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					                                                                                          Buy Report
                                                                                          April 2008

                                                                                      Richard Cervenka
                                                                                        Gary Fournier

UnitedHealth Group Incorporated (UnitedHealth Group),                            Company Overview
incorporated in January 1977, is a diversified health and well-being             Ticker: UNH
company, serving approximately 70 million Americans. The                         Exchange: NYSE
Company provides individuals with access to healthcare services                  Sector: Health Care
and resources through more than 560,000 physicians and other                     Industry: Health Care Plans
healthcare providers and 4,800 hospitals across the United States.               Market Cap: 44.80 B
UnitedHealth Group conducts its operations through four operating                Shares Out.: 1.361 B
divisions: Health Care Services, OptumHealth, Ingenix and                        Corp. HQ: Minnetonka, MN
Prescription Solutions.                                                          Founded: 1974

                                                                                  Stock Data
                                                                                  Current Price: $34.36
                                                                                  52 Week High: $59.46
                                                                                  52 Week Low: $33.57
                                                                                  EPS: 3.43
                                                                                  P/E: 10.44
                                                                                  P/B: 2.21
                                                                                  P/S: .59
                                                                                  Beta: .56
                                                                                  Div & Yield: .03 (.10%)
                                                                                  ROE: 22.77%

                        Summary – Buy 900 Shares (1/2 Position)
  o   The firm has a distinct competitive advantage over the rest of the industry – it is the 800 pound gorilla. This
      allows them an advantage in keeping medical costs low, and allows them to effectively amortize fixed costs.
  o   It’s down 44% in the past quarter – it’s unlikely that the economic value of the firm has changed that much.
  o   Although its tops-down outlook isn’t as positive as it could be, the company is a FCFF-generating machine.
      Despite using incredibly conservative inputs, valuations all indicate significant upside potential. In addition,
      if FCFF just remains constant, UNH’s economic value exceeds all of our valuations.

                                         Target Price: $53.49

  o 1
    T
Table of Contents
Company History……………………………………………………………………………………………...………………………………………………3

Recent Company News..................................................................................................……...................................4

Company Profile……………………………………………………………………………………………………………….………………………………5

Business Segments…………………………………………………………………………………………………………….…………….…………….…7

Revenue Breakdown………………………………………………………………………………………………............................................8

Management……………………………………………………………………………………………..….………………….……………….…………….9

Basic Conclusions About UNH’s Business Model……………………………………………….……………………..…………….……….10

Investor Relations…………………………………………………………………………………………….……………………..…………….……….11

Analyst Recommendations and Ownership……………………………………………………………...........................................12

Competitors…………………………………………………………………………………………………………….…………………..……….…….….13

Macroeconomic/Industry Outlook…………………………………………………………...........................................................15

SWOT Analysis………………………………………………………………………………………………………………………………….…………….17

Porter’s 5 Forces……………………………………………………………………………………………………………...................................19

Financial Ratio Analysis……………………………………………………………………………………………………………………………………21

Pro Forma Income Statement…………………………………………………….……………………………………………………………..……27

Multiples Valuation………………………………………………………………………………………………………………………………………...30

FCFF Analysis……………………………………………………………………………………………………………………………………….............36

Other Valuations…………………………………………………………………………………………………………………………………………..…38

Three Stage H-Model………………………………………………………………………………………………………………………………………40

Risks, Summary, and Recommendation…………………………………………………………………………….…………………………….42

Financial Statements……………………………………………………………………………………………………………………………….………42

Value Line……………………………………………………………………………………………………………………………………………………….47

Appendix…………………………………………………………………………………………………………………………………………………………48

           2
Company History1
1974 Charter Med Incorporated is founded by a group of physicians and other health care professionals who want to
expand health coverage options for consumers.

1977 United HealthCare Corporation is created and acquires Charter Med Incorporated.

1979 United HealthCare Corporation introduces the first network-based health plan for seniors and participates in the
earliest experiments with offering private-market alternatives for Medicare.

1984 United HealthCare Corporation becomes a publicly traded company.

1988 United HealthCare incorporates the first pharmacy benefits management company.

1992 United HealthCare is the first company to produce a Report Card on health care access, quality and cost.

1998 United HealthCare Corporation becomes known as UnitedHealth Group and launches a strategic realignment into
linked business segments — UnitedHealthcare, Ovations, Uniprise, Specialized Care Services and Ingenix.

2001 UnitedHealthcare uses Web-enabled technology to simplify and improve service for physicians, enabling them to
check benefit eligibility for patients and submit and review claims.

2002 Ingenix continues to introduce new knowledge and information products that help clients gain clinical and financial
insights and improve the quality of health care delivery and administration.

2004 UnitedHealth Group launches iPlan® HSA, a product that integrates a high-deductible health plan with a health
savings account, for employer groups.

2005 On December 20, 2005, the Company acquired PacifiCare Health Systems, Inc. (PacifiCare) for approximately $8.8
billion, composed of approximately 99.2 million shares of UnitedHealth Group common stock and approximately $2.1
billion in cash. PacifiCare provides health care and benefit services to individuals and employers.

2006 UnitedHealth Group announces enhanced card technology that will combine health benefit information and
financial information on a single card, making critical health information highly portable.

2006 In one of the largest executive-pay givebacks in history, former UnitedHealth CEO William McGuire agreed to
forfeit about $620 million in stock-option gains and retirement pay to settle civil and federal-government claims related
to stock-option backdating.

2007 On March 12, 2007, UNH signed a definitive merger agreement under which the Company will acquire all of the
outstanding shares of Sierra Health Services, Inc. (Sierra), a diversified health care services company based in Las Vegas,
Nevada, for approximately $2.6 billion in cash, representing a price of $43.50 per share of Sierra common stock.

2007 UnitedHealth Group extends and broadens its relationship with AARP for an additional seven years to include
Medicare Advantage, Part D and Medicare Supplement products across all markets.



1
    UNH Website

           3
Recent Company News2
02/25/08 UnitedHealth Group Completes Acquisition of Sierra Health Services

UnitedHealth Group (NYSE: UNH) and Sierra Health Services, Inc. (NYSE: SIE) announces that they completed their
transaction. Under the merger agreement, Sierra stockholders receive $43.50 in cash for each share of Sierra common
stock, representing an equity value of approximately $2.6 billion.

02/21/08 UnitedHealth Group Board Authorizes Payment of Annual Dividend to Shareholders

UnitedHealth Group (NYSE: UNH) announces that its Board of Directors, at its regular meeting on February 19, 2008,
authorized payment of an annual dividend to shareholders for 2008. The dividend, $0.03 per share, will be paid on April
16, 2008, to all shareholders of record of UnitedHealth Group common stock.

01/22/08 UnitedHealth Group Reports Record Fourth Quarter and Full Year 2007 Results

UnitedHealth Group (NYSE: UNH) achieves record revenues and earnings in 2007. Revenues exceeded $75 billion and
were supported by expanded operating margins and strong earnings growth.

01/10/08 UnitedHealthcare Completes Acquisition of Fiserv's Health-Related Businesses

UnitedHealthcare, a UnitedHealth Group (NYSE: UNH) company, and Fiserv, Inc. (NASDAQ: FISV) announces that they
have completed the sale of substantially all of Fiserv’s health-related businesses to UnitedHealthcare. The transaction
includes Fiserv Health, a leading administrator of medical benefits, Avidyn Health, a care facilitation business, and the
Fiserv Health Specialty Solutions businesses.

01/08/08 AmeriChoice to Acquire Unison Health Plans

AmeriChoice, a UnitedHealth Group (NYSE: UNH) company, announces it has signed a definitive agreement to acquire
Unison Health Plans, an organization exclusively dedicated to serving public sector health programs. On a combined
basis, AmeriChoice and Unison would serve more than 2 million people across 20 states.




2
    UNH Website

           4
Company Profile3
Health Insurance Plans

Health insurance plans are categorized either as indemnity (fee-for-service) or managed care. Indemnity plans, which
dominated the market for several decades, pay providers for each service, with patients contributing a portion of the
bill. These plans have lost favor to managed care, which now predominates. Two popular types of managed care
organizations (MCOs) in the United States are HMOs and preferred provider organizations (PPOs).

Health maintenance organizations
HMOs are the most restrictive type of health insurance plan, but they are the least expensive for members. They
typically require a flat monthly premium and a minimal copayment from members seeking services — often $20 to $30
per primary care physician visit, and a higher amount for a specialist visit — and do not make members pay deductibles.
HMOs employ or contract networks of doctors, hospitals, and other professionals and organizations in a city or region to
service members in that geographic area. The members have to use providers in the HMO’s network, which enables the
HMO to leverage its size to obtain favorable contracts with providers. Providers, in turn, are guaranteed a large volume
of patients.

Preferred provider organizations
Less restrictive than HMOs, PPOs allow enrollees to select physicians either within or outside the plan’s network. When
patients use out-of-network providers, however, their fees are higher. PPOs are similar to HMOs in that participating
providers agree to use procedures implemented by plan administrators and to accept the PPO’s reimbursement
structure and payment levels. PPOs often limit the size of their participating provider networks. By requiring a lower
copayment for in-network visits, the PPO helps to increase the volume of patients for these providers.

Point-of-service plan
Many HMOs offer a point-of-service (POS) plan. Like an HMO, such a plan allows patients to see physicians within its
network for a small copayment. Like a PPO, however, it permits patients to see physicians outside the network, for
which they pay a percentage of the charge after meeting the deductible. POS plans tend to charge higher monthly
premiums than do HMOs.

THE KEYS TO SUCCESS

Enrollment
Certain factors have propelled the expansion of managed care companies in the United States. Perhaps most important,
managed care plans offer a means of allocating finite resources. The model can deliver healthcare services at a lower
cost, while maintaining a high quality of care, by standardizing treatment practices and by permitting providers to share
clinical experiences gathered from a broad and diverse patient base.

MCOs can control costs much more efficiently than fee-for-service insurers, and they can leverage this cost advantage
when pricing their services. For employers that provide their workers with healthcare coverage, price considerations are
important. As penetration of a managed care firm reaches a particular threshold, they can negotiate more favorable
provider contracts, create virtually integrated delivery networks, and further improve their operating cost structures.


3
    Standard and Poor’s Net Advantage

            5
Choice of plans
Initially, MCOs offered HMOs as the only alternative to traditional indemnity plans. While HMOs control medical cost
inflation, they offer members no flexibility. During recent years, members often have favored PPO plans. To remain
competitive in today’s market and offer members’ choices in terms of cost and service levels, MCOs need to have a
broad product offering, including HMO and PPO plans, as well as hybrids.

Building the network
A health plan’s network of physicians, hospitals, and other treatment facilities is critical to its ability to provide quality,
cost-effective service. Most HMOs require patients to choose a primary care doctor; this physician acts as a gatekeeper
and is responsible for diagnosing patients, formulating treatment plans, and referring patients to specialists within the
HMO or in contracted facilities.

Cost controls
A well-run managed care company needs an efficient set of cost controls. Properly used by management, cost controls
compel or strongly encourage participants in a plan to exert the financial discipline needed to hold medical costs at
reasonable levels. Cost controls can affect decisions made by patients, providers, or manufacturers. Plans continually
evaluate new cost-control tools… Comprehensive healthcare education for both plan enrollees (including regular
physicals, dietary advice, and other proactive measures) and providers also helps to control costs. Finally, claims
management is crucial, making sure that an MCO’s charges and payments correspond with a doctor’s diagnosis and
treatment.

Management ability
A successful MCO needs experienced managers to run the business and keep a sharp focus on its financial health. Its
management team must be able to navigate the challenging, continually evolving healthcare environment and
communicate the company’s operating strategies and outlook to investors.

Making rates competitive
As enrollment is reaching saturation levels in many US regions, plans face escalating competition. Those that can
accurately estimate their potential costs for the forthcoming year have a competitive advantage because they can set
appropriate premium rates. Actual premiums may vary from one corporate plan to another, across different
geographical regions and patient populations, and for other reasons.

MEDICARE AND MANAGED CARE

Medicare is a federal program that provides health benefits to Americans who are aged 65 and older, and to some
Americans who have disabilities but are under the age of 65. Roughly 43 million Americans were covered by Medicare as
of February 2007. About 81% of Medicare recipients get Medicare directly from the government through traditional fee-
for-service programs. The remainder belongs to Medicare’s managed care programs.

The government has been particularly eager to encourage greater use of the managed care portion of Medicare as part
of a broad effort to slow growth in healthcare spending. Since 2003, the government has taken steps to encourage
beneficiaries to participate in private MCOs. These improvements, along with the addition of prescription drug benefits
(Medicare Part D), are gradually increasing enrollment — but they also cost more. The fluctuating participation over the
years reflects changes to the program, as the government sought to balance attractive terms against escalating costs.




         6
Business Segments4
Health Care Services:

The Company's Health Care Services segment consists of Commercial Markets, Ovations and AmeriChoice businesses.
This segment offers an array of consumer-oriented health benefit plans and services for small and mid-sized employers,
and individuals nationwide. UnitedHealthcare provides healthcare services on behalf of more than 15 million Americans
as of December 31, 2007. UnitedHealthcare also provides administrative and other management services to customers
that self-insure the medical costs of their employees and their dependents, for which UnitedHealthcare receives a fixed
service fee per individual served.

