UnitedHealth Group Incorporated (UNH)

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Unitedhealth Group (UNH)

Q3 2012 Earnings Call

October 16, 2012 8:45 am ET

Executives

Stephen J. Hemsley - Chief Executive Officer, President and Executive Director

Dan Schumacher

Jeff Alter - Chief Executive of UnitedHealthcare Employer & Individual Business

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

Larry C. Renfro - Executive Vice President and Chief Executive officer of Optum

Dirk McMahon

Jack Larsen

John S. Penshorn - Senior Vice President

Analysts

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Sarah James - Wedbush Securities Inc., Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Melissa McGinnis - Morgan Stanley, Research Division

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Jason Gurda - Leerink Swann LLC, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These 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, including the cautionary statements included in our current and periodic filings.

This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on our financial reports and SEC filings section of the company's Investors page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated October 16, 2012, which may be accessed from the Investors page of the company's website. [Operator Instructions]

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

Stephen J. Hemsley

Good morning, and thank you for joining us today to review our third quarter results. Third quarter revenues were $27.3 billion, increasing 8% year-over-year again this quarter. Earnings grew 28% to $1.50 per share, benefiting from strong revenue growth and improved operating margins.

Our third quarter 2012 operating margin of 9.6% reflects strong performance on clinical affordability and favorable reserve developments, resulting in the consolidated medical care ratio of 79%. Sharp margin improvement at Optum further contributed to the 140 basis point expansion in consolidated operating margin.

Operating costs grew seasonally to 15.7% of revenues. Execution across our enterprise continues to be strong and our financial flexibility remains distinctive.

Adjusted cash flows from operations of $2.4 billion in the third quarter brought year-to-date cash flow to $5.5 billion, a 9% year-over-year advance.

We ended the quarter at the ratio of debt to debt plus equity of 30% and have $1.6 billion in nonregulated cash on hand.

Last week, we announced our merger with Amil, the leading Brazilian health care company. We see expansive, early-stage market opportunities there, and we expect Amil will become a distinctive growth platform for both our Health Benefits and Health Services segments.

The rating agencies all reaffirmed our ratings subsequent to our announcement. Standard & Poor's had upgraded our corporate debt rating to A with a stable outlook in September; making UnitedHealth Group the highest-rated, publicly traded managed care organization they follow.

Our unique business diversity was key factor for S&P, along with strong cash flow generated from operations. And also during the quarter, we were honored to be added to the Dow Jones Industrial Average.

Let's review third quarter performance by business, beginning with UnitedHealthcare, which advanced third quarter revenues 8% year-over-year to $25.5 billion, and operating earnings 26% to $2.2 billion.

UnitedHealthcare has added 2 million people through the first 9 months of 2012. This includes net growth of 670,000 people this quarter alone, record organic growth for a third quarter. Major new clients this quarter included the initiation of health benefit services for state employees in Texas and Nebraska. We're honored to serve the employees of these states and their families.

UnitedHealthcare grew fee-based commercial benefits by 1.5 million people in the third quarter, bringing 9-month growth to 1.25 million people. Commercial risk-based business remained flat this quarter. The commercial environment continues to be characterized by persistently weak employment and new business formation.

The pricing intensity we see at local market levels remains unchanged from the last several quarters. Our offerings remain very competitive across the value spectrum due to our strong cost positions, effective care management, operating cost disciplines and innovative benefit designs and features. But we will remain disciplined on margins and continue to price to our forward view of underlying costs, including the insurer's fee. As we hold to these pricing disciplines, we expect to continue to lose moderate levels of risk-based membership in the near term, as we have for the last several quarters.

Our Medicare and Medicaid businesses contributed strongly to UnitedHealthcare's third quarter growth performance, together adding more than 165,000 people over the last 90 days. We grew by 35,000 seniors in Medicare Advantage and 70,000 Medicaid beneficiaries joined UnitedHealthcare plans. We made the decision, together with the state of Wisconsin, to end our contract serving 175,000 people in one product in the Milwaukee market as of November 1, while we continue to serve 125,000 people statewide.

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