UNH 2014.6.30 10-Q

 
 
 
 
 
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 JUNE 30, 2014
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:
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 July 31, 2014, there were 971,624,800 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
 
 
 
 
 



UNITEDHEALTH GROUP
Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






Table of Contents

PART I
ITEM 1.    FINANCIAL STATEMENTS

UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data)
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
6,412

 
$
7,276

Short-term investments
 
1,877

 
1,937

Accounts receivable, net
 
5,383

 
3,052

Other current receivables, net
 
4,041

 
3,998

Assets under management
 
2,791

 
2,757

Deferred income taxes
 
496

 
430

Prepaid expenses and other current assets
 
1,851

 
930

Total current assets
 
22,851

 
20,380

Long-term investments
 
19,274

 
19,605

Property, equipment and capitalized software, net
 
4,267

 
4,010

Goodwill
 
32,462

 
31,604

Other intangible assets, net
 
3,791

 
3,844

Other assets
 
2,821

 
2,439

Total assets
 
$
85,466

 
$
81,882

Liabilities and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
12,305

 
$
11,575

Accounts payable and accrued liabilities
 
9,625

 
7,458

Other policy liabilities
 
5,247

 
5,279

Commercial paper and current maturities of long-term debt
 
2,117

 
1,969

Unearned revenues
 
1,482

 
1,600

Total current liabilities
 
30,776

 
27,881

Long-term debt, less current maturities
 
14,630

 
14,891

Future policy benefits
 
2,479

 
2,465

Deferred income taxes
 
2,011

 
1,796

Other liabilities
 
1,332

 
1,525

Total liabilities
 
51,228

 
48,558

Commitments and contingencies (Note 9)
 
 
 


Redeemable noncontrolling interests
 
1,303

 
1,175

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;
973 and 988 issued and outstanding
 
10

 
10

Retained earnings
 
33,215

 
33,047

Accumulated other comprehensive loss
 
(290
)
 
(908
)
Total shareholders’ equity
 
32,935

 
32,149

Total liabilities and shareholders’ equity
 
$
85,466

 
$
81,882

See Notes to the Condensed Consolidated Financial Statements

1

Table of Contents


UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Premiums
 
$
28,840

 
$
27,220

 
$
56,955

 
$
54,494

Services
 
2,447

 
2,244

 
4,851

 
4,356

Products
 
1,037

 
749

 
2,035

 
1,500

Investment and other income
 
250

 
195

 
441

 
398

Total revenues
 
32,574

 
30,408

 
64,282

 
60,748

Operating costs:
 
 
 
 
 
 
 
 
Medical costs
 
23,523

 
22,173

 
46,731

 
44,742

Operating costs
 
5,206

 
4,825

 
10,400

 
9,439

Cost of products sold
 
929

 
669

 
1,821

 
1,351

Depreciation and amortization
 
364

 
340

 
724

 
676

Total operating costs
 
30,022

 
28,007

 
59,676

 
56,208

Earnings from operations
 
2,552

 
2,401

 
4,606

 
4,540

Interest expense
 
(155
)
 
(176
)
 
(315
)
 
(354
)
Earnings before income taxes
 
2,397

 
2,225

 
4,291

 
4,186

Provision for income taxes
 
(989
)
 
(789
)
 
(1,784
)
 
(1,510
)
Net earnings
 
1,408

 
1,436

 
2,507

 
2,676

Earnings attributable to noncontrolling interests
 

 

 

 
(48
)
Net earnings attributable to UnitedHealth Group common shareholders
 
$
1,408

 
$
1,436

 
$
2,507

 
$
2,628

Earnings per share attributable to UnitedHealth Group common shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
1.44

 
$
1.42

 
$
2.56

 
$
2.60

Diluted
 
$
1.42

 
$
1.40

 
$
2.52

 
$
2.56

Basic weighted-average number of common shares outstanding
 
979

 
1,009

 
981

 
1,012

Dilutive effect of common share equivalents
 
12

 
17

 
13

 
15

Diluted weighted-average number of common shares outstanding
 
991

 
1,026

 
994

 
1,027

Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
 
8

 
9

 
9

 
13

Cash dividends declared per common share
 
$
0.3750

 
$
0.2800

 
$
0.6550

 
$
0.4925


See Notes to the Condensed Consolidated Financial Statements

2

Table of Contents



UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Net earnings
 
$
1,408

 
$
1,436

 
$
2,507

 
$
2,676

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Gross unrealized holding gains (losses) on investment securities during the period
 
314

 
(453
)
 
480

 
(501
)
Income tax effect
 
(114
)
 
165

 
(175
)
 
181

Total unrealized gains (losses), net of tax
 
200

 
(288
)
 
305

 
(320
)
Gross reclassification adjustment for net realized gains included in net earnings
 
(107
)
 
(49
)
 
(153
)
 
(106
)
Income tax effect
 
39

 
18

 
56

 
39

Total reclassification adjustment, net of tax
 
(68
)
 
(31
)
 
(97
)
 
(67
)
Total foreign currency translation gains (losses)
 
151

 
(604
)
 
410

 
(586
)
Other comprehensive income (loss)
 
283

 
(923
)
 
618

 
(973
)
Comprehensive income
 
1,691

 
513

 
3,125

 
1,703

Comprehensive income attributable to noncontrolling interests
 

 

 

 
(48
)
Comprehensive income attributable to UnitedHealth Group common shareholders
 
$
1,691

 
$
513

 
$
3,125

 
$
1,655


See Notes to the Condensed Consolidated Financial Statements

3

Table of Contents


UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’
Equity
(in millions)
 
Shares
 
Amount
 
 
 
Net Unrealized Gains (Losses) on Investments
 
Foreign Currency Translation (Losses) Gains
 
Balance at January 1, 2014
 
988

 
$
10

 
$

 
$
33,047

 
$
54

 
$
(962
)
 
$
32,149

Net earnings attributable to UnitedHealth Group common shareholders
 
 
 
 
 
 
 
2,507

 
 
 
 
 
2,507

Other comprehensive income
 
 
 
 
 
 
 
 
 
208

 
410

 
618

Issuances of common shares, and related tax effects
 
10

 

 
23

 
 
 
 
 
 
 
23

Share-based compensation, and related tax benefits
 
 
 
 
 
217

 
 
 
 
 
 
 
217

Common share repurchases
 
(25
)
 

 
(240
)
 
(1,697
)
 
 
 
 
 
(1,937
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(642
)
 
 
 
 
 
(642
)
Balance at June 30, 2014
 
973

 
$
10

 
$

 
$
33,215

 
$
262

 
$
(552
)
 
$
32,935

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
 
1,019

 
$
10

 
$
66

 
$
30,664

 
$
516

 
$
(78
)
 
$
31,178

Net earnings attributable to UnitedHealth Group common shareholders
 
 
 
 
 
 
 
2,628

 
 
 
 
 
2,628

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(387
)
 
(586
)
 
(973
)
Issuances of common shares, and related tax effects
 
10

 

 
228

 
 
 
 
 
 
 
228

Share-based compensation, and related tax benefits
 
 
 
 
 
207

 
 
 
 
 
 
 
207

Common share repurchases
 
(23
)
 

 
(445
)
 
(889
)
 
 
 
 
 
(1,334
)
Acquisition of noncontrolling interests
 
 
 
 
 
(56
)
 
 
 
 
 
 
 
(56
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(497
)
 
 
 
 
 
(497
)
Balance at June 30, 2013
 
1,006

 
$
10

 
$

 
$
31,906

 
$
129

 
$
(664
)
 
$
31,381



See Notes to the Condensed Consolidated Financial Statements

4

Table of Contents


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended June 30,
(in millions)
 
2014
 
2013
Operating activities
 
 
 
 
Net earnings
 
$
2,507

 
$
2,676

Noncash items:
 
 
 
 
Depreciation and amortization
 
724

 
676

Deferred income taxes
 
(16
)
 
100

Share-based compensation
 
188

 
176

Other, net
 
(148
)
 
(86
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(2,131
)
 
(952
)
Other assets
 
(1,135
)
 
(661
)
Medical costs payable
 
560

 
792

Accounts payable and other liabilities
 
2,219

 
107

Other policy liabilities
 
(218
)
 
(41
)
Unearned revenues
 
(128
)
 
(260
)
Cash flows from operating activities
 
2,422

 
2,527

Investing activities
 
 
 
 
Purchases of investments
 
(5,477
)
 
(5,942
)
Sales of investments
 
4,393

 
2,924

Maturities of investments
 
1,544

 
2,718

Cash paid for acquisitions, net of cash assumed
 
(523
)
 
(284
)
Purchases of property, equipment and capitalized software
 
(716
)
 
(625
)
Proceeds from disposal of property, equipment and capitalized software
 

 
146

Other, net
 
(99
)
 
45

Cash flows used for investing activities
 
(878
)
 
(1,018
)
Financing activities
 
 
 
 
Acquisition of noncontrolling interest shares
 

 
(1,474
)
Common stock repurchases
 
(1,937
)
 
(1,334
)
Cash dividends paid
 
(642
)
 
(497
)
Proceeds from common stock issuances
 
267

 
314

Repayments of long-term debt
 
(172
)
 
(1,560
)
Repayments of commercial paper, net
 
(101
)
 
(688
)
Proceeds from issuance of long-term debt
 

 
2,235

Customer funds administered
 
333

 
855

Other, net
 
(170
)
 
(18
)
Cash flows used for financing activities
 
(2,422
)
 
(2,167
)
Effect of exchange rate changes on cash and cash equivalents
 
14

 
(94
)
Decrease in cash and cash equivalents
 
(864
)
 
(752
)
Cash and cash equivalents, beginning of period
 
7,276

 
8,406

Cash and cash equivalents, end of period
 
$
6,412

 
$
7,654


See Notes to the Condensed Consolidated Financial Statements

5

Table of Contents


UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1.Basis of Presentation
Basis of Presentation
UnitedHealth Group Incorporated (individually and together with its subsidiaries, “UnitedHealth Group” and “the Company”) is a diversified health and well-being company dedicated to helping people live healthier lives and making health care work better. The Company offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services.
The Company has prepared the Condensed Consolidated Financial Statements according to U.S. Generally Accepted Accounting Principles (GAAP) and has included the accounts of UnitedHealth Group and its subsidiaries. The year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by 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 Part II, Item 8, “Financial Statements” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC (2013 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
On January 1, 2014, 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. The Company’s Optum business platform took responsibility for certain technology operations and business processing activities with the intention of pursuing additional third-party commercial opportunities in addition to continuing to serve UnitedHealthcare. These activities, which were historically a corporate function, are now included in OptumInsight’s results of operations. The Company’s reportable segments remain the same and prior period segment financial information has been recast to conform to the 2014 presentation. See Note 10 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 estimates and judgments for medical costs payable and revenues, valuation and impairment analysis of goodwill and other intangible assets, estimates of other policy liabilities and other current receivables, valuations of certain investments, and estimates and judgments related to income taxes and contingent liabilities. Certain of 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 change in estimates is included in earnings in the period in which the estimate is adjusted.
Accounting Policies
Industry Tax. The Patient Protection and Affordable Care Act and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (together, Health Reform Legislation or ACA) include an annual, nondeductible insurance industry tax (Industry Tax) to be levied proportionally across the insurance industry for risk-based health insurance products that began on January 1, 2014.
The Company estimates its liability for the Industry Tax based on a ratio of the Company’s applicable net premiums written compared to the U.S. health insurance industry total applicable net premiums, both for the previous calendar year. The Company records in full the estimated liability for the Industry Tax at the beginning of the calendar year with a corresponding deferred cost that is amortized to operating costs on the Condensed Consolidated Statements of Operations using a straight-line method of allocation over the calendar year. The liability is recorded in accounts payable and accrued liabilities and the corresponding deferred cost is recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The Industry Tax liability was $1.3 billion and as of June 30, 2014 the unamortized asset was $660 million. The Company has experienced a higher effective income tax rate in 2014 as compared to 2013 due to the nondeductible nature of the Industry Tax.
Premium Stabilization Programs. Since the beginning of 2014, Health Reform Legislation has included three programs designed to stabilize health insurance markets (Premium Stabilization Programs): a permanent risk adjustment program; a temporary risk corridors program; and a transitional reinsurance program (Reinsurance Program).


