22,000, or 1 percent, from June 30, 2006.
·      
Membership in the company’s Smart plans and other consumer offerings increased year over year to 432,700 at September 30, 2006, representing over 13 percent of Commercial medical membership compared to 11 percent at September 30, 2005 and 13 percent at June 30, 2006.

Revenues:
·      
Premiums and administrative services fees for the Commercial Segment decreased 6 percent to $1.58 billion in 3Q06 compared to $1.67 billion in the prior year’s quarter, as an increase in administrative services fees resulting from a 29 percent increase in ASO membership was more than offset by lower premiums due to declines in at-risk enrollment.
·      
Commercial Segment medical premiums for fully insured groups increased approximately 5 percent on a per-member basis during 3Q06 compared to 3Q05. This increase primarily includes the effect of a greater percentage of the company’s fully-insured group block being weighted towards small groups, as its large group business becomes more weighted towards ASO. Premium yield and medical cost trends for the small group business generally include a higher level of benefit buy-downs versus larger employers.
 
4
 
Medical Expenses:
·      
In 3Q06, the Commercial Segment MER of 81.7 percent was 270 basis points lower than the 3Q05 MER of 84.4 percent(e), primarily reflecting improving medical cost utilization trends and the company’s commitment to underwriting discipline.
·      
The company continues to experience individual components of commercial medical cost same-store trend for 2006 as follows: inpatient hospital utilization - flat to 1 percent; inpatient and outpatient hospital rates - upper single digits; outpatient hospital utilization - low to mid single digits; physician - mid single digits; and pharmacy - high single digits to low double digits.

SG&A Expenses:
·      
The Commercial Segment SG&A expense ratio of 20.7 percent for 3Q06 compares to 20.2 percent(a)(d)(e) in 3Q05, primarily the result of lower average fully-insured medical enrollment and an increase in the percentage of Commercial medical membership related to ASO, outweighing the benefit of the favorable comparison against litigation(d) and hurricane expenses(e) in 3Q05 that did not recur in 3Q06. On a sequential basis, the segment’s SG&A expense ratio increased 190 basis points primarily due to a higher percentage of Commercial medical members in ASO accounts, with ASO comprising 46 percent of Commercial medical members at September 30, 2006 versus 43 percent at June 30, 2006.


Balance Sheet

·      
Cash and cash equivalents declined $1.08 billion or 48 percent sequentially as a result of CMS opting to remit the October 2006 revenue payment one business day later than the traditional payment pattern. Consequently, the company experienced a corresponding sequential decline in unearned premium revenues during 3Q06.
·      
On August 1, 2006, the company’s $300 million, 7.25 percent senior notes matured and were repaid, reducing current liabilities. Debt-to-total capitalization at September 30, 2006 was 25.1 percent, down 390 basis points from June 30, 2006.
·      
The company’s working capital at September 30, 2006 included approximately $432.5 million in net Part D risk-share payables to CMS associated with the company’s Medicare Advantage and stand-alone PDP offerings.
·      
Days in claims payable rose 1.7 days on a sequential basis to 61.2 days at September 30, 2006 from 59.5 days at June 30, 2006. Favorable prior-year reserve development year-to-date of $173.2 million increased sequentially by $54.6 million primarily driven by further actuarial development on medical claims. This sequential change had no impact on Humana’s 3Q06 results given the consistent reserving methodology used by the company.


Cash Flows from Operations

Cash flows used in operations for 3Q06 of $391.0 million compared to cash provided by operations of $586.0 million(a) in 3Q05. The company also evaluates operating cash flows on a non-GAAP basis(b)(c).
 
5
 
Cash flows from operations
($ in millions)
3Q06
3Q05(a)
YTD06
YTD05(a)
 
GAAP cash flows (used in) provided by operations
($391.0)
$586.0 
 
 
$1,151.8
 
 
$860.9 
 
Timing of premium payment from CMS(c)
1,031.8 
(384.8)
 
 
―  
 
 
(365.0)
Non-GAAP cash flows provided by operations(b)(c)
$640.8 
$201.2 
 
$1,151.8
 
$495.9 

Non-GAAP cash flows provided by operations rose to $640.8 million in 3Q06 from $201.2 million(a) in 3Q05 driven by growth in the company’s Medicare operations.


Footnotes

(a)   
In accordance with Generally Accepted Accounting Principles (GAAP), Humana adopted the retrospective method for implementing new stock option accounting rules on January 1, 2006. Consequently, prior period results in this news release have been adjusted to retrospectively reflect the expensing of stock options.
(b)   
The company has included certain financial measures that are not in accordance with GAAP within this news release. The company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses these non-GAAP financial measures as indicators of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP.
(c)   
When reviewing and analyzing Humana’s operating cash flows, company management applies the CMS premium payment in each month to match the corresponding disbursements. To do otherwise distorts meaningful analysis of the company’s operating cash flow. Therefore, decisions such as management’s forecasting and business plans regarding cash flow use this non-GAAP financial measure.
(d)   
On October 18, 2005, the company announced it had reached an agreement to settle a nationwide class action suit that had been pending in U.S. District Court in Miami for more than six years. Pursuant to the settlement, Humana’s 3Q05 financial results included pretax expenses of $71.9 million ($44.8 million after tax or $0.27 per share) in connection with the settlement and other related litigation costs. Detail of the related segment impacts is included in the statistical pages accompanying this news release.
(e)   
During 3Q05, certain of Humana’s operations were affected by the impact of Hurricane Katrina. Expenses related to Hurricane Katrina primarily stem from the company’s efforts, in close cooperation with the Departments of Insurance in the affected states, to help Humana’s members by offering participating-provider benefits at non-participating providers, paying claims for members who were unable at that time to meet their premium obligations and similar measures. The company recorded $6.7 million in pretax expenses ($4.2 million after tax or $0.03 per share) in hurricane-related medical and administrative costs during 3Q05. Detail of the related segment impacts is included in the statistical pages accompanying this news release.
(f)   
During the first quarter of 2006, the company realized a gain on the sale of an investment totaling approximately $52 million on a pretax basis, which was $34 million higher than the pretax capital gains realized in 2005. The company, in turn, donated $0.02 per share of the $0.13 per share in excess capital gains to the Humana Foundation. Detail of the related segment impacts is included in the statistical pages accompanying this news release.
 
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(g)   
During the first quarter of 2005, the company realized a favorable tax contingency of $22.8 million or $0.14 per share.


Conference Call & Virtual Slide Presentation

Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and the company’s expectations for future earnings. A live virtual presentation (audio with slides) may be accessed via Humana’s Investor Relations page at www.humana.com. The company suggests Web participants sign on approximately 15 minutes in advance of the call. The company also suggests Web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.

All parties interested in the audio-only portion of the conference call are invited to dial 888-625-7430. No password is required. The company suggests participants dial in approximately ten minutes in advance of the call. For those unable to participate in the live event, the virtual presentation archive will be available in the Historical Presentations section of the Investor Relations page at www.humana.com.


