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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number: 1-10864

UnitedHealth Group Incorporated

(952) 936-1300

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 þ          No o

As of August 2, 2002, 303,425,030 shares of the registrant’s Common Stock, $.01 par value per share, were issued and outstanding.

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UNITEDHEALTH GROUP

INDEX

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PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements (unaudited)

UNITEDHEALTH GROUP

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements

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UNITEDHEALTH GROUP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements

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UNITEDHEALTH GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements

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UNITEDHEALTH GROUP

1.     Basis of Presentation and Use of Estimates

Unless the context otherwise requires, the use of the terms the “Company,” “we,” “us,” and “our” in the following refers to UnitedHealth Group Incorporated and its subsidiaries. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, needed to present the financial results for these interim periods fairly. In accordance with the rules and regulations of the Securities and Exchange Commission, we have omitted footnote disclosures that would substantially duplicate the disclosures contained in our annual audited financial statements. Read together with the disclosures below, we believe the interim financial statements are presented fairly. However, these unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the year ended December 31, 2001.

These financial statements include certain amounts that are based on our best estimates and judgments. These estimates require the application of complex assumptions and judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and will change in subsequent periods. The most significant estimates relate to medical costs, medical costs payable, contingent liabilities, and asset valuations, allowances and impairments. We adjust these estimates each period, as more current information becomes available. The impact of any changes in estimates is included in the determination of earnings in the period in which the estimate is updated.

2.     Cash, Cash Equivalents and Investments

As of June 30, 2002, the amortized cost, gross unrealized gains and losses, and fair value of cash, cash equivalents and investments were as follows (in millions):

During the three and six month periods ended June 30, we recorded realized gains and losses on the sale of investments as follows:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.     Goodwill and Other Intangible Assets

We adopted Statement of Financial Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002. We completed the initial impairment tests of goodwill and other intangible assets as required by SFAS No. 142, and determined that our goodwill and other intangible assets were not impaired. Under SFAS No. 142, goodwill and other indefinite-lived intangibles are not amortized. The following table shows net earnings and earnings per common share adjusted to reflect the adoption of the non-amortization provision of SFAS No. 142 as of the beginning of the respective periods (in millions, except per share data):

Changes in the carrying amount of goodwill, by operating segment, during the six months ended June 30, 2002, were as follows (in millions):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The gross carrying value, accumulated amortization and net carrying value of other intangible assets as of June 30, 2002 and December 31, 2001 were as follows (in millions):

Amortization expense relating to amortized intangible assets is approximately $7 million annually.

4.     Commercial Paper and Debt

Commercial paper and debt consists of the following (in millions):

As of June 30, 2002, our outstanding commercial paper had interest rates ranging from 1.8% to 1.9%. The interest rates on the floating-rate notes due November 2003 and the floating-rate notes due November 2004 are reset quarterly to the three month LIBOR (London Interbank Offered Rate) plus 0.3% and to the three month LIBOR plus 0.6%, respectively. As of June 30, 2002, the applicable rates on the notes were 2.2% and 2.5%, respectively.

In January 2002, we issued $400 million of 5.2% fixed-rate notes due January 2007. Proceeds from this borrowing were primarily used to repay commercial paper. When we issued these notes, we entered into interest rate swap agreements to convert a portion of our interest rate exposure from a fixed to a variable rate. The interest rate swap agreements qualify as fair value hedges for accounting purposes, and have an aggregate notional amount of $200 million maturing January 2007. The variable rates approximate the six month LIBOR rate and are reset on a semiannual basis in arrears. At June 30, 2002, the rate used to accrue interest expense was approximately 2.0%. The differential between the fixed and variable rates to be paid or received is accrued and recognized over the life of the agreements as an adjustment to interest expense in the Condensed Consolidated Statements of Operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We have credit arrangements for $900 million that support our commercial paper program. These credit arrangements include a $450 million revolving facility that expires in July 2005, and a $450 million, 364-day facility that expires in July 2003. We also have the capacity to issue approximately $200 million of extendible commercial notes (ECNs). As of June 30, 2002, we had no amounts outstanding under our credit facilities or ECNs.

Our debt agreements and credit facilities contain various covenants, the most restrictive of which require us to maintain a debt-to-total-capital ratio below 45% and to exceed specified minimum interest coverage levels. We are in compliance with the requirements of all debt covenants.

5.     AARP

In January 1998, we began providing services under a 10-year contract to provide insurance products and services to members of AARP. Under the terms of the contract, we are compensated for claim administration and other services as well as for assuming underwriting risk. We are also engaged in product development activities to complement the insurance offerings under this program.

The underwriting gains or losses related to the AARP business are recorded as an increase or decrease to a rate stabilization fund (RSF). The primary components of the underwriting results are premium revenue, medical costs, investment income, administrative expenses, member services expenses, marketing expenses and premium taxes. Underwriting gains and losses are charged to the RSF and accrue to AARP policyholders, unless cumulative net losses were to exceed the balance in the RSF. To the extent underwriting losses exceed the balance in the RSF, we would have to fund the deficit. Any deficit we fund could be recovered by underwriting gains in future periods of the contract. To date, we have not been required to fund any underwriting deficits. The RSF balance is reported in Other Policy Liabilities in the accompanying Condensed Consolidated Balance Sheets. We believe the RSF balance is sufficient to cover potential future underwriting or other risks associated with the contract.

When we entered the contract, we assumed the policy and other policy liabilities related to the AARP program, and we received cash and premium receivables from the previous insurance carrier equal to the carrying value of these liabilities as of January 1, 1998. The following AARP program-related assets and liabilities are included in our Condensed Consolidated Balance Sheets (in millions):

The effects of changes in balance sheet amounts associated with the AARP program accrue to AARP policyholders through the RSF balance. Accordingly, we do not include the effect of such changes in our Condensed Consolidated Statements of Cash Flows.