OptumHealth:

OptumHealth reaches approximately 58 million individuals with its diversified offering of health, financial and ancillary
benefit services and products that assist consumers in navigating the healthcare system and accessing services, support
their emotional health, provide ancillary insurance benefits and facilitate the financing of healthcare services through
account-based programs. During the year ended December 31, 2007, OptumHealth began marketing most of its
products under a single brand. Its products are distributed through the three markets that it serves: the employer
market for both UnitedHealth Group customers and unaffiliated parties; the payer market for Health Care Services
health plans, independent health plans, third-party administrators and reinsurers, and the public sector market for
Medicare and state Medicaid offerings through partnerships with Ovations, AmeriChoice and other intermediaries.
OptumHealth is organized into four major groups: Care Solutions, Behavioral Solutions, Specialty Benefits and Financial
Services.

Ingenix:

 Ingenix offers database and data management services, software products, publications, consulting services,
outsourced services, and pharmaceutical development and consulting services on a nationwide and international basis.
As of December 31, 2007, Ingenix's customers include approximately 5,000 hospitals, 240,000 physicians, 1,500 payers
and intermediaries, 245 Fortune 500 companies, 250 life sciences companies, and 150 government entities, as well as
other UnitedHealth Group businesses. Ingenix is engaged in the simplification of healthcare administration with
information and technology that helps customers document, code and bill for the delivery of care services.

Prescription Solutions:

Prescription Solutions was established as a reporting segment during the year ended December 31, 2007, and offers a
suite of integrated pharmacy benefit management (PBM) services to approximately 10.3 million people, through
approximately 64,000 retail network pharmacies and two mail service facilities as of December 31, 2007. Prescription
Solutions processed approximately 300 million retail and mail service claims during 2007. Prescriptions Solutions
markets include Health Care Services health plans, external employer groups, union trusts, seniors (Part D, Secure
Horizons and Evercare) and commercial health plans.




4
    Rueters.com

           7
Revenue Breakdown5
                                                                                In 2007, the Health Care Services segment contributed
               Revenues by Business Segment
                                                                       close to 80% of UNH’s total revenues. Prescription services and
            15%                                                        OptumHealth accounted for the majority of the remaining
      1%                                                               revenues, with Ingenix contributing about 1%. From the 2006 to
                                          Health Care Services         2007, the prescription services segment’s revenues at 224%; this is
      5%                                  OptumHealth                  the source of the majority of UNH’s growth in revenues. Ingenix
                                                                       had the next fastest growth in revenues at 36%. Health Care
                                          Ingenix
                                                                       Services and OptumHealth had much more moderate levels of
                                          Prescription Solutions
                                                                       revenue growth at 5% and 13%, respectively.
                                   79%


                   (in millions)           2007               2006           Percent of Total (2007)     Percent Change
               Health Care Services       71,119             67,817                  78.50%                     5%
                  OptumHealth              4,921              4,342                  5.43%                      13%
                     Ingenix               1,304                 956                 1.44%                      36%
           Prescription Solutions         13,249              4,084                  14.63%                    224%


                                                                                Revenues from premiums account for over 90% of total
                 Revenues by Product/Services
                                                                        revenues. The remaining revenues come from products,
                    1%                                                  services, and investment & other income. Product revenues
                            1%
                                                                        come mostly from pharmacy drugs while service revenues consist
            6%
                                             Premiums                   mostly of health information and research businesses.
                                             Services                   Investment & other income is mostly attributed to interest
                                                                        income. Revenues from investment and other income grew
                                             Products
                                                                        quickest, due primarily to increased levels of cash and fixed-
                                             Investment and other
                                             Income
                                                                        income investments. Growth in revenues from products also
                                                                        grew quickly due to pharmacy sales growth at Prescription
                            92%                                         Solutions. Revenue growth in premiums and services grew
                                                                        modestly.

                                                                       modestly.
            (in millions)                            2007           2006    Percent of Total (2007)      Percent Change
            Premiums                                68,800         65,700          91.25%                      5%
            Services                                 4,600          4,260           6.10%                      8%
            Products                                  898            737            1.19%                     22%
            Investment and other Income             1,100              827              1.46%                   31%


5
    UNH Annual Report

           8
Management6
Stephen J. Hemsley- President and Chief Executive Officer

Stephen Hemsley was named chief executive officer and president, UnitedHealth Group,
on Nov. 30, 2006. He had previously served as president and chief operating officer,
UnitedHealth Group, and is a member of the company’s board of directors. Hemsley joined
the company in June 1997.

William A. Munsell- Vice President, President- Enterprise Services Group

William Munsell became president of the Enterprise Services Group in September 2007. Enterprise Services includes
OptumHealth, Ingenix and Exante. He was appointed executive vice president, UnitedHealth Group, in December 2006.
Previously, Munsell held the positions of chief executive officer, Specialized Care Services, and chief administrative
officer, UnitedHealthcare. He joined UnitedHealth Group in 1997 and brings more than 25 years of experience in
operations, finance, treasury, executive management and business processes to the company.

Anthony Welters- Vice President, President- Public and Senior Markets Group

In September 2007, Anthony Welters was named president of the Public and Senior Markets Group, which is made up of
Ovations and AmeriChoice. He was appointed executive vice president, UnitedHealth Group, in December 2006. Welters
had previously been president, chief executive officer and a founder of AmeriChoice, which was acquired by
UnitedHealth Group in 2002. Prior to his role with AmeriChoice, Welters held a number of senior positions in the federal
government and in private industry.

David S. Wichmann- Vice President, President- Commercial Markets Group

In December 2006, David Wichmann was named president of the Commercial Markets Group, which consists of
UnitedHealthcare and Uniprise. Wichmann has most recently served as president and chief operating officer,
UnitedHealthcare. He previously held positions at UnitedHealth Group as president and chief executive officer,
Specialized Care Services, and senior vice president, Corporate Development. Prior to joining UnitedHealth Group in
1998, Wichmann was a partner with Arthur Andersen.

G. Mike Mikan- Vice President, Chief Financial Officer

Mike Mikan was elected executive vice president and chief financial officer, UnitedHealth Group, in November 2006. He
was most recently senior vice president, Finance, for the company. Mikan previously served as chief financial officer for
UnitedHealthcare and chief financial officer for Specialized Care Services. Prior to these positions, Mikan was an
executive in the company’s Corporate Development group, which is responsible for merger and acquisition activities.




6
    UNH Website

           9
Basic Conclusions About UNH’s Business Model:
 o Their focus is on enhancing the performance of the health care system and improving
   the overall health and well-being of the people they serve and their communities.
         o From the employees/consumers perspective, UNH helps people get the care they need at an
           affordable cost, support the physician/patient relationship, and empower people with the
           information, guidance and tools they need to make personal health choices and decisions.
         o From the employers’ perspective, they help keep medical costs under control, and supply a
           network of doctors and physicians at a lower cost to the employer than they could otherwise
           receive these services, among other things.
 o The industry leader in their core health insurance and health care management
   segments. Also the industry leader in health data, technology, analytics and services,
   which – along with the more general goal of keeping medical cost inflation increasing at
   a lower rate, which the government could potentially achieve by using UNH’s health
   care management products and services - are aspects being pushed by those supporting
   a national health care system. This indicates that UNH can thrive regardless of health
   care system in place.
 o The firms’ size, network, cost controls, competitive rates, and choice of plans are best-
   in-class, and act like self-enforcing positive feedback loops: their size contributes to the
   quality of their network and their ability to control costs, which in turn allow them a
   competitive advantage in pricing, which in turn increases their size, etc…




    10
Investor Relations
Dear Mr. Fournier,

I am happy to send you the latest investor conference book which gives detailed information/data to your below
questions. It is a large book, which encompasses over 100 Q&A of UNH and its various businesses.

If you forward your address, I will ensure it is in today's mail.

Regards,
Cheryl Mamer
Investor Relations



    1. What do you view as the primary reasons behind the drop off in Free Cash Flow to the Firm in 2007? Do you
         believe these causes will continue into the future? If so, for how long?

    2. Going along with the prior question, the volatility in Free Cash Flow to the Firm has been quite high over the
         past four years (large growth in ’04 and ’06; no growth in ’05; negative in ’07). What do you view as being the
         cause of this volatility? Are there reasons to believe this volatility might be reduced in the future? If so, why?

    3. What do you view as being your competitive advantages over your competition? Who do you view as being your
         primary competitors?

    4. What can UNH do to try and control or offset higher medical costs, intense competition?

    5. In general, how sensitive is the firms’ member retention to industry prices? Similarly, what degree of pricing
         power do you feel the firm has?

    6. What do you view as being the key factors for longer-term growth? What business lines do you view as being of
         primary importance to future growth in sales, earnings, and cash flow?

    7. How would a national health care program impact you? Would you view such a turn of events as being positive,
         or negative?

    8.    How does UNH manage regulatory risk? What is your outlook on the future regulatory environment?




         11
Analyst Recommendations and Ownership7
Analyst Recommendations

            1-5 Linear Scale                    Current         1 Month Ago             2 Months Ago         1 Year Ago
BUY (1)                                     8             7                     6                       5
OUTPERFORM (2)                              5             5                     5                       9
HOLD (3)                                    5             6                     8                       5
UNDERPERFORM (4)                            0             0                     0                       1
SELL (5)                                    0             0                     0                       0
No Opinion                                  0             0                     0                       0

        Currently, of the eighteen analysts covering UnitedHealth Group, eight of them rate UNH as a buy. 5 analysts
currently project UNH to outperform the market, but are not confident enough to rate the stock a buy. The remaining
five analysts recommend holding UNH under the current market and company conditions. Only one analyst in the past
year has projected UNH to underperform the market. We view these figures as both a positive and a negative.
Although the confidence in UNH is reassuring, when everyone is positive, it raises the risk that the firm will
underperform expectations.


    Date                 Research Firm                        Action             From                       To

25-Mar-08                Credit Suisse                    Upgrade               Neutral                Outperform

24-Mar-08                    UBS                          Upgrade               Neutral                     Buy

10-Jan-08               Lehman Brothers                   Upgrade             Underweight              Equal-weight

30-Nov-07             BMO Capital Markets                 Initiated             Initiated              Outperform

27-Sep-07                  Wachovia                       Initiated             Initiated              Mkt Perform

19-Jun-07             Banc of America Sec                 Upgrade                Sell                    Neutral



            Based on the upgrade and downgrade history, over the past year, there have not been any downgrades.
    There are been four upgrades, with three of these upgrades coming in the last 6 months.




7
    Reuters.com

           12
Ownership

         Ownership Information                       Of the 1.29 billion shares outstanding, close to 85 percent of
                                             those shares are held by institutions. Having institutions hold such a
Shares Outstanding              1.29 Bil     large percentage of the shares could be a testament to the stable
                                             performance of UNH in the past. However, having low institutional
Institutional Ownership (%) 84.38            ownership can also be viewed as a positive, as institutions can the “wind
                                             at your back,” so to speak. The percentage of shares owned by insiders is
Top 10 Institutions (%)         36.00
                                             4 percent. We would prefer this to be higher, thus signifying the
                                             confidence of insiders in the company. The quality of management,
Mutual Fund Ownership (%) 1.95
                                             although relatively new to the company, reduces our concerns in this
5%/Insider Ownership (%)        4.00         regard.

Float (%)                       96.00


Competitors8
WellPoint, Inc.
WellPoint, Inc. (WellPoint) is a commercial health benefits company. The Company is an independent
licensee of the Blue Cross Blue Shield Association (BCBSA), an association of independent health
benefit plans. The Company serves its members as the Blue Cross licensee for California and as the
Blue Cross and Blue Shield (BCBS), licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky,
Maine, Missouri, Nevada, New Hampshire, New York, Ohio, Virginia and Wisconsin. The Company
also serves its members throughout various parts of the United States as UniCare. WellPoint is
licensed to conduct insurance operations in all 50 states through its subsidiaries.

Cigna Corporation
CIGNA Corporation (CIGNA), incorporated in 1981, is an investor-owned health service organization.
The Company's subsidiaries are providers of healthcare and benefits, the majority of which are
offered through the workplace, including healthcare products and services; group disability, life and
accident insurance, and workers' compensation related services. CIGNA's revenues are derived
principally from premiums, fees, mail order pharmacy, other revenues and investment income. The
Company operates in five business segments: HealthCare; Disability and Life; International; Other
Operations, and Run-off Reinsurance.




8
    Reuters and Standard and Poor’s Net Advantage

          13
Aetna, Inc.
Aetna Inc. (Aetna) is a diversified healthcare benefits company. It
offers a range of traditional and consumer-directed health insurance
products and related services, including medical, pharmacy, dental,
behavioral health, group life, and disability plans, and medical
management capabilities and healthcare management services for
Medicaid plans. The Company's customers include employer groups,
individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored
plans, labor groups and expatriates. The Company's operations include three business segments: Health Care, Group
Insurance and Large Case Pensions. Health Care consists of medical, pharmacy benefits management, dental and vision
plans offered on both an insured basis and an employer-funded basis. Medical products include point-of-service (POS),
preferred provider organization (PPO), health maintenance organization (HMO), and indemnity benefit (Indemnity)
plans. Group Insurance products include life, disability and long-term care insurance. Large Case Pensions manages a
range of retirement products, including pension and annuity products primarily for tax qualified pension plans.

