The Quarterly
UNH 2014 10-K

Unitedhealth Group Inc (UNH) SEC Quarterly Report (10-Q) for Q2 2015

UNH Q3 2015 10-Q
UNH 2014 10-K UNH Q3 2015 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, 2015

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)

 __________________________________________________________ 

Delaware

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 24, 2015, there were 953,562,580 shares of the registrant's Common Stock, $.01 par value per share, issued and outstanding.




UNITEDHEALTH GROUP

Table of Contents

Page

Part I. Financial Information

Item 1.

Financial Statements (unaudited)

1

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014

2

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014

3

Condensed Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 2015 and 2014

4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

5

Notes to the Condensed Consolidated Financial Statements

6

1.

Basis of Presentation

6

2.

Investments

7

3.

Fair Value

9

4.

Medicare Part D Pharmacy Benefits

13

5.

Medical Costs Reserve Development

13

6.

Health Insurance Industry Tax

13

7.

Commercial Paper and Long-Term Debt

14

8 .

Shareholders' Equity

16

9.

Share-Based Compensation

16

10.

Commitments and Contingencies

17

11.

Segment Financial Information

19

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

Part II. Other Information

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6.

Exhibits

31

Signatures

32














PART I

ITEM 1.    FINANCIAL STATEMENTS

UnitedHealth Group

Condensed Consolidated Balance Sheets

(Unaudited)

(in millions, except per share data)

June 30,
2015

December 31,
2014

Assets

Current assets:

Cash and cash equivalents

$

7,887


$

7,495


Short-term investments

1,915


1,741


Accounts receivable, net

6,034


4,252


Other current receivables, net

6,160


5,498


Assets under management

2,863


2,962


Deferred income taxes

514


556


Prepaid expenses and other current assets

2,193


1,052


Total current assets

27,566


23,556


Long-term investments

18,996


18,827


Property, equipment and capitalized software, net

4,473


4,418


Goodwill

34,154


32,940


Other intangible assets, net

3,316


3,669


Other assets

2,918


2,972


Total assets

$

91,423


$

86,382


Liabilities and shareholders' equity

Current liabilities:

Medical costs payable

$

13,867


$

12,040


Accounts payable and accrued liabilities

10,901


9,247


Other policy liabilities

6,772


5,965


Commercial paper and current maturities of long-term debt

2,693


1,399


Unearned revenues

1,508


1,972


Total current liabilities

35,741


30,623


Long-term debt, less current maturities

15,378


16,007


Future policy benefits

2,491


2,488


Deferred income taxes

1,877


2,065


Other liabilities

1,301


1,357


Total liabilities

56,788


52,540


Commitments and contingencies (Note 10)



Redeemable noncontrolling interests

1,615


1,388


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;

952 and 954 issued and outstanding

10


10


Additional paid in capital

55


-


Retained earnings

35,262


33,836


Accumulated other comprehensive loss

(2,307

)

(1,392

)

Total shareholders' equity

33,020


32,454


Total liabilities and shareholders' equity

$

91,423


$

86,382


See Notes to the Condensed Consolidated Financial Statements


1

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UnitedHealth Group

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

(in millions, except per share data)

2015

2014

2015

2014

Revenues:

Premiums

$

31,961


$

28,840


$

63,635


$

56,955


Services

2,865


2,447


5,571


4,851


Products

1,223


1,037


2,453


2,035


Investment and other income

214


250


360


441


Total revenues

36,263


32,574


72,019


64,282


Operating costs:

Medical costs

26,026


23,523


51,715


46,731


Operating costs

5,852


5,206


11,801


10,400


Cost of products sold

1,111


929


2,211


1,821


Depreciation and amortization

379


364


757


724


Total operating costs

33,368


30,022


66,484


59,676


Earnings from operations

2,895


2,552


5,535


4,606


Interest expense

(151

)

(155

)

(301

)

(315

)

Earnings before income taxes

2,744


2,397


5,234


4,291


Provision for income taxes

(1,159

)

(989

)

(2,236

)

(1,784

)

Net earnings

$

1,585


$

1,408


$

2,998


$

2,507


Earnings per common share:

Basic

$

1.66


$

1.44


$

3.15


$

2.56


Diluted

$

1.64


$

1.42


$

3.10


$

2.52


Basic weighted-average number of common shares outstanding

952


979


953


981


Dilutive effect of common share equivalents

14


12


14


13


Diluted weighted-average number of common shares outstanding

966


991


967


994


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

8


8


8


9


Cash dividends declared per common share

$

0.5000


$

0.3750


$

0.8750


$

0.6550



See Notes to the Condensed Consolidated Financial Statements


2

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UnitedHealth Group

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

2015

2014

2015

2014

Net earnings

$

1,585


$

1,408


$

2,998


$

2,507


Other comprehensive (loss) income:

Gross unrealized (losses) gains on investment securities during the period

(222

)

314


(117

)

480


Income tax effect

80


(114

)

43


(175

)

Total unrealized (losses) gains, net of tax

(142

)

200


(74

)

305


Gross reclassification adjustment for net realized gains included in net earnings

(68

)

(107

)

(71

)

(153

)

Income tax effect

25


39


26


56


Total reclassification adjustment, net of tax

(43

)

(68

)

(45

)

(97

)

Total foreign currency translation gains (losses)

163


151


(796

)

410


Other comprehensive (loss) income

(22

)

283


(915

)

618


Comprehensive income

$

1,563


$

1,691


$

2,083


$

3,125



See Notes to the Condensed Consolidated Financial Statements


3

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UnitedHealth Group

Condensed Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

Common Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive (Loss) Income

Total Shareholders'

Equity

(in millions)

Shares

Amount

Net Unrealized Gains (Losses) on Investments

Foreign Currency Translation (Losses) Gains

Balance at January 1, 2015

954


$

10


$

-


$

33,836


$

223


$

(1,615

)

$

32,454


Net earnings

2,998


2,998


Other comprehensive loss

(119

)

(796

)

(915

)

Issuances of common shares, and related tax effects

7


-


23


23


Share-based compensation, and related tax benefits

319


319


Noncontrolling interests fair value and other adjustments

(73

)

(73

)

Common share repurchases

(9

)

-


(214

)

(739

)

(953

)

Cash dividends paid on common shares

(833

)

(833

)

Balance at June 30, 2015

952


$

10


$

55


$

35,262


$

104


$

(2,411

)

$

33,020


Balance at January 1, 2014

988


$

10


$

-


$

33,047


$

54


$

(962

)

$

32,149


Net earnings

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




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)

2015

2014

Operating activities

Net earnings

$

2,998


$

2,507


Noncash items:

Depreciation and amortization

757


724


Deferred income taxes

(30

)

(16

)

Share-based compensation

211


188


Other, net

(160

)

(148

)

Net change in other operating items, net of effects from acquisitions and changes in AARP balances:

Accounts receivable

(1,725

)

(2,131

)

Other assets

(2,178

)

(1,135

)

Medical costs payable

1,988


560


Accounts payable and other liabilities

1,809


2,219


Other policy liabilities

208


(218

)

Unearned revenues

(446

)

(128

)

