UNH 2011.9.30 10Q
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________ 
Form 10-Q
__________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 1-10864
__________________________________________________________ 
UnitedHealth Group Incorporated
(Exact name of registrant as specified in its charter)
 __________________________________________________________ 
Minnesota
 
41-1321939
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
UnitedHealth Group Center
9900 Bren Road East
Minnetonka, Minnesota
 
55343
(Address of principal executive offices)
 
(Zip Code)
(952) 936-1300
(Registrant’s telephone number, including area code)
__________________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x
As of October 31, 2011, there were 1,066,026,494 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
 
 
 
 
 
UNITEDHEALTH GROUP
Table of Contents
 
 
 
Page
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.



Table of Contents


PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data)
 
September 30,
2011
 
December 31,
2010
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
13,679

 
$
9,123

Short-term investments
 
2,698

 
2,072

Accounts receivable, net
 
2,234

 
2,061

Assets under management
 
2,597

 
2,550

Deferred income taxes
 
492

 
403

Other current receivables, net
 
2,142

 
1,643

Prepaid expenses and other current assets
 
666

 
541

Total current assets
 
24,508

 
18,393

Long-term investments
 
15,398

 
14,707

Property, equipment and capitalized software, net
 
2,388

 
2,200

Goodwill
 
23,723

 
22,745

Other intangible assets, net
 
2,855

 
2,910

Other assets
 
2,038

 
2,108

Total assets
 
$
70,910

 
$
63,063

Liabilities and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
9,448

 
$
9,220

Accounts payable and accrued liabilities
 
6,643

 
6,488

Other policy liabilities
 
6,532

 
3,979

Commercial paper and current maturities of long-term debt
 
2,364

 
2,480

Unearned revenues
 
3,631

 
1,533

Total current liabilities
 
28,618

 
23,700

Long-term debt, less current maturities
 
9,555

 
8,662

Future policy benefits
 
2,443

 
2,361

Deferred income taxes and other liabilities
 
2,422

 
2,515

Total liabilities
 
43,038

 
37,238

Commitments and contingencies (Note 12)
 
 
 
 
Shareholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value - 10 shares authorized;
no shares issued or outstanding
 
—

 
—

Common stock, $0.01 par value - 3,000 shares authorized;
1,054 and 1,086 issued and outstanding
 
11

 
11

Retained earnings
 
27,464

 
25,562

Accumulated other comprehensive income (loss):
 
 
 
 
Net unrealized gains on investments, net of tax effects
 
412

 
280

Foreign currency translation losses
 
(15
)
 
(28
)
Total shareholders’ equity
 
27,872

 
25,825

Total liabilities and shareholders’ equity
 
$
70,910

 
$
63,063

See Notes to the Condensed Consolidated Financial Statements

1
Table of Contents


UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
 
Premiums
 
$
22,806

 
$
21,467

 
$
68,622

 
$
63,720

Services
 
1,637

 
1,469

 
4,891

 
4,246

Products
 
667

 
596

 
1,921

 
1,701

Investment and other income
 
170

 
136

 
512

 
458

Total revenues
 
25,280

 
23,668

 
75,946

 
70,125

Operating costs:
 
 
 
 
 
 
 
 
Medical costs
 
18,408

 
17,192

 
55,711

 
51,583

Operating costs
 
3,899

 
3,548

 
11,249

 
10,183

Cost of products sold
 
609

 
536

 
1,762

 
1,553

Depreciation and amortization
 
294

 
247

 
834

 
744

Total operating costs
 
23,210

 
21,523

 
69,556

 
64,063

Earnings from operations
 
2,070

 
2,145

 
6,390

 
6,062

Interest expense
 
(129
)
 
(119
)
 
(366
)
 
(363
)
Earnings before income taxes
 
1,941

 
2,026

 
6,024

 
5,699

Provision for income taxes
 
(670
)
 
(749
)
 
(2,140
)
 
(2,108
)
Net earnings
 
$
1,271

 
$
1,277

 
$
3,884

 
$
3,591

Basic net earnings per common share
 
$
1.19

 
$
1.15

 
$
3.62

 
$
3.18

Diluted net earnings per common share
 
$
1.17

 
$
1.14

 
$
3.56

 
$
3.15

Basic weighted-average number of common shares outstanding
 
1,065

 
1,115

 
1,074

 
1,129

Dilutive effect of common stock equivalents
 
18

 
9

 
17

 
10

Diluted weighted-average number of common shares outstanding
 
1,083

 
1,124

 
1,091

 
1,139

Anti-dilutive shares excluded from the calculation of dilutive effect of common stock equivalents
 