Cautionary Statement

This news release contains forward-looking statements and earnings guidance points. The forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described in the following documents filed by Humana with the Securities and Exchange Commission:
·      
Form 10-K for the year ended December 31, 2005,
·      
Form 10-Qs for the quarters ended March 31, 2006 and June 30, 2006.

 
About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nation’s largest publicly traded health benefits companies, with over 11 million medical members. Humana offers a diversified portfolio of health insurance products and related services - through traditional and consumer-choice plans - to employer groups, government-sponsored plans, and individuals.

Over its 45-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.

More information regarding Humana is available to investors via the Investor Relations page of the company’s Web site at www.humana.com, including copies of:
·  Annual report to stockholders;
·  Securities and Exchange Commission filings;
 
7
 
·  Most recent investor conference presentation;
·  Quarterly earnings news releases;
·  Replay of most recent earnings release conference call;
·  Calendar of events (includes upcoming earnings conference call dates, times, amd access number, as well as planned interaction with research analysts and institutional investors);
·  Corporate Governance information.
 
 
8
 
Humana Inc.
 GAAP Guidance Points as of October 30, 2006
 For the year ending December 31, 2006
 For the year ending December 31, 2007
 Comments
 Diluted earnings per common share (EPS)
 Full year EPS: $2.82 to $2.88;
 Fourth quarter EPS: $0.84 to $0.90
 Full year EPS: $3.90 to $4.10
 2006 EPS growth rate of 58% to 61%
 2007 EPS growth rate of 35%
to 45%
 Revenues
 Consolidated revenues: $21 billion to $22 billion;
 Medicare Advantage: $8.5 billion to $9.0 billion;
 Medicare stand-alone PDPs: $2.8 billion to $3.2 billion;
 TRICARE: $2.5 billion to $2.9 billion;
 Commercial: $6.5 billion to $7.0 billion
 Consolidated revenues: $24 billion to $26 billion;
 Medicare Advantage: $10.5 billion to $12.0 billion;
 Medicare stand-alone PDPs: $3.0 billion to $3.5 billion;
 TRICARE: $2.5 billion to $3.5 billion;
 Commercial: $6.0 billion to $7.0 billion
  
 Ending medical membership
 Medicare Advantage: approximately 1 million;
 Medicare stand-alone PDPs: approximately 3.5 million;
 TRICARE: No material change from prior year;
 Medicaid: Down approximately 40,000 from prior year;
 Commercial: Up approximately 110,000 to 120,000 from prior year including the benefit of members acquired via the CHA Health acquisition
 Medicare Advantage: approximately 1.1 million to 1.2 million;
 Medicare stand-alone PDPs: approximately 3.5 million including the anticipated loss of approximately 300,000 Complete plan members;
 TRICARE: No material change from prior year;
 Medicaid: No material change from prior year;
 Commercial: Up approximately 50,000 to 75,000 from prior year
 Commercial represents combined ASO and fully insured medical membership
 Medical costs
 Total Medicare products (Medicare Advantage and stand-alone PDP) MER in the range of 84% to 85%; 
 Commercial fully insured groups: Medical cost trends in the range of 5% to 6%; premium yields in line with medical cost trends
 Total Medicare products (Medicare Advantage and stand-alone PDP) MER in the range of 82% to 84%;
 Commercial fully insured groups: Medical cost trends in the range of 5% to 6%; premium yields in line with medical cost trends
 2007 same-store trend for individual medical cost trend components is not anticipated to be materially different from 2006
 
9
 
 GAAP Guidance Points as of October 30, 2006
 For the year ending December 31, 2006
 For the year ending December 31, 2007 Comments
 Selling, general & administrative expenses
 Consolidated SG&A expense ratio of 13.5% to 14.5%
 Consolidated SG&A expense ratio of 13% to 14%
  
 Investment income and interest expense
 Investment income of $280 million to $290 million including approximately $75 million in venture capital gains;
 Interest expense of approximately $64 million
 Net investment income by segment:
 35% to 40% Government Segment; 60% to 65% Commercial Segment
 Investment income of $280 million to $290 million with no
material benefit from venture capital gains;
 Interest expense of approximately $70 million
 Net investment income by segment:
 55% to 60% Government Segment; 40% to 45% Commercial Segment
 2007 is not forecast to include any material gains from venture capital investments due to fewer such investments now held by the company
 Investment income (net of interest expense) is recorded to the business segments based upon changes in working capital that fund cash available for investment
 Pretax results
 Total Medicare products (Medicare Advantage and stand-alone PDP): 2.5% to 3.5% pretax margin including a pretax loss on stand-alone PDP;
 TRICARE: Approximately 3% to 4% pretax margin;
 Commercial Segment: $210 million to $230 million including approximately $45 million in venture capital investment gains
 Total Medicare products (Medicare Advantage and stand-alone PDP): 4% to 5% pretax margin including a pretax gain on stand-alone PDP;
 TRICARE: Approximately 3% to 4% pretax margin;
 Commercial Segment: $190 million to $210 million including no material benefit from venture capital gains
 Investment and other income and interest expense are not recorded at the line-of-business level

10
 
GAAP Guidance Points as of
October 30, 2006
  For the year ending December 31, 2006  For the year ending December 31, 2007 Comments
 Cash flows from operations
 $1.6 billion to $1.8 billion
 At least $1.8 billion
 2006 cash flows from operations is anticipated to be used towards capital expenditures (approximately 10%), net Part D risk-share payment to be remitted in 2007 (approximately 40%), and capital contributions into the subsidiaries (approximately 50%)
 2007 cash flows from operations include the forecasted payment to CMS of the net Part D risk-share payable related to the 2006 plan year
 Capital expenditures
 $190 million to $200 million
 Approximately $200 million
 
 Effective tax rate
 Approximately 35% to 37%
 Approximately 36% to 38%
 
 Shares used in computing EPS
 Approximately 168 million
 Approximately 171 million
 
 
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Statistical Schedules
And
Supplementary Information
3Q06 Earnings Release
 
 
 
S-1
 
Humana Inc.
Statistical Schedules and Supplementary Information
3Q06 Earnings Release
 
Contents
 
Page
Description
   
S-3
S-4
S-5
S-6
S-7
S-8
S-9
S-10
S-11
S-12
S-13
S-14-15
S-16
S-17
S-18
S-19
S-20
 
S-2
 
3Q06 Consolidated Statements of Income
In thousands, except per common share results
             
             
   
Three Months Ended September 30,
      
         
Dollar
Percentage
   
2006
2005 (A)
  
Change
Change
Revenues:
            
Premiums
 
$5,486,368
$3,712,364
 
$1,774,004
47.8%
Administrative services fees
 
86,332
66,072
 
20,260
30.7%
Investment income
 
62,474
38,778
 
23,696
61.1%
Other revenue
 
14,610
4,247
 
10,363
244.0%
Total revenues
 
5,649,784
3,821,461
 
1,828,323
47.8%
Operating expenses:
            