Humana
Humana Inc. (Humana) is a health and supplemental benefits
companies. The Company is a full-service benefits solutions
company, offering an array of health and supplemental benefit
plans for employer groups, government benefit programs, and
individuals. As of December 31, 2007, Humana had approximately
11.5 million members in its medical benefit plans, as well as approximately 6.8 million members in its specialty products.
During the year ended December 31, 2007, 71% of its premiums and administrative services fees were derived from
contracts with the federal government, including 17% related to its contracts in Florida with the Centers for Medicare
and Medicaid Services (CMS), and 12% related to its military services contracts. Under its CMS contracts in Florida,
Humana provided health insurance coverage to approximately 507,700 members as of December 31, 2007. The
Company manages its business with two segments: Government and Commercial. The Government segment consists of
beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid.
The Commercial segment consists of members enrolled in its medical and specialty products marketed to employer
groups and individuals. In 2007, Humana acquired KMG America Corporation, CompBenefits Corporation, and
DefenseWeb Technologies, Inc.




       14
Macroeconomic/Industry Outlook
Macroeconomic Outlook
Cyclical Outlook:
         Massive house price and credit market deflation has resulted in economy-wide de-leveraging that has effectively
halted economic activity. Given the drastic steps historically needed to halt such widespread asset and debt-deflation,
the recursive nature of asset and debt-deflation, and the lack of tools at policymakers’ disposal to effectively deal with
current woes, said weakness could potentially continue for some time. On the inflation side, weak U.S. aggregate
demand9 has historically put downward pressure on pricing power, and thus inflation. However, inflation expectations
have risen uncomfortably recently, and continued commodity-price inflation and dollar weakness would likely continue
to put upwards pressure on inflation. Although the Federal Reserve currently expects commodity prices to pullback and
the dollar to firm to some degree, there are certainly reasons to be uncomfortable with the longer-term outlook for
inflation. Indeed, we believe inflation pressures over the next five years will be very different from said pressures over
the past twenty, thanks to a slowdown in both the rate of increase in productivity growth as well as growth in the
effective global labor supply.
         If this turns outlook turns out to be correct, the primary implications for UNH would likely be: a) continued labor
market weakness impacting enrollment growth, thus putting downward pressure on revenue, earnings, and cash flow.
To the extent that it puts downwards pressure on premium growth, this could also impact margins; b) the credit market
turmoil and falling yields leading to lower investment income, which – in turn – would also impact earnings and cash
flow; and c) if headline inflation continues to outpace core inflation, there is a risk that this could continue to put
upwards pressure on core inflation. To the extent that this, in turn, would spill into UNH’s input costs, and to the extent
that UNH fails to accurately forecast the future trend in input costs, this could impact the company’s margins.

Secular Outlook:
Over the longer-term, the macroeconomic variables of primary importance to UNH are labor market growth, medical
cost inflation, state & local as well as federal budget deficits, and the broad regulatory environment they face.
    a) Labor Market Growth: The institutions & policies currently in place in the U.S. support relatively stronger labor
         market growth. However, the world is about to experience never-before-seen population aging, which will put
         downward pressure on labor market growth, thus likely impact UNH’s revenue, earnings, and cash flow growth.
         In addition, if benefits for retired individuals are not cut, the firm could face a substantially higher tax rate –
         although this would not put them at a competitive disadvantage (given that their peers are all solely U.S.-based).
    b) Medical Cost Inflation: The rapidly aging global population, an ineffective health care system in the U.S., and
         continued technological advances have put upwards pressure on medical costs10. Although a number of drugs
         coming off patents has and could continue to reduce this cost pressure to some degree, this alone is not likely
         enough to lower medical cost inflation noticeably. Political pressure and system-wide changes could help,
         although there is currently great uncertainty as to what direction we’re likely to go in (nationwide health care,
         etc…). Regardless of the political changes, UNH is a going-concern, and fits into any future political scenario.
    c) Budget Deficits: Budget deficits put pressure on policymakers to reduce expenditures and/or raise taxes. Given
         the unpopularity of higher taxes, usually expenditures shoulders to brunt of the weight. Currently, weak
         economic growth – and the potential inability for monetary policy to solve the problem as effectively as it has in
         past downturns – raises the probability that fiscal policymakers will try and step in to “help out.” The
         consequence – when combined with the fact that slower economic growth means slower tax revenue growth –
         will likely be higher future deficits, particularly when you look farther out and take into consideration the effects

9
  A good indicator for the relative strength of aggregate demand is “5% minus Nominal GDP.” Nominal GDP less than 5% indicates weak aggregate
demand, which should reduce firm pricing power.
10
   http://www.federalreserve.gov/newsevents/speech/bernanke20061004a.htm. Note that - unlike in many other areas – technological advances
in the medical field actually put upward pressure on input costs.
         15
       of rapid population aging and the large benefits currently being promised retired individuals. These deficits, in
       turn, could aid the industry in that it might lead policymakers to turn more and more to managed care
       companies to help control costs, although – at the same time – it could negatively affect industry players by
       leading policymakers to limit premium rate hikes.
    d) Regulatory Environment: As stated directly above, the outlook for the industry’s regulatory environment is
       highly uncertain. In a worst-case scenario, government intervention could put a cap on premium growth,
       potentially leading to tighter margins. However, the type of government intervention that would take place in
       this scenario would likely be accompanied by price caps on actual medical costs as well, thus potentially
       offsetting this margin pressure.




Industry Outlook:




Recent Investor Concerns:
         UNH and its peers have underperformed the broader market since the beginning of 2008, likely due to concerns
over how a weaker economy would impact enrollment growth and the pricing power of companies relative to cost
inflation. These concerns were exacerbated after WellPoint lowered its guidance for 2008, citing a high-degree of
competition, faster-than-expected medical cost inflation due primarily to rising physician costs, and a weakening macro
environment as the factors dampening their expectations. Despite the fact that no other company in the industry has
come out and offered guidance, it appears that investors have come to the conclusion that the aforementioned
problems were not just specific to WellPoint, but were rather broad-based in nature. Indeed, since WellPoint’s
announcement on March 10th, 2008, UNH has fallen approximately 25%, close to the 32.5% that WellPoint has dropped.

Industry M&A:
         In recent years, the industry has witnessed a number of large acquisitions; for example, in 2005, UNH purchased
PacifiCare Health Systems for approximately $8.8 billion. Given the relatively slow demographic growth, and the
relatively high insurance coverage, internal growth will likely be hard to come by. Thus, expect further acquisitions as
firms jockey for market coverage to help growth and profitability.

Medical Cost Inflation:

       16
         Although the influx of pharmaceutical drugs going off patents has helped reduce medical cost inflation in recent
years, higher physician costs have recently become a concern. Sustained high headline inflation also has historically
spilled over into core products, which indicates the risk of continued cost pressure. In addition, to the extent that a
larger portion of the firms’ revenue comes from Medicare & Medicaid – which could potentially occur as you look
farther out for all the firms in the industry, given the rapid aging the global population is experiencing – this would also
put upward pressure on medical cost ratios.
         The longer-term trend in medical cost inflation, of course, is highly uncertain. How greatly will our aging
population impact medical costs? At what rate will technological progress continue in the healthcare industry? How will
federal and state-mandated changes impact healthcare cost inflation? These, of course, are the great unknowns.
However, in all the healthcare systems currently being discussed, there is certainly a place for UNH, although the exact
profitability of each scenario is obviously unknown.

Market Coverage:
        One longer-term positive is that approximately 47 million people – or roughly 15% of the U.S. population – are
without healthcare insurance11. Furthermore, this figure is expected to reach 52 million – or 16.8% of the population –
by 2010. Thus, to the extent that UNH can capitalize on this untapped market, it could help boost the firms’ revenues,
earnings, and cash flows.

Product Mix:
        An aging population will also impact the industry in that it will likely shift a greater percentage of revenue from
enrollment-based growth to Medicare-related growth. Those companies positioning for Medicare market share now
could potentially benefit from such a trend, although an unexpected regulatory change could change this from a benefit
to a hindrance – highlighting the uncertainty the industry faces. In addition, many firms in the industry are slowly
moving – to the extent possible - away from risk-based revenue and towards non-risk-based revenue growth. Doing so
reduces the firms’ exposure to medical cost inflation risks, although margins on non-risk-based revenue are – on average
– tighter.




SWOT Analysis
Strengths:
                o   Market Share: The firm has leading market share in nearly every major market across the country, as
                    well as in nearly every product and service line. The combination gives them pricing power, and also acts
                    as a positive feedback loop, with higher market share enticing more employers to sign up with them
                    which gives them even greater market share, etc… Finally, this market share helps them to effectively
                    amortize their fixed costs, which – in turn – allows to either lower prices and/or attempt to grow market
                    share further, or widen margins.
                o   Network: Their network is considered the best in the industry, and aids them in their mission to increase
                    market share by enticing employers to sign up with them. In addition, their nationwide operations allow
                    them to effectively diversify region-specific macro and operational risk.
                o   Controlling, Predicting Costs: They have a terrific track record in terms of their ability to predict and
                    control costs, as indicated by their consistently low medical cost ratio. This leads to less volatile cash



11
     U.S. Census Bureau

           17
              flows, which – in turn – helps reduce the firms’ cost of capital, with the combination boosting the
              market value of the firm.
          o   Acquisitions: Over time, the firm has consistently made value-adding – rather than value-destroying –
              acquisitions. Given the importance of acquisitions in fueling growth and profitability in the industry, this
              can prove to be an important advantage.
          o   Profitability, FCFF: The firm is extremely profitable, thanks to the fact that they use their “float” to
              finance their operations at effectively no cost. This, in turn, helps them generate massive FCFF, which
              they can then use to enhance shareholder value further.


Weaknesses:
          o   Relatively New CEO: Former CEO Bill McGuire – who stepped down in 2006 amid an options backdating
              scandal – effectively built the company into the dominant player it is today. Without this guiding figure
              around, will the firm be able to continue its past ways of value-creating acquisitions and investments?
          o   Downtrodden Stock: Since former CEO Bill McGuire was initially accused of options backdating, the
              stock has suffered. Given that a number of well-capitalized growth-oriented funds had built up
              substantial position by then – and given that UNH’s stock has continued to lag, forcing said managers to
              “bite the bullet” – this has put further downward pressure on the stock, especially recently.
          o   Maturing/Mature Industry: UNH competes in a maturing – if not already mature – industry. With fewer
              value-creating investment opportunities than they’ve seen in the past, can the firm create shareholder
              value as effectively as before? In addition, a high degree of competition in a mature industry can lead to
              management reaching for ways to boost growth – with this “forced action” potentially destroying
              shareholder value.
          o   Industry Competition: The industry is already very competitive, as the firm is forced to compete against
              competent for-profit as well as not-for-profit organizations. This, in turn, can put downward pressure on
              prices, harming firm profitability and making it more difficult to maintain their market share advantage.
          o   Uncertainty: Although uncertainty plagues any and all firms, the wide variety of uncertainty that plagues
              firms like UNH is substantial. This can lead to more volatile firm profitability and cash flows, and even
              raises the risk of the firm being suddenly forced to change their business model noticeably.


Opportunities:
          o   Acquisitions: The firm has made value-creating acquisition after value-creating acquisition in the past.
              Indeed, given the importance of market share in further future growth and profitability, acquisitions will
              likely play a large role in UNH’s future.
          o   Medicare, AARP: UNH is by far and away the dominant provider of services to AARP, which gives them a
              distinct advantage in their ability to benefit from an aging society. They also are a primary player in
              Medicare, which also potentially gives them an advantage over their competition to benefit from
              demographic trends.
          o   Continued Expansion of Non-Risk-Based Enrollment: UNH has recently continued to shift a greater
              portion of their revenue base towards non-risk-based products and services. Although the margins on
              such products and services are lower, the firm does not take on the risk associated with medical costs,
              thus greatly reducing the firms’ overall risk level. This, in turn, can reduce their cost of capital, which can
              increase shareholder value.
          o   Government Deficits: Rising government deficits and future demands placed on said government funds
              due to population aging increase the likelihood that policymakers will try and confront rising healthcare
              costs. One prominent way for them to do this is turned to a managed care firm like UNH – a move that
              UNH would certainly benefit from.


     18
  Threats:
           o   Further Increases in Competition: Although the industry is already very competitive, there are often
               new entrants in the field, which can put newfound downward pressure on prices and margins. Also, to
               the extent that a competitor suddenly desires to sacrifice margins for potential market share growth,
               this can harm UNH’s profitability and market share as well.
           o   Regulatory Changes: The industry is always susceptible to sudden, unexpected regulatory changes. This
               is especially true, given the negative light the industry is often painted in by the media. This, in turn,
               could force UNH to suddenly have to change its business model greatly, which could make their current
               market share a hindrance rather than the benefit widely expected.
           o   Medical Cost Inflation: A firms’ profitability in this industry is largely dependent on their ability to
               accurately forecast and control costs. Continued high headline inflation has historically put upwards
               pressure on core goods, which can make medical cost inflation more unpredictable, thus leading to
               volatile swings in margins and FCFF.
           o   Government Deficits: As mentioned above, rising government deficits can lead policymakers to try and
               reduce healthcare-related expenditures. To the extent that they try and do this by placing caps on
               premiums, this would negatively affect firms’ like UNH.