43

 
97

 
49

 
98

Cash dividends per common share
 
$
0.1625

 
$
0.1250

 
$
0.4500

 
$
0.2800

See Notes to the Condensed Consolidated Financial Statements

2
Table of Contents


UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
 
 
 
 
 
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
 
 
Common Stock
 
 
 
 
(in millions)
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2011
 
1,086

 
$
11

 
$
—

 
$
25,562

 
$
252

 
$
25,825

Net earnings
 
 
 
 
 
 
 
3,884

 
 
 
3,884

Net unrealized holding gains on investment securities during the period, net of tax expense
 
 
 
 
 
 
 
 
 
200

 
200

Reclassification adjustment for net realized gains included in net earnings, net of tax expense
 
 
 
 
 
 
 
 
 
(68
)
 
(68
)
Foreign currency translation gain
 
 
 
 
 
 
 
 
 
13

 
13

Issuances of common stock, and related tax benefits
 
14

 
—

 
231

 
 
 
 
 
231

Common stock repurchases
 
(46
)
 
—

 
(593
)
 
(1,501
)
 
 
 
(2,094
)
Share-based compensation, and related tax benefits
 
 
 
 
 
362

 
 
 
 
 
362

Common stock dividends
 
 
 
 
 
 
 
(481
)
 
 
 
(481
)
Balance at September 30, 2011
 
1,054

 
$
11

 
$
—

 
$
27,464

 
$
397

 
$
27,872

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2010
 
1,147

 
$
11

 
$
—

 
$
23,342

 
$
253

 
$
23,606

Net earnings
 
 
 
 
 
 
 
3,591

 
 
 
3,591

Net unrealized holding gains on investment securities during the period, net of tax expense
 
 
 
 
 
 
 
 
 
273

 
273

Reclassification adjustment for net realized gains included in net earnings, net of tax expense
 
 
 
 
 
 
 
 
 
(36
)
 
(36
)
Foreign currency translation gain
 
 
 
 
 
 
 
 
 
1

 
1

Issuances of common stock, and related tax benefits
 
11

 
—

 
126

 
 
 
 
 
126

Common stock repurchases
 
(59
)
 
—

 
(381
)
 
(1,511
)
 
 
 
(1,892
)
Share-based compensation, and related tax benefits
 
 
 
 
 
255

 
 
 
 
 
255

Common stock dividends
 
 
 
 
 
 
 
(313
)
 
 
 
(313
)
Balance at September 30, 2010
 
1,099

 
$
11

 
$
—

 
$
25,109

 
$
491

 
$
25,611

See Notes to the Condensed Consolidated Financial Statements

3
Table of Contents


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Nine Months Ended September 30,
(in millions)
 
2011
 
2010
Operating activities
 
 
 
 
Net earnings
 
$
3,884

 
$
3,591

Noncash items:
 
 
 
 
Depreciation and amortization
 
834

 
744

Deferred income taxes
 
(88
)
 
(4
)
Share-based compensation
 
316

 
250

Other, net
 
(80
)
 
25

Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(215
)
 
(35
)
Other assets
 
(235
)
 
94

Medical costs payable
 
74

 
(152
)
Accounts payable and other liabilities
 
254

 
297

Other policy liabilities
 
542

 
93

Unearned revenues
 
2,097

 
(71
)
Cash flows from operating activities
 
7,383

 
4,832

Investing activities
 
 
 
 
Purchases of investments
 
(6,984
)
 
(5,177
)
Sales of investments
 
2,986

 
1,927

Maturities of investments
 
2,974

 
2,236

Cash paid for acquisitions, net of cash assumed
 
(1,478
)
 
(2,072
)
Cash received from dispositions, net of cash transferred
 
385

 
—

Purchases of property, equipment and capitalized software
 
(806
)
 
(548
)
Cash flows used for investing activities
 
(2,923
)
 
(3,634
)
Financing activities
 
 
 
 
Common stock repurchases
 
(2,094
)
 
(1,892
)
Proceeds from common stock issuances
 
311

 
189

Dividends paid
 
(481
)
 
(313
)
Proceeds from commercial paper, net
 
820

 
1,131

Proceeds from issuance of long-term debt
 
747

 
—

Repayments of long-term debt
 
(955
)
 
(1,333
)
Interest rate swap termination
 
132

 
—

Customer funds administered
 
1,656

 
1,014

Checks outstanding
 
(94
)
 
