The following discussion should be read together with the accompanying Condensed
Consolidated Financial Statements and Notes. 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 subsidiaries.
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.
Our businesses participate in the U.S. health economy, which comprises
approximately 18% of U.S. gross domestic product and has grown consistently for
many years. We expect overall spending on health care in the U.S. to continue to
grow in the future, due to inflation, medical technology and pharmaceutical
advancement, regulatory requirements, demographic trends in the U.S. 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
enacted health care reforms, which could also impact our results of operations.
Consistent with historical periods, we expect increasing unit costs to continue
to be the primary cost driver of medical cost trends. Utilization in 2012
continues to increase modestly and we project steadily increasing medical system
utilization throughout the remainder of the year. We also have experienced and
expect to continue to experience an increase in prescription drug costs compared
to 2011. We will continue to work to manage medical and pharmacy cost trends
through care management programs, affordable network relationships,
pay-for-performance reimbursement programs for care providers, and targeted
clinical management programs and initiatives focused on improving quality and
Care providers are facing market pressures to change from fee-for-service models
to new delivery models focused on the holistic health of the consumer,
integrated care across care providers and pay-for-performance payment
structures. This is creating the need for health management services that can
coordinate care around the primary care physician and for investment in new
clinical and administrative information and management systems. We expect that
the portion of our costs that is tied to incentive contracts that reward
providers for outcome-based results and improved cost efficiencies will continue
to increase, and we expect these trends to provide growth opportunities for our
Optum business platform.
We seek to price our products consistent with anticipated underlying medical
trends, while balancing growth, margins, competitive dynamics and premium
rebates at the local market level. We work to sustain a stable medical care
ratio for an equivalent mix of business. Changes in business mix, such as
expanding participation in comparatively higher medical care ratio
government-sponsored public sector programs and Health Reform Legislation, may
impact our premiums, medical costs and medical care ratio. Further, we continue
to expect reimbursements to be under pressure through government payment rates
and continued market competition in commercial products. In the commercial
market segment, we expect pricing to continue to be highly competitive into
2013. We plan to hold to our pricing disciplines and, accordingly, expect
continued pressure on our risk-based product membership. In government programs,
we are also seeing rate pressures intensifying, and rates for some Medicaid
programs are slightly negative. Unlike in prior years, the current Medicaid
reductions have generally not been mitigated by corresponding benefit reductions
or provider fee schedule reductions by the state sponsor. We continue to take a
prudent, market-sustainable posture for both new bids and maintenance of
existing Medicaid contracts. Medicare funding is similarly pressured, see
further discussion below in "Regulatory Trends and Uncertainties."
The government, as a benefit sponsor, has been increasingly relying on private
sector solutions. We expect this trend to continue as we believe the private
sector provides a more flexible, better managed, higher quality health care
experience than do traditional passive indemnity programs.
Table of Contents
Regulatory Trends and Uncertainties
In the first quarter of 2010, the Health Reform Legislation was signed into law.
The Health Reform Legislation expands access to coverage and modifies aspects of
the commercial insurance market, the Medicaid and Medicare programs, CHIP and
other aspects of the health care system. Although the HHS, DOL, IRS and the
Treasury Department have issued or proposed regulations on a number of aspects
of the Health Reform Legislation, final rules and interim guidance on other key
aspects of the Health Reform Legislation, all of which have a variety of
effective dates, remain pending.
Following is a summary of management's view of the trends and uncertainties
related to some of the key provisions of the Health Reform Legislation and other
Medical Loss Ratio and Premium Rebates - Effective in 2011, commercial health
plans with medical loss ratios on fully insured products that fall below certain
targets are required to rebate ratable portions of their premiums annually.
In response to the Health Reform Legislation, minimum medical loss ratios and
premium rebates are considered in the pricing of our products. We have also made
changes to reduce our product distribution costs, including reducing producer
commissions, and are continuing to implement changes to distribution in the
large group insured market segment. Our results in 2012 and 2011 include the
effects of our estimates of the premium rebates. The 2011 rebate is payable in
the third quarter of 2012. Estimated 2012 rebates payable in 2013 are recorded
throughout 2012 as a reduction in premium revenue.