Porter’s 5 Forces
Bargaining Power of Suppliers: Moderate
  o   Suppliers of Labor: Low-to-Moderate
         o The labor market is always competitive
         o High-skilled labor – like the type needed for a lot of what UNH does – is in high demand (and often short
              supply)
         o However, given the reduced bargaining power of labor in recent years, real labor costs do not often
              fluctuate in a way that substantially impacts firm costs
  o   Suppliers of Capital: Very high
         o Like every other firm, UNH has to compete aggressively for capital by continuously producing above-
              average returns
         o However, UNH does benefit greatly from the “float” it enjoys, which can reduce its short-term financing
              needs
  o   Suppliers of Medical Services: Moderate
         o UNH – like other firms in the industry – has a vast network of doctors, physicians, hospitals, etc…
         o UNH is known to have the best network in the industry. Thus, supplier power for UNH is likely less than
              for other firms in the industry
  o   Suppliers of Pharmaceutical Products: Varies drastically (very low to very high)
         o Assuming the product is still on patent, the bargaining power of suppliers of pharmaceutical products is
              obviously very, very high
         o However, once a product comes off patent – as a number have done recently – supplier power becomes
              very low.

Bargaining Power of Customers: High

      19
   o   Given the large number of competitors in the industry, and UNH’s primary customer – employers – have a broad
       basket of options to choose from. However, UNH’s nationwide network does give them some advantage in this
       regard over competitors.
   o   Government can play an important role in UNH’s various markets. Obviously, the bargaining power of the
       government is very, very high, which can leave UNH open to unexpected changes.
   o   AARP is a large customer of UNH’s. The loss of this contract could harm UNH’s expected future profitability and
       growth. This, in turn, gives AARP considerable power over UNH.


Rivalry Among Existing Firms: Very High
   o   There are a very large number of for-profit and not-for-profit firms competing in UNH’s various markets. Given
       that industry-wide growth has slowed, this has likely heightened rivalry to some degree.
   o   However, competition has fallen somewhat in the past decade. This is reflected in UNH’s much higher
       profitability since the turn of the decade. This was a by-product of the competing firms’ collectively deciding to
       stop cannibalizing margins to such a great degree, although some of that obviously still goes on.

Threat of New Entrants: Moderate/Low
   o   Given the relatively higher level of profitability in recent years (as compared to the turn of the century), this
       should obviously create incentive for new entrants. However, the already high degree of competition limits this
       to some degree.
   o   In recent years, various competitors have emerged as large players in the industry, which helps create barriers
       to entry, in that they can squeeze new entrants via their dominant market share.
   o   Note that the government can effectively “enter the market” and change the landscape drastically.

Threat of Substitute Products: Low
   o   There’s always the risk of a breakthrough, revolutionary idea changing the industry landscape. However,
       anything but the most revolutionary and dramatic of ideas still has a role for UNH.
   o   Government-intervention could also drive the move towards some sort of substitute product, or some changed
       role for UNH.




       20
Ratio Analysis
                                            Extended DuPont Analysis

                                                Extended DuPont Model
                  ROE            Net Profit Margin            Total Asset Turnover             Equity Multiplier
        2007    23.19%     =          6.17%             x               1.48             x           2.54
        2006    19.95%     =          5.81%             x               1.48             x           2.32
        2005    17.18%     =          6.64%             x               1.12             x           2.31
        2004    22.48%     =          6.31%             x               1.37             x           2.60
        2003    35.49%     =          6.33%             x               1.63             x           3.44


        WLP     14.46%     =          5.47%             x               1.17             x           2.26
         CI     23.48%     =          6.33%             x               0.44             x           8.43
        AET     18.08%     =          6.63%             x               0.54             x           5.05
        HUM     20.70%     =          3.30%             x               1.96             x           3.20


         UNH’s return on equity has risen each of the last years. This increase can be attributed to the company’s
increasing equity multiplier and total asset turnover. The net profit margin has been very stable over the last past five
years; this partially explains the company’s low beta. UNH’s ROE is significantly higher than all of the competition except
Cigna, although historically UNH’s ROE has been much higher than that of Cigna. UNH’s profit margins are as good as
any of its peers. UNH’s asset turnover is better than of all of the competition except that of Humana. UNH’s low equity
multiplier in relation to the competition explains the company’s relatively lower reliance on debt to finance operations.

                                                Profitability Analysis

                                        UnitedHealth Group Historical Trends
                                                   2003        2004        2005        2006       2007
                   Gross Margin                 28.13%      26.70%       27.28%      24.65%     25.49%
                   Operating Margin             10.18%      10.09%       10.94%       9.76%     10.41%
                   Profit Margin                 6.33%        6.31%       6.64%       5.81%      6.17%
                   Return on Assets             10.35%        8.65%       7.47%       8.61%      9.14%
                   Return on Equity             35.49%      22.48%       17.18%      19.95%     23.19%

                                        UnitedHealth Group vs. Competitors
                                          UHN        WLP      CI         AET       HUM        Peer Avg.
                   Gross Margin           25.49%     24.04%   42.13%     29.19%    19.85%       28.80%
                   Operating Margin       10.41%      9.33%     9.25%    10.13%      5.37%       8.52%

        21
                   Profit Margin           6.17%      5.47%     6.33%     6.63%     3.30%        5.43%
                   Return on Assets        9.14%      6.43%     2.78%     3.61%     6.48%        4.83%
                   Return on Equity       23.19%    14.46%     23.48%    18.08%    20.70%       19.18%




        UNH’s gross profit margin has decreased over time, but EBIT and net profit margin have
                                                                                                         Profitability
stayed very consistent. While COGS has been increasing, the increasing revenue totals have been
                                                                                                          Rankings
able to offset this expense increase, such that the net profit margin has not taken a hit. Both
                                                                                                             UNH
return on assets and return on equity have increased over the past three years. This can be                   CI
attributed to UNH using assets more efficiently. While UNH has a lower gross margin than it peer             AET
group, its EBIT and net margins are better than the competition. UNH’s efficient operations have             WLP
made it more profitable than all its major competitors. For similar reasons, the return on assets            HUM
and equity is highest among the competition as well.

                                           Asset Management Analysis

                                         UnitedHealth Group Historical Trends
                                                           2003     2004
                                         UnitedHealth Group vs. Competitors2005          2006    2007
               Total Asset Turnover                 UNH       WLP
                                                               1.63      1.37 AET
                                                                        CI       1.12 HUM1.48
                                                                                            Peer Avg.
                                                                                                  1.48
               Total Asset Turnover
               Fixed Asset Turnover                   1.48    1.17
                                                              29.00      0.44
                                                                        34.30    32.60 1.96
                                                                                0.54     40.40        1.03
                                                                                                     37.60
               Fixed Asset Turnover
               Payables Period                      37.60     61.60
                                                               69.50    28.00 85.20 42.80
                                                                        65.50   71.60   52.10        54.40
                                                                                                     53.30
               Days Sales in Inventory
               Days Sales in Inventory                7.00    27.80
                                                               10.00   188.90 13.00
                                                                         8.10    8.80 9.30
                                                                                         6.70        59.75
                                                                                                      7.00
               Avg. Collection Period
               Avg. Collection Period                 7.73     6.51
                                                                9.52    34.17
                                                                         8.75  9.15
                                                                                 9.59 8.91
                                                                                         6.83        14.69
                                                                                                      7.73




         UNH total and fixed asset turnover have not changed dramatically over the last five         Asset Management
years. Also, UNH’s payables period and days sales in inventory have decreased steadily over the          Rankings
same time period. The average collection period has decreases during this time as well. In                  HUM
relation to its peer group, UNH’s total asset turnover is high, but its fixed asset turnover is             UNH
significantly lower than its peers. UNH maintains lower inventory levels than all of its peers and          WLP
                                                                                                            AET
collects receivable as fast as all its peers.
                                                                                                             CI



        22
                                          Debt Management Analysis

                                        UnitedHealth Group Historical Trends
                                                              2003        2004          2005         2006      2007
                Equity Multiplier                              3.44       2.60           2.31         2.32      2.54
                Debt-to-Equity                                 2.44       1.60           1.32         1.32      1.54
                Debt-to-Assets                                 0.71       0.62           0.57         0.57      0.61
                Times Interest Earned                         30.90      30.14          21.08        15.32     14.42


                                        UnitedHealth Group vs. Competitors
                                                  UNH         WLP        CI      AET           HUM      Peer Avg.
               Equity Multiplier                      2.54      2.26     8.43      5.05          3.20           4.74
               Debt-to-Equity                         1.54      1.26     7.43      4.05          2.20           3.74
               Debt-to-Assets                         0.61      0.56     0.88      0.80          0.69           0.73
               Times Interest Earned               14.42       12.74      NA      15.45         19.68          15.96

        Over the past five years, UNH has become less reliant on debt to finance its operations.                Debt Management
During this same time period, UNH’s times interest earned has been cut in half. When                                Rankings
comparing UNH to its peers, all of the peers rely on debt more heavily than UNH except for                            WLP
                                                                                                                      UNH
WLP. UNH’s time interest earned is in line with the competition.
                                                                                                                      HUM
                                                                                                                       AET
                                                                                                                        CI

                                        Liquidity Management Analysis

                                        UnitedHealth Group Historical Trends
                                                      2003        2004         2005           2006      2007
                       Current Ratio                    0.7       0.72          0.63          0.87      0.84
                       Quick Ratio                     0.34       0.43           0.4          0.63      0.56


                                        UnitedHealth Group vs. Competitors
                                             UNH       WLP       CI      AET     HUM            Peer Avg.
                      Current Ratio            0.84     0.91     NA      0.69          1.51          0.78
                      Quick Ratio              0.56     0.52     NA       0.3          0.46          0.32

       23
                                                                                                            Liquidity
         UNH has become slightly more liquid over the past five years. Low levels of liquidity are          Rankings
                                                                                                              HUM
typical of the industry. In relation to its peers, UNH is more liquid than all the competition except
                                                                                                              UNH
for HUM, which has a significantly larger current ratio than the peer group. Information on current           WLP
assets and current liabilities was not available for CI.                                                       AET




                                                  Growth Analysis

                                        UnitedHealth Group Historical Trends
                                                                2004           2005         2006          2007
             Revenue Growth YOY                               29.10%         21.90%       57.70%         5.40%
             3-Year Average                                   16.60%         21.90%       35.40%        26.60%
             5-Year Average                                   13.70%         26.50%       25.00%        24.70%
             Oper. Income Growth YOY                          39.70%         31.00%       30.00%        12.40%
             3-Year Average                                   37.80%         35.00%       33.50%        24.20%
             5-Year Average                                   34.20%         35.00%       34.90%        29.10%
             EPS Growth YOY                                   33.10%         25.90%       19.80%        15.20%
             3-Year Average                                   41.40%        32.70%        26.10%        20.20%
             5-Year Average                                   37.60%        35.30%        33.60%        28.30%


                                        UnitedHealth Group vs. Competitors
                                                UNH       WLP       CI           AET      HUM       Peer Avg.
             Revenue Growth YOY                  5.40%     7.30%         6.50%    9.80%   18.10%        10.43%
             3-Year Average                     26.60%    43.20%       -1.00%    11.50%   24.50%        19.55%
             5-Year Average                     24.70%    35.70%       -1.90%     6.80%   12.20%        13.20%
             Oper. Income Growth YOY            12.40%     7.30%       -5.80%     8.90%   64.60%        18.75%
             3-Year Average                     24.20%    53.20%    -11.80%      14.10%   45.70%        25.30%
             5-Year Average                     29.10%    44.50%       -0.10%    35.00%   43.00%        30.60%
             EPS Growth YOY                     15.20%    15.40%     12.80%      17.20%   69.30%        28.68%
             3-Year Average                     20.20%    22.20%         0.60%   21.50%   41.90%        21.55%
             5-Year Average                     28.30%    19.80%         9.10%   40.10%   42.00%        27.75%

         When analyzing UNH’s growth in revenue, the inconsistency is alarming. The differences in           Growth
revenue are due to non-operating changes within the company, with acquisitions being the most               Rankings
                                                                                                              HUM
notable. Revenue growth has slowed over the last four years as UNH has become the dominant
                                                                                                               AET
player in the industry, thus allowing for less growth. Operating income and EPS growth has steadily            UNH
decreased over the last four years but was still very positive in 2007. In relation to its peers, UNH’s        WLP
revenue growth has been the slowest in the past year. But at the same time, operating income                    CI
growth was only lower than HUM. The low revenue growth with relatively higher operating income growth is a
testament to the efficiently in UNH’s operations. UNH’s EPS growth is lower than most of its peers. It should be noted
        24
that UNH’s growth cannot be as fast as some of the peers as it’s a mature company with a dominant position in the
market.




                                               Cash Flow Analysis

                                       UnitedHealth Group Historical Trends
                                                                 2004            2005            2006          2007
            Operating Cash Flow Growth                       37.70%          4.60%             50.90%       (9.90%)
            Free Cash Flow Growth                            42.80%          0.90%             51.90%      (13.70%)
            Cap Ex as a % of Sales                              0.90%        1.10%              1.00%        1.20%
            Free Cash Flow/Sales                             10.17%          8.41%              8.10%        6.64%
            Free Cash Flow/Net Income                              1.46          1.16            1.39          1.08


                                       UnitedHealth Group vs. Competitors
                                              UNH         WLP       CI            AET           HUM        Pee Avg.
            Operating Cash Flow Growth          (9.90%)   7.40%            NA     22.30%        (27.40%)     2.30%
            Free Cash Flow Growth             (13.70%)    4.50%            NA     19.10%        (34.10%)    (2.63%)
            Cap Ex as a % of Sales               1.20%    0.50%          1.50%     1.50%          0.90%      1.10%
            Free Cash Flow/Sales                 6.64%    6.58%          6.13%     6.03%          3.89%      5.66%
            Free Cash Flow/Net Income              1.08     1.20          0.97          0.91        1.18       1.07



        Over the past four years UNH operating cash flow and free cash flow growth has been very
inconsistent. Similar to revenue growth, this is due to acquisitions. We view it more appropriate to         Cash Flow
                                                                                                              Analysis
average FCFF growth over the past four years to take into account the timing of acquisitions. When              AET
doing this, it is clear that UNH has still generated very solid growth in FCFF. In regards to capex, UNH        WLP
has spent more than $3 billion in investments in technology and change initiatives in just the past              UNH
five years, which has helped improve productivity by applying technology to automate and                        HUM
                                                                                                                  CI
streamline processes to achieve the lowest cost for delivering services, thus creating differential
margin advantages and results in their businesses. In the end, in recent years, UNH’s capital expenditure and free cash
flow generation growth falls in line with its peers. Growth in cash flows has been negative for UNH and HUM over the
past four years and positive for WLP and AET. Note that the level of FCFF generated by UNH is well above the rest of the
industry.




