Humana 2006 Annual Report Download - page 45

• Cash flows from operations increased $1,076.6 million to $1,686.7 million for 2006 compared to $610.1
million for 2005 primarily due to Medicare enrollment growth, improved earnings and the impact of our
new Part D offering. Our operating cash flows were favorably impacted by the Part D provisions of our
Medicare contracts, including $738.7 million in estimated net amounts owed to CMS under the Part D
risk corridor provisions which are expected to be settled in mid-2007.
• Net gains of $75.7 million from sales of venture capital investments contributed to investment income
during 2006.
• The effective income tax rate was 36.0% for 2006 compared to 26.3% for 2005. The lower effective tax
rate in 2005 primarily reflects the favorable impact from the resolution of a contingent gain of $22.8
million.
• We issued $500 million of 6.45% senior notes due June 1, 2016 in May 2006, replaced our existing
5-year $600 million unsecured revolving credit agreement with a new 5-year $1.0 billion unsecured
revolving credit agreement in July 2006, and repaid our $300 million of 7.25% senior notes in August
2006. These transactions are more fully described in Note 10 to the consolidated financial statements
included in Item 8.—Financial Statements and Supplementary Data.
We intend for the discussion of our financial condition and results of operations that follows to assist in the
understanding of our financial statements and related changes in certain key items in those financial statements
from year to year, and the primary factors that accounted for those changes, as well as how certain critical
accounting principles and estimates impact our financial statements.
2005 Settlement of Class Action Litigation
On October 17, 2005, we reached an agreement with representatives of more than 700,000 physicians to
settle a nationwide class action suit. In connection with the settlement and other related litigation costs, we
recorded pretax administrative expenses of $71.9 million ($44.8 million after taxes, or $0.27 per diluted common
share) in the third quarter of 2005. Of the $71.9 million, $33.4 million was included in the Government segment
results and the remaining $38.5 million was included in the Commercial segment results. These amounts were
paid in 2006.
2005 Hurricane Katrina
Certain of our operations, primarily the Louisiana market, were negatively affected by the impact of
Hurricane Katrina in August 2005. Expenses related to Hurricane Katrina primarily stemmed from our efforts, in
cooperation with Departments of Insurance in the affected states, to help our members by offering participating-
provider benefits at non-participating providers’ rates, paying claims for members who were unable at the time to
meet their premium obligations and similar measures. In connection with Hurricane Katrina, we recorded pretax
medical and administrative expenses of $27.0 million ($16.9 million after taxes, or $0.10 per diluted common
share) during the third and fourth quarters of 2005. Of the $27.0 million, $5.9 million was included in the
Government segment results and the remaining $21.1 million was included in the Commercial segment results.
Recent Acquisitions
On May 1, 2006, our Commercial segment acquired CHA Service Company, or CHA Health, a health plan
serving employer groups in Kentucky, for cash consideration of $67.5 million, including a $1.7 million
contingent purchase price settlement paid in January 2007. This acquisition strengthens our position in the
Kentucky market. The acquisition of CHA Health added approximately 60,100 fully insured group members and
28,300 ASO members to our Commercial segment medical membership. This transaction did not have a material
impact on our results of operations or cash flows from operations for 2006.
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