6.     Stock Repurchase Program

Under our board of directors’ authorization, we maintain a common stock repurchase program. Repurchases may be made from time to time at prevailing prices, subject to restrictions on volume, pricing and timing. During the six months ended June 30, 2002, we repurchased 11.3 million shares at an aggregate cost of $868 million. Through June 30, 2002, we had repurchased 123.8 million shares for an aggregate cost of

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$4.6 billion since the program began in November 1997. As of June 30, 2002, we had board of directors’ authorization to purchase up to an additional 27.5 million shares of our common stock.

As a limited part of our share repurchase activities, we had entered into purchase agreements with an independent third party to purchase shares of our common stock at various times and prices through 2003. In May 2002, the share repurchase agreements were terminated and we elected to receive shares of our common stock from the third party as settlement consideration. The favorable settlement amount was not material and was recorded through additional paid in capital.

7.     Comprehensive Income

The table below presents comprehensive income, defined as changes in the equity of our business excluding changes resulting from investments by and distributions to our shareholders, for the three and six month periods ended June 30 (in millions):

8.     Performance Summary

Second quarter diluted net earnings per share of $1.01 increased 49% from $0.68 per share in the second quarter of 2001, driven by solid revenue growth and significant operating margin expansion.

Revenues increased 5% on a reported basis, and 11% after considering the impact of targeted withdrawals from unprofitable risk-based arrangements with customers using multiple carriers and withdrawals and benefit design changes in certain Medicare markets. Revenue growth was driven by an increasing number of customers in Uniprise’s multi-site, large employer customer base, price increases in excess of 13% on UnitedHealthcare’s risk-based commercial products, and growth in a number of business units in the Specialized Care Services and Health Care Services segments.

Second quarter operating margins increased to 8.6% from 6.6% in the second quarter of 2001, as operating income grew to $523 million from $384 million in the comparable prior year period. Factors affecting the year-over-year comparison of second quarter operating results included:

•	Overall revenue growth, including the positive effects of leveraging new sales growth over the Company’s fixed cost infrastructure. Because our infrastructure can be scaled efficiently, we have been able to grow revenues at a proportionately higher rate than associated expenses.
•	A conscious product and customer mix shift, toward higher margin fee- and risk-based products and away from unprofitable markets and arrangements with customers using multiple carriers.
•	Consistent with improvements realized over the last several quarters, the Company’s medical care ratio (excluding AARP) improved to 81.2% from 84.0% in the second quarter of 2001, principally due to the significant withdrawals from marginal commercial and Medicare business and the shift to more favorable commercial business as noted above. As a result of these factors, medical cost estimates for the current year developed favorably by an estimated $40 million ($26 million net of tax) during the quarter.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•	On a comparable business mix basis, the operating cost ratio (operating costs as a percentage of total revenues) improved to 16.2% from 16.7% in the second quarter of 2001, driven by productivity gains from process improvements, technology deployment and cost management initiatives, partially offset by an increase in operating costs related to on-going technology development and deployment, and process and infrastructure enhancements.
•	An increase in net capital losses on investments realized in the quarter. In the second quarter of 2002, we realized a net capital loss of $8 million, as compared to a realized net capital gain of $4 million in the second quarter of 2001.
•	Depreciation and amortization expense decreased by $2 million to $62 million for the second quarter of 2002. The decrease is due to $23 million of goodwill and other indefinite-lived intangible assets amortization recorded in 2001 which is no longer amortized in 2002 pursuant to SFAS No. 142, largely offset by $21 million of increased depreciation and amortization resulting from higher levels of capital expenditures for technology enhancements and to support business growth.

9.     Segment Financial Information

Factors used in determining our reportable business segments include the nature of operating activities, existence of separate senior management teams, and the type of information presented to the company’s chief operating decision-maker to evaluate our results of operations. The following is a description of the types of products and services from which each of our business segments derives its revenues:

•	Health Care Services consists of the UnitedHealthcare and Ovations businesses. UnitedHealthcare provides health and well-being services on behalf of local employers and consumers nationwide. Ovations, which administers Medicare Supplement benefits on behalf of AARP, offers health and well-being services for Americans age 50 and older. In accordance with generally accepted accounting principles, the financial results of UnitedHealthcare and Ovations have been combined in the Health Care Services segment because both businesses have similar economic characteristics, including products and services, types of customers, distribution methods and operational processes, and both operate in a similar regulatory environment.
•	Uniprise provides health and well-being services, business-to-business transaction processing services, consumer connectivity and technology support for large employers and health plans.
•	Specialized Care Services is a portfolio of health and well-being companies, each serving a specialized market need with a unique blend of benefits, networks, services and resources.
•	Ingenix is a leader in the field of health care data analysis and application, serving pharmaceutical companies, health insurers and payers, health care providers, large employers and governments.

Transactions between business segments principally consist of customer service and claim processing services Uniprise provides to UnitedHealthcare, certain product offerings sold to Uniprise and UnitedHealthcare customers by Specialized Care Services, and sales of medical benefits cost, quality and utilization data and predictive modeling to UnitedHealthcare and Uniprise by Ingenix. These transactions are recorded at management’s best estimate of fair value, as if the services were purchased from or sold to third parties. All intersegment transactions are eliminated in consolidation. Assets and liabilities that are jointly used are assigned to each segment using estimates of pro-rata usage. Cash and investments are assigned such that each segment has minimum specified levels of regulatory capital or working capital for non-regulated businesses. The “Corporate and Eliminations” column includes company wide costs associated with enterprise-wide process improvement initiatives and eliminations of intersegment transactions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables present segment financial information for the three and six month periods ended June 30, 2002 and 2001 (in millions):