       25
                                             Industry Specific Analysis

                                       UnitedHealth Group vs. Competitors
                                             UNH       WLP      CI       AET       HUM      Peer Avg.
            Revenue/Medical Member            $2,502   $1,910   $1,762    $1,627   $2,768      $2,017
            Medical Loss Ratio               80.60%    82.40%   84.20%   79.80%    80.69%      81.77%
            Administative Cost Ratio         14.03%    15.58%   29.81%   21.22%    14.00%      20.15%



         The revenue/medical member calculation explains a company’s ability to generate revenue on their
enrollment levels. The higher this ratio is the more each additional medical member contributes to the total
revenue of a firm. UNH produces more revenue per medical member than any other company except for
HUM. The company’s medical loss ratio, measured by dividing a company’s total amount of direct medical
costs by premium revenues, is used to determine a company’s effectiveness in managing its enrollees. It can
also be used to indicate a company’s ability to control costs and predict future costs in an era of rapid medical
cost inflation. UNH’s MLR of 80.60% is below its peer average; this indicates that UNH manages its medical
costs of enrollees very efficiently. More specifically, UNH spends about 81 cents of each premium dollar on
medical costs. AN MLR of around 80 percent is good benchmark for evaluating a company’s ability to manage
its patient base. Companies that underestimate service usage will have their MLRs rise as a result. The
administrative cost ratio, determined by dividing SG&A costs by total operating revenues, is a reflection of a
company’s operating strategy, business mix, and business cycle. UNH’s ACR of 14.03 is the lowest in the peer
group; this reflects UNH’s ability to limit its spending on malpractice, insurance, and other administrative
costs. The ACR typically varies from 14% to 18% during a normal business cycle.




       26
                                  Pro Forma Income Statement12




12
     See “Appendix” for UNH’s performance outlook for 2008, as well as their 3-5 year outlook

           27
                                       2007         2008         2009         2010         2011         2012         2013         2014
Revenues:
 Health Care Services
   Revenue from Prod. & Serv.      $   70,155   $   72,728   $   75,575   $   79,198   $   83,039   $   87,111   $   91,331   $ 95,810
   Investment Income               $    1,044   $      679   $      721   $      765   $      813   $      863   $      916   $     971
 Revenue from Hlth Cr Srvc:        $   71,199   $   73,406   $   76,295   $   79,963   $   83,852   $   87,974   $   92,247   $ 96,781
 Other Revenue:                    $    4,232   $    4,401   $    4,577   $    4,806   $    5,047   $    5,299   $    5,564   $ 5,842
   Total Revenues:                 $   75,431   $   77,808   $   80,873   $   84,769   $   88,898   $   93,273   $   97,811   $ 102,623

Operating Costs:
 Medical Costs & COPS              $ 56,203     $ 60,457     $ 62,474     $ 64,849     $ 68,007     $ 71,354     $ 74,825     $ 78,506
 Operating Costs                   $ 10,583     $ 11,282     $ 11,727     $ 12,292     $ 12,890     $ 13,525     $ 14,183     $ 14,880
 D&A, & Other Noncash Charges      $    796     $    778     $    809     $    848     $    889     $    933     $    978     $ 1,026
   Total Operating Costs:          $ 67,582     $ 72,517     $ 75,009     $ 77,988     $ 81,786     $ 85,811     $ 89,986     $ 94,413

Operating Profit:                  $ 7,849      $ 5,291      $ 5,863      $ 6,782      $ 7,112      $ 7,462      $ 7,825      $    8,210

Interest Expense:                  $     544    $     703    $     703    $     703    $     703    $     703    $     703    $     703

Earnings Before Income Taxes:      $ 7,305      $ 4,588      $ 5,161      $ 6,079      $ 6,409      $ 6,759      $ 7,122      $    7,507

Taxes:                             $ 2,651      $ 1,665      $ 1,873      $ 2,206      $ 2,326      $ 2,453      $ 2,585      $    2,724

Net Earnings:                      $ 4,654      $ 2,923      $ 3,288      $ 3,873      $ 4,083      $ 4,306      $ 4,538      $    4,783
Diluted # of Shares Outstanding:        1,361        1,320        1,281        1,242        1,205        1,169        1,134        1,100

Diluted Net Earnings Per Share:    $     3.42   $     2.21   $     2.57   $     3.12   $     3.39   $     3.68   $     4.00   $     4.35



Total Revenues Projections:         To project total revenues, we broke the figure down into two broad categories:
“Health Care Services” and “Other Revenue.” “Health Care Services” was then further broken down into “Risk-Based”
and “Non-Risk-Based” enrollment & premium growth, and “Investment Income.”

                                                Health Care Services:
   o     “Risk-Based Enrollment Growth”: Approximately a 5% decline in ’08 and ’09, followed by a 4.2% decline
         between ’10-’12, and a 4.6% decline in ’13 and ’14. To come to these estimates, we looked at historical trends
         (one-year and three-year compound annual change was -4.25% and -1.34%, respectively) and then adjusted for
         managements’ explicit strategic direction, as well as our cyclical & secular macroeconomic outlook. More
         specifically, we believe that cyclical headwinds will continue to soften the labor market, directly impacting
         enrollment in the process, and causing enrollment to decline 5% in ’08 and ’09. Said cyclical headwinds abating
         is the reason for improvement in 2010, with negative demographic trends causing the decline to accelerate in
         2013.
   o     “Risk-Based Premium Growth”: 6% in ’08 and ’09, followed by 7% thereafter. Historically, UNH has typically
         increased risk-based premiums roughly 8% a year. However, we anticipate increased industry competition & a
         weakening cyclical macroeconomic outlook to put some downward pressure on premiums in ’08 and ’09. After
         ’09, we adjusted down from 8% due to potential litigation risk, the competitive environment, and the potential
         efforts to reduce health cost inflation – which, in turn, is a driving factor in premium growth.
   o     “Non-Risk-Based Enrollment Growth”: Approximately 3.5% growth in ’08 and ’09, followed by 3.75% growth
         thereafter. We came to this conclusion by first looking at the three-year compounded annual change in non-risk-
         based enrollment (5.47%) as well as the one-year change (9.71%). We then adjusted these figures to take into
         account aforementioned regulatory, competitive, and other risks; our cyclical and secular macro outlook; and
         28
        managements’ explicit strategic direction. Note that these figures are kept highly conservative, due to the
        uncertainty surrounding the political environment; how demographic changes will wholly impact non-risk-based
        enrollment; etc.
    o   “Non-Risk-Based Premium/Price Growth”: 1.75% in ’08 and ’09 followed by 2% thereafter. The thinking was
        the same as above: driven by historical precedent, and then appropriately adjusted for our macro, industry, and
        political outlook. Note that there is a smaller fall in non-risk-based premium growth over the next two years
        relative to risk-based premium growth due to the less cyclical nature of these products/services. As was the case
        with non-risk-based enrollment growth, these estimates are highly conservative, with uncertainty surrounding
        Medicare and Medicaid pricing also coming into play.
    o   “Investment Income”: 25% fall in investment income in 2008, followed by 6.19% compounded annual growth.
        Due to falling yields, credit market turmoil, and a lower level of investments – among other things – we
        anticipate investment income to fall in ’08. Using 2002 – when investment income declined 22% yoy - as our
        precedent, and then adjusting this figure for various factors (ex: the level of investments increased in 2002,
        while the company has explicitly stated that they expect it to decline in 2008), we guess that investment income
        will fall 35% yoy in ’08. After that – given the uncertain nature of investment income – we simply assume that it
        will grow at 6.19% annually, which is equal to what the 10-year Treasury has yielded on average over the past 20
        years, and is fairly close to the average yield received over the same period on a basket we compiled of short-
        term and longer-term fixed income assets that UNH has historically held.

                                                  Other Revenue:
Despite having growth well above 10% a year over the past five years - to stay with our conservative tone, and given the
higher uncertainty of these revenues - we simply assume that the secular growth rate for “Other Revenue” is
approximately five percent annually. Adjusting ’08 and ’09 for macro factors, we project 4% annual growth in the initial 2
years, followed by that secular growth rate for the rest of the forecast horizon.


Operating Costs:      Approximately 6% annual rise in ’08 and ’09, followed by an approximately 5% rise thereafter.
Imbedded within this projection are:
   o Medical Costs: We anticipate the medical cost ratio (medical costs ÷ premium revenues) to equal approximately
      83.5% in ’08 and 82.5% in 2009, followed by 82% thereafter. Historically, UNH’s medical cost ratio has fluctuated
      between 79% and 82.5%: in ’07, it was 80.6%; the three-year average is 80.59%; and the five-year average is
      80.75%. The reason these historic relationships were adjusted upward was due to political uncertainty (in an
      attempt to look like “the good guy,” politicians might try and punish health insurers for excessive premiums,
      thus putting downward pressure on premiums relative to medical costs) as well as medical cost inflation
      uncertainty (higher headline inflation fueled by commodity price inflation – when sustained for some period of
      time - has the tendency to “leak out” into a broad array of categories, leading to unexpectedly higher inflation
      for things like medical products. To the extent that the jump is somewhat unforeseen, the medical cost ratio
      would be higher than it otherwise would be). Rising industry competition can also force higher medical cost
      ratios, which we believe could also be a factor in coming years.
   o Operating Costs: We assume that operating costs as a percentage of total revenue will remain at 14.5%
      throughout our forecast horizon. In 2007, operating costs as a percentage of total revenue were 14.03%; the
      three-year average was 14.5% of total revenue; and the five-year average was 15.14%. Thus, there has been a
      clear decline in operating costs as a percentage of total revenue over time, with it declining under 15% in 2006.
      This decline can be attributed to higher volume (and thus higher market share) effectively amortizing these fixed
      costs, with this higher volume – in turn – being largely driven by their recent acquisitions. We view this scale
      advantage as being relatively permanent in nature, thus leading to our expectation of 14.5%.
   o Cost of Products Sold: We anticipate these costs to increase 10% in 2008, followed by an 8% annual increase
      thereafter. Although there’s somewhat a lack of steady historical precedent, we note that the annual increase in
        29
        the cost of products sold has typically outstripped the annual increase in the revenue from products sold
        (historically, cost of products sold has increased at roughly 1.5 times the rate of increase in revenue from
        products sold). Given that we expect revenue from products sold to increase at a rate if roughly 5% a year over
        the forecast horizon, historic relationships would lead us to believe cost of products sold would increase at
        roughly a rate of 7% annually over the same time period. We then adjusted this up to take into account inflation
        uncertainty. The fact that our 2008 cost growth estimate exceeds our projections for other years reflects
        inflation stickiness.
    o   Depreciation, Amortization, & Other Non-cash Charges: Expected to equal 1% of total revenue through 2014. In
        2007, these non-cash charges equaled 1.005% of total revenue; the three-year average is .989% of total
        revenue; and the five-year average is 1.002%. Thus, there was a decline in non-cash charges as a percentage of
        total revenues beginning in 2005 and 2006, although it picked back above 1% in 2007. In the end, we though the
        five-year average was the most appropriate figure, given the highly uncertain nature of this variable.

Operating Profit: The inputs discussed above left us with an operating profit margin of 6.8% in 2008, 7.25% in 2009,
and 8% thereafter. The fact these projections are in-line with historic relationships are comforting, and could potentially
indicate that the inputs seen above were well-laid out. Indeed, in 2007, operating margins were10.4%; the three-year
average was 10.67%; the five-year average was 10.64%; and the ten-year average was 7.93%. Given the aforementioned
regulatory, macroeconomic, and industry-specific headwinds we view the firm facing, the initial decline appears right;
using 2001 as a potential precedent for macro headwinds, we see that operating margins then were 6.7%, just 10 bps
below our estimate. The secular increase between 2009-2014 also appears correct, as it is approximately equal to UNH’s
ten year average. One could certainly argue that the ten-year average under-predicts the likely potential profitability of
the firm, given that their presence in the industry and the increasing industry-wide focus on not cannibalizing margins
completely has changed industry dynamics. However, given the always-present uncertainty surrounding the future –
particularly UNH’s future – we view 8% as sounding right.

Interest Expenses: Equal to $702,560,124 throughout the forecast. Given the rapid rise in their use of L-T debt in
recent years, and given that UNH has sufficiently “proven” to the market (particularly lenders, in this case) their ability
to generate significant cash flows, we believe UNH will eventually up the proportion of L-T debt in its capital structure to
20%. Assuming that this occurs in 2008, and assuming the market value of equity used is the current value: we then
calculated the value of L-T debt needed to currently bring the proportion of L-T debt up to 20%, and then multiplied the
necessary change in principal by the current YTM on 10-year UNH unsecured corporate bonds. This gave us an interest
expense of $702,560,124, which was used for 2008. Given the uncertainty regarding future changes in both principal
values as well as coupon rates, we kept this amount stationary for the rest of the forecast period.