(221
)
Other, net
 
54

 
4

Cash flows from (used for) financing activities
 
96

 
(1,421
)
Increase (decrease) in cash and cash equivalents
 
4,556

 
(223
)
Cash and cash equivalents, beginning of period
 
9,123

 
9,800

Cash and cash equivalents, end of period
 
$
13,679

 
$
9,577

See Notes to the Condensed Consolidated Financial Statements

4
Table of Contents


UNITEDHEALTH GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include the consolidated accounts of UnitedHealth Group Incorporated and its subsidiaries (the Company). The Company has eliminated intercompany balances and transactions. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. Generally Accepted Accounting Principles (U.S. GAAP). In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC), the Company has omitted certain footnote disclosures that would substantially duplicate the disclosures contained in its annual audited Consolidated Financial Statements. Therefore, these Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and the Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC (2010 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
During the first quarter of 2011, the Company renamed its reportable segments to conform to the naming conventions of its market facing businesses. Consequently, the Health Benefits reportable segment is now UnitedHealthcare, and the health services businesses, OptumHealth, Ingenix, and Prescriptions Solutions, are now under the Company’s Optum brand as OptumHealth, OptumInsight, and OptumRx, respectively. On January 1, 2011, the Company realigned certain of its businesses to respond to changes in the markets it serves and the opportunities that are emerging as the health system evolves. For example, OptumHealth’s results of operations now include the Company’s clinical services assets, including Southwest Medical multi-specialty clinics in Nevada and Evercare nurse practitioners serving the frail and elderly, which had historically been reported in UnitedHealthcare Employer & Individual and UnitedHealthcare Medicare & Retirement, respectively. UnitedHealthcare Employer & Individual’s results of operations now include OptumHealth Specialty Benefits, including dental, vision, life and disability. The Company’s reportable segments remain the same and prior period segment financial information has been recast to conform to the 2011 presentation. See Note 11 of Notes to the Condensed Consolidated Financial Statements for segment financial information.
Use of Estimates. These Condensed Consolidated Financial Statements include certain amounts based on the Company’s best estimates and judgments. The Company’s most significant estimates relate to medical costs payable and medical costs, risk-sharing provisions related to revenues, valuation and impairment analysis of goodwill and other intangible assets, other policy liabilities, other current receivables, valuation of investments, income taxes and contingent liabilities. These estimates require the application of complex assumptions and judgments, often because they involve matters that are inherently uncertain and will likely change in subsequent periods. The impact of any changes in estimates is included in earnings in the period in which the estimate is adjusted.
Recently Issued Accounting Standards. In July 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-06, “Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers a consensus of the FASB Emerging Issues Task Force” (ASU 2011-06). This update addresses the recognition and classification of an entity’s share of the annual health insurance industry assessment (the “fee”) mandated by the Patient Protection and Affordable Care Act and its related reconciliation act (Health Reform Legislation). The fee will be levied on health insurers for each calendar year beginning on or after January 1, 2014 and is not deductible for income tax purposes. For reporting entities subject to the fee, the amendments in ASU 2011-06 specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (ASU 2011-08). This update intends to simplify how entities test goodwill for impairment by including an option for entities to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test on the subject reporting unit. The amendments in ASU 2011-08 will be effective for annual and interim goodwill impairment tests performed for the Company's fiscal year 2012. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before the issuance of the amendments, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of ASU 2011-08 is not expected to have a material impact on the Company's Condensed Consolidated Financial Statements.
The Company has determined that there have been no other recently issued accounting standards that will have a material

5
Table of Contents


impact on its Condensed Consolidated Financial Statements.

2.
Investments

A summary of short-term and long-term investments is as follows:
(in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2011
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,207

 
$
53

 
$
—

 
$
2,260

State and municipal obligations
 
6,353

 
331

 
(4
)
 
6,680

Corporate obligations
 
5,426

 
194

 
(28
)
 
5,592

U.S. agency mortgage-backed securities
 
2,245

 
80

 
(1
)
 
2,324

Non-U.S. agency mortgage-backed securities
 
498

 
23

 
(1
)
 
520

Total debt securities - available-for-sale
 
16,729

 
681

 
(34
)
 
17,376

Equity securities - available-for-sale
 
514

 
24

 
(18
)
 
520

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
167

 
8

 
—

 
175

State and municipal obligations
 
15

 
—

 
—

 
15

Corporate obligations
 
18

 
—

 
—

 
18

Total debt securities - held-to-maturity
 
200

 
8

 
—

 
208

Total investments
 
$
17,443

 
$
713

 
$
(52
)
 
$
18,104

December 31, 2010
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,214

 
$
28

 
$
(8
)
 
$
2,234

State and municipal obligations
 
6,007

 
183

 
(42
)
 
6,148

Corporate obligations
 
5,111

 
210

 
(11
)
 
5,310

U.S. agency mortgage-backed securities
 
1,851

 
58

 
(6
)
 