Medical
 
4,616,002
3,094,397
 
1,521,605
49.2%
Selling, general and administrative
 
729,722
616,126
 
113,596
18.4%
Depreciation
 
32,562
26,661
 
5,901
22.1%
Other intangible amortization
 
5,115
7,458
 
(2,343)
-31.4%
Total operating expenses
 
5,383,401
3,744,642
 
1,638,759
43.8%
Income from operations
  
266,383
76,819
 
189,564
246.8%
Interest expense
  
17,009
10,141
 
6,868
67.7%
Income before income taxes
  
249,374
66,678
 
182,696
274.0%
Provision for income taxes
  
90,176
19,871
 
70,305
353.8%
Net income
  
$159,198
$46,807
 
$112,391
240.1%
             
Basic earnings per common share
  
$0.97
$0.29
 
$0.68
234.5%
Diluted earnings per common share
  
$0.95
$0.28
 
$0.67
239.3%
             
Shares used in computing basic earnings per common share
 
164,387
162,048
     
Shares used in computing diluted earnings per common share
  
168,376
166,076
     
 
S-3
 
YTD Consolidated Statements of Income
In thousands, except per common share results
             
             
   
Nine Months Ended September 30,
      
         
Dollar
Percentage
   
2006
2005 (A)
  
Change
Change
Revenues:
            
Premiums
 
$15,272,329
$10,449,198
 
$4,823,131
46.2%
Administrative services fees
 
248,721
196,240
 
$52,481
26.7%
Investment income
 
211,943
100,120
 
$111,823
111.7%
Other revenue
 
28,325
9,489
 
$18,836
198.5%
Total revenues
 
15,761,318
10,755,047
 
$5,006,271
46.5%
Operating expenses:
            
Medical
 
12,879,429
8,736,639
 
$4,142,790
47.4%
Selling, general and administrative
 
2,204,471
1,586,085
 
$618,386
39.0%
Depreciation
 
94,027
76,282
 
$17,745
23.3%
Other intangible amortization
 
15,152
18,849
 
($3,697)
-19.6%
Total operating expenses
 
15,193,079
10,417,855
 
$4,775,224
45.8%
Income from operations
  
568,239
337,192
 
$231,047
68.5%
Interest expense
  
47,335
28,986
 
$18,349
63.3%
Income before income taxes
  
520,904
308,206
 
$212,698
69.0%
Provision for income taxes
  
188,502
73,252
 
$115,250
157.3%
Net income
  
$332,402
$234,954
 
$97,448
41.5%
             
Basic earnings per common share
  
$2.03
$1.45
 
$0.58
40.0%
Diluted earnings per common share
  
$1.98
$1.42
 
$0.56
39.4%
             
Shares used in computing basic earnings per common share
 
163,736
161,484
     
Shares used in computing diluted earnings per common share
  
167,746
165,240
     
 
S-4

Consolidated Balance Sheets
Dollars in thousands, except share amounts
 
              
               
   
September 30,
June 30,
December 31,
 
Sequential Change
   
2006
2006
2005 (A)
  
Dollar
Percent
Assets
              
Current assets:
              
Cash and cash equivalents
 
$1,181,234
$2,258,464
$732,016
     
Investment securities
 
3,242,711
2,998,440
2,354,904
     
Receivables, net:
 
            
Premiums
 
729,949
767,610
723,190
     
Administrative services fees
 
15,055
14,842
15,462
     
Securities lending collateral
 
917,325
240,849
47,610
     
Other
 
1,066,731
778,821
333,004
     
Total current assets
 
7,153,005
7,059,026
4,206,186
 
$93,979
1.3%
Property and equipment
  
518,930
505,721
484,412
     
Other assets:
              
Long-term investment securities
 
408,281
387,362
391,035
     
Goodwill
 
1,307,231
1,307,650
1,264,575
     
Other
 
569,718
576,841
523,406
     
Total other assets
 
2,285,230
2,271,853
2,179,016
     
Total assets
  
$9,957,165
$9,836,600
$6,869,614
  
$120,565
1.2%
               
Liabilities and Stockholders' Equity
              
Current liabilities:
              
Medical and other expenses payable
 
$2,562,943
$2,457,643
$1,909,682
      
Trade accounts payable and accrued expenses
 
1,528,991
1,102,919
560,550
     
Book overdraft
 
281,244
271,824
280,005
     
Securities lending payable
 
917,325
240,849
47,610
     
Unearned revenues
 
146,320
1,170,278
120,489
     
Current portion of long-term debt
 
-
299,941
301,254
     
Total current liabilities
 
5,436,823
5,543,454
3,219,590
 
($106,631)
-1.9%
Long-term debt
  
970,144
784,399
513,790
     
Other long-term liabilities
  
657,735
849,952
627,360
     
Total liabilities
 
7,064,702
7,177,805
4,360,740
 
($113,103)
-1.6%
Commitments and contingencies
              
Stockholders' equity:
              
Preferred stock, $1 par; 10,000,000 shares authorized, none issued
 
-
-
-
      
Common stock, $0.16 2/3 par; 300,000,000 shares authorized;
 
            
182,346,635 issued at September 30, 2006
 
30,391
30,170
29,843
     
Capital in excess of par value
 
1,333,503
1,285,399
1,235,888
     
Retained earnings
 
1,754,077
1,594,879
1,421,675
     
Accumulated other comprehensive (loss) income
 
(6,574)
(43,352)
24,832
     
Treasury stock, at cost, 16,118,177 shares at September 30, 2006
 
(218,934)
(208,301)
(203,364)
      
Total stockholders' equity
 
2,892,463
2,658,795
2,508,874
 
$233,668
8.8%
Total liabilities and stockholders' equity
  
$9,957,165
$9,836,600
$6,869,614
  
$120,565
1.2%
               
Debt to total capitalization ratio
  
25.1%
29.0%
24.5%
      
             
 
S-5
 
3Q06 Consolidated Statements of Cash Flows
Dollars in thousands
             
             
   
Three Months Ended September 30,
      
         
Dollar
Percentage
   
2006
2005 (A)
  
Change
Change
Cash flows from operating activities
            
Net income
 
$159,198
$46,807
     
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
          
Depreciation and amortization
 
37,677
34,119
     
Stock-based compensation
 
9,350
8,067
     
Provision (benefit) for deferred income taxes
 
23,495
(40,409)
      
Changes in operating assets and liabilities excluding
 
          
the effects of acquisitions:
 
          
Receivables
 
37,448
(102,986)
      
Other assets
 
(29,713)
(2,773)
      
Medical and other expenses payable
 
105,300
139,675
     
Other liabilities
 
293,274
97,277
     
Unearned revenues
 
(1,023,958)
412,760
     
Other
 
(3,088)
(6,531)
      
Net cash (used in) provided by operating activities
  
(391,017)
586,006
 
($977,023)
-166.7%
 
            
Cash flows from investing activities
            
Acquisitions, net of cash acquired
 
(431)
(90)
      
Purchases of property and equipment
 
(54,629)
(45,091)
      
Proceeds from sales of property and equipment
 
7,296
2,610
     
Purchases of investment securities
 
(1,246,843)
(448,518)
      
