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

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.” 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. 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. 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. 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 $586.0 million(a) in 3Q05. The company also evaluates operating cash flows on a non-GAAP basis(b)(c). Cash flows from operations ($ 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. (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; 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, and access number, as well as planned interaction with research analysts and institutional investors); Corporate Governance information. 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 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 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   S-1   Humana Inc. Statistical Schedules And Supplementary Information 3Q06 Earnings Release S-2   Humana Inc. Statistical Schedules and Supplementary Information 3Q06 Earnings Release   Contents   Page Description   S-3 3Q06 Consolidated Statements of Income S-4 YTD Consolidated Statements of Income S-5 Consolidated Balance Sheets S-6 3Q06 Consolidated Statements of Cash Flows S-7 YTD Consolidated Statements of Cash Flows S-8 Key Income Statement Ratios and Segment Operating Results S-9 Membership Detail S-10 3Q06 Premiums and Administrative Services Fees Detail S-11 YTD Premiums and Administrative Services Fees Detail S-12 Percentage of Ending Membership under Capitation Arrangements S-13 Detail of Medical and Other Expenses Payable Balance and Year-to-Date Changes S-14-15 Medical Claims Reserves Statistics S-16 3Q05 GAAP to Non-GAAP Reconciliation S-17 YTD GAAP to Non-GAAP Reconciliation S-18 2005 Quarters Adjusted to Reflect Retrospective Application of Expensing Stock Options S-19 2003 Through 2005 Adjusted to Reflect Retrospective Application of Expensing Stock Options S-20 Footnotes S-3   Humana Inc. 3Q06 Consolidated Statements of Income In thousands, except per common share results     Three Months Ended September 30,   Dollar Change  Percentage Change 2006  2005 (A) 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-4   Humana Inc. YTD Consolidated Statements of Income In thousands, except per common share results     Nine Months Ended September 30,   Dollar Change  Percentage Change 2006  2005 (A) 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-5   Humana Inc. Consolidated Balance Sheets Dollars in thousands, except share amounts   Sept. 30, 2006 June 30, 2006 Dec. 31, 2005 (A) Sequential Change 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-6   Humana Inc. 3Q06 Consolidated Statements of Cash Flows Dollars in thousands   Three Months Ended September 30,   Dollar Change  Percentage Change 2006  2005 (A) 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-7   Humana Inc. YTD Consolidated Statements of Cash Flows Dollars in thousands   Nine Months Ended September 30,   Dollar Change  Percentage Change 2006  2005 (A) 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-8   Humana Inc. 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-9   Humana Inc. Membership Detail In thousands       Ending Ending Year-over-year Change Ending June 30, 2006 Sequential Change Sept. 30, 2006 Average 3Q06 Sept. 30, 2005 Amount Percent 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-10   Humana Inc. 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 Change  Percentage Change 2006  2005  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-11   Humana Inc. 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-12   Humana Inc. 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-13   Humana Inc. Detail of Medical and Other Expenses Payable Balance and Year-to-Date Changes Dollars in thousands     Sept. 30, June 30, Dec. 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 Sept. 30, 2006 June 30, 2006 Dec. 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-14   Humana Inc. 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-15   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-16   Humana Inc. 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-17   Humana Inc. 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-18   Humana Inc. 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 164,179  164,496  164,908  165,149  166,037  166,076  166,371  166,521  common share   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-19   Humana Inc. 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-20   Humana Inc. 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. Providers 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 the company’s 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.