Humana Reports Third Quarter Financial Results, Provides 2009 Financial Guidance, Comments on Capital and Liquidity

Humana Inc. (NYSE: HUM) today reported diluted earnings per common share (EPS) for the quarter ended September 30, 2008 (3Q08) of $1.09 compared to $1.78 per share for the quarter ended September 30, 2007 (3Q07). The 3Q08 results included $0.40 per share in realized losses primarily associated with other-than-temporary impairments in the company’s investment and securities lending portfolios as well as sales of distressed financial institution securities during 3Q08. Excluding the $0.40 in realized losses, non-GAAP 3Q08 EPS of $1.49^(a)(e) was at the upper end of the company’s prior guidance of $1.45 to $1.50 per share.

Looking ahead to the year ending December 31, 2009 (FY09), the company anticipates a significant increase in earnings over that for the year ending December 31, 2008 (FY08) with EPS projected for FY09 to be in the range of $5.90 to $6.10.

"Our operating results came in as expected during the third quarter and, more importantly, we're forecasting good EPS growth in 2009,” said Michael B. McCallister, Humana’s president and chief executive officer. "As we previously disclosed, a relatively small portion of our investments were in financial institutions that are now in distress. However, that did not impact our operational progress and our financial position remains strong.”

The company has updated its expectations for 2008 EPS as follows:

Consolidated Highlights for 3Q08

Revenues – 3Q08 consolidated revenues rose 13 percent to $7.15 billion from $6.32 billion in 3Q07, with total premium and administrative services fees up 15 percent compared to the prior year’s quarter, primarily driven by higher average membership in 3Q08 versus 3Q07 for the company’s Medicare Advantage, Commercial medical and specialty products.

Consolidated revenues for 3Q08 include a net realized investment loss of $16.8 million in 3Q08 versus net realized investment income of $82.4 million in 3Q07. The year-over-year decline resulted from realized losses associated with other-than-temporary investment impairments and sales of distressed financial institution securities during 3Q08, as follows:

Benefit expenses – The 3Q08 consolidated benefits ratio (benefit expenses as a percent of premium revenues) was higher than that for the prior year’s quarter, as expected. The 3Q08 consolidated benefits ratio of 83.1 percent compares to 81.3 percent in 3Q07. This year-over-year increase was primarily driven by a 270 basis point increase in the Government Segment benefits ratio associated with higher PDP claim expenses.

Selling, general, & administrative (SG&A) expenses – The 3Q08 consolidated SG&A expense ratio (SG&A expenses as a percent of premiums, administrative services fees and other revenue) of 13.7 percent for 3Q08 compares to 13.3 percent in 3Q07. The 40 basis-point year-over-year increase was driven by a higher SG&A expense ratio for the Commercial Segment associated with a higher mix of members in specialty and individual medical products than in the prior year.

Investment and Securities Lending Portfolios

At September 30, 2008, the company had cash, cash equivalents, and debt and equity securities in its investment portfolio of $6.46 billion, up 2 percent from $6.36 billion at June 30, 2008. Additionally, the company held securities as collateral in connection with the company’s securities lending program of $488.4 million at September 30, 2008 compared to $800.3 million at June 30, 2008.

The company regularly evaluates its investment securities for impairment. For the purpose of determining gross realized gains and losses, the cost of investment securities is based upon specific identification. In analyzing individual securities for other-than-temporary impairments, the company considers factors affecting the issuer, factors affecting the industry the issuer operates within, and general debt and equity market trends. The company also considers the length of time an investment’s fair value has been below its carrying value, the severity of the decline, the near-term prospects for recovery to cost, and the company’s intent and ability to hold the investment until maturity or market recovery is realized.

As of September 30, 2008, approximately 1.3 percent of the assets in the company’s investment portfolio and approximately 5.1 percent of the securities held as collateral in connection with its securities lending program were deemed to have been impaired on an other-than-temporary basis, with the related losses realized as a component of 3Q08 net income.

Government Segment Results

Pretax results:

• Government segment pretax income decreased to $271.7 million in 3Q08 from $416.3 million in 3Q07 as the improved operating performance in the company’s Medicare Advantage business was more than offset by the combined effect of the previously announced lower 2008 PDP operating results and net realized investment losses during 3Q08.

Enrollment:

• Medicare Advantage membership grew to 1,368,000 at September 30, 2008, an increase of 230,000 members, or 20 percent from September 30, 2007, up 23,000, or 2 percent versus June 30, 2008, and 225,000 members, or 20 percent year to date. The increased net Medicare Advantage membership includes 7,300 members from acquisitions during 3Q08 and 48,000 such members acquired year to date.
• Membership in the company’s stand-alone PDPs totaled 3,089,000 at September 30, 2008 compared to 3,459,700 at September 30, 2007 and 3,105,200 at June 30, 2008.
• Military services membership at September 30, 2008 of 2,953,900 was up approximately 3 percent from September 30, 2007 and essentially unchanged from June 30, 2008.