Proceeds from maturities of investment securities
 
467,620
202,664
     
Proceeds from sales of investment securities
 
506,870
232,585
     
Change in securities lending collateral
 
(676,476)
(40,555)
      
Net cash used in investing activities
  
(996,593)
(96,395)
  
($900,198)
-933.9%
             
Cash flows from financing activities
            
Receipts from CMS contract deposits
 
382,787
-
      
Withdrawals from CMS contract deposits
 
(634,437)
-
      
Borrowings under credit agreement
 
150,000
-
      
Repayments under credit agreement
 
-
(244,000)
      
Repayment of senior notes
 
(300,000)
-
      
Debt issue costs
 
(1,971)
-
      
Change in book overdraft
 
9,420
75,940
     
Change in securities lending payable
 
676,476
40,555
     
Common stock repurchases
 
(10,633)
(380)
      
Tax benefit from stock-based compensation
 
17,135
5,033
     
Proceeds from stock option exercises and other
 
21,603
8,387
     
Net cash provided by (used in) financing activities
  
310,380
(114,465)
  
$424,845
371.2%
             
(Decrease)/increase in cash and cash equivalents
  
(1,077,230)
375,146
     
Cash and cash equivalents at beginning of period
  
2,258,464
603,790
     
             
Cash and cash equivalents at end of period
  
$1,181,234
$978,936
     
             
 
S-6
 
YTD Consolidated Statements of Cash Flows
Dollars in thousands
             
             
   
Nine Months Ended September 30,
      
         
Dollar
Percentage
   
2006
2005 (A)
  
Change
Change
Cash flows from operating activities
            
Net income
 
$332,402
$234,954
     
Adjustments to reconcile net income to net cash provided by operating activities:
 
          
Depreciation and amortization
 
109,179
95,131
     
Stock-based compensation
 
24,401
22,437
     
Provision (benefit) for deferred income taxes
 
22,269
(29,223)
      
Changes in operating assets and liabilities excluding
 
          
the effects of acquisitions:
 
          
Receivables
 
(5,509)
(129,236)
      
Other assets
 
(389,013)
(31,287)
      
Medical and other expenses payable
 
632,063
357,841
     
Other liabilities
 
465,993
(20,629)
      
Unearned revenues
 
20,892
367,809
     
Other
 
(60,866)
(6,931)
      
Net cash provided by operating activities
  
1,151,811
860,866
 
$290,945
33.8%
             
Cash flows from investing activities
            
Acquisitions, net of cash acquired
 
(26,362)
(352,816)
      
Purchases of property and equipment
 
(136,602)
(112,318)
      
Proceeds from sales of property and equipment
 
9,452
2,648
     
Purchases of investment securities
 
(3,505,391)
(1,694,123)
      
Proceeds from maturities of investment securities
 
1,478,017
596,276
     
Proceeds from sales of investment securities
 
1,219,555
992,420
     
Change in securities lending collateral
 
(869,715)
(39,713)
      
Net cash used in investing activities
  
(1,831,046)
(607,626)
  
($1,223,420)
-201.3%
             
Cash flows from financing activities
            
Receipts from CMS contract deposits
 
1,427,849
-
      
Withdrawals from CMS contract deposits
 
(1,370,862)
-
      
Borrowings under credit agreement
 
250,000
294,000
     
Repayments under credit agreement
 
(300,000)
(294,000)
      
Proceeds from issuance of senior notes
 
498,545
-
      
Repayment of senior notes
 
(300,000)
-
      
Debt issue costs
 
(5,796)
-
      
Change in book overdraft
 
1,239
66,373
     
Change in securities lending payable
 
869,715
39,713
     
Common stock repurchases
 
(15,570)
(2,071)
      
Tax benefit from stock-based compensation
 
30,791
11,258
     
Proceeds from stock option exercises and other
 
42,542
30,344
     
Net cash provided by financing activities
  
1,128,453
145,617
 
$982,836
674.9%
             
Increase in cash and cash equivalents
  
449,218
398,857
     
Cash and cash equivalents at beginning of period
  
732,016
580,079
     
             
Cash and cash equivalents at end of period
  
$1,181,234
$978,936
     
             
 
S-7

Key Income Statement Ratios and Segment Operating Results
Dollars in thousands
                         
   
Three Months Ended September 30,
        
Nine Months Ended September 30,
      
                         
           
Percentage
          
Percentage
   
2006
2005 (A)
  
Difference
Change
  
2006
2005 (A)
  
Difference
Change
Medical expense ratio
                        
Government Segment
  
85.0%
82.5%
  
2.5%
    
85.5%
83.7%
  
1.8%
  
Commercial Segment
  
81.7%
84.4%
  
-2.7%
    
81.6%
83.5%
  
-1.9%
  
Consolidated
  
84.1%
83.4%
  
0.7%
    
84.3%
83.6%
  
0.7%
  
                         
Selling, general, and administrative
                        
expense ratio
                        
Government Segment
  
10.1%
13.2%
  
-3.1%
    
11.6%
11.7%
  
-0.1%
  
Commercial Segment
  
20.7%
20.2%
  
0.5%
    
20.0%
18.6%
  
1.4%
  
Consolidated
  
13.1%
16.3%
  
-3.2%
    
14.2%
14.9%
  
-0.7%
  
                         
                         
Detail of Pretax Income (loss)
                        
Government Segment
  
$207,004
$87,868
 
$119,136
135.6%
  
$326,557
$260,871
 
$65,686
25.2%
Commercial Segment
  
42,370
(21,190)
  
63,560
300.0%
  
194,347
47,335
 
147,012
310.6%
Consolidated
  
$249,374
$66,678
 
$182,696
274.0%
  
$520,904
$308,206
 
$212,698
69.0%
                         
Detail of Pretax Margins
                       
Government Segment
  
5.1%
4.2%
  
0.9%
    
3.0%
4.6%
  
-1.6%
  
Commercial Segment
  
2.6%
-1.2%
  
3.8%
    
3.9%
0.9%
  
3.0%
  
Consolidated
  
4.4%
1.7%
  
2.7%
    
3.3%
2.9%
  
0.4%
  
                         
 
S-8

Membership Detail
In thousands
                         
   
Ending
  
Ending
  
Year-over-year Change
  
Ending
  
Sequential Change
   
September 30, 2006
Average - 3Q06
September 30, 2005
  
Amount
Percent
 
June 30, 2006
  
Amount
Percent
Medical Membership:
                        
Government Segment:
                        