6

Table of Contents


The risk-adjustment provisions of Health Reform Legislation are permanent regulations and apply to market reform compliant individual and small group plans in the commercial markets. Under the program, each covered member is assigned a risk score based upon demographic information and applicable diagnostic codes from the current year paid claims, in order to determine an average risk score for each plan in a particular state and market risk pool. Generally, a plan with an average risk score that is less than the state’s average risk score will pay into a pool, while a plan with an average risk score that is greater than the state’s average risk score will receive money from the pool.
The risk corridors provisions of Health Reform Legislation will be in place for three years and are intended to limit the gains and losses of individual and small group qualified health plans. Plans are required to calculate the U.S. Department of Health and Human Services (HHS) risk corridor ratio of allowable costs (defined as medical claims plus quality improvement costs adjusted for the impact of reinsurance recoveries and the risk adjustment program) to the defined target amount (defined as actual premiums less defined allowable administrative costs inclusive of taxes and profits). Qualified health plans with ratios below 97% are required to make payments to HHS, while plans with ratios greater than 103% will receive funds from HHS.
The Reinsurance Program is a temporary three year program that is funded on a per capita basis from all commercial lines of business including insured and self-funded arrangements. Only issuers of market reform compliant individual plans are eligible for reinsurance recoveries from the risk pools.
None of the Premium Stabilization Programs are expected to have a material impact on the Condensed Consolidated Financial Statements.
All other accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2013 10-K remain unchanged.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU 2014-09 will become effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the effect of the new revenue recognition guidance.
The Company has determined that there have been no other recently adopted or issued accounting standards that had, or will have, a material impact on its Condensed Consolidated Financial Statements.

7

Table of Contents


2.Investments
A summary of short-term and long-term investments by major security type is as follows:
(in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2014
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,693

 
$
6

 
$
(1
)
 
$
1,698

State and municipal obligations
 
6,549

 
220

 
(7
)
 
6,762

Corporate obligations
 
7,284

 
162

 
(12
)
 
7,434

U.S. agency mortgage-backed securities
 
2,092

 
36

 
(11
)
 
2,117

Non-U.S. agency mortgage-backed securities
 
847

 
15

 
(2
)
 
860

Total debt securities - available-for-sale
 
18,465

 
439

 
(33
)
 
18,871

Equity securities - available-for-sale
 
1,727

 
24

 
(11
)
 
1,740

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
187

 
3

 

 
190

State and municipal obligations
 
28

 

 

 
28

Corporate obligations
 
325

 

 

 
325

Total debt securities - held-to-maturity
 
540

 
3

 

 
543

Total investments
 
$
20,732

 
$
466

 
$
(44
)
 
$
21,154

December 31, 2013
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,211

 
$
5

 
$
(21
)
 
$
2,195

State and municipal obligations
 
6,902

 
147

 
(72
)
 
6,977

Corporate obligations
 
7,265

 
130

 
(60
)
 
7,335

U.S. agency mortgage-backed securities
 
2,256

 
23

 
(61
)
 
2,218

Non-U.S. agency mortgage-backed securities
 
697

 
12

 
(7
)
 
702

Total debt securities - available-for-sale
 
19,331

 
317

 
(221
)
 
19,427

Equity securities - available-for-sale
 
1,576

 
9

 
(13
)
 
1,572

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
181

 
1

 

 
182

State and municipal obligations
 
28

 

 

 
28

Corporate obligations
 
334

 

 

 
334

Total debt securities - held-to-maturity
 
543

 
1

 

 
544

Total investments
 
$
21,450

 
$
327

 
$
(234
)
 
$
21,543


8

Table of Contents



The fair values of the Company’s mortgage-backed securities by credit rating (when multiple credit ratings are available for an individual security, the average of the available ratings is used) and origination date as of June 30, 2014 were as follows:
(in millions)
 
AAA
 
AA
 
Non-Investment
Grade
 
Total Fair
Value
2014
 
$
157

 
$

 
$

 
$
157

2013
 
171

 

 

 
171

2012
 
88

 

 

 
88

2011
 
18

 

 

 
18

2010
 
24

 

 

 
24

2009
 
7

 

 

 
7

Pre - 2009
 
380

 
2

 
13

 
395

U.S. agency mortgage-backed securities
 
2,115

 
2

 

 
2,117

Total
 
$
2,960

 
$
4

 
$
13

 
$
2,977

The Company includes any securities backed by Alt-A or subprime mortgages and any commercial mortgage loans in default in the non-investment grade column in the table above.
The amortized cost and fair value of available-for-sale debt securities as of June 30, 2014, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
1,975

 
$
1,986

Due after one year through five years
 
7,046

 
7,179

Due after five years through ten years
 
4,754

 
4,900

Due after ten years
 
1,751

 
1,829

U.S. agency mortgage-backed securities
 
2,092

 
2,117

Non-U.S. agency mortgage-backed securities
 
847

 
860

Total debt securities - available-for-sale
 
$
18,465

 
$
18,871

The amortized cost and fair value of held-to-maturity debt securities as of June 30, 2014, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
82

 
$
82

Due after one year through five years
 
231

 
231

Due after five years through ten years
 
130

 
131

Due after ten years
 
97

 
99

Total debt securities - held-to-maturity
 
$
540

 
$
543


9

Table of Contents


The fair value of available-for-sale investments with gross unrealized losses by major security 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
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$

 
$

 
$
61

 
$
(1
)
 
$
61

 
$
(1
)
State and municipal obligations
 
349

 
(2
)
 
332

 
(5
)
 
681

 
(7
)
Corporate obligations
 
765

 
(3
)
 
479

 
(9
)
 
1,244

 
(12
)
U.S. agency mortgage-backed securities
 

 

 
402

 
(11
)
 
402

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

 

 
139

 
(2
)
 
139

 
(2
)
Total debt securities - available-for-sale
 
$
1,114

 
$
(5
)
 
$
1,413

 
$
(28
)
 
$
2,527

 
$
(33
)
Equity securities - available-for-sale
 
$
108

 
$
(7
)
 
$
59

 
$
(4
)
 
$
167

 
$
(11
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,055

 
$
(19
)
 
$
17

 
$
(2
)
 
$
1,072

 
$
(21
)
State and municipal obligations
 
2,491

 
(62
)
 
128

 
(10
)
 
2,619

 
(72
)
Corporate obligations
 
2,573

 
(51
)
 
103

 
(9
)
 
2,676

 
(60
)
U.S. agency mortgage-backed securities
 
1,393

 
(51
)
 
105

 
(10
)
 
1,498

 
(61
)
Non-U.S. agency mortgage-backed securities
 
289

 
(6
)
 
26

 
(1
)
 
315

 
(7
)
Total debt securities - available-for-sale
 
$
7,801

 
$
(189
)
 
$
379

 
$
(32
)
 
$
8,180

 
$
(221
)
Equity securities - available-for-sale
 
$
180

 
$
(13
)
 
$

 
$

 
$
180

 
$
(13
)
The Company’s unrealized losses from all securities as of June 30, 2014 were generated from approximately 2,800 positions out of a total of 21,300 positions. The Company believes that it will collect the principal and interest due on its debt securities that have an amortized cost in excess of fair value. The unrealized losses were primarily caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor other factors leading to an other-than-temporary impairment (OTTI). As of June 30, 2014, the Company did not have the intent to sell any of the securities in an unrealized loss position. Therefore, the Company believes these losses to be temporary.
The Company’s investments in equity securities consist of investments in Brazilian real denominated fixed-income funds, employee savings plan related investments, venture capital funds, and dividend paying stocks. The Company evaluated its investments in equity securities for severity and duration of unrealized loss, overall market volatility and other market factors.
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Total OTTI
 
$
(4
)
 
$
(1
)
 
$
(7
)
 
$
(4
)
Portion of loss recognized in other comprehensive income
 

 

 

 

Net OTTI recognized in earnings
 
(4
)
 
(1
)
 
(7
)
 
(4
)
Gross realized losses from sales
 
(29
)
 
(2
)
 
(39
)
 
(3
)
Gross realized gains from sales
 
140

 
52

 
199

 
113

Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations)
 
107

 
49

 
153

 
106

Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)
 
(39
)
 
(18
)
 
(56
)
 
(39
)
Realized gains, net of taxes
 
$
68

 
$
31

 
$
97

 
$
67


10

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3.
Fair Value
Certain assets and liabilities are measured at fair value in the Condensed Consolidated Financial Statements or have fair values disclosed in the Notes to the Condensed Consolidated Financial Statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by 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 is categorized in its entirety 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 summarized as follows:
Level 1 — Quoted prices (unadjusted) 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/liabilities in nonactive markets (e.g., few transactions, limited information, noncurrent prices, high variability over time);
Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, implied volatilities, credit spreads); and
Inputs that are corroborated by other observable market data.
Level 3 — Unobservable inputs that cannot be corroborated by observable market data.
Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there were no transfers between Levels 1, 2 or 3 of any financial assets or liabilities during 2014 or 2013.
Nonfinancial 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 six months ended June 30, 2014 or 2013.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument included in the tables below:
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 and Equity Securities. Fair values of 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, and, if necessary, makes 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 nonbinding 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 a secondary pricing source, such as 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 reviews of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
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.
Fair value estimates for Level 1 and Level 2 equity securities are based on quoted market prices for actively traded equity securities 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 a market valuation technique that relies heavily on management assumptions and qualitative observations. Under the market approach, 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 Company’s market modeling utilizes, as applicable, transactions for comparable

11

Table of Contents


companies in similar industries that also have similar revenue and growth characteristics and preferences in their capital structure. Key significant unobservable inputs in the market technique include implied earnings before interest, taxes, depreciation and amortization (EBITDA) multiples and revenue multiples. Additionally, the fair values of certain of the Company’s venture capital securities are based off of recent transactions in inactive markets for identical or similar securities. Significant changes in any of these inputs could result in significantly lower or higher fair value measurements.
Throughout the procedures discussed above in relation to the Company’s processes for validating third-party pricing information, the Company validates the understanding of assumptions and inputs used in security pricing and determines the proper classification in the hierarchy based on that understanding.
AARP Program-related Investments. The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance Program (AARP Program). AARP Program-related investments consist of debt securities and other investments held to fund costs associated with the AARP Program and are priced and classified using the same methodologies as the Company’s investments in debt and equity securities.
Interest Rate Swaps. Fair values of the Company’s swaps are estimated using the terms of the swaps and publicly available information including market yield curves. Because the swaps are unique and not actively traded but are valued using other observable inputs, the fair values are classified as Level 2.
Long-term Debt. The fair value of the Company’s long-term debt is estimated and classified using the same methodologies as the Company’s investments in debt securities.
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


The following table presents a summary of fair value measurements by level and carrying values for items measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets excluding AARP Program-related assets and liabilities, which are presented in a separate table below:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair and Carrying
Value
June 30, 2014
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
6,402

 
$
10

 
$

 
$
6,412

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,445

 
253

 

 
1,698

State and municipal obligations
 

 
6,762

 

 
6,762

Corporate obligations
 
19

 
7,365

 
50

 
7,434

U.S. agency mortgage-backed securities
 

 
2,117

 

 
2,117

Non-U.S. agency mortgage-backed securities
 

 
853

 
7

 
860

Total debt securities - available-for-sale
 
1,464

 
17,350

 
57

 
18,871

Equity securities - available-for-sale
 
1,426

 
12

 
302

 
1,740

Total assets at fair value

$
9,292

 
$
17,372

 
$
359

 
$
27,023

Percentage of total assets at fair value
 
35
%
 
64
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$

 
$
30

 
$

 
$
30

December 31, 2013
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,005

 
$
271

 
$

 
$
7,276

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,750

 
445

 

 
2,195

State and municipal obligations
 

 
6,977

 

 
6,977

Corporate obligations
 
25

 
7,274

 
36

 
7,335

U.S. agency mortgage-backed securities
 

 
2,218

 

 
2,218

Non-U.S. agency mortgage-backed securities
 

 
696

 
6

 
702

Total debt securities - available-for-sale
 
1,775

 
17,610

 
42

 
19,427

Equity securities - available-for-sale
 
1,291

 
12

 
269

 
1,572

Total assets at fair value
 
$
10,071

 
$
17,893

 
$
311

 
$
28,275

Percentage of total assets at fair value
 
36
%
 
63
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$

 
$
163

 
$

 
$
163


13

Table of Contents


The following table presents a summary of fair value measurements by level and carrying values for certain financial instruments not measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
 
Total Carrying Value
June 30, 2014
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
190

 
$

 
$

 
$
190

 
$
187

State and municipal obligations
 

 

