UnitedHealth Group Incorporated (UNH)

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Unitedhealth Group (UNH)

Q2 2011 Earnings Call

July 19, 2011 8:45 am ET

Executives

Jack Larsen - CFO, Public and Senior Sector Group

Gail Boudreaux - Executive Vice President and Chief Executive Officer of United Healthcare

Jeff Alter - Chief Executive of UnitedHealthcare Employer & Individual Business

John Penshorn - Senior Vice President

Dan Schumacher - CFO, UnitedHealthcare

Larry Renfro - Executive Vice President

Tom Paul - COO

David Wichmann - Chief Financial Officer, President of Operations and Executive Vice President

Stephen Hemsley - Chief Executive Officer, President and Executive Director

Analysts

Christian Rigg - Susquehanna Financial Group, LLLP

Joshua Raskin - Barclays Capital

Michael Baker - Raymond James & Associates, Inc.

Justin Lake - UBS Investment Bank

Matthew Borsch - Goldman Sachs Group Inc.

Charles Boorady - Crédit Suisse AG

Scott Fidel - Deutsche Bank AG

David Windley - Jefferies & Company, Inc.

Sheryl Skolnick - CRT Capital Group LLC

Ana Gupte - Sanford C. Bernstein & Co., Inc.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

John Rex - JP Morgan Chase & Co

Doug Simpson - Morgan Stanley

Christine Arnold - Cowen and Company, LLC

Kevin Fischbeck - BofA Merrill Lynch

Presentation

Operator

Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. This call and its contents are the property of UnitedHealth Group. Any use, copying or distribution without written permission from UnitedHealth Group is strictly prohibited.

Here are some important introductory information. This call contains forward-looking statements under U.S. Federal Securities Laws. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission from time to time, including the cautionary statements included in our current and periodic filings. Information presented on this call is in the earnings release we issued this morning and in our Form 8-K dated July 19, 2011, which may be accessed from the Investors page of the company's website at www.unitedhealthgroup.com.

I would now like to turn the conference over to the President and Chief Executive Officer of Unitedhealth Group, Stephen Hemsley.

Stephen Hemsley

Good morning, and thank you for joining us to review second quarter results. Across this company, we continue to focus on fundamental execution. For us, this means consistently serving customers and other stakeholders with excellent and with practical solutions-focused innovation. Improving fundamental execution is far from glamorous, it's blocking and tackling that take years to accomplish in incremental steps and its never really fully finished.

Today, market and customer satisfaction and other reputational measures for both our UnitedHealthcare and Optum businesses are at strong levels. In many instances, market-leading, based on credible independent sources. While we are grateful for any and all market-based recognitions, we also know we are not yet where we want or need to be.

Society is looking for innovative organizations that could be trusted to provide consistent, reliable and modern approaches to solving the challenges of healthcare, whether that means constructive approach to participating in health benefit or information exchanges, developing ACOs or providing innovative consumer-centric benefit offering. In any context, we understand a positive reputation will become increasingly valuable, our commitments to practical innovation, deeper relationships with the people we serve and strong follow-through on our brand and reputational promises are strengthening our businesses. The work required to accomplish this brought growth and market share gains to the first half of 2011.

Second quarter revenues again exceeded $25 billion, increasing $2 billion or 8.5% year-over-year. Growth was led by service revenues, which increased 17% from last year's second quarter, driven by growth in Health Services products and strong and consistent gains in fee offering in the health benefit businesses.

Operating margins of 8.3% were stable year-over-year, improving 10 basis points despite the impact of health reform, including significant cost for readiness and compliance and the advent of minimum care ratio thresholds.

Overall, revenue growth in higher margin service offerings was offset by investments within the Optum services businesses, as we continue to re-baseline that platform for higher growth and earnings contributions going forward.

In total, second quarter net earnings grew 17% year-over-year to $1.16 per share. These earnings were supported by strong cash flows from operations of $1.2 billion.

UnitedHealthcare's 3 businesses added more than 180,000 people, using its medical benefit products in the second quarter. It grew in every major product category, despite the fact that the benefits marketplace typically has fewer new business opportunities in the second quarter.

In the first half of 2011, the number of people UnitedHealthcare serves with medical benefits grew by 1.2 million, on top of nearly 1 million people added over the course of 2010. This 6-quarter addition of 2.2 million more people, almost entirely through organic means, places this among the strongest growth periods for our company.

Growth was led by the employer and individual business, which grew by 100,000 people in the quarter and contributed nicely to the nearly 900,000 person increase in the past 6 months, a growth of 1.1 million people year-over-year. Customer retention rates improved in 2011, in both the fully-insured and self-funded offering. We performed well in national account open enrollments this past January, when employees who have multiple health plans available to them, chose UnitedHealthcare more often this year.

Based on first half 2011 results, we're increasing our full year outlook for fee-based commercial growth by 100,000 people to a range of 650,000 to 750,000 people for the year. Both UnitedHealthcare Community & State and the UnitedHealthcare Medicare & Retirement have had strong growth as well. These businesses increased by 80,000 people this quarter, and 315,000 people in the past 6 months, plus another 250,000 people in stand-alone Part D plan in the past 6 months.

We grew by 20,000 people in Medicare Advantage products this quarter, and have added 115,000 people through the first half of the year. Even after absorbing the first quarter decrease of 225,000 people from market and product exits and programs that were not sufficiently funded or were fully discontinued by federal regulation.

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