Cash flows from operating activities

3,432


2,422


Investing activities

Purchases of investments

(4,286

)

(5,477

)

Sales of investments

2,260


4,393


Maturities of investments

1,622


1,544


Cash paid for acquisitions, net of cash assumed

(1,778

)

(523

)

Purchases of property, equipment and capitalized software

(716

)

(716

)

Other, net

48


(99

)

Cash flows used for investing activities

(2,850

)

(878

)

Financing activities

Common stock repurchases

(953

)

(1,937

)

Cash dividends paid

(833

)

(642

)

Proceeds from common stock issuances

242


267


Repayments of long-term debt

(416

)

(172

)

Proceeds from (repayments of) commercial paper, net

1,086


(101

)

Customer funds administered

941


333


Other, net

(188

)

(170

)

Cash flows used for financing activities

(121

)

(2,422

)

Effect of exchange rate changes on cash and cash equivalents

(69

)

14


Increase (decrease) in cash and cash equivalents

392


(864

)

Cash and cash equivalents, beginning of period

7,495


7,276


Cash and cash equivalents, end of period

$

7,887


$

6,412



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

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 the health system work better for everyone. Through its diversified family of businesses, the Company leverages core competencies in advanced, enabling technology; health care data, information and intelligence; and clinical care management and coordination to help meet the demands of the health system. 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, 2014 as filed with the SEC ( 2014 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.

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.

The accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, "Financial Statements" in the 2014 10-K remain unchanged.

Subsequent Events

On July 1, 2015, UnitedHealth Group Incorporated changed its state of incorporation from Minnesota to Delaware pursuant to a plan of conversion. The reincorporation was approved by the Company's shareholders at its 2015 Annual Meeting of Shareholders held on June 1, 2015. Upon reincorporation, the affairs of UnitedHealth Group Incorporated became subject to the Delaware General Corporation Law, a new certificate of incorporation and new bylaws, and each previously outstanding share of UnitedHealth Group Incorporated's common stock as a Minnesota corporation (UNH Minnesota) converted into an outstanding share of common stock of UnitedHealth Group Incorporated as a Delaware corporation after the reincorporation (UNH Delaware). The reincorporation was a tax-free reorganization under the U.S. Internal Revenue Code and did not affect the Company's business operations.

On July 23, 2015, the Company acquired all of the outstanding common shares of Catamaran Corporation (Catamaran) for $12.9 billion in cash and funded Catamaran's payoff of its outstanding debt and credit facility in connection with the closing. The Company drew its $1.5 billion delayed draw term loan and issued commercial paper and senior unsecured notes to fund the Company's purchase of Catamaran; see Note 7 of Notes to the Condensed Consolidated Financial Statements for detail on the related July 2015 debt issuance. Catamaran offers retail pharmacy network management, mail service pharmacy, pharmacy claims management and patient-centric specialty pharmacy services to a broad client portfolio, including health plans and employers serving 35 million people, and provides health care information technology solutions to the pharmacy benefits management industry. This acquisition diversifies OptumRx's customer and business mix, while accelerating its technology leadership and flexible service offerings. As the Catamaran acquisition occurred in the third quarter of 2015, it is not yet practicable to provide disclosures related to the purchase price allocation or pro forma information.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) 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


6

Table of Contents


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 in ASU 2014-09 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, new and enhanced disclosures will be required. 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. In July 2015, the FASB approved the deferral of ASU 2014-09 for one year and it is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption at the original effective date, interim and annual periods beginning after December 15, 2016, will be 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.

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, 2015

Debt securities - available-for-sale:

U.S. government and agency obligations

$

1,859


$

6


$

(4

)

$

1,861


State and municipal obligations

6,196


127


(17

)

6,306


Corporate obligations

7,654


76


(31

)

7,699


U.S. agency mortgage-backed securities

2,091


25


(14

)

2,102


Non-U.S. agency mortgage-backed securities

837


8


(5

)

840


Total debt securities - available-for-sale

18,637


242


(71

)

18,808


Equity securities - available-for-sale

1,559


36


(38

)

1,557


Debt securities - held-to-maturity:

U.S. government and agency obligations

182


3


-


185


State and municipal obligations

15


-


-


15


Corporate obligations

349


-


-


349


Total debt securities - held-to-maturity

546


3


-


549


Total investments

$

20,742


$

281


$

(109

)

$

20,914


December 31, 2014

Debt securities - available-for-sale:

U.S. government and agency obligations

$

1,614


$

7


$

(1

)

$

1,620


State and municipal obligations

6,456


217


(5

)

6,668


Corporate obligations

7,241


112


(26

)

7,327


U.S. agency mortgage-backed securities

2,022


39


(5

)

2,056


Non-U.S. agency mortgage-backed securities

872


12


(4

)

880


Total debt securities - available-for-sale

18,205


387


(41

)

18,551


Equity securities - available-for-sale

1,511


36


(25

)

1,522


Debt securities - held-to-maturity:

U.S. government and agency obligations

178


2


-


180


State and municipal obligations

19


-


-


19


Corporate obligations

298


-


-


298


Total debt securities - held-to-maturity

495


2


-


497


Total investments

$

20,211


$

425


$

(66

)

$

20,570



7

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The amortized cost and fair value of available-for-sale debt securities as of June 30, 2015 , by contractual maturity, were as follows:

(in millions)

Amortized

Cost

Fair

Value

Due in one year or less

$

2,010


$

2,014


Due after one year through five years

6,943


7,009


Due after five years through ten years

5,016


5,067


Due after ten years

1,740


1,776


U.S. agency mortgage-backed securities

2,091


2,102


Non-U.S. agency mortgage-backed securities

837


840


Total debt securities - available-for-sale

$

18,637


$

18,808


The amortized cost and fair value of held-to-maturity debt securities as of June 30, 2015 , by contractual maturity, were as follows:

(in millions)

Amortized

Cost

Fair

Value

Due in one year or less

$

126


$

126


Due after one year through five years

204


205


Due after five years through ten years

106


107


Due after ten years

110


111


Total debt securities - held-to-maturity

$

546


$

549


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, 2015

Debt securities - available-for-sale:

U.S. government and agency obligations

$

529


$

(4

)

$

-


$

-


$

529


$

(4

)

State and municipal obligations

1,561


(16

)

22


(1

)

1,583


(17

)

Corporate obligations

3,126


(27

)

229


(4

)

3,355


(31

)

U.S. agency mortgage-backed securities

752


(10

)

126


(4

)

878


(14

)

Non-U.S. agency mortgage-backed securities

364


(4

)

77


(1

)

441


(5

)

Total debt securities - available-for-sale

$

6,332


$

(61

)

$

454


$

(10

)

$

6,786


$

(71

)

Equity securities - available-for-sale

$

148


$

(9

)

$

82


$

(29

)

$

230


$

(38

)

December 31, 2014

Debt securities - available-for-sale:

U.S. government and agency obligations

$

420


$

(1

)

$

-


$

-


$

420


$

(1

)

State and municipal obligations

711


(4

)

99


(1

)

810


(5

)

Corporate obligations

2,595


(17

)

464


(9

)

3,059


(26

)

U.S. agency mortgage-backed securities

-


-


272


(5

)