 
28

 
28

 
28

Corporate obligations
 
50

 
9

 
266

 
325

 
325

Total debt securities - held-to-maturity
 
$
240

 
$
9

 
$
294

 
$
543

 
$
540

Long-term debt and other financing obligations
 
$

 
$
17,256

 
$

 
$
17,256

 
$
15,733

December 31, 2013
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
182

 
$

 
$

 
$
182

 
$
181

State and municipal obligations
 

 

 
28

 
28

 
28

Corporate obligations
 
47

 
9

 
278

 
334

 
334

Total debt securities - held-to-maturity
 
$
229

 
$
9

 
$
306

 
$
544

 
$
543

Long-term debt and other financing obligations
 
$

 
$
16,602

 
$

 
$
16,602

 
$
15,745


The carrying amounts reported on the Condensed Consolidated Balance Sheets for other financial assets and liabilities approximate fair value because of their short-term nature. These assets and liabilities are not listed in the table above.
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
 
Six Months Ended
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
46

 
$
313

 
$
359

 
$
42

 
$
269

 
$
311

Purchases
 
10

 
6

 
16

 
13

 
50

 
63

Sales
 

 
(147
)
 
(147
)
 

 
(151
)
 
(151
)
Net unrealized gains in accumulated other comprehensive income
 
1

 
6

 
7

 
2

 
10

 
12

Net realized gains in investment and other income
 

 
124

 
124

 

 
124

 
124

Balance at end of period
 
$
57

 
$
302

 
$
359

 
$
57

 
$
302

 
$
359

June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
32

 
$
239

 
$
271

 
$
17

 
$
224

 
$
241

Purchases
 
7

 
11

 
18

 
22

 
42

 
64

Sales
 

 

 

 

 
(21
)
 
(21
)
Net unrealized losses in accumulated other comprehensive income
 
(1
)
 
(4
)
 
(5
)
 
(1
)
 
(6
)
 
(7
)
Net realized (losses) gains in investment and other income
 

 
(1
)
 
(1
)
 

 
6

 
6

Balance at end of period
 
$
38

 
$
245

 
$
283

 
$
38

 
$
245

 
$
283


14

Table of Contents


The following table presents quantitative information regarding unobservable inputs that were significant to the valuation of assets measured at fair value on a recurring basis using Level 3 inputs:
 
 
 
 
 
 
 
 
Range
(in millions)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Low
 
High
June 30, 2014
 
 
 
 
 
 
 
 
 
 
Equity securities - available-for-sale
 
 
 
 
 
 
 
 
 
 
Venture capital portfolios
 
$
259

 
Market approach - comparable companies
 
Revenue multiple
 
1.0
 
5.0
 
 
 
 
 
 
EBITDA multiple
 
8.0
 
10.0
 
 
43

 
Market approach - recent transactions
 
Inactive market transactions
 
N/A
 
N/A
Total equity securities
     available-for-sale
 
$
302

 
 
 
 
 
 
 
 
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $57 million of available-for-sale debt securities at June 30, 2014, which were not significant.
The Company elected to measure the entirety of the AARP Program assets under management at fair value pursuant to the fair value option. See Note 2 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in the Company’s 2013 10-K for further detail on the AARP Program. 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)
 
Total
Fair and Carrying
Value
June 30, 2014
 
 
 
 
 
 
Cash and cash equivalents
 
$
230

 
$

 
$
230

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
422

 
283

 
705

State and municipal obligations
 

 
79

 
79

Corporate obligations
 

 
1,168

 
1,168

U.S. agency mortgage-backed securities
 

 
383

 
383

Non-U.S. agency mortgage-backed securities
 

 
147

 
147

Total debt securities
 
422

 
2,060

 
2,482

Other investments
 

 
79

 
79

Total assets at fair value
 
$
652

 
$
2,139

 
$
2,791

Other liabilities
 
$
6

 
$
14

 
$
20

December 31, 2013
 
 
 
 
 
 
Cash and cash equivalents
 
$
265

 
$

 
$
265

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
426

 
301

 
727

State and municipal obligations
 

 
63

 
63

Corporate obligations
 

 
1,145

 
1,145

U.S. agency mortgage-backed securities
 

 
414

 
414

Non-U.S. agency mortgage-backed securities
 

 
139

 
139

Total debt securities
 
426

 
2,062

 
2,488

Equity securities - available-for-sale
 

 
4

 
4

Total assets at fair value
 
$
691

 
$
2,066

 
$
2,757

Other liabilities
 
$
3

 
$
11

 
$
14


15

Table of Contents


4.
Medicare Part D Pharmacy Benefits
Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
 
 
June 30, 2014
 
December 31, 2013
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Drug Discount
 
Risk-Share
Other current receivables
 
$
895

 
$
250

 
$

 
$
881

 
$
425

 
$

Other policy liabilities
 

 
129

 
34

 

 
152

 
214

The Catastrophic Reinsurance and Low-Income Member Cost Sharing Subsidies (Subsidies) and drug discounts represent cost reimbursements under the Medicare Part D program. The Company is fully reimbursed by the Centers for Medicare & Medicaid Services (CMS) for costs incurred for these contract elements and, accordingly, there is no insurance risk to the Company. Amounts received for these contract elements are not reflected as premium revenues, but rather are accounted for as a reduction of receivables and/or increase in deposit liabilities. CMS provides prospective payments for the drug discounts, which the Company records as liabilities when received. The drug discounts are ultimately funded by the pharmaceutical manufacturers. The Company bills them for claims under the program and records those bills as receivables. Related cash flows are presented as customer funds administered within financing activities on 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 to other current receivables or other policy liabilities on the Condensed Consolidated Balance Sheets. See Note 2 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in the Company’s 2013 10-K for further detail on Medicare Part D.
5.
Medical Cost Reserve Development
The following table provides details of the Company's favorable medical cost reserve development:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Related to Prior Years
 
$
40

 
$
120

 
$
260

 
$
400

Related to Current Year
 
90

 
190

 
N/A

 
N/A

In both the three and six months ended June 30, 2014, the favorable medical cost reserve development was driven by a number of individual factors that were not material. Lower than expected health system utilization levels were a significant driver in both the three and six months ended June 30, 2013.

16

Table of Contents


6.     Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
 
 
June 30, 2014
 
December 31, 2013
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value
 
Fair
Value
Commercial paper
 
$
1,014

 
$
1,014

 
$
1,014

 
$
1,115

 
$
1,115

 
$
1,115

4.750% notes due February 2014
 

 

 

 
172

 
173

 
173

5.000% notes due August 2014
 
389

 
391

 
392

 
389

 
397

 
400

Floating-rate notes due August 2014
 
250

 
250

 
250

 
250

 
250

 
250

4.875% notes due March 2015 (a)
 
416

 
426

 
429

 
416

 
431

 
436

0.850% notes due October 2015 (a)
 
625

 
625

 
628

 
625

 
624

 
628

5.375% notes due March 2016 (a)
 
601

 
632

 
648

 
601

 
641

 
657

1.875% notes due November 2016
 
400

 
398

 
409

 
400

 
398

 
408

5.360% notes due November 2016
 
95

 
95

 
105

 
95

 
95

 
107

6.000% notes due June 2017
 
441

 
473

 
501

 
441

 
479

 
506

1.400% notes due October 2017 (a)
 
625

 
617

 
627

 
625

 
613

 
617

6.000% notes due November 2017
 
156

 
166

 
177

 
156

 
168

 
178

6.000% notes due February 2018
 
1,100

 
1,114

 
1,269

 
1,100

 
1,116

 
1,271

1.625% notes due March 2019 (a)
 
500

 
496

 
492

 
500

 
489

 
481

3.875% notes due October 2020 (a)
 
450

 
447

 
483

 
450

 
435

 
474

4.700% notes due February 2021
 
400

 
415

 
445

 
400

 
416

 
436

3.375% notes due November 2021 (a)
 
500

 
488

 
513

 
500

 
472

 
494

2.875% notes due March 2022 (a)
 
1,100

 
1,021

 
1,094

 
1,100

 
981

 
1,046

0.000% notes due November 2022
 
15

 
10

 
11

 
15

 
9

 
10

2.750% notes due February 2023 (a)
 
625

 
589

 
606

 
625

 
563

 
572

2.875% notes due March 2023 (a)
 
750

 
760

 
736

 
750

 
729

 
698

5.800% notes due March 2036
 
850

 
845

 
1,023

 
850

 
845

 
935

6.500% notes due June 2037
 
500

 
495

 
654

 
500

 
495

 
593

6.625% notes due November 2037
 
650

 
646

 
862

 
650

 
645

 
786

6.875% notes due February 2038
 
1,100

 
1,085

 
1,489

 
1,100

 
1,084

 
1,370

5.700% notes due October 2040
 
300

 
298

 
359

 
300

 
298

 
329

5.950% notes due February 2041
 
350

 
348

 
434

 
350

 
348

 
397

4.625% notes due November 2041
 
600

 
593

 
626

 
600

 
593

 
567

4.375% notes due March 2042
 
502

 
486

 
502

 
502

 
486

 
459

3.950% notes due October 2042
 
625

 
611

 
586

 
625

 
611

 
530

4.250% notes due March 2043
 
750

 
740

 
733

 
750

 
740

 
673

Total commercial paper and long-term debt
 
$
16,679

 
$
16,574

 
$
18,097

 
$
16,952

 
$
16,739

 
$
17,596

(a)
Fixed-rate debt instruments hedged with interest rate swap contracts. See below for more information on the Company’s interest rate swaps.
The Company’s long-term debt obligations also included $173 million and $121 million of other financing obligations, of which $36 million and $34 million were current as of June 30, 2014 and December 31, 2013, respectively.
Commercial Paper and Bank Credit Facilities
Commercial paper consists of short-duration, senior unsecured debt privately placed on a discount basis through broker-dealers. As of June 30, 2014, the Company’s outstanding commercial paper had a weighted-average annual interest rate of 0.2%.
The Company has $3.0 billion five-year and $1.0 billion 364-day revolving bank credit facilities with 23 banks, which mature in November 2018 and November 2014, respectively. These facilities provide liquidity support for the Company’s $4.0 billion commercial paper program and are available for general corporate purposes. There were no amounts outstanding under these facilities as of June 30, 2014. The interest rates on borrowings are variable based on term and are calculated based on the London Interbank Offered Rate (LIBOR) plus a credit spread based on the Company’s senior unsecured credit ratings. As of June 30, 2014, the annual interest rates on the bank credit facilities, had they been drawn, would have ranged from 1.0% to 1.2%.

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Debt Covenants
The Company’s bank credit facilities contain various covenants including requiring the Company to maintain a debt to debt-plus-equity ratio of not more than 50%. The Company was in compliance with its debt covenants as of June 30, 2014.
Interest Rate Swap Contracts
The Company uses interest rate swap contracts to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its cash equivalent and variable rate investment balances. The floating rates are benchmarked to LIBOR. The swaps are designated as fair value hedges on the Company’s fixed-rate debt. Since the critical terms of the swaps match those of the debt being hedged, they are considered to be highly effective hedges and all changes in the fair values of the swaps are recorded as adjustments to the carrying value of the related debt with no net impact recorded on the Condensed Consolidated Statements of Operations. Both the hedge fair value changes and the offsetting debt adjustments are recorded in interest expense on the Condensed Consolidated Statements of Operations. As of June 30, 2014 and December 31, 2013, the Company had interest rate swap contracts with notional amounts of $6.2 billion. The fair values of these swap liabilities were $30 million and $163 million, as of June 30, 2014 and December 31, 2013, respectively, which were recorded in other liabilities on the Condensed Consolidated Balance Sheets.
7.
Shareholders' Equity
Share Repurchase Program
Under its Board of Directors’ authorization, the Company maintains a share repurchase program. The objectives of the share repurchase program are to optimize the Company’s capital structure and cost of capital, thereby improving returns to shareholders, as well as to offset the dilutive impact of share-based awards. Repurchases may be made from time to time in open market purchases or other types of transactions (including prepaid or structured share repurchase programs), subject to certain Board restrictions. In June 2014, the Board renewed the Company’s share repurchase program with an authorization to repurchase up to 100 million shares of its common stock. During the six months ended June 30, 2014, the Company repurchased 25 million shares at an average price of $76.91 per share and an aggregate cost of $1.9 billion.
Dividends
In June 2014, the Company’s Board of Directors increased the Company’s quarterly cash dividend to shareholders to equal an annual dividend rate of $1.50 per share compared to the annual dividend rate of $1.12 per share, which the Company had paid since June 2013. Declaration and payment of future quarterly dividends is at the discretion of the Board and may be adjusted as business needs or market conditions change.
The following table provides details of the Company’s 2014 dividend payments:
Payment Date
 