1,903

Non-U.S. agency mortgage-backed securities
 
439

 
26

 
—

 
465

Total debt securities - available-for-sale
 
15,622

 
505

 
(67
)
 
16,060

Equity securities - available-for-sale
 
508

 
22

 
(14
)
 
516

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
167

 
5

 
—

 
172

State and municipal obligations
 
15

 
—

 
—

 
15

Corporate obligations
 
21

 
—

 
—

 
21

Total debt securities - held-to-maturity
 
203

 
5

 
—

 
208

Total investments
 
$
16,333

 
$
532

 
$
(81
)
 
$
16,784


Included in the Company’s investment portfolio were securities collateralized by sub-prime home equity lines of credit with fair values of $2 million and $6 million as of September 30, 2011 and December 31, 2010, respectively. Also included were Alt-A securities with fair values of $10 million and $15 million as of September 30, 2011 and December 31, 2010, respectively.


6
Table of Contents


The fair values of the Company’s mortgage-backed securities by credit rating and origination as of September 30, 2011 were as follows:
(in millions)
 
AAA
 
AA
 
A
 
Non-Investment
Grade
 
Total Fair
Value
2011
 
$
21

 
$
—

 
$
—

 
$
—

 
$
21

2010
 
—

 
3

 
—

 
—

 
3

2007
 
95

 
—

 
—

 
3

 
98

2006
 
173

 
—

 
—

 
10

 
183

2005
 
138

 
—

 
—

 
3

 
141

Pre - 2005
 
71

 
—

 
3

 
—

 
74

U.S. agency mortgage-backed securities
 
2,324

 
—

 
—

 
—

 
2,324

Total
 
$
2,822

 
$
3

 
$
3

 
$
16

 
$
2,844

The amortized cost and fair value of available-for-sale debt securities as of September 30, 2011, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,824

 
$
2,838

Due after one year through five years
 
5,044

 
5,215

Due after five years through ten years
 
4,332

 
4,591

Due after ten years
 
1,786

 
1,888

U.S. agency mortgage-backed securities
 
2,245

 
2,324

Non-U.S. agency mortgage-backed securities
 
498

 
520

Total debt securities - available-for-sale
 
$
16,729

 
$
17,376

The amortized cost and fair value of held-to-maturity debt securities as of September 30, 2011, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
41

 
$
41

Due after one year through five years
 
132

 
136

Due after five years through ten years
 
18

 
19

Due after ten years
 
9

 
12

Total debt securities - held-to-maturity
 
$
200

 
$
208


7
Table of Contents


The fair value of available-for-sale investments with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
 
$
366

 
$
(3
)
 
$
35

 
$
(1
)
 
$
401

 
$
(4
)
Corporate obligations
 
1,296

 
(28
)
 
8

 
—

 
1,304

 
(28
)
U.S. agency mortgage-backed securities
 
191

 
(1
)
 
1

 
—

 
192

 
(1
)
Non-U.S. agency mortgage-backed securities
 
56

 
(1
)
 
—

 
—

 
56

 
(1
)
Total debt securities - available-for-sale
 
$
1,909

 
$
(33
)
 
$
44

 
$
(1
)
 
$
1,953

 
$
(34
)
Equity securities - available-for-sale
 
$
242

 
$
(17
)
 
$
12

 
$
(1
)
 
$
254

 
$
(18
)
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
548

 
$
(8
)
 
$
—

 
$
—

 
$
548

 
$
(8
)
State and municipal obligations
 
1,383

 
(40
)
 
18

 
(2
)
 
1,401

 
(42
)
Corporate obligations
 
949

 
(11
)
 
14

 
—

 
963

 
(11
)
U.S. agency mortgage-backed securities
 
355

 
(6
)
 
—

 
—

 
355

 
(6
)
Total debt securities - available-for-sale
 
$
3,235

 
$
(65
)
 
$
32

 
$
(2
)
 
$
3,267

 
$
(67
)
Equity securities - available-for-sale
 
$
206

 
$
(14
)
 