In addition, beginning in 2014, Medicare Advantage plans will be required to
have a minimum medical loss ratio of 85%. CMS has not yet issued guidance as to
how this requirement will be calculated for Medicare Advantage plans.
Commercial Rate Increase Review - The Health Reform Legislation also requires
HHS to maintain an annual review of "unreasonable" increases in premium rates
for commercial health plans. HHS established a review threshold of annual
premium rate increases generally at or above 10% (with state-specific thresholds
to be applicable commencing September 2012) and clarified that HHS review will
not supersede existing state review and approval procedures. Premium rate review
legislation (ranging from new or enhanced rate filing requirements to prior
approval requirements) has been introduced or passed in more than half of the
states as of the date of this report.
The competitive forces common in our markets do not support unjustifiable rate
increases. We have experienced and expect to continue to experience a tight,
competitive commercial pricing environment. Further, our rates and rate filings
are developed using methods consistent with the standards of actuarial
practices. We anticipate requesting rate increases above 10% in a number of
markets due to the combination of medical cost trends and the incremental costs
of health care reform. We have begun to experience greater regulatory challenges
to appropriate premium rate increases in several states, including California,
New York and Rhode Island. Depending on the level of scrutiny by the states,
there is a broad range of potential business impacts. For example, it may become
more difficult to price our commercial risk business consistent with expected
underlying cost trends, leading to the risk of operating margin compression in
the commercial health benefits business.
Medicare Advantage Rates - Beginning in 2012, additional cuts from 2011 to
Medicare Advantage benchmarks have taken effect (benchmarks will ultimately
range from 95% of Medicare fee-for-service rates in high cost areas to 115% in
low cost areas), with changes being phased-in over two to six years, depending
on the level of benchmark reduction in a county. Additionally, Congress passed
the Budget Control Act of 2011, which following a failure of the Joint Select
Committee on Deficit Reduction to cut the federal deficit by $1.2 trillion,
triggers automatic across-the-board budget cuts (sequestration), including
Medicare spending cuts averaging 2% of total program costs for nine years,
starting in 2013.
A significant portion of our network contracts are tied to Medicare
reimbursement levels. However, future Medicare Advantage rates may be outpaced
by underlying medical cost trends, placing continued importance on effective
medical management and ongoing improvements in administrative costs. There are a
number of annual adjustments we can and are making to our operations, which may
partially offset any impact from these rate reductions. For example, we seek to
intensify our medical and operating cost management, adjust members' benefits
and decide on a county-by-county basis in which geographies to participate.
Additionally, achieving high quality scores from CMS for improving upon certain
clinical and operational performance standards will impact future quality
bonuses that may offset these anticipated rate reductions. CMS made certain
changes to quality definitions after the quality score measurement period was
completed that will adversely impact many Medicare Advantage market participants
in 2013, including UnitedHealthcare.
We also may be able to mitigate the effects of reduced funding by increasing
enrollment due, in part, to the increasing number of people eligible for
Medicare in coming years. Compared to second quarter of 2011, our Medicare
Advantage membership has increased by 395,000 consumers, or 18%, including
acquisitions. Longer term, market wide decreases in the availability or relative
quality of Medicare Advantage products may increase demand for other senior
health benefits products such as our Medicare Part D and Medicare Supplement
Industry Fees - The Health Reform Legislation includes an annual, non-deductible
insurance industry assessment to be levied proportionally across the insurance
industry. The amount of the annual fee is $8 billion in 2014, $11.3 billion for
2015 and 2016, $13.9 billion in 2017 and $14.3 billion in 2018. For 2019 and
beyond, the amount will be equal to the annual fee for the preceding year
increased by the rate of premium growth for the preceding year. The annual fee
will be allocated based on the ratio of an entity's net premiums written during
the preceding calendar year to the total health insurance industry's net
premiums written for any U.S. health risk during the preceding calendar year,
subject to certain exceptions. This fee will be first paid and expensed in 2014.
As a result of the non-deductibility of these fees, our effective income tax
rate will increase significantly in 2014.