Amount per Share
 
Total Amount Paid
 
 
 
 
(in millions)
March 25, 2014
 
$
0.2800

 
$
276

June 25, 2014
 
0.3750

 
366

 
8.
Share-Based Compensation
The Company’s outstanding share-based awards consist mainly of nonqualified stock options, stock-settled stock appreciation rights (SARs) and restricted stock and restricted stock units (collectively, restricted shares).
Stock Options and SARs
Stock option and SAR activity for the six months ended June 30, 2014 is summarized in the table below:
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic Value
 
(in millions)
 
 
 
(in years)
 
(in millions)
Outstanding at beginning of period
41

 
$
48

 
 
 
 
Granted
8

 
70

 
 
 
 
Exercised
(9
)
 
46

 
 
 
 
Forfeited
(1
)
 
60

 
 
 
 
Outstanding at end of period
39

 
53

 
5.4

 
$
1,131

Exercisable at end of period
25

 
46

 
3.3

 
884

Vested and expected to vest, end of period
38

 
52

 
5.3

 
1,114


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Restricted Shares
Restricted share activity for the six months ended June 30, 2014 is summarized in the table below:
(shares in millions)
 
Shares
 
Weighted-Average
Grant Date
Fair Value
per Share
Nonvested at beginning of period
 
11

 
$
50

Granted
 
4

 
70

Vested
 
(6
)
 
46

Nonvested at end of period
 
9

 
61

Other Share-Based Compensation Data
(in millions, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Stock Options and SARs
 
 
 
 
 
 
 
 
Weighted-average grant date fair value of shares granted, per share
 
$
19

 
$
20

 
$
22

 
$
19

Total intrinsic value of stock options and SARs exercised
 
74

 
242

 
286

 
325

Restricted Shares
 
 
 
 
 
 
 
 
Weighted-average grant date fair value of shares granted, per share
 
80

 
62

 
70

 
58

Total fair value of restricted shares vested
 
9

 

 
423

 

Share-Based Compensation Items
 
 
 
 
 
 
 
 
Share-based compensation expense, before tax
 
83

 
77

 
188

 
176

Share-based compensation expense, net of tax effects
 
71

 
18

 
157

 
107

Income tax benefit realized from share-based award exercises
 
24

 
83

 
143

 
116

(in millions, except years)
 
June 30, 2014
Unrecognized compensation expense related to share awards
 
$
509

Weighted-average years to recognize compensation expense
 
1.4

Share-Based Compensation Recognition and Estimates
The principal assumptions the Company used in calculating grant-date fair value for stock options and SARs were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Risk-free interest rate
 
1.8%
 
1.1%
 
1.7% - 1.8%
 
1.0% - 1.1%
Expected volatility
 
31.7%
 
43.0%
 
31.7% - 39.6%
 
42.6% - 43.0%
Expected dividend yield
 
1.9%
 
1.4%
 
1.6% - 1.9%
 
1.4% - 1.5%
Forfeiture rate
 
5.0%
 
5.0%
 
5.0%
 
5.0%
Expected life in years
 
5.4
 
5.3
 
5.4
 
5.3


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9.
Commitments and Contingencies
Legal Matters
Because of the nature of its businesses, the Company is frequently made party to a variety of legal actions and regulatory inquiries, including class actions and suits brought by members, care providers, consumer advocacy organizations, customers and regulators, relating to the Company’s businesses, including management and administration of health benefit plans and other services. These matters include medical malpractice, employment, intellectual property, antitrust, privacy and contract claims, and claims related to health care benefits coverage and other business practices.
The Company records liabilities for its estimates of probable costs resulting from these matters where appropriate. Estimates of costs resulting from legal and regulatory matters involving the Company are inherently difficult to predict, particularly where the matters: involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or represent a shift in regulatory policy; involve a large number of claimants or regulatory bodies; are in the early stages of the proceedings; or could result in a change in business practices. Accordingly, the Company is often unable to estimate the losses or ranges of losses for those matters where there is a reasonable possibility or it is probable that a loss may be incurred.
Litigation Matters
California Claims Processing Matter. On January 25, 2008, the California Department of Insurance (CDI) issued an Order to Show Cause to PacifiCare Life and Health Insurance Company, a subsidiary of the Company, alleging violations of certain insurance statutes and regulations related to an alleged failure to include certain language in standard claims correspondence, timeliness and accuracy of claims processing, interest payments, care provider contract implementation, care provider dispute resolution and other related matters. Although the Company believes that CDI had never before issued a fine in excess of $8 million, CDI advocated a fine of approximately $325 million in this matter. The matter was the subject of an administrative hearing before a California administrative law judge beginning in December 2009, and in August 2013, the administrative law judge issued a nonbinding proposed decision recommending a fine of $11.5 million. The California Insurance Commissioner rejected the administrative law judge’s recommendation and on June 9, 2014, issued his own decision imposing a fine of approximately $174 million. On July 10, 2014, the Company filed a lawsuit in California state court challenging the Commissioner’s decision. The Company cannot reasonably estimate the range of loss, if any, that may result from this matter given the procedural status of the dispute, the wide range of possible outcomes, the legal issues presented (including the legal basis for the majority of the alleged violations), the inherent difficulty in predicting a regulatory fine in the event of a remand, and the various remedies and levels of judicial review that remain available to the Company.
Endoscopy Center of Southern Nevada Litigation. In April 2013, a Las Vegas jury awarded $24 million in compensatory damages and $500 million in punitive damages against a Company health plan and its parent corporation on the theory that they were negligent in their credentialing and monitoring of an in-network endoscopy center owned and operated by independent physicians who were subsequently linked by regulators to an outbreak of hepatitis C. The trial court reduced the overall award to $366 million. The Company is appealing the case. Company plans are party to 41 additional individual lawsuits and two class actions, at various procedural stages, relating to the outbreak. The Company cannot reasonably estimate the range of loss, if any, that may result from these matters given the likelihood of reversal on appeal, the availability of statutory and other limits on damages, the novel legal theories being advanced by the plaintiffs, the various postures of the remaining cases, the availability in many cases of federal defenses under Medicare law and the Employee Retirement Income Security Act, and the pendency of certain relevant legal questions before the Nevada Supreme Court. The Company is vigorously defending these lawsuits.
Government Investigations, Audits and Reviews
The Company has been involved or is currently involved in various governmental investigations, audits and reviews. These include routine, regular and special investigations, audits and reviews by CMS, state insurance and health and welfare departments, the Brazilian national regulatory agency for private health insurance and plans (the Agência Nacional de Saúde Suplementar), state attorneys general, the Office of the Inspector General, the Office of Personnel Management, the Office of Civil Rights, the Government Accountability Office, the Federal Trade Commission, U.S. Congressional committees, the U.S. Department of Justice, the SEC, the Internal Revenue Service, the Brazilian federal revenue service (the Secretaria da Receita Federal), the U.S. Department of Labor, the Federal Deposit Insurance Corporation, the Defense Contract Audit Agency and other governmental authorities. Certain of the Company’s businesses have been reviewed or are currently under review, including for, among other things, compliance with coding and other requirements under the Medicare risk-adjustment model.
In February 2012, CMS announced a final Risk Adjustment Data Validation (RADV) audit and payment adjustment methodology and that it will conduct RADV audits beginning with the 2011 payment year. These audits involve a review of medical records maintained by care providers and may result in retrospective adjustments to payments made to health plans.

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CMS has not communicated how the final payment adjustment under its methodology will be implemented.
The Company cannot reasonably estimate the range of loss, if any, that may result from any material government investigations, audits and reviews in which it is currently involved given the inherent difficulty in predicting regulatory action, fines and penalties, if any, and the various remedies and levels of judicial review available to the Company in the event of an adverse finding.
10.
Segment Financial Information
Factors used to determine the Company’s reportable segments include the nature of operating activities, economic characteristics, existence of separate senior management teams and the type of information presented to the Company’s chief operating decision maker to evaluate its results of operations. Reportable segments with similar economic characteristics are combined. The Company’s four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx.
Transactions between reportable segments principally consist of sales of pharmacy benefit products and services to UnitedHealthcare customers by OptumRx, certain product offerings and care management and integrated care delivery services sold to UnitedHealthcare by OptumHealth, and health information and technology solutions, consulting and other services sold to UnitedHealthcare by OptumInsight. These transactions are recorded at management’s estimate of fair value. Intersegment transactions are eliminated in consolidation. Corporate and intersegment elimination amounts are presented to reconcile the reportable segment results to the consolidated results. For more information on the Company’s segments see Part I, Item I, “Business” and Note 13 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in the Company's 2013 10-K.
Prior period reportable segment financial information has been recast to conform to the 2014 presentation as discussed in Note 1. The following table presents the reportable segment financial information:
 
 
 
 
Optum
 
 
 
 
(in millions)
 
UnitedHealthcare
 
OptumHealth
 
OptumInsight
 
OptumRx
 
Optum Eliminations
 
Optum
 
Corporate and
Eliminations
 
Consolidated
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues - external customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
28,213

 
$
627

 
$

 
$

 
$

 
$
627

 
$

 
$
28,840

Services
 
1,646

 
242

 
532

 
27

 

 
801

 

 
2,447

Products
 
1

 
4

 
14

 
1,018

 

 
1,036

 

 
1,037

Total revenues - external customers
 
29,860

 
873

 
546

 
1,045

 

 
2,464

 

 
32,324

Total revenues - intersegment
 

 
1,674

 
697

 
6,955

 
(115
)
 
9,211

 
(9,211
)
 

Investment and other income
 
211

 
39

 

 

 

 
39

 

 
250

Total revenues
 
$
30,071

 
$
2,586

 
$
1,243

 
$
8,000

 
$
(115
)
 
$
11,714

 
$
(9,211
)
 
$
32,574

Earnings from operations
 
$
1,824

 
$
224

 
$
213

 
$
291

 
$

 
$
728

 
$

 
$
2,552

Interest expense
 

 

 

 

 

 

 
(155
)
 
(155
)
Earnings before income taxes
 
$
1,824

 
$
224

 
$
213

 
$
291

 
$

 
$
728

 
$
(155
)
 
$
2,397

Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues - external customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
26,603

 
$
617

 
$

 
$

 
$

 
$
617

 
$

 
$
27,220

Services
 
1,537

 
176

 
507

 
24

 

 
707

 

 
2,244

Products
 
2

 
5

 
14

 
728

 

 
747

 

 
749

Total revenues - external customers
 
28,142

 
798

 
521

 
752

 

 
2,071

 

 
30,213

Total revenues - intersegment
 

 
1,581

 
660

 
4,895

 
(115
)
 
7,021

 
(7,021
)
 

Investment and other income
 
163

 
32

 

 

 

 
32

 

 
195

Total revenues
 
$
28,305

 
$
2,411

 
$
1,181

 
$
5,647

 
$
(115
)
 
$
9,124

 
$
(7,021
)
 
$
30,408

Earnings from operations
 
$
1,809

 
$
216

 
$
230

 
$
146

 
$

 
$
592

 
$

 
$
2,401

Interest expense
 

 

 

 

 

 

 
(176
)
 
(176
)
Earnings before income taxes
 
$
1,809

 
$
216

 
$
230

 
$
146

 
$

 
$
592

 
$
(176
)
 
$
2,225


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Optum
 
 
 
 
(in millions)
 
UnitedHealthcare
 
OptumHealth
 
OptumInsight
 
OptumRx
 
Optum Eliminations
 
Optum
 
Corporate and
Eliminations
 
Consolidated
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues - external customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
55,724

 
$
1,231

 
$

 
$

 
$

 
$
1,231

 
$

 
$
56,955

Services
 
3,232

 
505

 
1,057

 
57

 

 
1,619

 

 
4,851

Products
 
2

 
11

 
40

 
1,982

 

 
2,033

 

 
2,035

Total revenues - external customers
 
58,958

 
1,747

 
1,097

 
2,039

 

 
4,883

 

 
63,841

Total revenues - intersegment
 

 
3,345

 
1,393

 
13,419

 
(230
)
 
17,927

 
(17,927
)
 

Investment and other income
 
367

 
74

 

 

 

 
74

 

 
441

Total revenues
 
$
59,325

 
$
5,166

 
$
2,490

 
$
15,458

 
$
(230
)
 
$
22,884

 
$
(17,927
)
 