Medicare Advantage - HMO
 
455.4
454.6
421.2
 
34.2
8.1%
  
457.0
 
(1.6)
-0.4%
Medicare Advantage - PPO
 
71.1
70.3
6.0
 
65.1
1085.0%
  
64.6
 
6.5
10.1%
Medicare Advantage - PFFS
 
466.5
462.3
75.9
 
390.6
514.6%
  
438.2
 
28.3
6.5%
Total Medicare Advantage
 
993.0
987.2
503.1
 
489.9
97.4%
  
959.8
 
33.2
3.5%
Medicare - PDP - Standard
 
2,081.7
2,063.9
-
 
2,081.7
100.0%
  
2,066.5
 
15.2
0.7%
Medicare - PDP - Enhanced
 
1,021.6
989.1
-
 
1,021.6
100.0%
  
977.2
 
44.4
4.5%
Medicare - PDP - Complete
 
417.7
415.1
-
 
417.7
100.0%
  
415.1
 
2.6
0.6%
Total Medicare stand-alone PDPs
 
3,521.0
3,468.1
-
 
3,521.0
100.0%
  
3,458.8
 
62.2
1.8%
Total Medicare
 
4,514.0
4,455.3
503.1
 
4,010.9
797.2%
  
4,418.6
 
95.4
2.2%
TRICARE insured
 
1,721.3
1,724.5
1,747.1
 
(25.8)
-1.5%
  
1,732.6
 
(11.3)
-0.7%
TRICARE ASO
 
1,141.4
1,141.6
1,127.3
 
14.1
1.3%
  
1,141.9
 
(0.5)
0.0%
Total TRICARE
 
2,862.7
2,866.1
2,874.4
 
(11.7)
-0.4%
  
2,874.5
 
(11.8)
-0.4%
Medicaid
 
412.6
413.4
459.4
 
(46.8)
-10.2%
  
418.5
 
(5.9)
-1.4%
Total Government Segment
 
7,789.3
7,734.8
3,836.9
 
3,952.4
103.0%
  
7,711.6
 
77.7
1.0%
Commercial Segment:
                        
Fully insured medical:
 
                      
Group
 
1,597.1
1,612.2
1,850.3
 
(253.2)
-13.7%
  
1,716.4
 
(119.3)
-7.0%
Individual
 
175.4
173.1
152.8
 
22.6
14.8%
  
170.0
 
5.4
3.2%
Medicare supplement
 
7.4
7.1
4.3
 
3.1
72.1%
  
6.7
 
0.7
10.4%
Total fully insured medical
 
1,779.9
1,792.4
2,007.4
 
(227.5)
-11.3%
  
1,893.1
 
(113.2)
-6.0%
ASO
 
1,512.0
1,510.3
1,170.5
 
341.5
29.2%
  
1,420.8
 
91.2
6.4%
Total Commercial Segment
 
3,291.9
3,302.7
3,177.9
 
114.0
3.6%
  
3,313.9
 
(22.0)
-0.7%
                         
Total medical membership
  
11,081.2
11,037.5
7,014.8
 
4,066.4
58.0%
  
11,025.5
 
55.7
0.5%
                         
                         
Specialty Membership (all Commercial Segment)
                        
Dental - fully insured
 
960.5
959.7
918.3
  
42.2
4.6%
  
955.6
 
4.9
0.5%
Dental - ASO
 
488.2
496.1
493.0
  
(4.8)
-1.0%
  
496.5
 
(8.3)
-1.7%
Total dental
 
1,448.7
1,455.8
1,411.3
 
37.4
2.7%
  
1,452.1
 
(3.4)
-0.2%
Group life
 
436.1
438.2
427.7
 
8.4
2.0%
  
427.2
 
8.9
2.1%
Short-term disability
 
14.9
15.1
16.5
 
(1.6)
-9.7%
  
15.6
 
(0.7)
-4.5%
Total specialty membership
  
1,899.7
1,909.1
1,855.5
 
44.2
2.4%
  
1,894.9
 
4.8
0.3%
                         
 
S-9
 
3Q06 Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
                   
               
Per Member per Month (B)
   
Three Months Ended September 30,
        
Three Months Ended September 30,
         
Dollar
Percentage
      
   
2006
2005
  
Change
Change
  
2006
2005
Premium revenues
                  
Government Segment:
                  
Medicare Advantage
 
$2,366,206
$1,296,743
 
$1,069,463
82.5%
  
$799
$876
Medicare stand-alone PDPs
 
851,398
-
 
851,398
100.0%
  
$82
-
Total Medicare
 
3,217,604
1,296,743
 
1,920,861
148.1%
      
TRICARE insured (C)
 
639,657
659,019
 
(19,362)
-2.9%
  
$124
$126
Medicaid
 
128,018
139,961
 
(11,943)
-8.5%
  
$103
$100
Total Government Segment premiums
 
3,985,279
2,095,723
 
1,889,556
90.2%
      
Commercial Segment:
                  
Fully insured medical
 
1,397,945
1,519,971
 
(122,026)
-8.0%
  
$260
$251
Specialty
 
103,144
96,670
 
6,474
6.7%
  
$21
$20
Total Commercial Segment premiums
 
1,501,089
1,616,641
 
(115,552)
-7.1%
      
Total premium revenues
  
$5,486,368
$3,712,364
 
$1,774,004
47.8%
      
                   
                   
Administrative services fees
                  
Government Segment (TRICARE-related) (C)
 
$11,136
$11,076
 
$60
0.5%
  
$3
$3
Commercial Segment
 
75,196
54,996
 
20,200
36.7%
  
$12
$11
Total administrative services fees
  
$86,332
$66,072
 
$20,260
30.7%
      
                   
 
S-10

YTD Premiums and Administrative Services Fees Detail
Dollars in thousands, except per member per month
                   
               
Per Member per Month (B)
   
Nine Months Ended September 30,
        
Nine Months Ended September 30,
         
Dollar
Percentage
      
   
2006
2005
  
Change
Change
  
2006
2005
Premium revenues
                  
Government Segment:
                  
Medicare Advantage
 
$6,196,455
$3,372,326
 
$2,824,129
83.7%
  
$805
$816
Medicare stand-alone PDPs
 
2,168,310
-
 
2,168,310
100.0%
  
$90
-
Total Medicare
 
8,364,765
3,372,326
 
4,992,439
148.0%
      
TRICARE insured (C)
 
1,898,038
1,832,526
 
65,512
3.6%
  
$122
$116
Medicaid
 
386,643
409,105
 
(22,462)
-5.5%
  
$101
$96
Total Government Segment premiums
 
10,649,446
5,613,957
 
5,035,489
89.7%
      
Commercial Segment:
                  
Fully insured medical
 
4,316,523
4,549,643
 
(233,120)
-5.1%
  
$259
$248
Specialty
 
306,360
285,598
 
20,762
7.3%
  
$21
$20
Total Commercial Segment premiums
 
4,622,883
4,835,241
 
(212,358)
-4.4%
      
Total premium revenues
  
$15,272,329
$10,449,198
 
$4,823,131
46.2%
      
                   
                   
Administrative services fees
                  
Government Segment (TRICARE-related) (C)
 
$33,471
$39,870
 
($6,399)
-16.0%
  
$3
$4
Commercial Segment
 
215,250
156,370
 
58,880
37.7%
  
$12
$10
Total administrative services fees
  
$248,721
$196,240
 
$52,481
26.7%
      
                   
 
S-11

Percentage of Ending Membership under Capitation Arrangements
                     
                     
   