With the introduction of state health insurance exchanges in 2014, the Health
Reform Legislation includes three programs designed to stabilize the health
insurance markets. These programs are: a transitional Reinsurance Program; a
temporary Risk Corridors Program; and a permanent Risk Adjustment Program. The
transitional Reinsurance Program is a temporary program which will be funded on
a per capita basis from all commercial lines of business including insured and
self-funded arrangements ($25 billion over a three-year period beginning in
2014; $20 billion (subject to increases based on state decisions) of which funds
the state reinsurance pools and $5 billion funds the U.S. Treasury). While the
final HHS regulations have been released, the terms of the specific reinsurance
programs to be used in each state are not yet known.
It is our intention to pass these fees on to customers through increases in
rates and/or decreases in benefits, subject to regulatory approval.
State-Based Exchanges and Coverage Expansion - Effective in 2014, state-based
exchanges are required to be established for individuals and small employers.
The Health Reform Legislation also provides for expanded Medicaid coverage
effective in January 2014. These measures remain subject to implementation at
the state level.
Court Proceedings and Legislative/Regulatory Actions - The United States Supreme
Court issued its opinion on June 28, 2012 declaring the Health Reform
Legislation constitutional, with the exception of the provision that would have
permitted Congress to withhold existing Medicaid funds from states choosing not
to participate in Medicaid expansion. With the Court's ruling, the focus turns
to potential regulatory or legislative action. For example, Congress may attempt
to withhold the funding necessary to implement the Health Reform Legislation, or
may attempt to replace the legislation with amended provisions or repeal it
altogether. Any partial or complete repeal or amendment, or uncertainty
regarding such events, could materially and adversely impact our results of
operations, financial position, cash flows and our ability to capitalize on the
opportunities presented by the Health Reform Legislation or may cause us to
incur additional costs of compliance or reversing some of the changes we have
already implemented. The potential for regulatory or legislative actions that
impact implementation creates additional uncertainties with respect to the law.
For additional information regarding the Health Reform Legislation and
Regulatory Trends and Uncertainties, see Item 1, "Business - Government
Regulation," Item 1A, "Risk Factors" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Regulatory Trends
and Uncertainties" in our 2011 10-K.
Table of Contents
Three Months Ended June 30, Increase/(Decrease) Six Months Ended June 30, Increase/(Decrease)
(in millions, except
percentages and per share
data) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Premiums $ 24,609 $ 22,813 $ 1,796 8 % $ 49,240 $ 45,816 $ 3,424 7 %
Services 1,800 1,656 144 9 3,591 3,254 337 10
Products 678 605 73 12 1,366 1,254 112 9
Investment and other
income 178 160 18 11 350 342 8 2
Total revenues 27,265 25,234 2,031 8 54,547 50,666 3,881 8
Medical costs 20,013 18,578 1,435 8 39,952 37,303 2,649 7
Operating costs 4,080 3,733 347 9 8,176 7,350 826 11
Cost of products sold 620 554 66 12 1,254 1,153 101 9
amortization 326 270 56 21 622 540 82 15
Total operating costs 25,039 23,135 1,904 8 50,004 46,346 3,658 8
Earnings from operations 2,226 2,099 127 6 4,543 4,320 223 5
Interest expense (153 ) (119 ) 34 29 (301 ) (237 ) 64 27
Earnings before income
taxes 2,073 1,980 93 5 4,242 4,083 159 4
Provision for income
taxes (736 ) (713 ) 23 3 (1,517 ) (1,470 ) 47 3
Net earnings $ 1,337 $ 1,267 $ 70 6 % $ 2,725 $ 2,613 $ 112 4 %
Diluted net earnings per
common share $ 1.27 $ 1.16 $ 0.11 9 % $ 2.59 $ 2.38 $ 0.21 9 %
Medical care ratio (a) 81.3 % 81.4 % (0.1 )% 81.1 % 81.4 % (0.3 )%
Operating cost ratio 15.0 14.8 0.2 15.0 14.5 0.5
Operating margin 8.2 8.3 (0.1 ) 8.3 8.5 (0.2 )
Tax rate 35.5 36.0 (0.5 ) 35.8 36.0 (0.2 )
Net margin 4.9 5.0 (0.1 ) 5.0 5.2 (0.2 )
Return on equity (b) 18.4 % 18.8 % (0.4 )% 18.9 % 19.7 % (0.8 )%
(a) Medical care ratio is calculated as medical costs divided by premium
(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 selected second quarter 2012
year-over-year operating comparisons to the second quarter 2011 and other
• Consolidated total revenues of $27.3 billion increased 8%.