$
64,282

Earnings from operations
 
$
3,228

 
$
435

 
$
410

 
$
533

 
$

 
$
1,378

 
$

 
$
4,606

Interest expense
 

 

 

 

 

 

 
(315
)
 
(315
)
Earnings before income taxes
 
$
3,228

 
$
435

 
$
410

 
$
533

 
$

 
$
1,378

 
$
(315
)
 
$
4,291

Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues - external customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
53,284

 
$
1,210

 
$

 
$

 
$

 
$
1,210

 
$

 
$
54,494

Services
 
2,931

 
383

 
995

 
47

 

 
1,425

 

 
4,356

Products
 
4

 
10

 
33

 
1,453

 

 
1,496

 

 
1,500

Total revenues - external customers
 
56,219

 
1,603

 
1,028

 
1,500

 

 
4,131

 

 
60,350

Total revenues - intersegment
 

 
3,188

 
1,306

 
9,343

 
(223
)
 
13,614

 
(13,614
)
 

Investment and other income
 
336

 
62

 

 

 

 
62

 

 
398

Total revenues
 
$
56,555

 
$
4,853

 
$
2,334

 
$
10,843

 
$
(223
)
 
$
17,807

 
$
(13,614
)
 
$
60,748

Earnings from operations
 
$
3,407

 
$
436

 
$
438

 
$
259

 
$

 
$
1,133

 
$

 
$
4,540

Interest expense
 

 

 

 

 

 

 
(354
)
 
(354
)
Earnings before income taxes
 
$
3,407

 
$
436

 
$
438

 
$
259

 
$

 
$
1,133

 
$
(354
)
 
$
4,186





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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the accompanying Condensed Consolidated Financial Statements and Notes and with our 2013 10-K, including the Consolidated Financial Statements and Notes in Item II, Part 8, “Financial Statements” in that report. References to the terms “UnitedHealth Group,” “we,” “our” or “us” used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to UnitedHealth Group Incorporated and its consolidated subsidiaries.
Readers are cautioned that the statements, estimates, projections or outlook contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations, including discussions regarding financial prospects, economic conditions, trends and uncertainties contained in this Item 2, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the results discussed or implied in the forward-looking statements. A description of some of the risks and uncertainties is set forth in Part I, Item 1A, “Risk Factors” in our 2013 10-K and in the discussion below.
EXECUTIVE OVERVIEW
General
UnitedHealth Group is a diversified health and well-being company dedicated to helping people live healthier lives and making health care work better. We offer a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services.
Further information on our business is included in Part I, Item 1, “Business” in our 2013 10-K and additional information on our segments can be found in this Item 2 and in Note 10 of Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Business Trends
Our businesses participate in the U.S., Brazilian and certain other international health economies. In the United States, health care spending comprises approximately 18% of gross domestic product and has grown consistently for many years. We expect overall spending on health care to continue to grow in the future, due to inflation, medical technology and pharmaceutical advancement, regulatory requirements, demographic trends in the population and national interest in health and well-being. The rate of market growth may be affected by a variety of factors, including macro-economic conditions and regulatory changes, including enacted health care reforms in the United States, which have impacted and could further impact our results of operations.
Pricing Trends. We seek to price our health care benefit products consistent with anticipated underlying medical trends, while balancing growth, margins, and competitive dynamics (such as product positioning and price competitiveness) and legislative and regulatory changes (such as cost increases for the Industry Tax provisions of Health Reform Legislation). Overall, we continue to be under pressure from ongoing market competition in commercial products and from government payment rates.
In some markets, competitors have adjusted their pricing to reflect recent medical cost trend experience as well as the implication of rate review rules, new benefit changes and fees from Health Reform Legislation. The intensity of commercial pricing competition depends on local market conditions and competitive dynamics. Generally, the industry has experienced lower medical costs trends due to moderated utilization, which has impacted pricing trends. Conversely, carriers have generally reflected the 2014 Industry Tax and Reinsurance Programs (together, ACA Fees) in their pricing.
We experienced an intensely competitive period of early renewals for commercial business, where many small group customers, with policies that would typically have renewed in early 2014, renewed early to avoid community rating and ACA related price increases. Additionally, we have seen intensified competitive pricing in several local markets recently, including for small group customers in a large market for us. If this trend continues, we could see further declines in risk-based membership.
Annual commercial premium rate increases are subject to federal and state review and approval procedures. While our rates and rate filings are developed using methods consistent with the standards of actuarial practice, we have experienced regulatory challenges to proposed premium rate increases in certain states, including California and New York.
The Medicare Advantage rate structure is changing and funding has been cut in recent years, including in 2014, with additional reductions to take effect in 2015, as discussed below in “Regulatory Trends and Uncertainties.” We are taking actions to respond to these funding reductions, but we expect these factors to result in pressure on net earnings for our Medicare business

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in 2014 and 2015.
Although we expect Medicaid revenue increases due to anticipated growth in our offerings, we also believe that the reimbursement rate environment will continue to exert downward pressure on Medicaid net margin percentages. We continue to work with our state customers to advocate for actuarially sound rates that are commensurate with our medical cost trends, including fees and related taxes, and to take a prudent, market-sustainable posture for both new bids and maintenance of existing Medicaid contracts.
Medical Cost Trends. Our medical cost trends are primarily related to unit costs, utilization and prescription drug costs. Consistent with recent years, our 2014 trend is expected to be driven primarily by continued unit cost pressure from health care providers. Although the weak economic environment combined with our medical cost management strategies has had a favorable impact on utilization trends in recent years, the impact of Health Reform Legislation and mandates in 2014 is exerting upward pressure on medical cost trends. Driving the increases are mandated essential health benefits and limits on out-of-pocket maximums. The primary drivers of prescription drug trends continue to be unit cost pressure on brand name drugs and a shift towards expensive new specialty medications, including new hepatitis C therapies.
Delivery System and Payment Modernization. The health care market is changing based on demographic shifts, new regulations, political forces and both payer and patient expectations. Health plans and care providers are being called upon to work together to close gaps in care and improve overall care for people, improve the health of populations and reduce costs. The focus on delivery system modernization and payment reform is critical and the alignment of incentives between key constituents remains an important theme.
Through expansion of our existing programs and the creation of new programs, we are increasingly rewarding care providers for delivering improvements in quality and cost-efficiency. As of June 30, 2014, we served nearly 3 million people through the most progressive of these arrangements, including full-risk, shared-risk and bundled episode-of-care payment approaches.
This trend is creating needs for health management services that can coordinate care around the primary care physician, including new primary care channels, and for investments in new clinical and administrative information and management systems, which we believe will provide growth opportunities for our Optum business platform.
Regulatory Trends and Uncertainties
Following is a summary of management’s view of the trends and uncertainties related to some of the key provisions of Health Reform Legislation and other regulatory items. For additional information regarding Health Reform Legislation and regulatory trends and uncertainties, see Part I, Item 1 “Business - Government Regulation” and Item 1A, “Risk Factors” in our 2013 10-K.
Medicare Advantage Rates and Minimum Loss Ratios. Medicare Advantage rates have been cut over the last several years, including in 2014, with additional funding reductions to be phased-in through 2017 as a result of (a) changes to CMS Medicare Advantage benchmark rates; (b) Health Reform Legislation; and (c) the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, which reduced Medicare Advantage and Medicare Part D payments, beginning April 1, 2013 (Sequestration). The CMS final notice of 2015 Medicare Advantage benchmark rates and payment policies includes additional significant reductions for 2015. These industry level reductions, including the impact of the Industry Tax described below, are expected to result in revenue reductions and incremental assessments totaling more than 6% of revenue in 2014 and more than an additional 3% in 2015, against a typical industry forward medical cost trend of 3%. The impact of these cuts to our Medicare Advantage revenues is partially mitigated by reductions in provider reimbursements for those care providers with rates indexed to Medicare Advantage revenues or Medicare fee-for-service reimbursement rates. Compared to 2013, and prior to any efforts to mitigate these funding reductions, we estimate that the net impact of these reductions and the Industry Tax on our full-year 2014 consolidated net earnings will be approximately $1.3 billion. These factors affected our plan benefit designs, market participation, growth prospects and earnings for our Medicare Advantage plans in 2014. Although, since the beginning of 2014, Medicare Advantage and Medicare Part D plans have been required to have minimum medical loss ratios (MLRs) of 85%, we do not believe the minimum MLR standard will have a material impact on our consolidated financial results.
Health Reform Legislation directed HHS to establish a program to reward high-quality Medicare Advantage plans beginning in 2012. Our Medicare Advantage rates are currently enhanced by CMS quality bonuses in certain counties based on our local plans’ star ratings. The level of star ratings from CMS, based upon specified clinical and operational performance standards, will impact future quality bonuses. In addition, star ratings affect the amount of savings a plan has to generate to offer supplemental benefits, which ultimately may affect the plan’s membership and revenue. The current expanded star bonus program that pays bonuses to qualifying plans rated 3 stars or higher expires after 2014. In 2015, quality bonus payments will be paid only to 4 and 5 star plans. For the 2014 payment year, approximately 57% of our current Medicare Advantage members are enrolled in plans rated 3.5 stars or higher and approximately 9% are enrolled in plans that will be rated 4 stars or higher. For the 2015 payment year, approximately 70% of our current Medicare Advantage members are enrolled in plans that will be rated

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3.5 stars or higher and approximately 24% are enrolled in plans that will be rated 4 stars or higher. Compared to current enrollment, in 2015 we expect a higher percentage of membership to be enrolled in plans that are rated 4 stars or higher based on the expected shift in membership.
The ongoing reductions to Medicare Advantage funding place continued importance on effective medical management and ongoing improvements in administrative efficiency. There are a number of adjustments we can make and are making to partially offset these rate reductions. These adjustments will impact the majority of the seniors we serve through Medicare Advantage. For example, we seek to intensify our medical and operating cost management, make changes to the size and composition of our care provider networks, adjust members' benefits, implement or increase member premiums over and above the monthly payments we receive from the government, and decide on a county-by-county basis where we will offer Medicare Advantage plans. The depth of the underfunding of these benefits caused us to exit certain plans and market areas for 2014 in which we served approximately 150,000 Medicare Advantage beneficiaries in 2013. In other markets, we may experience a reduction in membership in the plans with the greatest benefit cuts, but we expect stable or growing membership in our strongest markets. We are dedicating substantial resources to improving our quality scores and star ratings to improve the performance and sustainability of our local market programs for the 2016 payment year and beyond.
In the longer term, we also may be able to mitigate some of the effects of reduced funding by increasing enrollment due, in part, to the increasing number of people eligible for Medicare in coming years. As Medicare Advantage reimbursement changes, other products may become relatively more attractive to Medicare beneficiaries increasing the demand for other senior health benefits products such as our Medicare Supplement and stand-alone Medicare Part D insurance offerings.
Industry Tax and Premium Stabilization Programs. Health Reform Legislation includes an Industry Tax levied proportionally across the health insurance industry for risk-based products, that began January 1, 2014. The industry-wide amount of the annual tax is $8 billion in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017 and $14.3 billion in 2018. For 2019 and beyond, the amount will equal the annual tax for the preceding year increased by the rate of premium growth for the preceding year.
With the introduction of state health insurance exchanges and other significant market reforms in the individual and small group markets in 2014, Health Reform Legislation includes three programs designed to stabilize the health insurance markets. These programs encompass: a Reinsurance Program; a temporary risk corridors program; and a permanent risk adjustment program. The Reinsurance Program is a temporary program that will be funded on a per capita basis from all commercial lines of business including insured and self-funded arrangements. The total three year amount of $25 billion for the Reinsurance Program will be allocated as follows: $20 billion, subject to increases based on state decisions, to fund the reinsurance pool and $5 billion to fund the U.S. Treasury. While funding for the Reinsurance Program will come from all commercial lines of business, only market reform compliant individual business will be eligible for reinsurance recoveries.
We expect our share of the Industry Tax to be approximately $1.3 billion in 2014, which we began expensing ratably throughout the year on January 1, 2014. Our first annual payment is due in September 2014. Because this tax is not deductible, we estimate a significant increase of approximately 500 basis points (bps) in our 2014 effective income tax rate. We estimate that the full-year 2014 expense from tax deductible contributions to the Reinsurance Program will be approximately $0.5 billion in 2014, payable in 2015. We do not expect material payments or receipts related to the temporary risk corridors program, permanent risk adjustment program or reinsurance recoveries in 2014. To the extent possible, we include the reform fees and related tax impacts in our pricing, which is expected to result in $1.4 billion to $1.6 billion of additional annual premiums in 2014. Since the ACA Fees, are included in operating costs, we expect our medical care ratio to decrease in 2014 compared to historical results; the cost of these fees is factored in, however, when calculating minimum MLR rebates. For detail on the Industry Tax and Premium Stabilization Programs, see Note 1 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
Exchanges and Coverage Expansion. Across markets, we and our competitors are adapting product, network and marketing strategies to anticipate new or expanding distribution channels including public exchanges, private exchanges and off exchange purchasing. Effective in 2014, states have either created their own public exchange, entered a partnership exchange or relied on the federally facilitated exchange for individuals and small employers. The exchanges have created new market dynamics that have impacted and could further impact our existing businesses, depending on the ultimate member migration patterns for each market, the pace of migration in the market and the impact of the migration on our established membership. For example, over time certain employers may no longer offer health benefits to their employees and some employers purchasing full-risk products could convert to self-funded programs. Conversely, in private exchanges, some employers may convert from self-funded programs to full-risk products. Our level of participation in public exchanges is determined on a state-by-state basis. Each state is evaluated based on factors such as growth opportunities, our current local presence, our competitive positioning, our ability to honor our commitments to our local customers and consumers, and the regulatory environment. In 2014, we are participating in 13 exchanges in 10 states and the District of Columbia, including four individual and nine small group