$
11

 
$
—

 
$
217

 
$
(14
)
The unrealized losses from all securities as of September 30, 2011 were generated from 2,100 positions out of a total of 15,000 positions. The Company believes that it will collect the principal and interest due on its investments that have an amortized cost in excess of fair value. The unrealized losses on investments in U.S. government and agency obligations, state and municipal obligations and corporate obligations as of September 30, 2011 were primarily caused by interest rate increases and not by unfavorable changes in the credit ratings associated with these securities. The Company evaluates impairment at each reporting period for securities where the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality of the issuers and the credit ratings of the state and municipal obligations and the corporate obligations, noting neither a significant deterioration since purchase nor other factors leading to an other-than-temporary impairment (OTTI). The unrealized losses on mortgage-backed securities as of September 30, 2011 were primarily caused by higher interest rates in the marketplace. These unrealized losses represented less than 1% of the total amortized cost of the Company’s mortgage-backed security holdings as of September 30, 2011. The Company believes these losses to be temporary. All of the Company’s mortgage-backed securities in an unrealized loss position as of September 30, 2011 were rated “AAA” with no known deterioration or other factors leading to an OTTI. As of September 30, 2011, the Company did not have the intent to sell any of the securities in an unrealized loss position.
As of September 30, 2011, the Company’s holdings of non-U.S. agency mortgage-backed securities included $7 million of commercial mortgage loans in default. These investments were acquired in the first quarter of 2008 pursuant to an acquisition and were recorded at fair value. They represented less than 1% of the Company’s total mortgage-backed security holdings as of September 30, 2011.
A portion of the Company’s investments in equity securities and venture capital funds consists of investments held in various public and nonpublic companies concentrated in the areas of health care services and related information technologies. Market conditions that affect the value of health care and related technology stocks will likewise impact the value of the Company’s equity portfolio. The equity securities and venture capital funds were evaluated for severity and duration of unrealized loss, overall market volatility and other market factors.

8
Table of Contents


Net realized gains included in Investment and Other Income on the Condensed Consolidated Statements of Operations were from the following sources:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(in millions)
 
2011
 
2010
 
2011
 
2010
Total OTTI
 
$
(4
)
 
$
(13
)
 
$
(10
)
 
$
(18
)
Portion of loss recognized in other comprehensive income
 
—

 
—

 
—

 
—

Net OTTI recognized in earnings
 
(4
)
 
(13
)
 
(10
)
 
(18
)
Gross realized losses from sales
 
(5
)
 
—

 
(9
)
 
(3
)
Gross realized gains from sales
 
46

 
14

 
125

 
76

Net realized gains
 
$
37

 
$
1

 
$
106

 
$
55

For the three and nine months ended September 30, 2011 and 2010, all of the recorded OTTI charges resulted from the Company’s intent to sell certain impaired securities.
 
3.
Fair Value
Fair values of available-for-sale debt and equity securities are based on quoted market prices, where available. The Company obtains one price for each security primarily from a third-party pricing service (pricing service), which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to prices reported by its custodian, its investment consultant and third-party investment advisors. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service.
Certain assets and liabilities are measured at fair value in the financial statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by U.S. GAAP. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The fair value hierarchy is as follows:
Level 1 — Quoted (unadjusted) prices for identical assets/liabilities in active markets.
Level 2 — Other observable inputs, either directly or indirectly, including:
•
Quoted prices for similar assets/liabilities in active markets;
•
Quoted prices for identical or similar assets in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);
•
Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and
•
Inputs that are derived principally from or corroborated by other observable market data.
Level 3 — Unobservable inputs that cannot be corroborated by observable market data.

9
Table of Contents


The following table presents a summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis excluding AARP related assets and liabilities.
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
September 30, 2011
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,935

 
$
1,744

 
$
—

 
$
13,679

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,432

 
828

 
—

 
2,260

State and municipal obligations
 
—

 
6,680

 
—

 
6,680

Corporate obligations
 
44

 
5,416

 
132

 
5,592

U.S. agency mortgage-backed securities
 
—

 
2,324

 
—

 
2,324

Non-U.S. agency mortgage-backed securities
 
—

 
513

 
7

 
520

Total debt securities - available-for-sale
 
1,476

 
15,761

 
139

 
17,376

Equity securities - available-for-sale
 
309

 
2

 
209

 
520

Total cash, cash equivalents and investments at fair value
 
13,720

 
17,507

 
348

 
31,575

Interest rate swap assets
 
—

 
6

 
—

 
6

Total assets at fair value
 
$
13,720

 
$
17,513

 
$
348

 
$
31,581

Percentage of total assets at fair value
 
43
%
 
56
%
 
1
%
 
100
%
December 31, 2010
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,069

 
$
1,054

 
$
—

 
$
9,123

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,515

 
719

 
—

 
2,234

State and municipal obligations
 
—

 
6,148

 
—

 
6,148

Corporate obligations
 
31

 
5,146

 
133

 
5,310

U.S. agency mortgage-backed securities
 
—

 
1,903

 
—

 
1,903

Non-U.S. agency mortgage-backed securities
 
—

 
457

 
8

 
465

Total debt securities - available-for-sale
 
1,546

 
14,373

 
141

 
16,060

Equity securities - available-for-sale
 
306

 
2

 
208

 
516

Total cash, cash equivalents and investments at fair value
 
9,921

 
15,429

 
349

 
25,699

Interest rate swap assets
 
—

 
46

 
—

 
46

Total assets at fair value
 
$
9,921

 
$
15,475

 
$
349

 
$
25,745

Percentage of total assets at fair value
 
39
%
 
60
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$
—

 
$
104

 
$
—

 
$
104

There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2011 and 2010.