• UnitedHealthcare revenues of $25.5 billion rose 8%.
• Optum revenues of $7.3 billion increased 4%.
• UnitedHealthcare medical enrollment grew by 1.7 million people; Medicare
Part D stand-alone membership decreased by 0.6 million people.
• The consolidated medical care ratio of 81.3% decreased 10 basis points.
• Net earnings of $1.3 billion and diluted earnings per share of $1.27
increased 6% and 9%, respectively.
? $1.0 billion in cash was held by non-regulated entities as of June 30, 2012.
? 2012 debt offering raised new debt totaling $1.0 billion.
? June 30, 2012 debt to debt-plus-equity ratio increased 90 basis points
to 30.0% from 29.1% as of December 31, 2011.
? Cash paid for acquisitions in the first half of 2012, net of cash
assumed, totaled $2.4 billion.
• In July 2012, the Government Accountability Office affirmed the Defense
Department's award of the TRICARE West region Managed Care Support Contract
2012 RESULTS OF OPERATIONS COMPARED TO 2011 RESULTS
Consolidated Financial Results
The increases in revenues for the three and six months ended June 30, 2012 were
driven by growth in the number of individuals served and premium rate increases
in our UnitedHealthcare businesses and overall growth in our OptumHealth
business at Optum.
Medical costs for the three and six months ended June 30, 2012 increased due to
risk-based membership growth in our public and senior markets businesses, unit
cost inflation across all businesses and continued moderate increases in health
system use, partially offset by an increase in net favorable medical cost
development. Unit cost increases represented the majority of the increases in
our medical cost trend, with the largest contributor being price increases to
The increases in our operating costs for the three and six months ended June 30,
2012 were due to business growth, including an increase in fee-based benefits,
services and product revenues, which carry comparatively higher operating costs,
as well as investments in the pharmacy management services business.
We have four reportable segments across our two business platforms,
UnitedHealthcare and Optum:
• UnitedHealthcare, which includes UnitedHealthcare Employer & Individual,
UnitedHealthcare Medicare & Retirement and UnitedHealthcare Community &
• OptumInsight; and
See Note 10 of Notes to the Condensed Consolidated Financial Statements and Item
1, "Business" in our 2011 10-K for a description of how each of our reportable
segments derives its revenues.
Transactions between reportable segments principally consist of sales of
pharmacy benefit products and services to UnitedHealthcare customers by OptumRx,
certain product offerings and clinical 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.