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exchanges. In 2015, we currently plan to participate in as many as two dozen individual exchanges and 14 small group exchanges.
Health Reform Legislation, as interpreted by the U.S. Supreme Court, also provides for optional expanded Medicaid coverage that became effective in January 2014. We participate in programs in 24 states and the District of Columbia, and of these, 12 states have opted to expand Medicaid for 2014. The Congressional Budget Office forecasts that 12 million people will obtain coverage through Medicaid by the end of 2016, and we endeavor to build market share serving the needs of these beneficiaries and their state sponsors.
Individual and Small Group Market Reforms. Health Reform Legislation includes several provisions, for most individual and small group plans with plan years that began on January 1, 2014, that have altered the individual and small group marketplace, including, among other matters: (a) adjusted community rating requirements, which change how individual and small group plans are priced in many states; (b) essential health benefit requirements that result in benefit changes for many individual and small group policyholders; (c) actuarial value requirements, which significantly impact benefit designs in the individual market, such as member cost sharing requirements; and (d) guaranteed issue requirements that obligate carriers to provide coverage to any qualified group or individual. These changes resulted in significant benefit design and pricing changes for a substantial portion of the fully insured individual and small group markets and a reduction in the number of states in which we offer policies to new individual customers.

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RESULTS SUMMARY
The following table summarizes our consolidated results of operations and other financial information:
(in millions, except percentages and per share data)
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
2014
 
2013
 
2014 vs. 2013
 
2014
 
2013
 
2014 vs. 2013
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
28,840

 
$
27,220

 
$
1,620

 
6
%
 
$
56,955

 
$
54,494

 
$
2,461

 
5
%
Services
 
2,447

 
2,244

 
203

 
9

 
4,851

 
4,356

 
495

 
11

Products
 
1,037

 
749

 
288

 
38

 
2,035

 
1,500

 
535

 
36

Investment and other income
 
250

 
195

 
55

 
28

 
441

 
398

 
43

 
11

Total revenues
 
32,574

 
30,408

 
2,166

 
7

 
64,282

 
60,748

 
3,534

 
6

Operating costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Medical costs
 
23,523

 
22,173

 
1,350

 
6

 
46,731

 
44,742

 
1,989

 
4

Operating costs
 
5,206

 
4,825

 
381

 
8

 
10,400

 
9,439

 
961

 
10

Cost of products sold
 
929

 
669

 
260

 
39

 
1,821

 
1,351

 
470

 
35

Depreciation and amortization
 
364

 
340

 
24

 
7

 
724

 
676

 
48

 
7

Total operating costs
 
30,022

 
28,007

 
2,015

 
7

 
59,676

 
56,208

 
3,468

 
6

Earnings from operations
 
2,552

 
2,401

 
151

 
6

 
4,606

 
4,540

 
66

 
1

Interest expense
 
(155
)
 
(176
)
 
(21
)
 
(12
)
 
(315
)
 
(354
)
 
(39
)
 
(11
)
Earnings before income taxes
 
2,397

 
2,225

 
172

 
8

 
4,291

 
4,186

 
105

 
3

Provision for income taxes
 
(989
)
 
(789
)
 
200

 
25

 
(1,784
)
 
(1,510
)
 
274

 
18

Net earnings
 
1,408

 
1,436

 
(28
)
 
(2
)
 
2,507

 
2,676

 
(169
)
 
(6
)
Earnings attributable to noncontrolling interests
 

 

 

 
nm
 

 
(48
)
 
(48
)
 
nm
Net earnings attributable to UnitedHealth Group common shareholders
 
$
1,408

 
$
1,436

 
$
(28
)
 
(2
)%
 
$
2,507

 
$
2,628

 
$
(121
)
 
(5
)%
Diluted earnings per share attributable to UnitedHealth Group common shareholders
 
$
1.42

 
$
1.40

 
$
0.02

 
1
 %
 
$
2.52

 
$
2.56

 
$
(0.04
)
 
(2
)%
Medical care ratio (a)
 
81.6
%
 
81.5
%
 
0.1
 %
 
 
 
82.0
%
 
82.1
%
 
(0.1
)%
 
 
Operating cost ratio
 
16.0

 
15.9

 
0.1

 
 
 
16.2

 
15.5

 
0.7

 
 
Operating margin
 
7.8

 
7.9

 
(0.1
)
 
 
 
7.2

 
7.5

 
(0.3
)
 
 
Tax rate
 
41.3

 
35.5

 
5.8

 
 
 
41.6

 
36.1

 
5.5

 
 
Net earnings margin
 
4.3

 
4.7

 
(0.4
)
 
 
 
3.9

 
4.4

 
(0.5
)
 
 
Return on equity (b)
 
17.2
%
 
18.2
%
 
(1.0
)%
 
 
 
15.4
%
 
16.7
%
 
(1.3
)%
 
 
nm= not meaningful
(a)
Medical care ratio is calculated as medical costs divided by premium revenue.
(b)
Return on equity is calculated as annualized net earnings divided by average equity. Average equity is calculated using the equity balance at the end of the preceding year and the equity balances at the end of each of the quarters in the periods presented.
SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS
The following represents a summary of select second quarter 2014 year-over-year operating comparisons to second quarter 2013 and other 2014 significant items.
Consolidated revenues increased by 7%, UnitedHealthcare revenues increased 6% and Optum revenues grew 28%.
ACA Fees have favorably affected our 2014 medical care ratio (100 bps), and unfavorably impacted our operating cost ratio (120 bps) and effective income tax rate (5%).
Earnings from operations increased by 6%, including an increase of 23% at Optum and 1% at UnitedHealthcare.
Earnings per share to UnitedHealth Group shareholders increased 1% and included the negative year-over-year per share impact of $0.27 in ACA Fees and other adverse ACA impacts.
As of June 30, 2014, there was $1.1 billion of cash available for general corporate use and year-to-date 2014 cash flows from operations were $2.4 billion.

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2014 RESULTS OF OPERATIONS COMPARED TO 2013 RESULTS
Consolidated Financial Results
Revenues
The increases in revenues during the three and six months ended June 30, 2014 were primarily driven by growth in the number of individuals served in our public and senior markets businesses and pharmacy services growth at Optum.
Medical Costs and Medical Care Ratio
Medical costs during the three and six months ended June 30, 2014 increased due to risk-based membership growth in our public and senior markets businesses. The medical care ratio was relatively stable for the three and six months ended June 30, 2014 compared to 2013. The favorable impact on the medical cost ratio of the billing for the ACA Fees was largely offset by lower levels of favorable medical cost reserve development.
Operating Cost Ratio
The increase in our operating cost ratio during the three and six months ended June 30, 2014 was due to the introduction of ACA Fees and specific investments in Optum growth platforms, partially offset by productivity and scale advances enterprise wide.
Income Tax Rate
The increase in our income tax rate resulted primarily from the nondeductible Industry Tax.
See Note 1 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1, and “Industry Tax and Premium Stabilization Programs” in the “Executive Overview” above for more information on ACA Fees.



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Reportable Segments
Prior period segment financial information has been recast to conform to the 2014 presentation. See Notes 1 and 10 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for more information on our segments. The following table presents a summary of the reportable segment financial information:
 
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Six Months Ended June 30,
 
Increase/(Decrease)
(in millions, except percentages)
 
2014
 
2013
 
2014 vs. 2013
 
2014
 
2013
 
2014 vs. 2013
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UnitedHealthcare
 
$
30,071

 
$
28,305

 
$
1,766

 
6
%
 
$
59,325

 
$
56,555

 
$
2,770

 
5
%
OptumHealth
 
2,586

 
2,411

 
175

 
7

 
5,166

 
4,853

 
313

 
6

OptumInsight
 
1,243

 
1,181

 
62

 
5

 
2,490

 
2,334

 
156

 
7

OptumRx
 
8,000

 
5,647

 
2,353

 
42

 
15,458

 
10,843

 
4,615

 
43

Optum eliminations
 
(115
)
 
(115
)
 

 

 
(230
)
 
(223
)
 
7

 
3

Optum
 
11,714

 
9,124

 
2,590

 
28

 
22,884

 
17,807

 
5,077

 
29

Eliminations
 
(9,211
)
 
(7,021
)
 
2,190

 
31

 
(17,927
)
 
(13,614
)
 
4,313

 
32

Consolidated revenues
 
$
32,574

 
$
30,408

 
$
2,166

 
7
%
 
$
64,282

 
$
60,748

 
$
3,534

 
6
%
Earnings from operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UnitedHealthcare
 
$
1,824

 
$
1,809

 
$
15

 
1
 %
 
$
3,228

 
$
3,407

 
$
(179
)
 
(5
)%
OptumHealth
 
224

 
216

 
8

 
4

 
435

 
436

 
(1
)
 

OptumInsight
 
213

 
230

 
(17
)
 
(7
)
 
410

 
438

 
(28
)
 
(6
)
OptumRx
 
291

 
146

 
145

 
99

 
533

 
259

 
274

 
106

Optum
 
728

 
592

 
136

 
23

 
1,378

 
1,133

 
245

 
22

Consolidated earnings from operations
 
$
2,552

 
$
2,401

 
$
151

 
6
 %
 
$
4,606

 
$
4,540

 
$
66

 
1
 %
Operating margin
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UnitedHealthcare
 
6.1
%
 
6.4
%
 
(0.3
)%
 
 
 
5.4
%
 
6.0
%
 
(0.6
)%
 
 
OptumHealth
 
8.7

 
9.0

 
(0.3
)
 
 
 
8.4

 
9.0

 
(0.6
)
 
 
OptumInsight
 
17.1

 
19.5

 
(2.4
)
 
 
 
16.5

 
18.8

 
(2.3
)
 
 
OptumRx
 
3.6

 
2.6

 
1.0

 
 
 
3.4

 
2.4

 
1.0

 
 
Optum
 
6.2

 
6.5

 
(0.3
)
 
 
 
6.0

 
6.4

 
(0.4
)
 
 
Consolidated operating margin
 
7.8
%
 
7.9
%
 
(0.1
)%
 
 
 
7.2
%
 
7.5
%
 
(0.3
)%
 
 
UnitedHealthcare
The following table summarizes UnitedHealthcare revenue by business:
 
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Six Months Ended June 30,
 
Increase/(Decrease)
(in millions, except percentages)
 
2014
 
2013
 
2014 vs. 2013
 
2014
 
2013
 
2014 vs. 2013
UnitedHealthcare Employer & Individual
 
$
10,729

 
$
11,134

 
$
(405
)
 
(4
)%
 
$
21,686

 
$
22,194

 
$
(508
)
 
(2
)%
UnitedHealthcare Medicare & Retirement
 
11,785

 
11,053

 
732

 
7

 
23,287

 
22,233

 
1,054

 
5

UnitedHealthcare Community & State
 
5,764

 
4,482

 
1,282

 
29

 
10,938

 
8,920

 
2,018

 
23

UnitedHealthcare International
 
1,793

 
1,636

 
157

 
10

 
3,414

 
3,208

 
206

 
6

Total UnitedHealthcare revenue
 
$
30,071

 
$
28,305

 
$
1,766

 
6
 %
 
$
59,325

 
$
56,555

 
$
2,770

 
5
 %

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The following table summarizes the number of individuals served by our UnitedHealthcare businesses, by major market segment and funding arrangement:
 