272


(5

)

Non-U.S. agency mortgage-backed securities

254


(2

)

114


(2

)

368


(4

)

Total debt securities - available-for-sale

$

3,980


$

(24

)

$

949


$

(17

)

$

4,929


$

(41

)

Equity securities - available-for-sale

$

107


$

(6

)

$

88


$

(19

)

$

195


$

(25

)

The Company's unrealized losses from all securities as of June 30, 2015 were generated from approximately 7,100 positions out of a total of 23,000 positions. The Company believes that it will collect the principal and interest due on its debt securities


8

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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, 2015 , 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)

2015

2014

2015

2014

Total OTTI

$

(3

)

$

(4

)

$

(4

)

$

(7

)

Portion of loss recognized in other comprehensive income

-


-


-


-


Net OTTI recognized in earnings

(3

)

(4

)

(4

)


(7

)

Gross realized losses from sales

(5

)

(29

)

(11

)

(39

)

Gross realized gains from sales

76


140


86


199


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

68


107


71


153


Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)

(25

)

(39

)

(26

)

(56

)

Realized gains, net of taxes

$

43


$

68


$

45


$

97


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.

For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 4 of Notes to the Consolidated Financial Statements in Part II, Item 8, "Financial Statements" in the 2014 10-K.



9

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 assets and liabilities, related to a Supplemental Health Insurance Program (AARP Program), 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, 2015

Cash and cash equivalents

$

7,754


$

133


$

-


$

7,887


Debt securities - available-for-sale:

U.S. government and agency obligations

1,650


211


-


1,861


State and municipal obligations

-


6,306


-


6,306


Corporate obligations

12


7,609


78


7,699


U.S. agency mortgage-backed securities

-


2,102


-


2,102


Non-U.S. agency mortgage-backed securities

-


834


6


840


Total debt securities - available-for-sale

1,662


17,062


84


18,808


Equity securities - available-for-sale

1,226


12


319


1,557


Interest rate swap assets

-


54


-


54


Total assets at fair value


$

10,642


$

17,261


$

403


$

28,306


Percentage of total assets at fair value

38

%

61

%

1

%

100

%

Interest rate swap liabilities

$

-


$

33


$

-


$

33


December 31, 2014

Cash and cash equivalents

$

7,472


$

23


$

-


$

7,495


Debt securities - available-for-sale:

U.S. government and agency obligations

1,427


193


-


1,620


State and municipal obligations

-


6,668


-


6,668


Corporate obligations

2


7,257


68


7,327


U.S. agency mortgage-backed securities

-


2,056


-


2,056


Non-U.S. agency mortgage-backed securities

-


874


6


880


Total debt securities - available-for-sale

1,429


17,048


74


18,551


Equity securities - available-for-sale

1,200


12


310


1,522


Interest rate swap assets

-


62


-


62


Total assets at fair value

$

10,101


$

17,145


$

384


$

27,630


Percentage of total assets at fair value

37

%

62

%

1

%

100

%

Interest rate swap liabilities

$

-


$

55


$

-


$

55


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 the six months ended June 30, 2015 or 2014 .




10

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, 2015

Debt securities - held-to-maturity:

U.S. government and agency obligations

$

185


$

-


$

-


$

185


$

182


State and municipal obligations

-


-


15


15


15


Corporate obligations

92


10


247


349


349


Total debt securities - held-to-maturity

$

277


$

10


$

262


$

549


$

546


Other assets

$

-


$

473


$

-


$

473


$

472


Long-term debt and other financing obligations

$

-


$

17,755


$

-


$

17,755


$

16,664


December 31, 2014

Debt securities - held-to-maturity:

U.S. government and agency obligations

$

180


$

-


$

-


$

180


$

178


State and municipal obligations

-


-


19


19


19


Corporate obligations

46


10


242


298


298


Total debt securities - held-to-maturity

$

226


$

10


$

261


$

497


$

495


Other assets

$

-


$

478


$

-


$

478


$

484


Long-term debt and other financing obligations

$

-


$

18,863


$

-


$

18,863


$

17,085


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, 2015 or 2014 .

The carrying amounts reported on the Condensed Consolidated Balance Sheets for other current 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, 2015

Balance at beginning of period

$

79


$

309


$

388


$

74


$

310


$

384


Purchases

6


10


16


10


14


24


Sales

(2

)

(13

)

(15

)

(2

)

(14

)

(16

)

Net unrealized gains (losses) in accumulated other comprehensive income

1


-


1


2


(5

)

(3

)

Net realized gains in investment and other income

-


13


13


-


14


14


Balance at end of period

$

84


$

319


$

403


$

84


$

319


$

403


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



11

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, 2015

Equity securities - available-for-sale

Venture capital portfolios

$

268


Market approach - comparable companies

Revenue multiple

1.0

5.0

EBITDA multiple

8.0

10.0

51


Market approach - recent transactions

Inactive market transactions

N/A

N/A

Total equity securities

     available-for-sale

$

319


Also included in the Company's assets measured at fair value on a recurring basis using Level 3 inputs were $84 million of available-for-sale debt securities as of June 30, 2015 , 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 Part II, Item 8, "Financial Statements" in the Company's 2014 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, 2015

Cash and cash equivalents

$

205


$

-


$

205


Debt securities:

U.S. government and agency obligations

431


164


595


State and municipal obligations

-


96


96


Corporate obligations

-


1,287


1,287


U.S. agency mortgage-backed securities

-


400


400


Non-U.S. agency mortgage-backed securities

-


195


195


Total debt securities

431


2,142


2,573


Other investments

-


85


85


Total assets at fair value

$

636


$

2,227


$

2,863


Other liabilities

$

4


$

6


$

10


December 31, 2014

Cash and cash equivalents

$

415


$

-


$

415


Debt securities:

U.S. government and agency obligations

409


245


654


State and municipal obligations

-


95


95


Corporate obligations

-


1,200


1,200


U.S. agency mortgage-backed securities

-


340


340


Non-U.S. agency mortgage-backed securities

-


177


177


Total debt securities

409


2,057


2,466


Other investments

-


81


81


Total assets at fair value

$

824


$

2,138


$

2,962


Other liabilities

$

5


$

13


$

18



12

Table of Contents


4.

Medicare Part D Pharmacy Benefits

The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:

June 30, 2015

December 31, 2014

(in millions)

Subsidies

Drug Discount

Risk-Share

Subsidies

Drug Discount

Risk-Share

Other current receivables

$

1,776


$

266


$

20


$

1,801


$

719


$

20


Other policy liabilities

-


164


-


-


302


-


See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, "Financial Statements" in the Company's 2014 10-K for further detail on Medicare Part D.

5.

Medical Costs Reserve Development

The following table provides details of the Company's medical cost reserve development:

Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

2015

2014

2015

2014

Related to Prior Years

$

(10

)

$

40


$

130


$

260


Related to Current Year

100


90


N/A


N/A


In the three and six months ended June 30, 2015 and 2014, the medical cost reserve development was driven by a number of individual factors that were not material .

6.