Premiums and administrative services fees:

• Medicare Advantage premiums of $3.50 billion in 3Q08 increased 24 percent compared to $2.83 billion in 3Q07, primarily the combined result of a 19 percent increase in average membership and higher per member premium revenues.
• Medicare stand-alone PDP premiums of $782.9 million in 3Q08 decreased 12 percent compared to $890.4 million in 3Q07, primarily the result of a 10 percent decline in average membership versus that for 3Q07.
• Military services premiums and administrative services fees during 3Q08 increased $58.8 million to $790.6 million compared to $731.8 million in 3Q07.

Benefit Expenses:

• The Government Segment benefits ratio increased 270 basis points to 84.1 percent in 3Q08 compared to 81.4 percent in the prior year’s quarter. As previously noted, improved operating performance year over year in the company’s Medicare Advantage business was more than offset by an increase in the stand-alone PDP benefits ratio.

SG&A Expenses:

• The Government Segment’s SG&A expense ratio for 3Q08 of 10.2 percent was unchanged from that of 3Q07 and increased 70 basis points from the second quarter of 2008 as the company prepared for marketing of its 2009 Medicare plans on October 1, 2008.

Commercial Segment Results

Pretax results:

• Commercial Segment pretax earnings decreased 82 percent year over year, to $11.2 million in 3Q08 compared to $62.2 million in 3Q07. The net decline primarily reflects the effect of $56.4 million in net realized investment losses during 3Q08 associated with other-than-temporary investment write-downs and sales of securities from distressed financial institutions which more than offset the impact of improved operating results.

Enrollment:

• Commercial Segment medical membership grew 254,900 members to 3,554,000 at September 30, 2008, an increase of 8 percent from the September 30, 2007 medical membership for the segment of 3,299,100 and up 3 percent year to date. On an organic basis, Commercial Segment medical membership grew 191,800 members, or 6 percent year-over-year and 39,300 members, or 1 percent year to date.
• Organic medical membership growth in strategic commercial lines of business for 3Q08 compared to 3Q07 were as follows: HumanaOne membership increased 42 percent, Smart plans and other consumer offerings membership grew 20 percent, Small Group business membership increased 4 percent and ASO membership grew 4 percent.
• Membership in Commercial Segment specialty products^(d) at September 30, 2008 rose to 6,727,400 compared to 1,930,100 at September 30, 2007, primarily driven by the addition of membership from two specialty-product companies acquired during the fourth quarter of 2007. Specialty membership was essentially unchanged from December 31, 2007.

Premiums and administrative services fees:

• Premiums and administrative services fees for the Commercial Segment increased 17 percent to $1.88 billion in 3Q08 compared to $1.61 billion in the prior year’s quarter, primarily due to revenues associated with acquired companies and growth in strategic lines of business.
• Commercial Segment medical premiums for fully-insured groups increased approximately 3 percent on a per-member basis during 3Q08 compared to 3Q07 reflecting a shift in the mix of fully-insured group business from the prior year’s quarter to include fewer groups with higher-than-average premiums.

Benefit Expenses:

• The Commercial Segment benefits ratio for 3Q08 of 80.2 percent was 80 basis points lower than the 3Q07 benefits ratio of 81.0 percent, primarily due to a higher mix of individual and small group membership as a percent of the fully insured book and higher specialty product membership compared to the prior year’s quarter, together with continued underwriting discipline.

SG&A Expenses:

• The Commercial Segment SG&A expense ratio of 23.0 percent for 3Q08 compares to 21.8 percent in 3Q07, primarily driven by the higher administrative costs per member associated with small group, individual, administrative services only and specialty membership.

Cash Flows from Operations

Cash flows provided by operations for 3Q08 of $577.3 million compared to cash flows used in operations of $637.7 million in 3Q07 primarily reflecting changes in working capital accounts associated with the timing of the receipt of certain premiums from Medicare, impacting both premiums receivable and unearned revenues.

The company also evaluates operating cash flows on a non-GAAP basis^(a)(f).

Non-GAAP cash flows provided by operations increased to $577.3 million^(a)(f) in 3Q08 from $537.6 million^(a)(f) in 3Q07 also driven primarily by the changes in working capital accounts described above.

Capital and Liquidity

The company believes both the parent company (Humana Inc.) and its operating subsidiaries have ample capital and liquidity to meet all financial regulatory requirements and to satisfy their respective obligations.