10
Table of Contents


The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance Program (the Program). The Company elected to measure the entirety of the AARP Assets Under Management at fair value pursuant to the fair value option. See Note 12 of Notes to the Consolidated Financial Statements in the Company’s 2010 10-K for further detail on AARP. The following table presents fair value information about the AARP Program-related financial assets and liabilities:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
September 30, 2011
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
133

 
$
11

 
$
—

 
$
144

Debt securities:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
533

 
211

 
—

 
744

State and municipal obligations
 
—

 
21

 
—

 
21

Corporate obligations
 
—

 
1,097

 
—

 
1,097

U.S. agency mortgage-backed securities
 
—

 
439

 
—

 
439

Non-U.S. agency mortgage-backed securities
 
—

 
150

 
—

 
150

Total debt securities
 
533

 
1,918

 
—

 
2,451

Equity securities - available-for-sale
 
—

 
2

 
—

 
2

Total cash, cash equivalents and investments at fair value
 
$
666

 
$
1,931

 
$
—

 
$
2,597

Other liabilities
 
$
26

 
$
48

 
$
—

 
$
74

Total liabilities at fair value
 
$
26

 
$
48

 
$
—

 
$
74

December 31, 2010
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
115

 
$
—

 
$
—

 
$
115

Debt securities:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
515

 
244

 
—

 
759

State and municipal obligations
 
—

 
15

 
—

 
15

Corporate obligations
 
—

 
1,129

 
—

 
1,129

U.S. agency mortgage-backed securities
 
—

 
393

 
—

 
393

Non-U.S. agency mortgage-backed securities
 
—

 
137

 
—

 
137

Total debt securities
 
515

 
1,918

 
—

 
2,433

Equity securities - available-for-sale
 
—

 
2

 
—

 
2

Total cash, cash equivalents and investments at fair value
 
$
630

 
$
1,920

 
$
—

 
$
2,550

Other liabilities
 
$
—

 
$
—

 
$
59

 
$
59

Total liabilities at fair value
 
$
—

 
$
—

 
$
59

 
$
59

There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2011 and 2010.

11
Table of Contents


The table below includes fair values for certain financial instruments for which it is practicable to estimate fair value. The carrying values and fair values of these financial instruments were as follows:
 
 
September 30, 2011
 
December 31, 2010
(in millions)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets
 
 
 
 
 
 
 
 
Debt securities - available-for-sale
 
$
17,376

 
$
17,376

 
$
16,060

 
$
16,060

Equity securities - available-for-sale
 
520

 
520

 
516

 
516

Debt securities - held-to-maturity
 
200

 
208

 
203

 
208

AARP Program-related investments
 
2,453

 
2,453

 
2,435

 
2,435

Interest rate swap assets
 
6

 
6

 
46

 
46

Liabilities
 
 
 
 
 
 
 
 
Senior unsecured notes
 
10,166

 
11,463

 
10,212

 
10,903

Interest rate swap liabilities
 
—

 
—

 
104

 
104

AARP Program-related other liabilities
 
74

 
74

 
59

 
59

The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts and other current receivables, unearned revenues, commercial paper, accounts payable and accrued liabilities approximate fair value because of their short-term nature. These assets and liabilities are not listed in the table above.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2.
Debt Securities. The estimated fair values of debt securities held as available-for-sale are based on quoted market prices and/or other market data for the same or comparable instruments and transactions in establishing the prices. Fair values of debt securities that do not trade on a regular basis in active markets but are priced using other observable inputs are classified as Level 2. The Company’s Level 3 debt securities consist mainly of low income housing investments that are unique and non transferrable.
Equity Securities. Equity securities are held as available-for-sale investments. Fair value estimates for Level 1 and Level 2 publicly traded equity securities are based on quoted market prices and/or other market data for the same or comparable instruments and transactions in establishing the prices. The fair values of Level 3 investments in venture capital portfolios are estimated using market modeling approaches that rely heavily on management assumptions and qualitative observations. These investments totaled $169 million and $166 million as of September 30, 2011 and December 31, 2010, respectively. The fair values of the Company’s various venture capital investments are computed using limited quantitative and qualitative observations of activity for similar companies in the current market. The key inputs utilized in the Company’s market modeling include, as applicable, transactions for comparable companies in similar industries and having similar revenue and growth characteristics; similar preferences in the capital structure; discounted cash flows; liquidation values and milestones established at initial funding; and the assumption that the values of the Company’s venture capital investments can be inferred from these inputs. The Company’s remaining Level 3 equity securities holdings of $40 million and $42 million as of September 30, 2011 and December 31, 2010, respectively, consist of preferred stock and other items for which there are no active markets.
Interest Rate Swaps. Fair values of the Company’s interest rate swaps are estimated using the terms of the swaps and publicly available market yield curves. Because the swaps are unique and not actively traded, the fair values are classified as Level 2.
AARP Program-related Investments. AARP Program-related investments consist of debt and equity securities held to fund costs associated with the AARP Program and are priced and classified using the same methodologies as the Company’s other securities.
Senior Unsecured Notes. The fair values of the senior unsecured notes are estimated based on third-party quoted market prices for the same or similar issues.
AARP Program-related Other Liabilities. AARP Program-related other liabilities consist of liabilities that represent the amount of net investment gains and losses related to AARP Program-related investments that accrue to the benefit of the AARP policyholders.