 
June 30,
 
Increase/(Decrease)
(in thousands, except percentages)
 
2014
 
2013
 
2014 vs. 2013
Commercial risk-based
 
7,610

 
8,130

 
(520
)
 
(6
)%
Commercial fee-based
 
18,330

 
19,030

 
(700
)
 
(4
)
Commercial fee-based TRICARE
 
2,910

 
2,930

 
(20
)
 
(1
)
Total commercial
 
28,850

 
30,090

 
(1,240
)
 
(4
)
Medicare Advantage
 
2,985

 
2,920

 
65

 
2

Medicaid
 
4,670

 
3,940

 
730

 
19

Medicare Supplement (Standardized)
 
3,665

 
3,365

 
300

 
9

Total public and senior
 
11,320

 
10,225

 
1,095

 
11

International
 
4,765

 
4,685

 
80

 
2

Total UnitedHealthcare - medical
 
44,935

 
45,000

 
(65
)
 
 %
Supplemental Data:
 
 
 
 
 
 
 
 
Medicare Part D stand-alone
 
5,150

 
4,800

 
350

 
7
 %
The decrease in number of people served under commercial fee-based arrangements was primarily due to the loss of a large state employer account. The decrease in commercial risk-based enrollment was a result of disciplined pricing in a continued competitive environment and a decrease in individual policy customers due in part to customers moving to public exchanges. Medicare Advantage participation increased year-over-year despite the significant funding reductions, which caused us to exit certain markets, reduce product offerings, adjust networks and reduce benefits for 2014. Over half of the Medicaid growth was driven by Medicaid expansion under the ACA with the remaining growth from existing markets and programs. Medicare Supplement growth reflected strong customer retention and new sales. The number of people served internationally grew year-over-year primarily due to an acquisition, partially offset by decreases attributable to the strengthening of pricing in Brazil in response to regulatory requirements that are causing health care costs and utilization to rise. In our Medicare Part D stand-alone business, the number of people served increased primarily as a result of new product introductions and strong customer retention in the market.
UnitedHealthcare’s revenue growth during the three and six months ended June 30, 2014 was due to growth in the number of individuals served in our public and senior markets businesses, revenues to recover ACA Fees, price increases reflecting underlying medical cost trends and favorable revenue true-ups in federal and state-based benefit programs, partially offset by decreased commercial risk-based enrollment and a reduced level of Medicare Advantage funding.
UnitedHealthcare’s earnings from operations and operating margin for the six months ended June 30, 2014 decreased compared to the prior year as operating margins were pressured by ACA Fees, increased spending on specialty medications to treat hepatitis C, Medicare Advantage funding reductions and reduced levels of favorable medical cost reserve development compared to the second quarter of 2013, partially offset by public and senior growth and revenue true-ups. Results for the three month period ended June 30, 2014 were flat year-over-year.
Optum
Total revenues increased for the three and six months ended June 30, 2014 primarily due to pharmacy growth at OptumRx.
Optum’s earnings from operations for the three and six months ended June 30, 2014 increased compared to 2013 due to earnings growth at OptumRx, which were partially offset by investments to develop future growth opportunities for Optum overall. The operating margins declined due to the increased mix of comparatively lower margin pharmacy services in Optum’s overall business and investments to develop future growth opportunities, particularly at OptumHealth and OptumInsight.
The results by segment were as follows:
OptumHealth
Revenue increased at OptumHealth for the three and six months ended June 30, 2014 primarily due to expansion and growth in integrated care delivery services and in health care distribution services, partially offset by lower behavioral health revenues.
Earnings from operations for the three months ended June 30, 2014 increased slightly and were flat for the six months ended June 30, 2014 primarily due to revenue growth and cost efficiencies, offset by future growth investments. The operating margin for the three and six months ended June 30, 2014 decreased slightly due to investments for future growth.

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OptumInsight
Revenue at OptumInsight for the three and six months ended June 30, 2014 increased primarily due to the growth in Optum360 revenue management and government health care exchange services, partially offset by decreases in hospital clinical compliance services.
The decreased earnings from operations and operating margins for the three and six months ended June 30, 2014 reflected changes in product mix and investments for future growth.
OptumRx
Increased OptumRx revenue for the three and six months ended June 30, 2014 was due to growth in people served in UnitedHealthcare’s public and senior markets, the insourcing of UnitedHealthcare’s commercial pharmacy benefit programs and from external clients.
Earnings from operations and operating margins for the three and six months ended June 30, 2014 increased primarily due to strong revenue growth, scale efficiencies and significant productivity advances.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
Liquidity
Introduction
We manage our liquidity and financial position in the context of our overall business strategy. We continually forecast and manage our cash, investments, working capital balances and capital structure to meet the short-term and long-term obligations of our businesses while seeking to maintain liquidity and financial flexibility. Cash flows generated from operating activities are principally from earnings before noncash expenses.
Our regulated subsidiaries generate significant cash flows from operations and are subject to financial regulations and standards in their respective jurisdictions. These standards, among other things, require these subsidiaries to maintain specified levels of statutory capital, as defined by each jurisdiction, and restrict the timing and amount of dividends and other distributions that may be paid to their parent companies. In the United States, most of these regulations and standards are generally consistent with model regulations established by the National Association of Insurance Commissioners. Except in the case of extraordinary dividends, these standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. These dividends are referred to as “ordinary dividends” and generally may be paid without prior regulatory approval. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.
For the six months ended June 30, 2014, our U.S. regulated subsidiaries paid their parent companies dividends of $3.4 billion, and we had approximately $1.6 billion in ordinary dividend capacity remaining. For the twelve months ended December 31, 2013, our regulated subsidiaries paid their parent companies dividends of $3.2 billion.
Our nonregulated businesses also generate cash flows from operations that are available for general corporate use. Cash flows generated by these entities, combined with dividends from our regulated entities and financing through the issuance of long-term debt as well as issuance of commercial paper or the ability to draw under our committed credit facilities, further strengthen our operating and financial flexibility. We use these cash flows to expand our businesses through acquisitions, reinvest in our businesses through capital expenditures, repay debt, and return capital to our shareholders through shareholder dividends and/or repurchases of our common stock, depending on market conditions.

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Summary of our Major Sources and Uses of Cash and Cash Equivalents
 
 
Six Months Ended June 30,
 
Increase/(Decrease)
(in millions)
 
2014
 
2013
 
2014 vs. 2013
Sources of cash:
 
 
 
 
 
 
Cash provided by operating activities
 
$
2,422

 
$
2,527

 
$
(105
)
Sales and maturities of investments, net of purchases
 
460

 

 
460

Customer funds administered
 
333

 
855

 
(522
)
Proceeds from common stock issuances
 
267

 
314

 
(47
)
Other
 

 
45

 
(45
)
Total sources of cash
 
3,482

 
3,741

 
 
Uses of cash:
 
 
 
 
 
 
Common stock repurchases
 
(1,937
)
 
(1,334
)
 
(603
)
Purchases of property, equipment and capitalized software, net
 
(716
)
 
(479
)
 
(237
)
Cash dividends paid
 
(642
)
 
(497
)
 
(145
)
Cash paid for acquisitions and noncontrolling interest shares, net of cash assumed
 
(523
)
 
(1,758
)
 
1,235

Purchases of investments, net of sales and maturities
 

 
(300
)
 
300

Repayments of long-term debt and commercial paper, net of issuances
 
(273
)
 
(13
)
 
(260
)
Other
 
(269
)
 
(18
)
 
(251
)
Total uses of cash
 
(4,360
)
 
(4,399
)
 
 
Effect of exchange rate changes on cash and cash equivalents
 
14

 
(94
)
 
108

Net decrease in cash and cash equivalents
 
$
(864
)
 
$
(752
)
 
$
(112
)
2014 Cash Flows Compared to 2013 Cash Flows
Cash flows provided by operating activities in 2014 decreased primarily due to increased government receivables, which are primarily expected to be collected in the third quarter of 2014; partially offset by collection of ACA Fees in advance of remittance, which occurs in the third quarter of 2014 for the Industry Tax and in 2015 for the remittance of reinsurance contributions.
Other significant changes in sources or uses of cash year-over-year included: (a) decreased acquisitions; (b) increased repurchases of common stock; and (c) increased sales of investments.
Financial Condition
As of June 30, 2014, our cash, cash equivalent and available-for-sale investment balances of $27.0 billion included $6.4 billion of cash and cash equivalents (of which $1.1 billion was available for general corporate use), $18.9 billion of debt securities and $1.7 billion of investments in equity securities and venture capital funds. Given the significant portion of our portfolio held in cash equivalents, we do not anticipate fluctuations in the aggregate fair value of our financial assets to have a material impact on our liquidity or capital position. The use of different market assumptions or valuation methodologies, especially those used in valuing our $359 million of available-for-sale Level 3 securities (those securities priced using significant unobservable inputs), may have an effect on the estimated fair value amounts of our investments. Due to the subjective nature of these assumptions, the estimates may not be indicative of the actual exit price if we had sold the investment at the measurement date. Other sources of liquidity, primarily from operating cash flows and our commercial paper program, which is supported by our bank credit facilities, reduce the need to sell investments during adverse market conditions. See Note 3 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for further detail concerning our fair value measurements.
Our available-for-sale debt portfolio had a weighted-average duration of 3.8 years and a weighted-average credit rating of “AA” as of June 30, 2014. When multiple credit ratings are available for an individual security, the average of the available ratings is used to determine the weighted-average credit rating.

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Capital Resources and Uses of Liquidity
In addition to cash flows from operations and cash and cash equivalent balances available for general corporate use, our capital resources and uses of liquidity are as follows:
Commercial Paper and Bank Credit Facilities. Our bank credit facilities provide liquidity support for our commercial paper borrowing program, which facilitates the private placement of unsecured debt through third-party broker-dealers, and are available for general corporate purposes. For more information on our commercial paper and bank credit facilities, see Note 6 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
Our bank credit facilities contain various covenants, including covenants requiring us to maintain a debt to debt-plus-equity ratio of not more than 50%. Our debt to debt-plus-equity ratio, calculated as the sum of debt divided by the sum of debt and shareholders’ equity, which reasonably approximates the actual covenant ratio, was 33.7% as of June 30, 2014.
Long-term Debt. Periodically, we access capital markets and issue long-term debt for general corporate purposes, for example, to meet our working capital requirements, to refinance debt, to finance acquisitions or for share repurchases.
Credit Ratings. Our credit ratings at June 30, 2014 were as follows:
  
Moody’s
 
Standard & Poor’s
 
Fitch
 
A.M. Best
 
Ratings
 
Outlook
 
Ratings
 
Outlook
 
Ratings
 
Outlook
 
Ratings
 
Outlook
Senior unsecured debt
A3
 
Stable
 
A
 
Positive
 
A-
 
Stable
 
bbb+
 
Stable
Commercial paper
P-2
 
n/a
 
A-1
 
n/a
 
F1
 
n/a
 
AMB-2
 
n/a
The availability of financing in the form of debt or equity is influenced by many factors, including our profitability, operating cash flows, debt levels, credit ratings, debt covenants and other contractual restrictions, regulatory requirements and economic and market conditions. For example, a significant downgrade in our credit ratings or adverse conditions in the capital markets may increase the cost of borrowing for us or limit our access to capital.
Share Repurchase Program. In June 2014, our Board renewed our share repurchase program with an authorization to repurchase up to 100 million shares of our common stock. As of June 30, 2014, we had Board authorization to purchase up to an additional 95 million shares of our common stock. For more information on our share repurchase program, see Note 7 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
Dividends. In June 2014, our Board of Directors increased our quarterly cash dividend to shareholders to an annual dividend rate of $1.50 per share. For more information on our dividend, see Note 7 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
A summary of future obligations under our various contractual obligations and commitments as of December 31, 2013 was disclosed in our 2013 10-K. During the six months ended June 30, 2014, there were no material changes to this previously disclosed information outside the ordinary course of business. However, we continually evaluate opportunities to expand our operations, including through internal development of new products, programs and technology applications and acquisitions.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09. ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard using either the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU 2014-09 will become effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the effect of the new revenue recognition guidance.
We have determined that there have been no other recently issued, but not yet adopted, accounting standards that will have a material impact on our Condensed Consolidated Financial Statements.