Health Insurance 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) includes an annual, nondeductible insurance industry tax (Health Insurance Industry Tax). As of June 30, 2015 , the liability recorded in accounts payable and accrued liabilities related to the Health Insurance Industry Tax was $1.8 billion . The corresponding deferred cost recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets was $900 million . There was no liability or asset related to the Health Insurance Industry Tax recorded as of December 31, 2014 as the Health Insurance Industry Tax was paid in September 2014 and the asset was fully expensed by year end. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, "Financial Statements" in the Company's 2014 10-K for further detail on the Health Insurance Industry Tax.


13

Table of Contents


7.     Commercial Paper and Long-Term Debt

Commercial paper and senior unsecured long-term debt consisted of the following:

June 30, 2015

December 31, 2014

(in millions, except percentages)

Par

Value

Carrying

Value

Fair

Value

Par

Value

Carrying

Value

Fair

Value

Commercial paper

$

1,407


$

1,407


$

1,407


$

321


$

321


$

321


4.875% notes due March 2015 (a)

-


-


-


416


419


419


0.850% notes due October 2015 (a)

625


625


625


625


625


627


5.375% notes due March 2016 (a)

601


614


620


601


623


634


1.875% notes due November 2016 (a)

400


399


405


400


397


406


5.360% notes due November 2016

95


95


101


95


95


103


6.000% notes due June 2017 (a)

441


463


480


441


466


489


1.400% notes due October 2017 (a)

625


621


626


625


616


624


6.000% notes due November 2017 (a)

156


163


174


156


164


175


1.400% notes due December 2017 (a)

750


750


749


750


745


749


6.000% notes due February 2018 (a)

1,100


1,111


1,223


1,100


1,106


1,238


1.625% notes due March 2019 (a)

500


499


494


500


496


493


2.300% notes due December 2019 (a)

500


499


501


500


496


502


3.875% notes due October 2020 (a)

450


451


481


450


450


477


4.700% notes due February 2021 (a)

400


413


441


400


413


450


3.375% notes due November 2021 (a)

500


495


514


500


496


519


2.875% notes due December 2021 (a)

750


747


750


750


748


759


2.875% notes due March 2022 (a)

1,100


1,043


1,068


1,100


1,042


1,104


0.000% notes due November 2022

15


10


11


15


10


11


2.750% notes due February 2023 (a)

625


602


598


625


604


613


2.875% notes due March 2023 (a)

750


771


722


750


777


745


5.800% notes due March 2036

850


845


988


850


845


1,052


6.500% notes due June 2037

500


495


631


500


495


670


6.625% notes due November 2037

650


646


833


650


646


888


6.875% notes due February 2038

1,100


1,085


1,447


1,100


1,085


1,544


5.700% notes due October 2040

300


298


351


300


298


378


5.950% notes due February 2041

350


348


417


350


348


455


4.625% notes due November 2041

600


593


599


600


593


646


4.375% notes due March 2042

502


486


487


502


486


536


3.950% notes due October 2042

625


612


565


625


611


621


4.250% notes due March 2043

750


740


709


750


740


786


Total commercial paper and long-term debt

$

18,017


$

17,926


$

19,017


$

17,347


$

17,256


$

19,034


(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 $145 million and $150 million of other financing obligations, of which $47 million and $34 million were current as of June 30, 2015 and December 31, 2014 , 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, 2015 , the Company's outstanding commercial paper had a weighted-average annual interest rate of 0.3% .

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 2019 and November 2015 , respectively. The Company also has a $2.0 billion 364-day revolving bank credit facility with 22 banks maturing in April 2016 . These facilities provide liquidity support for the Company's commercial paper program and are available for general corporate purposes. In addition, the Company has a $1.5 billion delayed draw term loan to fund the Catamaran acquisition. As of June 30, 2015 , no amounts had been drawn on any of the bank credit facilities or the term loan. The annual interest rates, which are variable based on term, are calculated based on the London Interbank Offered Rate (LIBOR) plus a credit spread based on the Company's senior unsecured credit ratings. If amounts had been drawn on the bank credit facilities and the term loan as of June 30, 2015, annual interest rates would have ranged from 1.0% to 1.3% .


14

Table of Contents


July 2015 Debt Issuance

In July 2015, the Company issued commercial paper and senior unsecured notes and drew on its delayed draw term loan. The proceeds of these debt issuances were used to fund the Catamaran acquisition. For more detail on the Catamaran acquisition see Note 1 of the Notes to the Condensed Consolidated Financial Statements.

(in millions, except percentages)

Par
Value

Floating rate notes due January 2017

$

750


1.450% notes due July 2017

750


1.900% notes due July 2018

1,500


2.700% notes due July 2020

1,500


3.350% notes due July 2022

1,000


3.750% notes due July 2025

2,000


4.625% notes due July 2035

1,000


4.750% notes due July 2045

2,000


Total July 2015 Issuance

$

10,500


Delayed draw term loan

$

1,500


Commercial paper

$

2,400


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, 2015 .

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 variable rate financial assets. 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. The following table summarizes the location and fair value of the interest rate swap fair value hedges on the Company's Condensed Consolidated Balance Sheet:

Type of Fair Value Hedge

Notional Amount

Fair Value

Balance Sheet Location

(in billions)

(in millions)

June 30, 2015

Interest rate swap contracts

$

10.3


54


Other assets

33


Other liabilities

December 31, 2014

Interest rate swap contracts

$

10.7


$

62


Other assets


55


Other liabilities

The following table provides a summary of the effect of changes in fair value of fair value hedges on the Company's Condensed Consolidated Statements of Operations:

Three Months Ended June 30,

Six Months Ended

 June 30,

(in millions)

2015

2014

2015

2014

Hedge - interest rate swap (loss) gain recognized in interest expense

$

(208

)

$

67


$

14


$

133


Hedged item - long-term debt gain (loss) recognized in interest expense

208


(67

)

(14

)

(133

)

Net impact on the Company's Condensed Consolidated Statements of Operations

$

-


$

-


$

-


$

-



15

Table of Contents


8.

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 repurchase programs), subject to certain Board restrictions. During the six months ended June 30, 2015 , the Company repurchased 9 million shares at an average price of $111.56 per share and an aggregate cost of $953 million . As of June 30, 2015 , the Company had Board authorization to purchase up to 63 million  shares of its common stock.

Dividends

In June 2015 , the Company's Board of Directors increased the Company's quarterly cash dividend to shareholders to equal an annual dividend rate of $2.00 per share compared to the annual dividend rate of $1.50 per share, which the Company had paid since June 2014 . 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 2015 dividend payments:

Payment Date

Amount per Share

Total Amount Paid

(in millions)

March 24, 2015

$

0.3750


$

357


June 24, 2015

0.5000


476


9.

Share-Based Compensation

In June 2015, the Company's shareholders approved an amendment to the 2011 Stock Incentive Plan (Plan). The approved amendment increased the number of shares authorized for issuance under the Plan by 70 million and removed the limit in the Plan for shares other than options and stock-settled stock appreciation rights (SARs) that can be awarded. The Company's outstanding share-based awards consist mainly of nonqualified stock options, SARs and restricted stock and restricted stock units (collectively, restricted shares). As of June 30, 2015 , the Company had 85 million shares available for future grants of share-based awards under its share-based compensation plan.