12
Table of Contents


A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows:
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
140

 
$
222

 
$
362

 
$
141

 
$
208

 
$
349

Purchases
 
6

 
—

 
6

 
15

 
31

 
46

Sales
 
—

 
(2
)
 
(2
)
 
—

 
(16
)
 
(16
)
Settlements
 
(7
)
 
(6
)
 
(13
)
 
(17
)
 
(6
)
 
(23
)
Net unrealized losses in accumulated other comprehensive income
 
—

 
—

 
—

 
—

 
(3
)
 
(3
)
Net realized losses in investment and other income
 
—

 
(5
)
 
(5
)
 
—

 
(5
)
 
(5
)
Balance at end of period
 
$
139

 
$
209

 
$
348

 
$
139

 
$
209

 
$
348

September 30, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
107

 
$
186

 
$
293

 
$
120

 
$
312

 
$
432

Purchases
 
43

 
16

 
59

 
44

 
37

 
81

Sales
 
—

 
(1
)
 
(1
)
 
(8
)
 
(11
)
 
(19
)
Settlements
 
(4
)
 
—

 
(4
)
 
(11
)
 
(153
)
 
(164
)
Net unrealized gains in accumulated other comprehensive income
 
—

 
3

 
3

 
—

 
9

 
9

Net realized (losses) gains in investment and other income
 
—

 
(1
)
 
(1
)
 
1

 
9

 
10

Balance at end of period
 
$
146

 
$
203

 
$
349

 
$
146

 
$
203

 
$
349

Non-financial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There were no significant fair value adjustments for these assets and liabilities recorded during the three and nine months ended September 30, 2011 and 2010.
 
4.
CMS Prepayments and Medicare Part D Pharmacy Benefits Contract

CMS Prepayments

On September 30, 2011, the Company received approximately $2.3 billion for its October monthly premium payment and approximately $650 million for the Catastrophic Reinsurance and Low-Income Member Cost Sharing Subsidies (Subsidies) and drug discount from the Centers for Medicare & Medicaid Services (CMS). CMS generally pays on the first calendar day of the applicable month. If the first calendar day of the month falls on a weekend or a holiday, CMS has typically paid the Company on the last business day of the preceding calendar month. The Company recorded the premium payment as unearned revenues in both its Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows. The treatment of the Subsidies and drug discount is described below.
Medicare Part D Pharmacy Benefits Contract
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
 
 
September 30, 2011
 
December 31, 2010
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Risk-Share
Other current receivables
 
$
—

 
$
365

 
$
—

 
$
—

 
$
—

Other policy liabilities
 
1,658

 
582

 
260

 
475

 
265

The Subsidies represent cost reimbursements under the Medicare Part D program. The Company is fully reimbursed by CMS for costs incurred for these contract elements and, accordingly, there is no insurance risk to the Company. Beginning in 2011, the Health Reform Legislation mandates a consumer discount of 50% on brand name prescription drugs for Part D plan

13
Table of Contents
UNITEDHEALTH GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


participants in the coverage gap. This discount is funded by CMS and pharmaceutical manufacturers while the Company administers the application of these funds. Amounts received for these Subsidies and discount are not reflected as premium revenues, but rather are accounted for as receivables and/or deposits. Related cash flows are presented as customer funds administered within financing activities in the Condensed Consolidated Statements of Cash Flows.
Premiums from CMS are subject to risk-sharing provisions based on a comparison of the Company’s annual bid estimates of prescription drug costs and the actual costs incurred. Variances may result in CMS making additional payments to the Company or require the Company to remit funds to CMS subsequent to the end of the year. The Company records risk-share adjustments to premium revenue and other current receivables or other policy liabilities in the Condensed Consolidated Balance Sheets.