Taxes: Equal to 36.29% throughout the time horizon. In 2007, UNH’s marginal tax rate was 36.29%; the three-year
average has been 36.09%; and the five-year average has been 35.78%. Given the relative stability of their marginal tax
rate throughout time, we view it as being reasonable to simply assume that the most recent experienced marginal tax
rate will equal hold throughout the forecast period.

Diluted Weighted-Average of Common Shares Outstanding: 3% compounded annual reduction in
shares outstanding between 2008-2014. Note that – throughout our projections – we assume that UNH does not acquire
any other company. Historically, in years where acquisitions have been relatively lower (1998-2004, 2007), the company
has bought back on average approximately 4% of the shares outstanding. To be conservative, we assumed that the
company would only buyback 3% of the shares outstanding. Note that the firm does not currently have a buyback plan
in place, but does actively purchase shares on the open-market when it feels its stock is undervalued. Indeed, last year,
they purchased approximately 3% of the shares outstanding at an average price of $53/share. This is a positive sign,


        30
given that the current price – approximately $35/share – is well below $53/share, indicating the management likely
views the current market price as being a relative bargain, and thus is likely to up share repurchases, if anything.




Multiples Valuation
                                                                              P/E:
                                                                                                 UNH      UNH      UNH
                                                                                               Premium: Premium: Premium:
                        2005 2006 2007 TTM Forward                        5-Yr Avg 10-Yr Avg     TTM    5-Yr Avg 10-Yr Avg
             UNH         25.1    18.1    17.4      10        7.7            20.5      21.4
             WLP         20.2    16.3    16.4     8.2         7             17.1       -         1.2       1.2       -
              CI         11.4    12.8    14.5     10.6       8.5            11.8     14.5        0.9       1.7      1.5
             AET         17.5    14.6    16.9     12.7       9.7            15.3       -         0.8       1.3       -
             HUM         29.1    19.1    17.1     9.5        8.4            19.8     19.9        1.1       1.0      1.1
         Peer Avg: 19.6 15.7 16.2 10.3                      8.4            16.0        -         1.0       1.3       -
         S&P 500        17.3 16.8 16.5 19.1                13.8            18.1      20.7        0.5       1.1      1.0
        * Both 5-year and 10-year averages are realized annual averages

UNH’s Historical Trend: The firms’ TTM & Forward P/E ratios are currently at 10-year lows, with the previous lows being
16.6 (1999) & 12.08 (1999), respectively. In addition, it’s trading at less than ½ its 5 and 10-year average. Although a
relatively larger size, an expected earnings slowdown to due cyclical headwinds (as well as newfound concern about the
company’s cyclicality after the recent WLP release), and fewer growth opportunities might be the cause of this lower
multiple, current analyst expectations are for 14% annual compounded earnings growth over the next 5 years. Although
we view 14% earnings growth as being overly optimistic at the moment (it would have to be fueled by future additional
– and hopefully value-creating - acquisitions), the fact that the company is trading at only approximately 2 times our
pessimistic long-term internal earnings growth projection can offer some degree downside comfort (however, if this
3.5% rate were realized over the next seven years or so, and if there were no reason seven years from now to expect
accelerating earnings growth, we’d likely see the stock lower at that point in time than it is today, as two-times-earnings
growth is sometimes thought of as the upside boundary for rapidly growing stocks – something that UNH, in this
scenario, would not be).
Conclusion: Potentially (relatively) cheap

UNH vs. Peers: Currently, UNH is trading at roughly the same TTM P/E multiple as its peer group, and is trading at a
discount to its peers when looking at Forward P/E. Traditionally, the firm has traded at a premium relative to its peers
(ex: over the past 5 years, UNH’s P/E has – on average – been 1.3 times the peer group average). In addition, UNH’s 5-
year expected earnings growth is 14.8%, while analysts only expect 13.78% earnings growth from its peers. This
indicates a potential misalignment in valuation.
Conclusion: Potentially (relatively) cheap

UNH vs. S&P 500: UNH has historically traded at roughly the same multiple as the S&P 500. Currently, however, it
appears to be trading at a considerable discount relative to the S&P 500, with its TTM and Forward P/E only 54% and
61% of the multiple the S&P 500 is currently receiving in the marketplace. This is surprising, given that UNH’s expected
5-year earnings growth is higher (14.8%) than the S&P 500’s (12.3%).
Conclusion: Potentially (relatively) cheap


        31
Final P/E Conclusion: Potentially (relatively) cheap
Relative to its current and projected level of earnings, the firm is trading at historic lows. At first glance, this could
indicate that the firm is a relative bargain, although longer-term growth concerns or rising firm-specific risk could be the
leading factor behind this lower valuation. However, analysts’ current expectations for 5-year growth indicate that UNH
is likely cheap relative to both the S&P 500 as well as its peers, assuming that the market will not permanently discount
UNH’s growth at a higher rate than it has historically relative to these two groups.


P/E Valuation: Price Target = $42.79. In our overly conservative pro forma income statement, we
project EPS in 2009 of $2.57. Looking out at the five years after 2009, we project 11.1% annual compounded earnings
growth. Putting a 1.5 multiple on top of that growth rate – which we believe is fairly reasonable – gives us a multiple of
approximately 16.65. Multiplying that multiple by our 2009 expected EPS of $2.57 gives us a target price of $42.79. This
represents approximately 25% upside from the close on 3/31/08. The fact that the upside valuation calculated using a
P/E multiple is smaller than that calculated using FCFF is not surprising – UNH’s FCFF story is much more impressive than
its future ability to grow earnings via internal growth and share buybacks (although the FCFF story obviously helps
finance those share buybacks).


                                                             P/B
                                                                                           UNH      UNH      UNH
                                                                                         Premium: Premium: Premium:
               2005         2006        2007        TTM        5-Yr Avg: 10-Yr Avg:        TTM      5-Yr     10-Yr
   UNH           4.4         3.5         3.6         2.1          4.7        4.5
   WLP           2.0         2.0         2.1         1.1           1.7          -            1.9         2.7           -
     CI          2.6         3.1         3.5         2.4           2.6         2.6           0.9         1.8          1.7
    AET          2.7         2.5         3.0         2.2           2.3          -            1.0         2.1           -
   HUM           3.6         3.0         3.4         2.0           2.9         2.1           1.1         1.7          2.1
 Peer Avg:      2.7          2.7         3.0         1.9           2.4          -            1.1         2.0           -
 S&P 500        2.8          2.9         2.7         3.9           2.9         3.3           0.5         1.6         1.3

UNH’s Historical Trend: The firms’ P/B ratio is currently less than one-half of the 5 and 10-year average. In addition, the
firm is currently traded at 10-year lows (tied with 1998). Some of this, however, can likely be explained by its larger size
and the relatively fewer growth opportunities. Recent acquisitions (particularly in 2004 and 2005) might have also
distorted this historic relationship to some degree, although the simple change in 2008 – 3.6 vs. 2.1 – seems rather
extreme.
Conclusion: Potentially (relatively) cheap

UNH vs. Peers: Historically, UNH has received a P/B multiple twice as high as the peer group average. However,
currently, the firm is trading at only 1.1 times the peer group average. Looking at the relative current dividend and
financing policies, as well as analysts expectations for future EPS growth (with the latter being a proxy for the firms’
ability to grow book value), this could indicate that UNH is potentially undervalued relative to historic relationships.
Conclusion: Potentially (relatively) cheap

UNH vs. S&P 500: In regards to P/B, the company has typically traded at a premium relative to the S&P 500 (see 5-year
and 10-year averages). In stark contrast with this is the fact that it’s current P/B multiple is only one-half of the multiple
received by the S&P 500. The only other year in the past 10 years that UNH traded at a discount relative to this broader
market index was in 1999, when its P/B multiple relative to the S&P 500’s was approximately the same as it is today.

          32
Note that valuations for the broader market were incredibly high in 1999, thanks to “irrational exuberance” (the tech
bubble).
Conclusion: Potentially (relatively) cheap

Final P/B Conclusion: Potentially (relatively) cheap
Again, either the firm is cheap relative to historic relationships and valuations; investors are reducing their growth
expectations (specifically, they’re ability to grow book value) for the firm (both relative to UNH’s historic ability to grow
book, and/or relative to its peer group and the broader market’s ability to grow book); investors expectations of the
timing of the expected future growth have changed (relative to prior expectations and/or relative to UNH’s peers and
the broader market); investors have decided to discount the firms’ future prospects at a higher rate (or discount the
future prospects of the broader market as well as the company’s peers at a lower rate relative to UNH, which seems
unlikely, given the current market turmoil); or some combination of the above.

                                                            P/S:
                                                                                            UNH      UNH      UNH
                                                                                          Premium: Premium: Premium:
               2005        2006         2007        TTM         5-Yr Avg: 10-Yr Avg:        TTM      5-Yr     10-Yr
   UNH           1.8         1.0         1.1         0.6           1.4        1.1
   WLP           0.6         0.9         0.9         0.5           0.8           -            1.2         1.7          -
     CI          0.9         0.9         0.9         0.7           0.7          0.8           0.9         1.8         1.4
    AET          1.3         1.0         1.2         0.8           1.0           -            0.8         1.3          -
   HUM           0.6         0.4         0.5         0.3           0.4          0.3           2           3.1         3.4
 Peer Avg:      0.9         0.8          0.9         0.6           0.7           -           1.0         1.8           -
 S&P 500        1.5         1.6          1.5         2.6           1.6         1.7           0.2         0.9         0.7


UNH’s Historical Trend: UNH’s P/S ratio is currently approximately one-half of its 5 and 10-year average. Only three
times in the past ten years has its P/S ratio been less than 1 (in 1998 and 1999, it was .5). Slower future revenue growth
– due to relatively larger size and fewer growth opportunities – might be the cause of this lower P/S multiple, as could
be UNH’s recent product shift towards lower-margin products. However, the change just since 2007 is rather extreme.
Conclusion: Potentially (relatively) cheap

UNH vs. Peers: Over the past 5 years, UNH has – on average – received a premium relative to its peers (1.8 times the
peer group average). Currently, however, the company is receiving the same multiple as its peers, indicating that it’s
currently relatively cheaper than it has been on average relative to that peer group. As mentioned above, some of that
could potentially be explained by growth differences, differences in discount rates, and/or differences in market
expectations as to how profitable said sales revenue would be for the various firms in the industry. Regardless, the
decline just since 2008 seems fairly extreme.
Conclusion: Potentially (relatively) cheap

UNH vs. S&P 500: Although the firm has historically sold at a discount to the S&P 500, the size of this discount is the
second largest it’s been in the past ten years – and the only time the discount was larger was back in 1999, when the
market was being valued at ridiculous levels (the P/S multiple it received in 1999 was only 21% of the multiple received
by the S&P 500 in that same year; currently, its multiple is 23% of the S&P 500’s). In addition, after receiving roughly the
same multiple the broader market over the past 5 years, the current level is surprisingly low.
Conclusion: Potentially (relatively) cheap


          33
Final P/S Conclusion: Potentially (relatively) cheap
Yet again, it appears that the firm couple potentially be undervalued relative to historic relationships and valuations.
That being said, fewer growth opportunities and a shift in the company’s product mix does likely support a relatively
lower P/S multiple (relative to the historic multiple it has received).

                                                             P/Operating CF:
                                                                                                 UNH      UNH      UNH
                                                                                               Premium: Premium: Premium:
                            2005 2006 2007 TTM                 4-Yr Avg: 10-Yr Avg:              TTM      4-Yr     10-Yr
                 UNH        18.8     11.2    12.7     7.9         14.2      12.2
                 WLP         7.7     12.5    11.6     6.3          11.4             -              1.3          1.2    -
                  CI        21.5     23.9    15.3     8.9          17.1           14.0             0.9          0.8   0.9
                 AET        15.7     15.0    16.2     11.2         15.1             -              0.7          0.9    -
                HUM         14.1      5.5     6.6     6.5          10.0           17.7             1.2          1.4   0.7
              Peer Avg: 14.8 14.2 12.4                8.2         13.4              -              1.0          1.1    -
              S&P 500       10.8 11.1 11.6 13.0                   11.3           12.4              0.6          1.3   1.0
                * A 4-year average is used here rather than a 5-year average due to distortionary 5-year data


UNH’s Historical Trend: Again, we find the firm trading well-below its 5 and 10-year average (its currently trading at
58% and 65% of these historic averages). The last time it was trading near its current levels was in 1998 and 1999, when
it traded at 7.7 and 7.9 times operating cash flow, respectively. Some of this decline might be due to worries about the
incremental year-over-year change in net working capital turning positive for the first time in the past 10 years
Conclusion: Potentially (relatively) cheap

UNH vs. Peers: Although UNH is currently trading at a slight discount relative to its peers (UNH’s ratio is currently 96%
the size of the average P/OCF multiple received by its peer group) when it has historically traded at a slight premium
(typically receives a multiple 1.06 times that received by its peers), the current relationship does not suggest that UNH is
noticeably undervalued relative to said peers.
Conclusion: Appears approximately fairly valued

UNH vs. S&P 500: Over the past 5 and 10 years – on average – UNH has traded at a multiple either above or equal to
that received by the S&P 500. However, currently, the company is trading at a notable discount (60% of the multiple
received by the aforementioned market index). Given the operating profitability of UNH’s business, this is a surprising
change.
Conclusion: Potentially (relatively) cheap




Final P/OCF Conclusion: Potentially (relatively) cheap, although not as convincing as data seen above
Although relationships indicate that UNH could be potentially undervalued, P/OCF is not as decisive & convincing as the
data seen above. However, to the extent that the entire group of health insurers seen above is currently cheap relative
to the S&P 500 – which is certainly a possibility – the evidence could be explained to some degree.