Stock Options and SARs

Stock option and SAR activity for the six months ended June 30, 2015 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

33


$

53


Granted

8


109


Exercised

(6

)

52


Outstanding at end of period

35


66


6.2


$

1,971


Exercisable at end of period

18


47


3.7


1,335


Vested and expected to vest, end of period

34


66


6.1


1,933


Restricted Shares
Restricted share activity for the six months ended June 30, 2015 is summarized in the table below:

(shares in millions)

Shares

Weighted-Average Grant Date Fair Value per Share

Nonvested at beginning of period

9


$

61


Granted

2


109


Vested

(4

)

57


Nonvested at end of period

7


79



16

Table of Contents


Other Share-Based Compensation Data

(in millions, except per share amounts)

Three Months Ended

June 30,

Six Months Ended
June 30,

2015

2014

2015

2014

Stock Options and SARs

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

$

21


$

19


$

23


$

22


Total intrinsic value of stock options and SARs exercised

107


74


328


286


Restricted Shares

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

118


80


109


70


Total fair value of restricted shares vested

12


9


407


423


Share-Based Compensation Items

Share-based compensation expense, before tax

86


83


211


188


Share-based compensation expense, net of tax effects

76


71


177


157


Income tax benefit realized from share-based award exercises

36


24


174


143


(in millions, except years)

June 30, 2015

Unrecognized compensation expense related to share awards

$

551


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,

2015

2014

2015

2014

Risk-free interest rate

1.7%

1.8%

1.6% - 1.7%

1.7% - 1.8%

Expected volatility

22.5%

31.7%

22.5% - 24.1%

31.7% - 39.6%

Expected dividend yield

1.7%

1.9%

1.4% - 1.7%

1.6% - 1.9%

Forfeiture rate

5.0%

5.0%

5.0%

5.0%

Expected life in years

5.6

5.4

5.6 - 6.1

5.4

10.

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


17

Table of Contents


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.

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 U.S. Drug Enforcement Administration, 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. 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.

Guaranty Fund Assessments

Under state guaranty fund laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies. In 2009, the Pennsylvania Insurance Commissioner placed long term care insurer Penn Treaty Network America Insurance Company and its subsidiary (Penn Treaty), neither of which is affiliated with the Company, in rehabilitation and petitioned a state court for approval to liquidate Penn Treaty. In 2012, the court denied the liquidation petition and ordered the Insurance Commissioner to submit a rehabilitation plan. The court held a hearing on July 13, 2015 to begin its consideration of the latest proposed rehabilitation plan.

If the current proposed rehabilitation plan, which contemplates the partial liquidation of Penn Treaty, is approved by the court, the Company's insurance entities and other insurers may be required to pay a portion of Penn Treaty's policyholder claims through state guaranty association assessments in future periods. The Company intends to vigorously challenge the proposed rehabilitation plan. The Company is currently unable to estimate losses or ranges of losses because the Company cannot predict whether, when or to what extent Penn Treaty will ultimately be declared insolvent, the amount of the insolvency, if any, the amount and timing of any associated guaranty fund assessments or the availability and amount of any premium tax and other potential offsets.


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11.

Segment Financial Information

The Company's four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx . 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 Part II, Item 8, "Financial Statements" in the Company's 2014 10-K.

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, 2015

Revenues - external customers:

Premiums

$

31,186


$

775


$

-


$

-


$

-


$

775


$

-


$

31,961


Services

1,715


579


542


29


-


1,150


-


2,865


Products

1


11


16


1,195


-


1,222


-


1,223


Total revenues - external customers

32,902


1,365


558


1,224


-


3,147


-


36,049


Total revenues - intersegment

-


2,031


851


7,688


(172

)

10,398


(10,398

)

-


Investment and other income

171


42


-


1


-


43


-


214


Total revenues

$

33,073


$

3,438


$

1,409


$

8,913


$

(172

)

$

13,588


$

(10,398

)

$

36,263


Earnings from operations

$

2,031


$

253


$

271


$

340


$

-


$

864


$

-


$

2,895


Interest expense

-


-


-


-


-


-


(151

)

(151

)

Earnings before income taxes

$

2,031


$

253


$

271


$

340


$

-


$

864


$

(151

)

$

2,744


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



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Table of Contents


Optum

(in millions)

UnitedHealthcare

OptumHealth

OptumInsight

OptumRx

Optum Eliminations

Optum

Corporate and

Eliminations

Consolidated

Six Months Ended June 30, 2015

Revenues - external customers:

Premiums

$

62,091


$

1,544


$

-


$

-


$

-


$

1,544


$

-


$

63,635


Services

3,318


1,100


1,101


52


-


2,253


-


5,571


Products

1


16


36


2,400


-


2,452


-


2,453


Total revenues - external customers

65,410


2,660


1,137


2,452


-


6,249


-


71,659


Total revenues - intersegment

-


3,994


1,662


14,755


(331

)

20,080


(20,080

)

-


Investment and other income

286


73


-


1


-


74


-


360


Total revenues

$

65,696


$

6,727


$

2,799


$

17,208


$

(331

)

$

26,403


$

(20,080

)

$

72,019


Earnings from operations

$

3,929


$

487


$

493


$

626


$

-


$

1,606


$

-


$

5,535


Interest expense

-


-


-


-


-


-


(301

)

(301

)

Earnings before income taxes

$

3,929


$

487


$

493


$

626


$

-


$

1,606


$

(301

)

$

5,234


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



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 2014 10-K, including the Consolidated Financial Statements and Notes in Part II, Item 8, "Financial Statements" in that report. Unless the context indicates otherwise, 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 2014 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 the health system work better for everyone. Through our diversified family of businesses, we leverage core competencies in advanced, enabling technology; health care data, information and intelligence; and clinical care management and coordination to help meet the demands of the health system. 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" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2014 10-K and additional information on our segments can be found in this Item 2 and in Note 11 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 reform legislation in the United States, which have impacted and could further impact our results of operations.

Pricing Trends . To price our health care benefit products, we start with our view of expected future costs. We frequently evaluate and adjust our approach in each of the local markets we serve, considering all relevant factors, such as product positioning, price competitiveness and environmental, competitive, legislative and regulatory considerations. Our review of regulatory considerations involves a focus on minimum loss ratio (MLR) thresholds and the risk adjustment, risk corridor and reinsurance provisions that impact the small group and individual markets. We will continue seeking to balance growth and profitability across all of these dimensions.

We continue to be under pressure from ongoing market competition in commercial products and from government payment rates. The intensity of commercial pricing competition depends on local market conditions and competitive dynamics. Annual commercial premium rate increases are subject to federal and state review and approval procedures. The Medicare Advantage rate structure is changing and funding has been cut in recent years, with additional reductions taking effect in 2015, as discussed below in "Regulatory Trends and Uncertainties." Although we expect continued Medicaid revenue increases due to anticipated growth in the number of people served through our offerings, the reimbursement rate environment creates the risk of downward pressure on Medicaid net margin percentages.