Government Segment
Commercial Segment
  
September 30, 2006
  
Medicare Advantage
Medicare
stand-alone PDPs
TRICARE
Medicaid
Total Govt. Segment
Fully insured
ASO
Total Comm. Segment
Total
 Medical Membership
                     
Capitated HMO hospital system based (D)
  
3.1%
-
-
-
0.4%
1.9%
-
1.0%
0.6%
Capitated HMO physician group based (D)
  
2.4%
-
-
34.8%
2.2%
1.8%
-
1.0%
1.8%
Risk-sharing (E)
  
27.8%
-
-
64.5%
7.0%
1.4%
-
0.8%
5.1%
All other membership
  
66.7%
100.0%
100.0%
0.7%
90.4%
94.9%
100.0%
97.2%
92.5%
Total medical membership
  
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
                     
September 30, 2005
                    
                     
Capitated HMO hospital system based (D)
  
7.0%
-
-
-
0.9%
2.6%
-
1.6%
1.2%
Capitated HMO physician group based (D)
  
4.6%
-
-
37.2%
5.1%
2.2%
-
1.4%
3.4%
Risk-sharing (E)
  
44.1%
-
-
59.1%
12.9%
2.6%
-
1.6%
7.8%
All other membership
  
44.3%
-
100.0%
3.7%
81.1%
92.6%
100.0%
95.4%
87.6%
Total medical membership
  
100.0%
-
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
 
S-12

Detail of Medical and Other Expenses Payable Balance and Year-to-Date Changes
Dollars in thousands
         
         
   
September 30,
June 30,
December 31,
   
2006
2006
2005
Detail of medical and other expenses payable
        
IBNR and other medical expenses payable (F)
 
$1,715,791
$1,580,587
$1,125,205
TRICARE IBNR (G)
 
332,962
316,251
409,413
TRICARE other medical expenses payable (H)
 
95,593
92,963
88,443
Unprocessed claim inventories (I)
 
187,900
193,700
148,200
Processed claim inventories (J)
 
89,500
128,926
83,635
Payable to pharmacy benefit administrator (K)
 
141,197
145,216
54,786
Total medical and other expenses payable
  
$2,562,943
$2,457,643
$1,909,682
         
         
         
   
Nine Months Ended
Six Months Ended
Year Ended
   
September 30, 2006
June 30, 2006
December 31, 2005
Year-to-date changes in medical and other expenses payable
        
         
Balances at January 1
 
$1,909,682
$1,909,682
$1,422,010
         
Acquisitions
 
21,198
21,198
37,375
         
Incurred related to:
 
      
Current year (L)
 
13,163,725
8,465,493
11,765,662
Prior years - non-TRICARE (L)
 
(173,223)
(118,602)
(72,868)
Prior years - TRICARE (M)
 
(111,073)
(83,464)
(41,324)
Total incurred
 
12,879,429
8,263,427
11,651,470
         
Paid related to:
 
      
Current year
 
(11,193,784)
(6,724,304)
(9,979,449)
Prior years
 
(1,053,582)
(1,012,360)
(1,221,724)
Total paid
 
(12,247,366)
(7,736,664)
(11,201,173)
         
Balances at end of period
 
$2,562,943
$2,457,643
$1,909,682
         
 
S-13
 
Medical Claims Reserves Statistics
           
           
Receipt Cycle Time (N)
           
   
2006
2005
Change
Percentage Change
1st Quarter Average
16.1
16.6
(0.5)
-3.0%
2nd Quarter Average
15.8
15.9
(0.1)
-0.6%
3rd Quarter Average
16.0
16.7
(0.7)
-4.2%
4th Quarter Average
-
16.9
N/A
N/A
Full Year Average
15.9
16.5
(0.6)
-3.6%
           
           
           
Unprocessed Claims Inventories
           
 
Date
Estimated Valuation (000's)
Claim Item Counts
Number of Days on Hand
  
 
9/30/2004
$122,300
453,300
4.4
 
 
12/31/2004
$115,300
394,400
3.7
 
 
3/31/2005
$111,200
393,200
3.6
 
 
6/30/2005
$119,500
443,600
4.0
 
 
9/30/2005
$136,700
512,800
4.7
 
 
12/31/2005
$148,200
498,400
4.6
 
 
3/31/2006
$185,300
683,900
5.6
 
 
6/30/2006
$193,700
702,000
4.8
 
 
9/30/2006
$187,900
623,900
5.4
 
 
S-14

Humana Inc.
Medical Claims Reserves Statistics (Continued)
               
               
Days in Claims Payable (O) (P)
 
 
Quarter Ended
Days in Claim
Payable (DCP)
Annual
Change
Percentage
Change
DCP Excluding Capitation
Annual
Change
Percentage
Change
 
9/30/2004
51.8
4.6
9.7%
59.1
4.6
8.4%
 
12/31/2004
49.5
3.3
7.1%
54.8
1.6
3.0%
 
3/31/2005
50.5
3.1
6.5%
56.1
1.8
3.3%
 
6/30/2005
52.8
5.4
11.4%
58.6
4.5
8.3%
 
9/30/2005
54.0
2.2
4.2%
60.8
1.7
2.9%
 
12/31/2005
60.3
10.8
21.8%
66.6
11.8
21.5%
 
3/31/2006
59.1
8.6
17.0%
65.5
9.4
16.8%
 
6/30/2006
59.5
6.7
12.7%
65.5
6.9
11.8%
 
9/30/2006
61.2
7.2
13.3%
67.1
6.3
10.4%
               
Year-to-Date Change in Days in Claims Payable (P) (Q)
               
       
2006
2005
    
DCP - 4th quarter of prior year
60.3
49.5
   
 
Components of year-to-date change in DCP:
        
 
Change in claims receipt cycle time
(2.0)
0.2
   
 
Change in unprocessed claims inventories
1.0
1.0
   
 
Change in processed claims inventories
0.1
(0.4)
    
 
Change in TRICARE reserve balances
(4.6)
3.9
   
 
Change in pharmacy payment cutoff
(0.2)
1.5
   
 
Growth in Medicare PFFS membership
6.1
1.2
   
 
Growth in individual membership
0.4
0.9
   
 
Change in provider payables under risk arrangements
1.9
1.4
   
 
All other
(1.8)
1.1
   
DCP - current quarter
61.2
60.3
   
               
 
S-15
 
3Q05 GAAP to Non-GAAP Reconciliation
Dollars in thousands, except EPS
                   
                   
   
3Q06
  
3Q05
       
GAAP (A)
  