The following table presents reportable segment financial information:
Three Months Ended
Six Months Ended
June 30, Increase/(Decrease) June 30, Increase/(Decrease)
(in millions, except
percentages) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
UnitedHealthcare $ 25,516 $ 23,653 $ 1,863 8 % $ 51,049 $ 47,527 $ 3,522 7 %
OptumHealth 2,025 1,670 355 21 3,964 3,177 787 25
OptumInsight 671 658 13 2 1,342 1,329 13 1
OptumRx 4,605 4,688 (83 ) (2 ) 9,326 9,320 6 -
Total Optum 7,301 7,016 285 4 14,632 13,826 806 6
Eliminations (5,552 ) (5,435 ) 117
2 (11,134 ) (10,687 ) 447 4
Consolidated revenues $ 27,265$ 25,234$ 2,031
8 % $ 54,547 $ 50,666 $ 3,881 8 %
UnitedHealthcare $ 1,906 $ 1,759 $ 147 8 % $ 3,971 $ 3,658 $ 313 9 %
OptumHealth 123 135 (12 ) (9 ) 215 244 (29 ) (12 )
OptumInsight 95 87 8 9 184 170 14 8
OptumRx 102 118 (16 ) (14 ) 173 248 (75 ) (30 )
Total Optum 320 340 (20 ) (6 ) 572 662 (90 ) (14 )
from operations $ 2,226 $ 2,099 $ 127 6 % $ 4,543 $ 4,320 $ 223 5 %
UnitedHealthcare 7.5 % 7.4 % 0.1 % 7.8 % 7.7 % 0.1 %
OptumHealth 6.1 8.1 (2.0 ) 5.4 7.7 (2.3 )
OptumInsight 14.2 13.2 1.0 13.7 12.8 0.9
OptumRx 2.2 2.5 (0.3 ) 1.9 2.7 (0.8 )
Total Optum 4.4 4.8 (0.4 ) 3.9 4.8 (0.9 )
margin 8.2 % 8.3 % (0.1 )% 8.3 % 8.5 % (0.2 )%
The following table summarizes UnitedHealthcare revenue by business:
Three Months Ended Six Months Ended
June 30, Increase/(Decrease) June 30, Increase/(Decrease)
(in millions, except percentages) 2012 2011 2012 vs. 2011 2012 2011 2012 vs.
UnitedHealthcare Employer & Individual $ 11,616$ 11,307 $
309 3 % $ 23,293 $ 22,449 $ 844 4 %
UnitedHealthcare Medicare & Retirement 10,098 9,015 1,083 12 20,311 18,427 1,884
UnitedHealthcare Community & State 3,802 3,331 471 14 7,445 6,651 794
Total UnitedHealthcare revenue $ 25,516 $ 23,653 $ 1,863 8 % $ 51,049 $ 47,527 $ 3,522 7 %
The following table summarizes the number of individuals served by our
UnitedHealthcare businesses, by major market segment and funding arrangement:
(in thousands, except percentages) 2012 2011 2012 vs. 2011
Commercial risk-based 9,345 9,495 (150 ) (2 )%
Commercial fee-based 17,075 16,205 870 5
Total commercial 26,420 25,700 720 3
Medicare Advantage 2,580 2,185 395 18
Medicaid 3,800 3,430 370 11
Medicare Supplement 3,075 2,860 215 8
Total public and senior (a) 9,455 8,475 980 12
Total UnitedHealthcare - medical 35,875 34,175 1,700 5 %
Medicare Part D stand-alone 4,230 4,780 (550 ) (12 )%
(a) Excludes pre-standardized Medicare Supplement and other AARP products.
Commercial risk-based membership decreased due to a competitive market
environment, conversions to fee-based products by large public sector clients
that we retained and other decreases in the public sector. In fee-based
commercial products the increase was due to strong customer retention and a
number of new business awards. Medicare Advantage increased due to strengthened
execution in product design, marketing and local engagement combined with the
addition of 185,000 Medicare Advantage members from 2012 acquisitions. Medicaid
growth was due to a combination of winning new state accounts and growth within
existing state customers. Medicare Supplement growth was due to strong retention
and new sales. In our Medicare Part D stand-alone business, membership decreased
primarily as a result of the first quarter 2012 loss of approximately 470,000
auto-assigned low-income subsidy Medicare Part D beneficiaries, due to pricing
benchmarks for the government-subsidized low income Medicare Part D market
coming in below our bids in a number of regions.
UnitedHealthcare's revenue growth for the three and six months ended June 30,
2012 was primarily due to growth in the number of individuals served and
commercial premium rate increases due to expected underlying medical cost
UnitedHealthcare's earnings from operations for the three and six months ended
June 30, 2012 increased compared to the prior year primarily due to the factors
that increased revenues combined with an improvement in the medical care ratio.
The six month increase in earnings from operations included the benefit of $140
million as a result of updating estimates for the calculations of 2011 premium
In March 2012, UnitedHealthcare was awarded the TRICARE West Region Managed Care
Support Contract. The contract, for health care operations, includes a
transition period and five one-year renewals at the government's option. The
first year of operations is anticipated to begin April 1, 2013. The base
administrative services contract is expected to generate $1.4 billion in
revenues over the five years. In 2012, we expect to incur startup costs that
will not have a material effect on our financial statements.