Medical Cost Trends. Our medical cost trends are primarily related to changes in unit costs, health system utilization and prescription drug costs. Although Health Reform Legislation and prescription drug utilization, particularly use of new specialty medications, have exerted upward pressure on medical cost trends, our medical cost management strategies have had a moderating impact on utilization trends in recent years.

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", Item 1A, "Risk Factors", and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2014 10-K.

Medicare Advantage Rates. Medicare Advantage rates have been cut over the last several years, with additional funding reductions to be phased-in through 2017. The impact of these cuts to our 2015 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. These factors affected our plan benefit designs, market participation, growth prospects and earnings expectations for our Medicare Advantage plans this year.

The 2016 Final Rate notice released by CMS in April 2015 provided some progress toward more stable program rates, with the industry seeing an average increase in funding of 125 basis points. However, these rates still trail the pace of the rising cost of medical care and create continued pressure on the Medicare Advantage program. 

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 previous star bonus program, which paid bonuses to qualifying plans rated 3 stars or higher, expired after 2014. In 2015, quality bonus payments will be paid only to plans rated 4 stars and higher. For the 2015 star bonus payment year, 39% of our Medicare Advantage members are enrolled in plans rated 4 stars or higher. We are dedicating substantial resources to advance our quality scores and star ratings to strengthen our local market programs and further improve our performance in future years.


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Table of Contents


Health Insurance Industry Tax and Premium Stabilization Programs. Health Reform Legislation includes a Health Insurance Industry Tax levied on risk-based products proportionally across the industry. The industry-wide amount of the annual tax is $11.3 billion in 2015 and we expect that our proportionate share will be $1.8 billion. Health Reform Legislation also includes three programs designed to stabilize the health insurance markets. These programs encompass: a temporary reinsurance program; a temporary risk corridors program; and a permanent risk adjustment program. Of the $8 billion allocated for the reinsurance program in 2015, $6 billion will fund the reinsurance pool and $2 billion will 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.

For further detail on the Health Insurance Industry Tax and Premium Stabilization Programs, see Note 2 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements" in our 2014 10-K.

Exchanges and Coverage Expansion. We and our competitors are adapting product, network and marketing strategies across markets to anticipate new or expanding distribution channels, including public exchanges, private exchanges and off exchange purchasing. In 2015, we are participating in 23 individual public exchanges and in 12 small group public exchanges.

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)

2015

2014

2015 vs. 2014

2015

2014

2015 vs. 2014

Revenues:

Premiums

$

31,961


$

28,840


$

3,121


11

%

$

63,635


$

56,955


$

6,680


12

%

Services

2,865


2,447


418


17


5,571


4,851


720


15


Products

1,223


1,037


186


18


2,453


2,035


418


21


Investment and other income

214


250


(36

)

(14

)

360


441


(81

)

(18

)

Total revenues

36,263


32,574


3,689


11


72,019


64,282


7,737


12


Operating costs:

Medical costs

26,026


23,523


2,503


11


51,715


46,731


4,984


11


Operating costs

5,852


5,206


646


12


11,801


10,400


1,401


13


Cost of products sold

1,111


929


182


20


2,211


1,821


390


21


Depreciation and amortization

379


364


15


4


757


724


33


5


Total operating costs

33,368


30,022


3,346


11


66,484


59,676


6,808


11


Earnings from operations

2,895


2,552


343


13


5,535


4,606


929


20


Interest expense

(151

)

(155

)

(4

)

(3

)

(301

)

(315

)

(14

)

(4

)

Earnings before income taxes

2,744


2,397


347


14


5,234


4,291


943


22


Provision for income taxes

(1,159

)

(989

)

170


17


(2,236

)

(1,784

)

452


25


Net earnings

$

1,585


$

1,408


$

177


13


$

2,998


$

2,507


$

491


20


Diluted earnings per common share

$

1.64


$

1.42


$

0.22


15

 %

$

3.10


$

2.52


$

0.58


23

 %

Medical care ratio (a)

81.4

%

81.6

%

(0.2

)%

81.3

%

82.0

%

(0.7

)%

Operating cost ratio

16.1


16.0


0.1


16.4


16.2


0.2


Operating margin

8.0


7.8


0.2


7.7


7.2


0.5


Tax rate

42.2


41.3


0.9


42.7


41.6


1.1


Net earnings margin

4.4


4.3


0.1


4.2


3.9


0.3


Return on equity (b)

19.5

%

17.2

%

2.3

 %

18.5

%

15.4

%

3.1

 %


(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.


21

Table of Contents


SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS

The following summarizes select second quarter 2015 year-over-year operating comparisons to second quarter 2014 and other 2015 significant items.

Consolidated revenues grew 11% , UnitedHealthcare revenues grew 10% and Optum revenues grew 16% .

UnitedHealthcare grew to serve an additional 1.6 million people domestically.

Earnings from operations increased 13% , including an increase of 11% at UnitedHealthcare and 19% at Optum.

Diluted earnings per common share increased 15% to $1.64 .

Year-to-date 2015 cash flows from operations were $3.4 billion an increase of 42%.

On July 23, 2015, we acquired Catamaran through the purchase of all of its outstanding common stock for cash. See Note 1 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for more information about this transaction.

2015 RESULTS OF OPERATIONS COMPARED TO 2014 RESULTS

Consolidated Financial Results

Revenues

The increase in revenues during the three and six months ended June 30, 2015 was primarily driven by growth in the number of individuals served across our benefits businesses and growth across all of Optum's businesses.

Medical Costs and Medical Care Ratio

Medical costs during the three and six months ended June 30, 2015 increased due to risk-based membership growth in our benefits businesses. The medical care ratio for the three and six months ended June 30, 2015 decreased 20 and 70 basis points, respectively, primarily due to premium increases to cover the 2015 step up in the Health Insurance Industry Tax and our performance in managing health care costs across our benefits businesses.

Operating Cost Ratio

The increase in our operating cost ratio during the three and six months ended June 30, 2015 was due to services business acquisitions, which carry proportionately higher operating costs than premium-based business, largely offset by growth in government benefits programs and productivity gains.


22

Table of Contents


Reportable Segments

See Note 11 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" 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)

2015

2014

2015 vs. 2014

2015

2014

2015 vs. 2014

Revenues

UnitedHealthcare

$

33,073


$

30,071


$

3,002


10

%

$

65,696


$

59,325


$

6,371


11

%

OptumHealth

3,438


2,586


852


33


6,727


5,166


1,561


30


OptumInsight

1,409


1,243


166


13


2,799


2,490


309


12


OptumRx

8,913


8,000


913


11


17,208


15,458


1,750


11


Optum eliminations

(172

)

(115

)

57


50


(331

)

(230

)

101


44


Optum

13,588


11,714


1,874


16


26,403


22,884


3,519


15


Eliminations

(10,398

)

(9,211

)

1,187


13


(20,080

)

(17,927

)