Because premium revenues are generally collected in advance of medical claim payments by a period of up to several months, the company’s business produces positive cash flows during periods of increasing enrollment. In addition, to support its liquidity needs the parent company has available a 5-year, $1.0 billion unsecured revolving credit agreement which expires in July 2011. As of September 30, 2008 there were no borrowings outstanding under this credit agreement. During the fourth quarter of 2008, the company expects to draw approximately $250 million under the revolving credit agreement in order to complete its pending acquisition of Cariten Healthcare (announced August 4, 2008).

The company has various issuances of senior notes. As of September 30, 2008, the senior notes outstanding aggregated approximately $1.55 billion, with the first senior notes due to mature in June 2016. Upon issuance of each of the senior notes, the company had entered into interest-rate swap agreements to exchange the fixed interest rate under these senior notes for variable interest rates based on LIBOR. Based primarily on conditions in the credit markets, on October 7, 2008, the company terminated each of the swap agreements outstanding associated with its senior notes, resulting in an anticipated weighted-average fixed coupon rate on the company’s senior notes of 6.28 percent versus a weighted average fixed rate on the senior notes of 6.94 percent and the then-current floating rate of 6.59 percent. In exchange for terminating its rights under the various interest-rate swaps, the company received $108.3 million in cash from its counterparties, which resulted in an offsetting adjustment to the related debt obligations.

Certain of the company’s subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to the parent company, and require minimum levels of equity as well as limit the investments to approved securities. The amount of dividends that may be paid to the parent company by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of the assets held, minimum requirements can vary significantly at the state level.

As of June 30, 2008, the company had aggregate statutory capital and surplus of $3.0 billion in its state-regulated subsidiaries, $1.1 billion above the aggregate $1.9 billion in applicable statutory requirements which would trigger any regulatory action by the respective states. The company anticipates at least maintaining the current excess subsidiary capital levels when statutory filings for 3Q08 are completed in November 2008, primarily driven by subsidiary operating earnings exceeding realized investment losses during 3Q08.

Acquisition Activity

During 3Q08, the company completed its acquisition of Metcare Health Plans, Inc. in Florida. On August 4, 2008, the company announced its intent to acquire PHP Companies, Inc. (d/b/a Cariten Healthcare), from Knoxville, Tennessee-based Covenant Health for cash consideration of approximately $245 million. The transaction has received all required regulatory approvals and is scheduled to close in the fourth quarter of 2008.

Share Repurchase Program

On July 28, 2008, the company’s Board of Directors increased its share repurchase authorization for use of up to $250 million for this program, excluding the $92.8 million used year to date in connection with the Board of Director’s prior authorization in February 2008. These discretionary repurchases may be made from time to time in the open market or in privately negotiated transactions. The program has an end date of December 31, 2009. The company has not yet repurchased shares under the July 2008 authorization.

Footnotes

(a) The company believes that the non-GAAP measures included in this release, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses these non-GAAP financial measures as indicators of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

(b) Investments were disclosed by the company in its Form 8-K filed with the Securities and Exchange Commission on September 15, 2008.

(c) Investments were disclosed by the company during its second quarter 2008 earnings conference call held August 4, 2008.

(d) The Commercial Segment provides a full range of insured specialty products including dental, vision and other supplemental products. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products. Other supplemental benefits include life, disability, and fixed-benefit products including cancer and critical illness policies.

(e) Realized investment losses for the 2008 third quarter which are excluded for this non-GAAP measure result from portfolio valuations associated with current financial market conditions and primarily do not relate to the underwriting or servicing of the company’s products.

(f) 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.

Conference Call & Virtual Slide Presentation

Humana will host a conference call, as well as a virtual slide presentation, at 7:00 a.m. eastern time today to discuss its financial results for the quarter and the company’s expectations for future earnings. A live virtual presentation (audio with slides) may be accessed via Humana’s Investor Relations page at www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.

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

Cautionary Statement

This news release contains statements and earnings guidance points that are forward-looking. The forward-looking items herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking items may be significantly impacted by certain risks and uncertainties described in the following company documents, as filed with the Securities and Exchange Commission:

• Form 10-K for the year ended December 31, 2007;
• Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008;
• Form 8-Ks filed during 2008.

About Humana

Humana Inc., headquartered in Louisville, Kentucky, is one of the nation’s largest publicly traded health and supplemental benefits companies, with approximately 11.5 million medical members. Humana is a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government programs and individuals.

Over its 47-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.

More information regarding Humana is available to investors via the Investor Relations page of the company’s web site at www.humana.com, including copies of:

• Annual reports to stockholders;
• Securities and Exchange Commission filings;
• Most recent investor conference presentations;
• Quarterly earnings news releases;
• Replays of most recent earnings release conference calls;
• Calendar of events (including upcoming earnings conference call dates and times, as well as planned interaction with research analysts and institutional investors);
• Corporate Governance information.

Humana Inc. – Earnings Guidance Points as of October 27, 2008