Optum. Total revenue for Optum businesses increased for the three and six months
ended June 30, 2012 due to business growth and 2011 acquisitions at OptumHealth.
Optum's earnings from operations and operating margin for the three and six
months ended June 30, 2012 decreased compared to 2011 due to investments across
the Optum business infrastructure (primarily to support scaling pharmacy
management services) and the reduction in Medicare Part D pharmacy membership
and related prescription volumes.
The results by segment were as follows:
The increases in revenues at OptumHealth for the three and six months ended
June 30, 2012 were primarily due to market expansion, including 2011
acquisitions in integrated care delivery, and strong growth in wellness and
network-based health programs.
Earnings from operations and operating margin for the three and six months ended
June 30, 2012 decreased compared to 2011, driven by business mix, primarily a
higher revenue base and comparatively lower margins in integrated care delivery
and investments to expand and develop the business.
Revenues at OptumInsight for the three and six months ended June 30, 2012
increased slightly, as the impact of organic growth was mostly offset by the
divestiture of the clinical trials services business in June 2011.
The increases in earnings from operations and operating margins for the three
and six months ended June 30, 2012 reflect an improved mix of services.
The decrease in OptumRx revenues for the three months ended June 30, 2012 was
driven by the reduction in UnitedHealthcare Medicare Part D plan participants.
OptumRx revenues for the six months ended June 30, 2012 were flat as net growth
in customers and an increase in high revenue specialty pharmacy scripts offset
the reduction in UnitedHealthcare Medicare Part D plan participants.
Intersegment revenues eliminated in consolidation were $3.9 billion and $8.0
billion for the three and six months ended June 30, 2012 and $4.1 billion and
$8.1 billion for the three and six months ended June 30, 2011.
OptumRx earnings from operations and operating margins for the three and six
months ended June 30, 2012 decreased as investments to support growth
initiatives, including the in-sourcing of our commercial pharmacy benefit
programs, and decreased prescription volume in the Medicare Part D business,
more than offset the earnings contribution from specialty pharmacy growth and
greater use of generic medications.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
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- 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 non-cash expenses.
Our regulated subsidiaries generate significant cash flows from operations and
are subject to financial regulations and standards in their respective states of
domicile. Most of these regulations and standards conform to those established
by the National Association of Insurance Commissioners. These standards, among
other things, require these subsidiaries to maintain specified levels of
statutory capital, as defined by each state, and restrict the timing and amount
of dividends and other distributions that may be paid to their parent companies.
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 can 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.
In 2012, based on the 2011 statutory net income and statutory capital and
surplus levels, the maximum amount of ordinary dividends that can be paid by our
regulated subsidiaries to their parent companies is $4.6 billion. For the six
months ended June 30, 2012, our regulated subsidiaries paid their parent
companies dividends of $2.1 billion, including $393 million of extraordinary
dividends. For the year ended December 31, 2011, our regulated subsidiaries paid
their parent companies dividends of $4.5 billion, including $1.1 billion of
Our non-regulated businesses also generate cash flows from operations 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 drawings under our
committed credit facility, 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.
Summary of our Major Sources and Uses of Cash
Six Months Ended June 30,
(in millions) 2012 2011
Sources of cash:
Cash provided by operating activities $ 5,771 $ 2,419
Proceeds from customer funds administered 1,108 1,228
Proceeds from issuance of long-term debt 995 -
Other - 269
Total sources of cash 7,874 3,916
Uses of cash:
Cash paid for acquisitions, net of cash assumed (2,404 ) (449 )
Common stock repurchases (1,809 ) (1,255 )
Purchases of property, equipment and capitalized software (465 ) (516 )
Purchases of investments, net of sales and maturities (534 ) (593 )
Dividends paid (386 ) (309 )
Repayments of long-term debt and commercial paper, net of issuances
- (54 )
Other (127 ) (88 )
Total uses of cash (5,725 ) (3,264 )
Net increase in cash $ 2,149 $ 652
2012 Cash Flows Compared to 2011 Cash Flows
Cash flows from operating activities increased $3.4 billion, from 2011. The
increased cash flows were primarily driven by an approximately $2.7 billion
increase in unearned premiums due to the early receipt of the July CMS payment
and a decrease in accounts receivable also attributed to the July CMS payment.