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CRITICAL ACCOUNTING ESTIMATES
In preparing these Condensed Consolidated Financial Statements, we are required to make judgments, assumptions and estimates, which we believe are reasonable and prudent based on the available facts and circumstances. These judgments, assumptions and estimates affect certain of our revenues and expenses and their related balance sheet accounts and disclosure of our contingent liabilities. We base our assumptions and estimates primarily on historical experience and factor in known and projected trends. On an ongoing basis, we re-evaluate our selection of assumptions and the method of calculating our estimates. Actual results, however, may materially differ from our calculated estimates and this difference would be reported in our current operations.
Our critical accounting estimates include medical costs payable, revenues, goodwill and intangible assets, investments, income taxes and contingent liabilities. For a detailed description of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2013 10-K. For a detailed discussion of our significant accounting policies, see Note 2 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in our 2013 10-K and Note 1 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
FORWARD-LOOKING STATEMENTS
The statements, estimates, projections, guidance or outlook contained in this report include “forward-looking” statements within the meaning of the PSLRA. These statements are intended to take advantage of the “safe harbor” provisions of the PSLRA. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “forecast,” “plan,” “project,” “should” and similar expressions identify forward-looking statements, which generally are not historical in nature. These statements may contain information about financial prospects, economic conditions and trends and involve risks and uncertainties. We caution that actual results could differ materially from those that management expects, depending on the outcome of certain factors.
Some factors that could cause results to differ materially from results discussed or implied in the forward-looking statements include: our ability to effectively estimate, price for and manage our medical costs, including the impact of any new coverage requirements; the potential impact that new laws or regulations, or changes in existing laws or regulations, or their enforcement or application could have on our results of operations, financial position and cash flows, including as a result of increases in medical, administrative, technology or other costs or decreases in enrollment resulting from U.S., Brazilian and other jurisdictions' regulations affecting the health care industry; the impact of any potential assessments for insolvent payers under state guaranty fund laws; the impact of the Patient Protection and Affordable Care Act, which could materially and adversely affect our results of operations, financial position and cash flows through reduced revenues, increased costs, new taxes and expanded liability, or require changes to the ways in which we conduct business or put us at risk for loss of business; potential reductions in revenue or delays to cash flows received under Medicare, Medicaid and TRICARE programs, including sequestration and potential effects of a prolonged U.S. government shutdown or debt ceiling constraints; uncertainties regarding changes in Medicare, including potential changes in risk adjustment data validation audit and payment adjustment methodology; failure to comply with privacy and data security regulations; regulatory and other risks and uncertainties associated with the pharmacy benefits management industry; competitive pressures, which could affect our ability to maintain or increase our market share; the impact of challenges to our public sector contract awards; our ability to execute contracts on competitive terms with physicians, hospitals and other service professionals; increases in costs and other liabilities associated with increased litigation, government investigations, audits or reviews; failure to manage successfully our strategic alliances or complete or receive anticipated benefits of acquisitions and other strategic transactions, including the Amil acquisition; the impact of fluctuations in foreign currency exchange rates on our reported shareholders’ equity and results of operations; potential downgrades in our credit ratings; our ability to attract, retain and provide support to a network of independent producers (i.e., brokers and agents) and consultants; the potential impact of adverse economic conditions on our revenues (including decreases in enrollment resulting from increases in the unemployment rate and commercial attrition) and results of operations; the performance of our investment portfolio; possible impairment of the value of our goodwill and intangible assets in connection with dispositions or if estimated future results do not adequately support goodwill and intangible assets recorded for our existing businesses or the businesses that we acquire; increases in health care costs resulting from large-scale medical emergencies; failure to maintain effective and efficient information systems or if our technology products otherwise do not operate as intended; misappropriation of our proprietary technology; failure to protect against cyber-attacks or other privacy or data security incidents; our ability to obtain sufficient funds from our regulated subsidiaries or the debt or capital markets to fund our obligations, to maintain our debt to total capital ratio at targeted levels, to maintain our quarterly dividend payment cycle or to continue repurchasing shares of our common stock; and failure to achieve targeted operating cost productivity improvements, including savings resulting from technology enhancement and administrative modernization.
This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain risk factors that may affect our business operations, financial condition and results of operations, in our other periodic and

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current filings with the SEC, including our 2013 10-K. Any or all forward-looking statements we make may turn out to be wrong, and can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. By their nature, forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Actual future results may vary materially from expectations expressed or implied in this report or any of our prior communications. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. We do not undertake to update or revise any forward-looking statements, except as required by applicable securities laws.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risks are exposures to (a) changes in interest rates that impact our investment income and interest expense and the fair value of certain of our fixed-rate investments and debt, (b) foreign currency exchange rate risk of the U.S. dollar primarily to the Brazilian real and (c) changes in equity prices that impact the value of our equity investments.
As of June 30, 2014, we had $7.8 billion of cash, cash equivalents and investments on which the interest rates received vary with market interest rates, which may materially impact our investment income. Also, $8.7 billion of our commercial paper, debt and deposit liabilities as of June 30, 2014 were at interest rates that vary with market rates, either directly or through the use of related interest rate swap contracts.
The fair value of certain of our fixed-rate investments and debt also varies with market interest rates. As of June 30, 2014,
$18.0 billion of our investments were fixed-rate debt securities and $10.6 billion of our debt was non-swapped fixed-rate term debt. An increase in market interest rates decreases the market value of fixed-rate investments and fixed-rate debt. Conversely, a decrease in market interest rates increases the market value of fixed-rate investments and fixed-rate debt.
We manage exposure to market interest rates by diversifying investments across different fixed income market sectors and debt across maturities, as well as by endeavoring to match our floating-rate assets and liabilities over time, either directly or through the use of interest rate swap contracts.
The following table summarizes the impact of hypothetical changes in market interest rates across the entire yield curve by 1% point or 2% points as of June 30, 2014 on our investment income and interest expense per annum, and the fair value of our investments and debt (in millions, except percentages):
 
 
June 30, 2014
Increase (Decrease) in Market Interest Rate
 
Investment
Income Per
Annum (a)
 
Interest
Expense Per
Annum (a)
 
Fair Value of
Investments (b)
 
Fair Value of
Debt
2 %
 
$
156

 
$
171

 
$
(1,404
)
 
$
(1,949
)
1
 
78

 
86

 
(714
)
 
(1,064
)
(1)
 
(38
)
 
(13
)
 
660

 
1,280

(2)
 
nm

 
nm

 
1,134

 
2,756

nm = not meaningful
(a)
Given the low absolute level of short-term market rates on our floating-rate assets and liabilities as of June 30, 2014, the assumed hypothetical change in interest rates does not reflect the full 100 basis point reduction in interest income or interest expense as the rate cannot fall below zero and thus the 200 basis point reduction is not meaningful.
(b)
As of June 30, 2014, some of our investments had interest rates below 2% so the assumed hypothetical change in the fair value of investments does not reflect the full 200 basis point reduction.
We have an exposure to changes in the value of the Brazilian real to the U.S. dollar in translation of Amil’s operating results at the average exchange rate over the accounting period, and Amil’s assets and liabilities at the spot rate at the end of the accounting period. The gains or losses resulting from translating foreign currency assets and liabilities into U.S. dollars are included in shareholders’ equity and comprehensive income.
An appreciation of the U.S. dollar against the Brazilian real reduces the carrying value of the net assets denominated in Brazilian real. For example, as of June 30, 2014, a hypothetical 10% and 20% increase in the value of the U.S. dollar against the Brazilian real would have caused a reduction in net assets of approximately $505 million and $925 million, respectively. We manage exposure to foreign currency risk by conducting our international business operations primarily in their functional currencies.
As of June 30, 2014, we had $1.7 billion of investments in equity securities, consisting of investments in non-U.S. dollar fixed-income funds; employee savings plan related investments; venture capital funds; and dividend paying stocks. Valuations in non-U.S. dollar funds are subject to foreign exchange rates. Valuations in venture capital funds are subject to conditions affecting health care and technology stocks, and dividend paying equities are subject to more general market conditions.

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ITEM 4.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the filing of this Form 10-Q, management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2014.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFROMATION
ITEM 1.
LEGAL PROCEEDINGS
A description of our legal proceedings is included in and incorporated by reference to Note 9 of Notes to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this report.
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” of our 2013 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2013 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
There have been no material changes to the risk factors disclosed in our 2013 10-K.
ITEM 2.    UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities (a)
Second Quarter 2014
For the Month Ended
 
Total Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Maximum Number
of Shares That May
Yet Be Purchased
Under The Plans or
Programs
 
 
(in millions)
 
 
 
(in millions)
 
(in millions)
April 30, 2014
 
5

 
$
78

 
5

 
67

May 31, 2014
 
3

 
77

 
3

 
63

June 30, 2014
 
5

 
80

 
5

 
95

Total
 
13

 
$
79

 
13

 
 
 
(a)
In November 1997, our Board of Directors adopted a share repurchase program, which the Board evaluates periodically. In June 2014, the Board renewed our share repurchase program with an authorization to repurchase up to 100 million shares of our common stock in open market purchases or other types of transactions (including prepaid or structured repurchase programs). There is no established expiration date for the program.


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ITEM 6. EXHIBITS *
The following exhibits are filed in response to Item 601 of Regulation S-K.
3.1

 
Third Restated Articles of Incorporation of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated May 29, 2007)
3.2

 
Fourth Amended and Restated Bylaws of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated October 23, 2009)
4.1

 
Senior Indenture, dated as of November 15, 1998, between United HealthCare Corporation and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3/A, SEC File Number 333-66013, filed on January 11, 1999)
4.2

 
Amendment, dated as of November 6, 2000, to Senior Indenture, dated as of November 15, 1998, between UnitedHealth Group Incorporated and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001)
4.3

 
Instrument of Resignation, Appointment and Acceptance of Trustee, dated January 8, 2007, pursuant to the Senior Indenture, dated as of November 15, 1998, amended November 6, 2000, among UnitedHealth Group Incorporated, The Bank of New York and Wilmington Trust Company (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
4.4

 
Indenture, dated as of February 4, 2008, between UnitedHealth Group Incorporated and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, SEC File Number 333-149031, filed on February 4, 2008)
  12.1

 
Computation of Ratio of Earnings to Fixed Charges
  31.1

 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1

 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101

 
The following materials from UnitedHealth Group Incorporated’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 4, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Changes in Shareholders' Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.
 ________________
*
 
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of certain holders of long-term debt are not filed. The Company will furnish copies thereof to the SEC upon request.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
UNITEDHEALTH GROUP INCORPORATED
 
/s/    STEPHEN J. HEMSLEY
 
President and Chief Executive Officer
(principal executive officer)
Dated:
August 4, 2014
Stephen J. Hemsley
 
  
 
 
 
 
/s/    DAVID S. WICHMANN
 
Executive Vice President and
Chief Financial Officer of UnitedHealth Group and President of UnitedHealth Group Operations
(principal financial officer)
Dated:
August 4, 2014
David S. Wichmann
 
  
 
 
 
 
/S/    ERIC S. RANGEN
 
Senior Vice President and
Chief Accounting Officer
(principal accounting officer)
Dated:
August 4, 2014
Eric S. Rangen
 
  
 


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EXHIBIT INDEX*
 
The following exhibits are filed in response to Item 601 of Regulation S-K.
3.1

 
Third Restated Articles of Incorporation of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated May 29, 2007)
3.2

 
Fourth Amended and Restated Bylaws of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated October 23, 2009)
4.1

 
Senior Indenture, dated as of November 15, 1998, between United HealthCare Corporation and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3/A, SEC File Number 333-66013, filed on January 11, 1999)
4.2

 
Amendment, dated as of November 6, 2000, to Senior Indenture, dated as of November 15, 1998, between UnitedHealth Group Incorporated and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001)
4.3

 
Instrument of Resignation, Appointment and Acceptance of Trustee, dated January 8, 2007, pursuant to the Senior Indenture, dated as of November 15, 1998, amended November 6, 2000, among UnitedHealth Group Incorporated, The Bank of New York and Wilmington Trust Company (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
4.4

 
Indenture, dated as of February 4, 2008, between UnitedHealth Group Incorporated and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, SEC File Number 333-149031, filed on February 4, 2008)
  12.1

 
Computation of Ratio of Earnings to Fixed Charges
  31.1

 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1

 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101

 
The following materials from UnitedHealth Group Incorporated’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 4, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Changes in Shareholders' Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.
 ________________
*
 
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of certain holders of long-term debt are not filed. The Company will furnish copies thereof to the SEC upon request.


39