5.
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, were as follows:
(in millions)
 
UnitedHealthcare
 
OptumHealth
 
OptumInsight
 
OptumRx
 
Consolidated
Balance at December 31, 2010 (a)
 
$
17,837

 
$
760

 
$
3,308

 
$
840

 
$
22,745

Acquisitions
 
7

 
1,189

 
—

 
—

 
1,196

Dispositions
 
(2
)
 
—

 
(214
)
 
—

 
(216
)
Subsequent payments and adjustments, net
 
(2
)
 
—

 
—

 
—

 
(2
)
Balance at September 30, 2011
 
$
17,840

 
$
1,949

 
$
3,094

 
$
840

 
$
23,723

(a)
Prior period reportable segment financial information has been recast to conform to the 2011 presentation as discussed in Note 1 of Notes to the Condensed Consolidated Financial Statements.

6.
Medical Costs and Medical Costs Payable
Medical costs and medical costs payable include estimates of the Company’s obligations for medical care services that have been rendered on behalf of insured consumers, but for which claims have either not yet been received or processed, and for liabilities for physician, hospital and other medical cost disputes. The Company develops estimates for medical costs incurred but not reported using an actuarial process that is consistently applied, centrally controlled and automated. The actuarial models consider factors such as time from date of service to claim receipt, claim backlogs, care provider contract rate changes, medical care consumption and other medical cost trends. The Company estimates liabilities for physician, hospital and other medical cost disputes based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies. Each period, the Company re-examines previously established medical costs payable estimates based on actual claim submissions and other changes in facts and circumstances. As the medical costs payable estimates recorded in prior periods develop, the Company adjusts the amount of the estimates and includes the changes in estimates in medical costs in the period in which the change is identified.
For the three months ended September 30, 2011, there was $90 million of net favorable medical cost development related to prior fiscal years and $110 million of net favorable medical cost development related to the first half of 2011. For the nine months ended September 30, 2011, medical costs included $650 million of net favorable medical cost development related to prior fiscal years. The favorable development in 2011 was primarily driven by continued efficiencies in claims submission, handling and processing, which results in higher completion factors, and lower than expected health system utilization levels.
For the three months ended September 30, 2010, there was $80 million of net favorable medical cost development related to prior fiscal years and $150 million of net favorable medical cost development related to the first half of 2010. For the nine months ended September 30, 2010, medical costs included $660 million of net favorable medical cost development related to prior fiscal years. The favorable development for 2010 was primarily driven by lower than expected health system utilization levels and more efficient claims handling and processing.



14
Table of Contents


7.
Commercial Paper and Long-Term Debt
Commercial paper and long-term debt consisted of the following:
 
 
September 30, 2011
 
December 31, 2010
(in millions)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value
 
Fair
Value
Commercial paper
 
$
1,753

 
$
1,753

 
$
1,753

 
$
930

 
$
930

 
$
930

Senior unsecured floating-rate notes due February 2011
 
—

 
—

 
—

 
250

 
250

 
250

5.3% senior unsecured notes due March 2011
 
—

 
—

 
—

 
705

 
712

 
711

5.5% senior unsecured notes due November 2012
 
352

 
366

 
370

 
352

 
372

 
377

4.9% senior unsecured notes due February 2013
 
534

 
541

 
560

 
534

 
541

 
568

4.9% senior unsecured notes due April 2013
 
409

 
423

 
430

 
409

 
425

 
437

4.8% senior unsecured notes due February 2014
 
172

 
185

 
186

 
172

 
186

 
184

5.0% senior unsecured notes due August 2014
 
389

 
427

 
427

 
389

 
425

 
423

4.9% senior unsecured notes due March 2015
 
416

 
462

 
460

 
416

 
456

 
444

5.4% senior unsecured notes due March 2016
 
601

 
682

 
685

 
601

 
666

 
661

5.4% senior unsecured notes due November 2016
 
95

 
95

 
109

 
95

 
95

 
105

6.0% senior unsecured notes due June 2017
 
441

 
501

 
505

 
441

 
484

 
491

6.0% senior unsecured notes due November 2017
 
156

 
174

 
181

 
156

 
167

 
174

6.0% senior unsecured notes due February 2018
 
1,100

 
1,124

 
1,305

 
1,100

 
1,065

 
1,249

3.9% senior unsecured notes due October 2020
 
450

 
441

 
475

 
450

 
413

 
429

4.7% senior unsecured notes due February 2021
 
400

 
420

 
441

 
—

 
—

 
—

Zero coupon senior unsecured notes due November 2022
 
1,095

 
611

 
690

 
1,095

 
588