2,153


12


Consolidated revenues

$

36,263


$

32,574


$

3,689


11

%

$

72,019


$

64,282


$

7,737


12

%

Earnings from operations

UnitedHealthcare

$

2,031


$

1,824


$

207


11

%

$

3,929


$

3,228


$

701


22

%

OptumHealth

253


224


29


13


487


435


52


12


OptumInsight

271


213


58


27


493


410


83


20


OptumRx

340


291


49


17


626


533


93


17


Optum

864


728


136


19


1,606


1,378


228


17


Consolidated earnings from operations

$

2,895


$

2,552


$

343


13

%

$

5,535


$

4,606


$

929


20

%

Operating margin

UnitedHealthcare

6.1

%

6.1

%

-

 %

6.0

%

5.4

%

0.6

 %

OptumHealth

7.4


8.7


(1.3

)

7.2


8.4


(1.2

)

OptumInsight

19.2


17.1


2.1


17.6


16.5


1.1


OptumRx

3.8


3.6


0.2


3.6


3.4


0.2


Optum

6.4


6.2


0.2


6.1


6


0.1


Consolidated operating margin

8.0

%

7.8

%

0.2

 %

7.7

%

7.2

%

0.5

 %

UnitedHealthcare

The following table summarizes UnitedHealthcare revenues by business:

Three Months Ended

June 30,

Increase/(Decrease)

Six Months Ended

June 30,

Increase/(Decrease)

(in millions, except percentages)

2015

2014

2015 vs. 2014

2015

2014

2015 vs. 2014

UnitedHealthcare Employer & Individual

$

11,845


$

10,729


$

1,116


10

 %

23,268


$

21,686


$

1,582


7

 %

UnitedHealthcare Medicare & Retirement

12,559


11,785


774


7


25,340


23,287


2,053


9


UnitedHealthcare Community & State

7,205


5,764


1,441


25


14,110


10,938


3,172


29


UnitedHealthcare Global

1,464


1,793


(329

)

(18

)

2,978


3,414


(436

)

(13

)

Total UnitedHealthcare revenues

$

33,073


$

30,071


$

3,002


10

 %

$

65,696


$

59,325


$

6,371


11

 %


23

Table of Contents


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)

2015

2014

2015 vs. 2014

Commercial risk-based

8,105


7,610


495


7

 %

Commercial fee-based, including TRICARE

21,295


21,240


55


-


Total commercial

29,400


28,850


550


2


Medicare Advantage

3,205


2,985


220


7


Medicaid

5,210


4,670


540


12


Medicare Supplement (Standardized)

3,965


3,665


300


8


Total public and senior

12,380


11,320


1,060


9


Total UnitedHealthcare - domestic medical

41,780


40,170


1,610


4


International

4,080


4,765


(685

)

(14

)

Total UnitedHealthcare - medical

45,860


44,935


925


2

 %

Supplemental Data:

Medicare Part D stand-alone

5,075


5,150


(75

)

(1

)%

The increase in commercial risk-based enrollment was a result of strong participation in UnitedHealthcare's individual public exchange products and favorable annual renewal activity and new business wins in the employer group segment. Medicare Advantage participation increased year-over-year primarily due to growth in people served through employer-sponsored group Medicare Advantage plans. Medicaid growth was driven by the combination of ACA Medicaid expansion, states launching new programs to complement established programs and growth in established programs, which was partially offset by a decrease of 175,000 people in one market, where an additional offering was introduced by the state in the first quarter of 2015. Medicare Supplement growth reflected strong customer retention and new sales. The number of people served internationally decreased year-over-year primarily due to pricing and underwriting disciplines in Brazil in response to regulatory actions.

UnitedHealthcare's revenue growth during the three and six months ended June 30, 2015 was due to growth in the number of individuals served across its businesses and price increases reflecting underlying medical cost trends.

UnitedHealthcare's operating earnings for the three and six months ended June 30, 2015 increased year-over-year due to a combination of strong growth across the business along with improved medical cost management and increased productivity. 

Optum

Total revenues increased for the three and six months ended June 30, 2015 as each reporting segment advanced revenues by double-digit percentages as a result of the factors discussed below.

The increases in Optum's earnings from operations for the three and six months ended June 30, 2015 were driven by revenue growth. For the six months ended June 30, 2015, the increase in earnings from operations was partially offset by transaction costs related to the acquisition of Catamaran at OptumRx.

The results by segment were as follows:

OptumHealth

Revenue and earnings from operations increased at OptumHealth during the three and six months ended June 30, 2015 primarily due to growth in the number of patients served across its OptumCare health delivery businesses as well as the impact of acquisitions. The operating margins for the three and six months ended June 30, 2015 decreased from the prior year primarily due to stronger growth in lower margin lines of business and investments made to support future growth.

OptumInsight

Revenue at OptumInsight for the three and six months ended June 30, 2015 increased primarily due to growth in care provider revenue management services. Earnings from operations and operating margins for the three and six months ended June 30, 2015 increased primarily due to increased revenues, growth in technology services and simplification of lines of business.

OptumRx

OptumRx revenue, earnings from operations and operating margin for the three and six months ended June 30, 2015 increased due to an increase in prescription volume driven by serving an increasing number of people, increases in revenue per script and


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growth in specialty medications. The increases in earnings from operations and operating margin for the six months ended June 30, 2015 were partially offset by transaction costs related to the acquisition of Catamaran. For more information about the Catamaran transaction, see Note 1 in Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

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, these regulations and standards are generally consistent with model regulations established by the National Association of Insurance Commissioners. 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, 2015 , our U.S. regulated subsidiaries paid their parent companies dividends of $2.4 billion, and we had approximately $1.9 billion in ordinary dividend capacity remaining for the year.

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)

2015

2014

2015 vs. 2014

Sources of cash:

Cash provided by operating activities

$

3,432


$

2,422


$

1,010


Customer funds administered

941


333


608


Issuances of commercial paper and long-term debt, net of repayments

670


-


670


Proceeds from common stock issuances

242


267


(25

)

Sales and maturities of investments, net of purchases

-


460


(460

)

Other

48


-


48


Total sources of cash

5,333


3,482


Uses of cash:

Common stock repurchases

(953

)

(1,937

)

984


Cash paid for acquisitions, net of cash assumed

(1,778

)

(523

)

(1,255

)

Purchases of investments, net of sales and maturities

(404

)

-


(404

)

Purchases of property, equipment and capitalized software, net

(716

)

(716

)

-


Cash dividends paid

(833

)

(642

)

(191

)

Repayments of long-term debt and commercial paper, net of issuances

-


(273

)

273


Other

(188

)

(269

)

81


Total uses of cash

(4,872

)

(4,360

)

Effect of exchange rate changes on cash and cash equivalents

(69

)

14


(83

)

Net increase (decrease) in cash and cash equivalents

$

392


$

(864

)

$

1,256


2015 Cash Flows Compared to 2014 Cash Flows

Cash flows provided by operating activities in 2015 increased primarily due to improvement in net earnings and growth in risk-based products, which increased medical costs payable, partially offset by the first quarter 2015 payment of reinsurance program fees.

Other significant changes in sources or uses of cash year-over-year included decreased share repurchases in 2015 compared to 2014, net debt issuances in 2015 compared to net repayments in 2014, increased cash paid for acquisitions in 2015 compared to 2014, and a change in investment activity to net purchases in 2015 compared to net sales in 2014.