Adjustments
  
Non-GAAP
           
Class Action
Litigation
Settlement
Hurricane
Katrina
    
Consolidated
                  
Pretax income
  
$249,374
 
$66,678
 
$71,850
$6,699
 
$145,227
Pretax margin
  
4.4%
  
1.7%
  
1.9%
0.2%
  
3.8%
Net income
  
$159,198
 
$46,807
 
$44,834
$4,181
 
$95,822
EPS
  
$0.95
 
$0.28
 
$0.27
$0.03
 
$0.58
Growth rate vs. P/Y GAAP
  
239.3%
              
Growth rate vs. P/Y Non-GAAP
  
63.8%
              
MER
  
84.1%
  
83.4%
  
-
-0.2%
  
83.2%
SG&A ratio
  
13.1%
  
16.3%
  
-1.9%
-
  
14.4%
                   
Government Segment
                  
Pretax income
  
$207,004
 
$87,868
 
$33,360
$1,529
 
$122,757
Pretax margin
  
5.1%
  
4.2%
  
1.5%
0.1%
  
5.8%
MER
  
85.0%
  
82.5%
  
-
-
  
82.5%
SG&A ratio
  
10.1%
  
13.2%
  
-1.6%
-
  
11.6%
                   
Commercial Segment
                  
Pretax (loss) income
  
$42,370
 
($21,190)
  
$38,490
$5,170
 
$22,470
Pretax margin
  
2.6%
  
-1.2%
  
2.2%
0.3%
  
1.3%
MER
  
81.7%
  
84.4%
  
-
-0.3%
  
84.1%
SG&A ratio
  
20.7%
  
20.2%
  
-2.3%
-
  
17.9%
                   
 
S-16

YTD GAAP to Non-GAAP Reconciliation
Dollars in thousands, except EPS
                             
                             
   
3Q06 YTD
  
3Q05 YTD
   
GAAP
  
Adjustments
  
Non-GAAP
  
GAAP (A)
  
Adjustments
  
Non-GAAP
       
Excess Net
Realized
Capital Gains -
1Q06
          
Realization of
Tax Gain Contingency
Class Action Litigation Settlement
Hurricane
Katrina
    
Consolidated
                            
Pretax income
  
$520,904
 
($29,113)
  
$491,791
 
$308,206
 
-
$71,850
$6,699
 
$386,755
Pretax margin
  
3.3%
  
-0.2%
  
3.1%
  
2.9%
  
-
0.6%
0.1%
  
3.6%
Net income
  
332,402
 
($18,167)
  
$314,235
 
$234,954
 
($22,800)
$44,834
$4,181
 
$261,169
EPS
  
$1.98
 
($0.11)
  
$1.87
 
$1.42
 
($0.14)
$0.27
$0.03
 
$1.58
Growth rate
  
39.4%
      
18.4%
                
MER
  
84.3%
  
-
  
84.3%
  
83.6%
  
-
-
-
  
83.6%
SG&A ratio
  
14.2%
  
-
  
14.2%
  
14.9%
  
-
-0.7%
-
  
14.2%
                             
Government Segment
                            
Pretax income
  
$326,557
 
($1,872)
  
$324,685
 
$260,871
 
-
$33,360
$1,529
 
$295,760
Pretax margin
  
3.0%
  
-
  
3.0%
  
4.6%
  
-
0.6%
-
  
5.2%
MER
  
85.5%
  
-
  
85.5%
  
83.7%
  
-
-
-
  
83.7%
SG&A ratio
  
11.6%
  
-
  
11.6%
  
11.7%
  
-
-0.6%
-
  
11.1%
                             
Commercial Segment
                            
Pretax income
  
$194,347
 
($27,241)
  
$167,106
 
$47,335
 
-
$38,490
$5,170
 
$90,995
Pretax margin
  
3.9%
  
-0.5%
  
3.4%
  
0.9%
  
-
0.8%
0.1%
  
1.8%
MER
  
81.6%
  
-
  
81.6%
  
83.5%
  
-
  
-0.1%
  
83.4%
SG&A ratio
  
20.0%
  
-0.1%
  
19.9%
  
18.6%
  
-
-0.8%
-
  
17.8%
                             
 
S-17

2005 Quarters Adjusted to Reflect Retrospective Application of Expensing Stock Options
In thousands, except per common share results
                                 
   
1Q05
  
2Q05
  
3Q05
  
4Q05
   
Reported
  
Adjusted (A)
  
Reported
  
Adjusted (A)
  
Reported
  
Adjusted (A)
  
Reported
  
Adjusted (A)
                                 
Revenues
  
$3,387,225
 
$3,387,225
 
$3,546,361
 
$3,546,361
 
$3,821,461
 
$3,821,461
 
$3,663,080
 
$3,663,080
                                 
Pretax income (loss):
                                
Government
  
$72,224
 
$70,472
 
$104,092
 
$102,531
 
$89,557
 
$87,868
 
$57,395
 
$55,805
Commercial
  
49,463
 
46,208
 
25,215
 
22,317
 
(18,053)
  
(21,190)
  
41,821
 
38,869
Consolidated
  
$121,687
 
$116,680
 
$129,307
 
$124,848
 
$71,504
 
$66,678
 
$99,216
 
$94,674
       
 
          
 
            
Net income
  
$109,795
 
$106,735
 
$84,137
 
$81,412
 
$49,944
 
$46,807
 
$64,607
 
$61,776
               
 
                
Diluted earnings per common share
  
$0.67
 
$0.65
 
$0.51
 
$0.49
 
$0.30
 
$0.28
 
$0.39
 
$0.37
                       
 
        
Shares used in computing diluted                                
earnings per common share
  
164,179
 
164,496
 
164,908
 
165,149
 
166,037
 
166,076
 
166,371
 
166,521
SG&A expense ratio:
                                
Government
  
10.8%
  
10.9%
  
10.6%
  
10.6%
  
13.1%
  
13.2%
  
15.5%
  
15.6%
Commercial
  
17.6%
  
17.8%
  
17.5%
  
17.7%
  
20.0%
  
20.2%
  
18.1%
  
18.3%
Consolidated
  
14.1%
  
14.3%
  
13.8%
  
14.0%
  
16.2%
  
16.3%
  
16.7%
  
16.9%
                                 
Total assets
  
$6,149,593
 
$6,149,593
 
$6,277,907
 
$6,277,907
 
$6,832,421
 
$6,832,421
 
$6,869,614
 
$6,869,614
Total liabilities
  
$3,949,788
 
$3,916,471
 
$3,961,719
 
$3,927,862
 
$4,466,451
 
$4,432,166
 
$4,395,509
 
$4,360,740
Total stockholders' equity
  
$2,199,805
 
$2,233,122
 
$2,316,188
 
$2,350,045
 
$2,365,970
 
$2,400,255
 
$2,474,105
 
$2,508,874
                                 
Net cash provided by (used in)                                
operating activities
  
$99,228
 
$95,573
 
$181,857
 
$179,287
 
$591,039
 
$586,006
 
($246,497)
  
($250,784)
Net cash used in investing activities
  
($451,322)
  
($451,322)
  
($59,909)
  
($59,909)
  
($96,395)
  
($96,395)
  
($159,650)
  
($159,650)
Net cash provided by (used in)                                
financing activities
  
$332,279
 
$335,934
 
($78,422)
  
($75,852)
  
($119,498)
  
($114,465)
  