                                                                    P/FCFF:

        34
                                                                                                                      UNH      UNH
                                                                                                                    Premium: Premium:
                          2005           2006            2007           TTM            4-Yr Avg: 10-Yr Avg:           TTM      4-Yr
          UNH              21.3           12.6            14.5            9.3              15.9           14.3
          WLP              8.1            13.1            12.5            6.8              12.3            -           1.4        1.3
             CI           N/A             N/A             19.0           11.1              19.0            -           0.8        0.8
           AET             18.3           18.1            20.1           13.9              18.1            -           0.7        0.9
          HUM              19.2            6.2            8.2             8.1              13.6            -           1.1        1.2
       Peer Avg:          15.2            12.5           15.0            10.0             15.0             -           0.9       1.1
        * A 4-year average is used here rather than a 5-year average due to distortionary 5-year data



UNH’s Historical Trend: The multiple UNH is currently receiving is well-below its 4 and 10-year average. In addition, the
current TTM multiple is the lowest multiple they’ve received in the past 10 years, and its only the third time in the past
10 years that the multiple has been in the single digits (the other two times were in 1998 and 1999, when their P/FCFF
was 9.6 and 9.5, respectively). Some of this fall could have been due to newfound fear over the fact that the incremental
yoy change in net working capital turned positive for the first time in 10 years. In addition, new value-adding investment
opportunities are likely harder to find now than they have been in the past, again indicating that it will be harder for
UNH to grow FCFF at rates seen in the past. Future pressure on operating margins could also help fundamentally explain
the decline.
Conclusion: Potentially (relatively) cheap, although less convincing than what was seen above

UNH vs. Peers: UNH has typically traded at a slight premium relative to its peers. Although it is currently trading at a
slight discount relative to those same peers, this measure alone is not conclusive of the company being potentially
notably undervalued. Indeed, its peers have struggled to generate positive FCFF in the past, indicating that they could
potentially grow FCFF at a faster rate than UNH in the future.
Conclusion: Appears approximately fairly valued

Final P/FCFF Conclusion: Potentially (relatively) cheap, although not convincingly so
P/FCFF – our favorite measure – indicates that the firm could potentially be cheap relative to historical relationships and
valuations, although this metric alone is not decisive evidence of this.

                                                                     PEG Ratio:
                                                                                                                    Industry   S&P 500
                           UNH               CI           WLP              AET            HUM           Peer Avg:   Average    Average
        PEG Ratio            0.5            0.7             0.5             0.6             0.6            0.6        0.7        1.2
           PEG
         Payback
           (Yrs)             4.5            5.3             4.3             5.4             4.9            5.0        5.5        ---


UNH’s PEG Payback: Assuming the company grows earnings at the 5-year rate currently being projected by analysts
(14.8%), it would only take 4.5 years for an investor to recoup the price currently paid for $1 dollar in earnings. This is
obviously a short period of time.
Conclusion: Potentially (relatively) cheap

UNH vs. Peers: UNH’s PEG ratio is currently below the industry average, indicating that – relative to what analysts’
project their respective annual 5-year growth rates will be – UNH is cheap. In other words, you are currently paying less

        35
for the growth analysts are expecting when buying UNH than when buying one of its peers. However, the difference is
not substantial enough to say with any certitude that UNH is cheap relative to its peers simply using this measure.
Conclusion: Appears approximately fairly valued

UNH vs. S&P 500: UNH’s PEG is less than one-half of the S&P 500’s, indicating a relative bargain, assuming that analysts’
5-year growth expectations are accurate.
Conclusion: Potentially (relatively) cheap

Final PEG Conclusion: Potentially (relatively) cheap
This indicates that UNH is potentially cheap relative to analysts’ expectations for earnings growth over the next five
years and given the forward P/E ratio (within which analysts’ expectations are again imbedded) – relative to historic
relationships & the S&P 500. However, relative to its peers, UNH appears approximately fairly valued. In addition, to the
extent that analyst expectations are currently too high for UNH (both next years’ earnings expectations, and five-year
growth rate expectations), this ratio can be deceiving. Finally, note that since “earnings are the opinion of an
accountant; cash is fact”13, PEG (and other accounting figures) might be masking true ECONOMIC projections,
relationships, and valuations.

                                                                    Cash Return:
                                             UNH             CI        WLP     AET    HUM    Peer Avg:
                         Cash Return         11.36           9.49      14.77   7.24   N/A       10.5

UNH’s Cash Return: UNH’s cash return is currently 11.36%. This indicates that – for every $1 you pay for the stock – the
company is generating $.1136 annually in FCFF. This is a relatively large amount. For example, cash cows JNJ & KO only
generated $.0672 annually and $.0373 in FCFF in 2007 per dollar you’d pay for them now, respectively.
Conclusion: Potentially (relatively) cheap

UNH vs. Peers: UNH and its peers sport some of the highest cash returns in the equity world, making the entire group
appear to be a relative bargain based on this metric alone. However, even when compared to its fellow undervalued
peers, UNH still appears relatively undervalued, although less so than WLP.
Conclusion: Potentially (relatively) cheap, although less convincing as other metrics

Final Cash Return Conclusion: Potentially (relatively) cheap
UNH and its peer group are all sporting very attractive cash returns at the moment, although one must consider the
potential fundamental reasons behind this – the market could be expecting tighter margins, slowing revenue growth, or
even falling revenue in coming years - before getting too excited.



                                                              Valuation Conclusion
         In the end, we feel it’s safe to say that the market is currently valuing UNH cheaper – relative to how the
company has been valued historically, relative to how it has been valued in comparison with its peers, and relative to the
S&P 500 – than it has in the past 10 years. Fundamentally, this might be explained by newfound concerns over the
cyclicality of UNH’s revenue, earnings and cash flow; fewer value-creating growth opportunities; rising competition; and
regulatory concerns, among other things. Various non-operating difficulties – such as the options backdating scandal –

13
     As stated by Dr. Cooley in “Financial Policy” in 2007

           36
could also be weighing on the stock. Another reason is likely the stagnant stock price; growth fund managers – such as
Tom Marsico - had built up substantial positions in the past several years, and evidence suggests that many have
recently/begun to “bite the bullet” and are in the process of reducing their positions. Given the large amounts of capital
supporting these funds, this would likely weigh on the stock price tremendously. In the end, however, the collapse since
the beginning of 2008 in virtually all of the valuation metrics is certainly eye-catching. Although we expect analysts to
adjust future earnings expectations downwards in coming months - which could continue to weigh on the stock over this
period of time – current valuations seem to suggest that UNH is being fairly valued at worst. Theoretically, this would
indicate that UNH would offer average annual returns over the next 5 to 10 years of approximately 8.56% (our
calculated pessimistic WACC). To the extent that growth comes in well-above our current expectations, this would
simply offer additional upside to annual investor returns.




FCFF Analysis
All numbers in Millions, aside from Per Share values
FCFF using "The EBIT Method"

                                             2007     2008       2009       2010       2011       2012       2013        2014
Total Revenue                            $ 75,431 $ 77,808   $ 80,873   $ 84,769   $ 88,898   $ 93,273   $ 97,811   $ 102,623
Incremental Change in Revenue                     $ 2,377    $ 3,065    $ 3,896    $ 4,129    $ 4,375    $ 4,538    $ 4,812
EBIT                                     $ 7,849 $ 5,291     $ 5,863    $ 6,782    $ 7,112    $ 7,462    $ 7,825    $ 8,210
Taxes                                    $ 2,651 $ 1,665     $ 1,873    $ 2,206    $ 2,326    $ 2,453    $ 2,585    $ 2,724
EBI                                      $ 5,198 $ 3,626     $ 3,990    $ 4,576    $ 4,786    $ 5,009    $ 5,240    $ 5,486
D&A, Other Noncash Charges               $    796 $    778   $    809   $    848   $    889   $    933   $    978   $ 1,026
Fixed Capital Investment                 $ 1,133 $     779   $ 1,005    $ 1,278    $ 1,354    $ 1,435    $ 1,488    $ 1,578
Working Capital Investment               $    648 $    -     $    -     $    -     $    -     $    -     $    -     $     -
FCFF                                     $ 4,213 $ 3,625     $ 3,794    $ 4,146    $ 4,321    $ 4,507    $ 4,730    $ 4,934
PV of FCFF (WACC = 8.56%)                         $ 3,339    $ 3,219    $ 3,241    $ 3,111    $ 2,989    $ 2,890    $ 2,777
Sum of PV of FCFF:                       $ 21,565


                              Terminal Value                                       Target Price

               Value in 2014:                                    PV of 2008-2014 FCFF             $      21,565
               V 0 = (FCFF0 * (1+gL))/(WACC-gL)                  PV of Terminal Value             $      51,434
                   = ($4,934 * (1.03))/(.0856-.03)               PV of FCFF (WACC = 8.56%)        $      72,999
                   = $91,403                                     + Cash & Cash Equivalents        $       8,865
                                                                 - Long-Term Debt                 $      (9,063)
            PV of the Terminal Value:                            PV of Equity                     $      72,801
            PV of V 0 = V 0/(1.0856)^7                           Shares Outstanding                        1,361
                      = $51,434                      Target Price                        $53.49
Underlying Assumptions:
   o For “Total Revenue”, “Incremental Change in Revenue”, “EBIT”, “Taxes”, “EBI”, and “D&A, Other Non-cash
       Charges”, please see Pro Forma Section above.




         37
     o    Fixed Capital Investment14: 32.8% of total revenue. In 2007, incremental fixed capital investment was 29.13% of
          sales; the three-year average was 22.62% of sales; the five-year average was 24.7% of sales; and the six-year
          average was 28.22% of sales. However, we felt these numbers were artificially low due to a single outlier – in
          2006, incremental fixed capital investment was only 5.36% of sales, which was the result of a large acquisition
          that took place at the end of 2005 (thus, the revenues generated from that acquisition were not reflected in
          2005 sales figures, while the cash outflows occurred in 2005). Taking out the aforementioned outlier, the
          average for 2007, 2005, 2004, 2003, and 2002 was 32.8%, which is the figure we used.
     o    Working Capital Investment15: 0 effect. Historically, the incremental change in NWC has been largely negative.
          For example, between 2002 and 2006, the incremental change in NWC divided by the incremental change in
          revenue averaged -15% annually. In addition, the change was never positive during this period of time.
          However, in 2007, a year-over-year decline in “Accounts Payable and Accrued Liabilities” caused this ratio to
          turn positive for the first time in recent history. To the extent that they have met their limits in terms of their
          ability to delay their payments, then this could indicate that it will be more difficult to keep incremental working
          capital investment declining year-over-year, which would have negative repercussions for FCFF. However, it is
          difficult to say whether this is a one-year “snapshot” blip16, or if this is something more serious. To be cautious,
          we simply had working capital investment having no effect on FCFF; again, recall that working capital investment
          has historically added to FCFF, indicating the conservative nature with which our FCFF estimates were
          calculated.
     o    Discount Rate: 8.69%. In actuality, we calculated the discount rate three times, using different inputs each time.
          Given that we have explicitly tried to be as conservative as possible, we would continue that trend here. Thus,
          for our baseline case shown below, we present our most conservative discount rate17:
               o Cost of Equity = 9.55%
                         Risk-Free Rate: We use average yield on the 10-year Treasury seen over the past 20 years, which
                            was 6.19%. This is approximately 1% above the typical “2% expected inflation, 3% real rate”
                            average forecast, although approximately 1% below the 40-year average. Thus, it can be seen as
                            fairly reasonable.
                         Beta: According to Bloomberg, UNH’s beta is .56. Morningstar had .52. We went with the higher
                            of the two.
                         Equity Premium: Although the equity premium has only averaged 3.5% over the past 40 years,
                            and only 4.79% since 1928, we used 6% - which is half-way between the typical 5%-7%
                            boundary.
               o Weight of Equity = 80%
                         Although the weight of equity in the current capital structure is approximately 83.8%, we
                            believe UNH will continue to increase the amount of L-T debt it has in its capital structure,
                            ultimately targeting a weight of equity of 80%.
               o Cost of Debt = 5.24%
                         YTM: UNH’s credit rating has historically been a BBB+. Over the past 20 years, BBB+ rated
                            corporate bonds have yielded approximately 2.04% above Treasuries. Given that we used 6.19%
                            as the risk-free rate when calculating the cost of equity – to be consistent – we put that 2%
                            premium on top of 6.19% to get 8.23% for the nominal cost of debt.
                         Marginal Tax Rate: As discussed above, we used a marginal tax rate of 36.29%.
               o Weight of Debt = 20%

14
   Fixed capital investment consisted of “Cash Paid for Acquisitions, net of cash assumed and other Effects” plus “Purchases of Property, Equipment and Capitalized
Software” minus “Proceeds from Disposal of Property, Equipment and Capitalized Software”. The resulting number was then divided by the incremental change in
revenue
15
   Net working capital investment consists of “Accounts Receivable”, “Other Current Assets”, “Medical Costs Payable”, “Accounts Payable & Accrued Liabilities”. The
incremental net change in this was then divided by the incremental change in total revenue
16
   Due to the fact that a balance sheet is just a snapshot of the company, it could just be due to a distortionary look
17
   “Most conservative” here indicates that this was the highest discount rate we came up with
          38
                            As discussed above, we expect the weight of L-T debt to make up approximately 20% of the
                             capital structure in the future.