Financial Condition

As of June 30, 2015 , our cash, cash equivalent and available-for-sale investment balances of $28.3 billion included $7.9 billion of cash and cash equivalents (of which $654 million was available for general corporate use), $18.8 billion of debt securities and $1.6 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. 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 $403 million of available-for-sale Level 3 securities (those securities priced using significant unobservable inputs), may have an effect on the estimated fair values 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 3.3 years and a weighted-average credit rating of "AA" as of June 30, 2015 . 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 7 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 35.4% as of June 30, 2015 .

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. In July 2015, we issued debt to fund the acquisition of Catamaran. For more information on this debt issuance, see Note 7 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Credit Ratings. Our credit ratings as of June 30, 2015 , were as follows:

Moody's

Standard & Poor's

Fitch (a)

A.M. Best

Ratings

Outlook

Ratings

Outlook

Ratings

Outlook

Ratings

Outlook

Senior unsecured debt

A3

Negative

A+

Negative

A-

Negative

Watch

bbb+

Stable

Commercial paper

P-2

n/a

A-1

n/a

F1

n/a

AMB-2

n/a

(a)

In July 2015, Fitch removed us from Negative Watch, affirmed our ratings, and changed our outlook to Negative.

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. We expect continued moderated share repurchase activity for the remainder of 2015 due to the acquisition of Catamaran. For more information on our share repurchase program, see Note 8 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Dividends. In June 2015 , our Board increased our quarterly cash dividend to shareholders to an annual dividend rate of $2.00 per share. For more information on our dividend, see Note 8 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Catamaran Acquisition. In March 2015, we entered into an agreement to purchase all of Catamaran's outstanding common shares for cash. The transaction closed on July 23, 2015. We paid for the acquisition primarily with the proceeds of new indebtedness. For more information about the Catamaran transaction and related debt issuances, see Note 1 and 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, 2014 was disclosed in our 2014 10-K. During the six months ended June 30, 2015 , other than the Catamaran acquisition, 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 FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)." 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 in ASU 2014-09 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, new and enhanced disclosures will


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be required. 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. In July 2015, the FASB approved the deferral of ASU 2014-09 for one year and is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption at the original effective date, interim and annual periods beginning after December 15, 2016, will be 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.

CRITICAL ACCOUNTING ESTIMATES

In preparing our 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 consider 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 2014 10-K. For a detailed discussion of our significant accounting policies, see Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, "Financial Statements" in our 2014 10-K.

FORWARD-LOOKING STATEMENTS

The statements, estimates, projections, guidance or outlook contained in this document 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 actual 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; new laws or regulations, or changes in existing laws or regulations, or their enforcement or application, including 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; assessments for insolvent payers under state guaranty fund laws; our ability to achieve improvement in CMS star ratings and other quality scores that impact revenue; reductions in revenue or delays to cash flows received under Medicare, Medicaid and TRICARE programs, including sequestration and the effects of a prolonged U.S. government shutdown or debt ceiling constraints; changes in Medicare, including changes in payment methodology, the CMS star ratings program or the application of risk adjustment data validation audits; our participation in federal and state health insurance exchanges which entail uncertainties associated with mix and volume of business; cyber-attacks or other privacy or data security incidents; failure to comply with privacy and data security regulations; regulatory and other risks and uncertainties of the pharmacy benefits management industry; competitive pressures, which could affect our ability to maintain or increase our market share; challenges to our public sector contract awards; our ability to execute contracts on competitive terms with physicians, hospitals and other service providers; failure to achieve targeted operating cost productivity improvements, including savings resulting from technology enhancement and administrative modernization; 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 our acquisition of Catamaran; fluctuations in foreign currency exchange rates on our reported shareholders equity and results of operations; downgrades in our credit ratings; adverse economic conditions, including decreases in enrollment resulting from increases in the unemployment rate and commercial attrition; the performance of our investment portfolio; 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 do not operate as intended; and our ability to obtain sufficient funds from our regulated subsidiaries or the debt or capital markets to


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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.

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 annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-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 document 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 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, as well as foreign currency exchange rate risk of the U.S. dollar primarily to the Brazilian real.

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. Unrealized gains and losses on investments in available-for-sale securities are reported in comprehensive income.

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, 2015 on our investment income and interest expense per annum, and the fair value of our investments and debt (in millions, except percentages):

June 30, 2015

Increase (Decrease) in Market Interest Rate

Investment

Income Per

Annum (a)

Interest

Expense Per

Annum (a)

Fair Value of

Financial Assets (b)

Fair Value of

Financial Liabilities

2 %

$

197


$

263


$

(1,374

)

$

(1,657

)

1

98


131


(696

)

(909

)

(1)

(61

)

(24

)

645


1,108


(2)

nm


nm


1,114


2,464


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, 2015 , 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, 2015 , 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 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, 2015 , a hypothetical 10% and 25% increase in the value of the U.S. dollar against the Brazilian real would have caused a reduction in net assets of approximately $370 million and $815 million, respectively. We manage exposure to foreign currency risk by conducting our international business operations primarily in their functional currencies.

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.


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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, 2015 . 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, 2015 .

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, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

A description of our legal proceedings is included in and incorporated by reference to Note 10 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 2014 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2014 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 2014 10-K.

ITEM 2.    UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities (a)

Second Quarter 2015

For the Month Ended

Total Number

of Shares

Purchased (b)

Average Price

Paid per Share

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs (b)

Maximum Number

of Shares That May

Yet Be Purchased

Under The Plans or

Programs

(in millions)

(in millions)

(in millions)

April 30, 2015

-


$

-


-


63


May 31, 2015

-


-


-


63


June 30, 2015

-


-


-


63


Total

-


$

-


-


(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.

(b)

During the three months ended June 30, 2015, we repurchased 0.5 million shares at an average price of $117 per share.


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ITEM 6.

EXHIBITS**


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

3.1


Certificate of Incorporation of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form 8-A/A filed on July 1, 2015)

3.2


Bylaws of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A/A filed on July 1, 2015)

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)

*10.1


Amended and Restated UnitedHealth Group Incorporated 2011 Stock Incentive Plan, effective June 1, 2015 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 5, 2015)

  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, 2015 filed on July 29, 2015, 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.

 ________________

*

Denotes management contracts and compensation plans in which certain directors and named executive officers participate and which are being filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.

**

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/    S TEPHEN  J. H EMSLEY

Chief Executive Officer
(principal executive officer)

Dated:

July 29, 2015

Stephen J. Hemsley

/s/    D AVID  S. W ICHMANN

President and Chief Financial Officer
(principal financial officer)

Dated:

July 29, 2015

David S. Wichmann

/ S /    E RIC  S. R ANGEN

Senior Vice President and

Chief Accounting Officer
(principal accounting officer)

Dated:

July 29, 2015

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


Certificate of Incorporation of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form 8-A/A filed on July 1, 2015)

3.2


Bylaws of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A/A filed on July 1, 2015)

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)

*10.1


Amended and Restated UnitedHealth Group Incorporated 2011 Stock Incentive Plan, effective June 1, 2015 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 5, 2015)

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, 2015 filed on July 29, 2015, 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.

 ________________

*

Denotes management contracts and compensation plans in which certain directors and named executive officers participate and which are being filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.

**

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.



33