$159,227
 
$163,514
                                 
 
S-18

2003 Through 2005 Adjusted to Reflect Retrospective Application of Expensing Stock Options
In thousands, except per common share results
                         
   
For the year ended
  
For the year ended
  
For the year ended
   
December 31, 2005
  
December 31, 2004
  
December 31, 2003
   
Reported
  
Adjusted (A)
  
Reported
  
Adjusted (A)
  
Reported
  
Adjusted (A)
                         
Revenues
  
$14,418,127
 
$14,418,127
 
$13,104,325
 
$13,104,325
 
$12,226,311
 
$12,226,311
                         
Pretax income:
                        
Government
  
$323,268
 
$316,676
 
$273,840
 
$269,063
 
$223,706
 
$221,240
Commercial
  
98,446
 
86,204
 
142,010
 
130,315
 
121,010
 
114,973
Consolidated
  
$421,714
 
$402,880
 
$415,850
 
$399,378
 
$344,716
 
$336,213
   
 
                    
Net income
  
$308,483
 
$296,730
 
$280,012
 
$269,947
 
$228,934
 
$223,739
                         
Diluted earnings per common share
  
$1.87
 
$1.79
 
$1.72
 
$1.66
 
$1.41
 
$1.38
                         
Shares used in computing diluted earnings per common
share
  
165,374
 
165,560
 
162,456
 
162,905
 
161,960
 
162,406
                         
SG&A expense ratio:
                        
Government
  
12.6%
  
12.7%
  
12.2%
  
12.3%
  
13.4%
  
13.5%
Commercial
  
18.3%
  
18.5%
  
16.4%
  
16.5%
  
16.9%
  
17.0%
Consolidated
  
15.3%
  
15.4%
  
14.5%
  
14.6%
  
15.4%
  
15.4%
                         
Total assets
  
$6,869,614
 
$6,869,614
 
$5,657,617
 
$5,657,617
 
$5,379,814
 
$5,379,814
Total liabilities
  
$4,395,509
 
$4,360,740
 
$3,567,493
 
$3,533,369
 
$3,543,865
 
$3,510,842
Total stockholders' equity
  
$2,474,105
 
$2,508,874
 
$2,090,124
 
$2,124,248
 
$1,835,949
 
$1,868,972
                         
Net cash provided by operating activities
  
$625,627
 
$610,082
 
$347,809
 
$344,061
 
$413,140
 
$397,921
Net cash used in investing activities
  
($767,276)
  
($767,276)
  
($624,081)
  
($624,081)
  
($382,837)
  
($382,837)
Net cash provided by (used in) financing activities
  
$293,586
 
$309,131
 
($75,053)
  
($71,305)
  
$179,744
 
$194,963
                         
 
S-19

Footnotes to Statistical Schedules and Supplementary Information
3Q06 Earnings Release
   
Footnote
(A)
Adjusted to include stock-based compensation expense. Under SFAS 123R, which the company adopted effective January 1, 2006 using the modified retrospective method, stock-based compensation expense is recognized based on the grant date fair value over the vesting period.
   
(B)
Computed based on average membership for the period (i.e., monthly ending membership during the period divided by the number of months in the period).
   
(C)
TRICARE revenues are not contracted on a per member basis.
   
(D)
In a limited number of circumstances, the company contracts with hospitals and physicians to accept financial risk for a defined set of HMO membership. In transferring this risk, the company prepays these providers a monthly fixed-fee per member to coordinate substantially all of the medical care for their capitated HMO membership, including some health benefit administrative functions and claims processing. For these capitated HMO arrangements, the company generally agrees to reimbursement rates that target a medical expense ratio ranging from 82% to 89%. Providers participating in hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within their system for their HMO membership. Provider participating in physician-based capitated HMO arrangements generally have subcontracted specialist physicians and are responsible for reimbursing such hospitals and physicians for services rendered to their HMO membership.
   
(E)
In some circumstances, the company contracts with physicians under risk-sharing arrangements whereby physicians have assumed some level of risk for all or a portion of the medical costs of their HMO membership. Although these arrangements do include capitation payments for services rendered, the company processes substantially all of the claims under these arrangements.
   
(F)
IBNR represents an estimate of medical expenses payable for claims incurred but not reported (IBNR) at the balance sheet date. The level of IBNR is primarily impacted by membership levels, medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received (i.e. a shorter time span results in lower reserves for claims IBNR). Other medical expenses payable includes amounts payable to providers under capitation arrangements.
   
(G)
TRICARE IBNR decreased since the prior year end due to favorable development as more fully discussed in Footnote M below.
   
(H)
TRICARE other medical expenses payable may include liabilities to subcontractors and/or risk share payables to the Department of Defense. The level of these balances may fluctuate from period to period due to the timing of payment (cutoff) and whether or not the balances are payables or receivables (receivables from the Department of Defense are classified as receivables in the company's balance sheet).
   
(I)
Unprocessed claim inventories represent the estimated valuation of claims received but not yet fully processed. TRICARE claim inventories are not included in this amount as an independent third party administrator processes all TRICARE medical claims on the company's behalf. Reserves for TRICARE unprocessed claims inventory are included in TRICARE IBNR.
   
(J)
Processed claim inventories represent the estimated valuation of processed claims that are in the post-claim-adjudication process, which consists of administrative functions such as audit and check batching and handling.
   
(K)
The balance due to the company's pharmacy benefit administrator fluctuates as a result of the number of business days in the last payment cycle of the month. Payment cycles are every 10 days (10th & 20th of month) and the last day of the month.
   
(L)
The impact of any change in "incurred related to prior years" claims is offset as the company re-establishes such amounts in the "incurred related to current year".
   
(M)
Changes in estimates of TRICARE incurred claims for prior years recognized during 2006 and 2005 resulted primarily from claim costs and utilization levels developing favorably from the levels originally estimated for the second half of the prior year. As a result of substantial risk-sharing provisions with the Department of Defense and with subcontractors, any resulting impact on operations from the change in estimates of incurred related to prior years is substantially reduced, whether positive or negative.
   
(N)
The receipt cycle time measures the average length of time between when a claim was initially incurred and when the claim form was received. Receipt cycle time data for our largest claim processing platforms representing approximately 72% of the company's fully insured claims volume. Pharmacy claims are excluded from this measurement.
   
(O)
A common metric for monitoring medical claim reserve levels relative to the medical claims expense is days in claims payable, or DCP, which represents the medical claim liabilities at the end of the period divided by average medical expenses per day in the quarterly period. Since the company has some providers under capitation payment arrangements (which do not require a medical claim IBNR reserve), the company has also summarized this metric excluding capitation expense.
   
(P)
Excludes the impact of Medicare stand-alone PDPs.
   
(Q)
DCP fluctuates due to a number of issues, the more significant of which are detailed in the rollforward of DCP from the fourth quarter of the prior year. Growth in certain product lines can also impact DCP for the quarter since a provision for claims would not have been recorded for members that had not yet enrolled earlier in the quarter, yet those members would have a provision and corresponding reserve recorded upon enrollment later in the quarter.
 
S-20