See Note 4 of Notes to the Condensed Consolidated Financial Statements for
further detail on the July CMS payment. We anticipate lower year over year cash
flows from operations in 2012, which will include payments in the third quarter
for 2011 premium rebate obligations.
Cash flows used for investing activities increased $1.8 billion, or 118%,
primarily due to increased investments in acquisitions in 2012.
Cash flows used for financing activities increased $10 million, or 5%, primarily
due to an increase in share repurchases partially offset by increased net
As of June 30, 2012, our cash, cash equivalent and available-for-sale investment
balances of $30.7 billion included $11.6 billion of cash and cash equivalents
(of which $1.0 billion was held by non-regulated entities), $18.5 billion of
debt securities and $606 million 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 $235 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 $3.0 billion bank credit
facility, reduce the need to sell investments during adverse market conditions.
See Note 3 of Notes to the Condensed Consolidated Financial Statements for
further detail of our fair value measurements.
Our cash equivalent and investment portfolio has a weighted-average duration of
1.9 years and a weighted-average credit rating of "AA" as of June 30, 2012.
Included in the debt securities balance are $2.1 billion of state and municipal
obligations that are guaranteed by a number of third parties. Due to the high
underlying credit ratings of the issuers, the weighted-average credit rating of
these securities with and without the guarantee was "AA" as of June 30, 2012. We
do not have any significant exposure to any single guarantor (neither indirect
through the guarantees, nor direct through investment in the guarantor). 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.
Capital Resources and Uses of Liquidity
In addition to cash flow 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. We maintain a commercial paper borrowing program, which
facilitates the private placement of unsecured debt through third-party
broker-dealers. The commercial paper program is supported by the bank credit
facility described below. As of June 30, 2012, we had no commercial paper
Bank Credit Facility. We have a $3.0 billion five-year revolving bank credit
facility with 21 banks, which will mature in December 2016. This facility
supports our commercial paper program and is available for general corporate
purposes. There were no amounts outstanding under this facility as of June 30,
2012. The interest rate on borrowings is variable based on term and amount and
is calculated based on the LIBOR plus a credit spread based on our senior
unsecured credit ratings. As of June 30, 2012, the annual interest rate on this
facility, had it been drawn, would have ranged from 1.2% to 1.6%.
Our bank credit facility contains various covenants, including requiring us to
maintain a debt to debt-plus-equity ratio below 50%. Our debt to
debt-plus-equity ratio, calculated as the sum of debt divided by the sum of debt
and shareholders' equity, which approximates the actual covenant ratio, was
30.0% and 29.1% as of June 30, 2012 and December 31, 2011, respectively. We were
in compliance with our debt covenants as of June 30, 2012.
Long-term debt. Periodically, we access capital markets and issue long-term debt
for general corporate purposes and the funds may be used, for example, to meet
our working capital requirements, to refinance debt, to finance acquisitions,
for share repurchases or for other general corporate purposes.
In March 2012, we issued $1 billion in senior unsecured notes. The issuance
included $600 million of 2.875% fixed-rate notes due March 2022 and $400 million
of 4.375% fixed-rate notes due March 2042.
Credit Ratings. Our credit ratings at June 30, 2012 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-2 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 conditions in the capital markets may
increase the cost of borrowing for us or limit our access to capital. We have
adopted strategies and actions toward maintaining financial flexibility to
mitigate the impact of such factors on our ability to raise capital.
Share Repurchase Program. Under our Board of Directors' authorization, we
maintain a share repurchase program. 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 2012, our Board renewed and expanded the Company's share repurchase program
with an authorization to repurchase up to 110 million shares of our common
stock. During the six months ended June 30, 2012, we repurchased 33 million
shares at an average price of $55.03 per share and an aggregate cost of $1.8
billion. As of June 30, 2012, we had Board authorization to purchase up to an
additional 109 million shares of our common stock.
Dividends. In June 2012, our Board of Directors increased our cash dividend to
shareholders to an annual dividend rate of $0.85 per share, paid quarterly.
Since May 2011, we had paid an annual dividend of $0.65 per share, paid
quarterly. Declaration and payment of future quarterly dividends is at the
discretion of the Board and may be adjusted as business needs or market
The following table provides details of our dividend payments in 2012:
Payment Date Amount per Share Total Amount Paid
3/19/2012 $ 0.1625 $ 168
6/22/2012 $ 0.2125 218
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
A summary of future obligations under our various contractual obligations and
commitments as of December 31, 2011 was disclosed in our 2011 10-K. During the
six months ended June 30, 2012 there were no material changes to this
previously-filed information outside the ordinary course of business. However,
we continually evaluate opportunities to expand our operations, including
internal development of new products, programs and technology applications and
RECENTLY ISSUED ACCOUNTING STANDARDS
We have determined that there have been no recently issued, but not yet adopted,
accounting standards that will have a material impact on our Consolidated
CRITICAL ACCOUNTING ESTIMATES
We prepared our Condensed Consolidated Financial Statements in conformity with
U.S. GAAP. 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 trends and factor in known and projected trends. On an on-going
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
Our critical accounting estimates include medical costs, revenues, goodwill and
intangible assets, investments, income taxes and contingent liabilities. For a
detailed description of our critical accounting estimates, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II of our 2011 10-K. As of June 30, 2012, our critical
accounting policies have not changed from those described in our 2011 10-K. For
a detailed discussion of our significant accounting policies, see Note 2 of
Notes to the Consolidated Financial Statements in our 2011 10-K.
CONCENTRATIONS OF CREDIT RISK
Investments in financial instruments such as marketable securities and accounts
receivable may subject us to concentrations of credit risk. Our investments in
marketable securities are managed under an investment policy authorized by our
Board of Directors. This policy limits the amounts that may be invested in any
one issuer and generally limits our investments to U.S. government and agency
securities, state and municipal securities and corporate debt obligations that
are investment grade. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of employer groups and other
customers that constitute our client base. As of June 30, 2012, we had an
aggregate $1.9 billion reinsurance receivable resulting from the sale of our
Golden Rule Financial Corporation life and annuity business in 2005. We
regularly evaluate the financial condition of the reinsurer and only record the
reinsurance receivable to the extent that the amounts are deemed probable of
recovery. Currently, the reinsurer is rated by A.M. Best as "A+." As of June 30,
2012, there were no other significant concentrations of credit risk.
The statements, estimates, projections, guidance or outlook contained in this
report include "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (PSLRA). These statements are intended
to take advantage of the "safe harbor" provisions of the PSLRA. Generally the
words "believe," "expect," "intend," "estimate," "anticipate," "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
Some factors that could cause results to differ materially from 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 federal, state, local and international regulations affecting the
health care industry; the impact of any potential assessments for insolvent
payers under state guaranty fund laws, including any that could arise out of the
potential liquidation of Penn Treaty Network America Insurance Company; the
ultimate 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 received from
Medicare and Medicaid programs; uncertainties regarding changes in Medicare,
including potential changes in risk adjustment data validation audit and payment
adjustment methodology; failure to comply with patient privacy and data security
regulations; regulatory and other risks and uncertainties associated with the
pharmacy benefits management industry and our ability to successfully repatriate
our pharmacy benefits management business; 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; our ability to attract, retain and provide support to a network
of independent producers (i.e., brokers and agents) and consultants; events that
may adversely affect our relationship with AARP; increases in costs and other
liabilities associated with increased litigation, government investigations,
audits or reviews; 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; our ability to obtain sufficient funds from our
regulated subsidiaries to fund our obligations, to maintain our quarterly
dividend payment cycle or to continue repurchasing shares of our common stock;
failure to complete or receive anticipated benefits of acquisitions and other
strategic transactions; potential downgrades in our credit ratings; 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 current filings with the SEC, including our 2011 10-K.
Any or all forward-looking statements we make may turn out to be wrong. They 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 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.