 Other Valuations18
"Additional Risk Premium - Cost of Equity" Model

                                         2007     2008           2009       2010       2011       2012       2013           2014
Total Revenue                        $ 75,431 $ 77,808       $ 80,873   $ 84,769   $ 88,898   $ 93,273   $ 97,811      $ 102,623
Incremental Change in Revenue                 $ 2,377        $ 3,065    $ 3,897    $ 4,129    $ 4,375    $ 4,538       $ 4,812
EBIT                                 $ 7,849 $ 5,291         $ 5,863    $ 6,782    $ 7,112    $ 7,462    $ 7,825       $ 8,210
Taxes                                $ 2,651 $ 1,665         $ 1,873    $ 2,206    $ 2,326    $ 2,453    $ 2,585       $ 2,724
EBI                                  $ 5,198 $ 3,626         $ 3,990    $ 4,575    $ 4,786    $ 5,009    $ 5,240       $ 5,485
D&A, Other Noncash Charges           $    796 $    778       $    809   $    848   $    889   $    933   $    978      $ 1,026
Fixed Capital Investment             $ 1,133 $     779       $ 1,005    $ 1,278    $ 1,354    $ 1,435    $ 1,488       $ 1,578
Working Capital Investment           $    648 $    -         $    -     $    -     $    -     $    -     $    -        $     -
FCFF                                 $ 4,213 $ 3,624         $ 3,794    $ 4,145    $ 4,321    $ 4,507    $ 4,730       $ 4,934
PV of FCFF (WACC = 8.16%)                     $ 3,351        $ 3,243    $ 3,276    $ 3,157    $ 3,045    $ 2,954       $ 2,849
Sum of PV of FCFF:                   $ 21,876
                                  Terminal Value:                                    Target Price
                     Value in 2014:                                       PV of 2008-2014 FCFF           $ 21,876
                     V 0 = (FCFF0 * (1+gL))/(WACC-gL)                     PV of Terminal Value           $ 56,871
                         = ($4934 * (1.03))/(.0816-.03)                   PV of FCFF (WACC = 8.16%)      $   78,747
                         = $98,489                                        + Cash & Cash Equivalents      $    8,865
                                                                          - Long-Term Debt               $   (9,063)
                     PV of the Terminal Value:                            PV of Equity                   $   78,549
                     PV of V 0 = V 0 /(1.0816)^7                          Shares Outstanding                  1,361
                               = $56,871                                  Target Price                   $ 57.71


 Inputs Aside From Discount Rate: The inputs are all the same as before, aside from the discount rate used.

 Discount Rate: For our discount rate, we began with an expectation that the risk-free rate would be 5%, rather than the
 6.19% we used elsewhere. Putting the average spread yielding on BBB+ debt above Treasuries over the past 20 years
 (2.04%) on top of this risk-free rate estimate of 5% gave us an expected nominal cost of debt of 7.04%. We then
 multiplied this nominal cost of debt by the expected weight of debt in the capital structure (20%). Then, to calculate the
 cost of equity, we used 5% as the risk-free rate, a beta of .56, and a market premium of 5.5%. Then we added an
 additional risk premium of 1% to account for the higher, non-volatility-related risk we feel the firm carries due to the
 high degree of potential government intervention in their markets. This gave us a cost of equity of 9.08%. When
 multiplied by the expected weight of equity in the capital structure (80%), and then added to the product of the nominal
 cost of debt times the expected weight of debt in the capital structure, we got a discount rate of 8.16%.

 18
      For yet two more valuations, please see the appendix

            39
                              "Nominal Cost of Debt + Risk Premium" Model:

                                          Current YTM on 10-Year UNH Bond: 5.7%
                                          Additional Risk Premium: 3%
                                          Discount Rate = 8.7%

    "Nominal Cost of Debt + Risk Premium" Model:

                                          2007     2008         2009       2010       2011       2012       2013        2014
    Total Revenue                     $ 75,431 $ 77,808     $ 80,873   $ 84,769   $ 88,898   $ 93,273   $ 97,811   $ 102,623
    Incremental Change in Revenue              $ 2,377      $ 3,065    $ 3,897    $ 4,129    $ 4,375    $ 4,538    $ 4,812
    EBIT                              $ 7,849 $ 5,291       $ 5,863    $ 6,782    $ 7,112    $ 7,462    $ 7,825    $ 8,210
    Taxes                             $ 2,651 $ 1,665       $ 1,873    $ 2,206    $ 2,326    $ 2,453    $ 2,585    $ 2,724
    EBI                               $ 5,198 $ 3,626       $ 3,990    $ 4,575    $ 4,786    $ 5,009    $ 5,240    $ 5,485
    D&A, Other Noncash Charges        $    796 $    778     $    809   $    848   $    889   $    933   $    978   $ 1,026
    Fixed Capital Investment          $ 1,133 $     779     $ 1,005    $ 1,278    $ 1,354    $ 1,435    $ 1,488    $ 1,578
    Working Capital Investment        $    648 $    -       $    -     $    -     $    -     $    -     $    -     $     -
    FCFF                              $ 4,213 $ 3,624       $ 3,794    $ 4,145    $ 4,321    $ 4,507    $ 4,730    $ 4,934
    PV of FCFF (WACC = 8.7%)                   $ 3,334      $ 3,211    $ 3,227    $ 3,095    $ 2,970    $ 2,867    $ 2,751
    Sum of PV of FCFF:                $ 21,457

                                Terminal Value:                                    Target Price

                    Value in 2014:                                 PV of 2008-2014 FCFF             $       21,457
                    V 0 = (FCFF0 * (1+gL))/(WACC-gL)               PV of Terminal Value             $       49,723
                        = ($4934 * (1.03))/(.087-.03)              PV of FCFF (WACC = 8.7%)         $       71,180
                        = $89,158                                  + Cash & Cash Equivalents        $        8,865
                                                                   - Long-Term Debt                 $       (9,063)
                    PV of the Terminal Value:                      PV of Equity                     $       70,982
                    PV of V 0 = V 0 /(1.087)^7                     Shares Outstanding                         1,361
                              = $49,723                            Target Price                           $52.15


What’s the same as the Other Valuations: All the inputs aside from the discount rate.

The Discount Rate: Here, we took the current YTM on a 10-year UNH bond, and added a 3% risk premium to it. The fact that
the YTM is a current market rate should take into account such factors as the risk of default that also affect the cost of equity,
making this a reasonable starting point. The 3% risk premium primarily reflects the regulatory environment in the industry.




      Three Stage H-Model
              40
                                    WACC = 8.69%
                                    Cost of Equity = 6.19% + .56(6%) = 9.55%
                                    Expected Targeted Weight of Equity = 80%
                                    Cost of Debt = (6.19% + 2.04%)*(1-.3629) = 5.24%
                                    Expected Targeted Weight of Debt = 20%

                                    Assumptions:
                                    FCFF2007 = $4,213,238,396
                                    GS (3 years) = 4%
                                    Linear Decline (4 years) = 4% to 3%
                                    GL = 3%
                                    WACC = 8.69%


                  "Short-Run" FCFF:
                                                              2008           2009            2010
                  FCFF:                          $ 4,381,767,932 $ 4,557,038,649 $ 4,739,320,195
                  PV of FCFF (WACC = 8.69%):     $ 4,031,436,132 $ 3,857,478,680 $ 3,691,027,534
                  Sum of PV of FCFF:             $ 11,579,942,346



                  Terminal Value:
                  Terminal Value = (FCFF2010 *2*(.04-.03)+(FCFF2010 *1.03))/(.0869-.03)
                                 = $87,456,699,554
                  PV of Terminal Value:          $ 68,112,107,398



                  Target Price:
                  PV of "Short-Run" FCFF:        $    11,579,942,346
                  PV of Terminal Value:          $    68,112,107,398
                  PV of Future FCFF:             $    79,692,049,744
                    + Cash & Cash Equivalents:   $     8,865,000,000
                    - Long-Term Debt:            $    (9,063,000,000)
                  PV of Equity:                  $    79,494,049,744
                  Shares Outstanding:                  1,361,000,000
                  Target Price:                   $        58.41




Assumptions: We used the same assumptions using the 3-stage H-model as we did before. Thus, for more of the assumptions,
see above.

Model Form: As another form of valuation, we used the 3-stage H-model.

             41
   o    First Stage: The first stage – which takes place over a three-year period – encompasses annual FCFF growth of 4%. In
        regards to the growth rate of FCFF, this rate is well-below both the three-year as well as the five-year average annual
        FCFF growth rates of 9.77% and 20.09%, respectively. We view this as appropriate, given the aforementioned
        regulatory, industry-specific, and cyclical macro uncertainty. Note that we have FCFF growth below 5%, which is the
        often-used assumption regarding nominal U.S. GDP growth; we do this to remain conservative, given the uncertainty
        regarding the firms’ premium pricing power in the face of potential regulatory headwinds. In regards to the timing, we
        had the short-run growth rate occur for only three years because of UNH’s large size, and the potential lack of
        profitable future investment opportunities.
   o    Second Stage: We assume that growth declines linearly over a period of four years from the expected short-run FCFF
        growth rate of 4% down to the expected long-run FCFF growth rate of 3%. We view the timing as appropriate, because
        – beginning in approximately 2013 – the rate of increase in people retiring from the labor force begins accelerating.
        Although this shouldn’t impact UNH as much as other firms – given their exposure to Medicare – the uncertainty
        regarding just exactly how this will affect UNH drives us to be cautious and assume that it will negatively impact UNH’s
        bottom line.
   o    Third Stage: We assume a final growth rate in FCFF of 3%. We view this as conservatively appropriate, given the
        uncertainty surrounding just how population aging will affect the firms’ profitability. The size of the firm relative to the
        size of the industry, and the aforementioned uncertainties surrounding the regulatory and industry-specific outlook
        also are reasons for the low growth rate.

Calculation: As seen above, we discounted back to the present time – using WACC - the expected future FCFF generated by
the firm between 2008-2010. We then added to this present value the present value of the terminal value, which we
discounted back from 2010. After subtracting L-T debt and adding cash and cash equivalents, we divided this present value
amount by the diluted number of shares outstanding, which left us with a target price of $58.41. This represents 70% upside
from the closing price on 3/31/08.


                                                       NPV of Investment:
       Assumptions:
          o SMF purchases $30,000 in UNH stock
          o Given the recent fall in UNH’s stock price, and given the uncertainty surrounding the company’s cyclical outlook,
             we assume it takes until 2011 for the stock to gain momentum again. At that point in time, its price converges
             on “true underlying economic value.”
                 o For “true underlying economic value,” we use the target price of $53.42 – which, by the way, was the
                     lowest estimate resulting from any FCFF-based valuation - from our “FCFF Spreadsheet Model.” This
                     represents 55.47% upside from the closing price on 3/31/08.
          o After converging on “true underlying economic value” in 2011, we assume its stock price rises at a rate of 9.55%
             a year (9.55% equals the cost of the firms’ equity) for the next two years.
          o SMF sells UNH in 2013.

       NPV = $4,755.95



       Risks, Summary, and Recommendation
       Risks:
                42
  o   If UNH fails to effectively estimate and manage health care costs, profitability could be affected.
  o   If UNH fails to comply with or fail to respond quickly and appropriately to frequent changes in federal and state
      regulations, their business model could be materially affected.
  o   A reduction or less than expected increase in Medicare and Medicaid program funding and/or UNH’s failure to
      retain and acquire Medicare, Medicaid and State Medicaid Children’s Health Insurance Programs (SCHIP)
      enrollees could adversely affect their revenues, earnings, and cash flows.
  o   UNH’s relationship with AARP is important to them, and the loss of such relationship could have an adverse
      effect on their business.
  o   Because of the nature of their business, UNH is routinely subject to various litigation actions, which, if resolved
      unfavorably to UNH, could result in substantial monetary damages. Any failure by UNH to manage acquisitions
      and other significant transactions successfully could harm their financial results, business and prospects.

Summary:

                                       Buy 900 Shares (1/2 Position)
      o    The firm has a distinct competitive advantage over the rest of the industry – it is the 800 pound gorilla. This
           allows them an advantage in keeping medical costs low, and allows them to effectively amortize fixed costs.
      o    It’s down 44% in the past quarter – it’s unlikely that the economic value of the firm has changed that much.
      o    Although its tops-down outlook isn’t as positive as it could be, the company is a FCFF-generating machine.
           Despite using incredibly conservative inputs, valuations all indicate significant upside potential. In addition,
           if FCFF just remains constant, UNH’s economic value exceeds all of our valuations.

                                              Target Price: $53.49


      o    T




Income Statement
      43
                                                   2007       2006       2005       2004       2003
In Millions of U.S. Dollars                     12/31/07   12/31/06   12/31/05   12/31/04   12/31/03
(except for per share items)

Revenue                                          74,287     70,671     45,920     37,804     28,566
Other Revenue, Total                              1,144        871        505        413        257
Total Revenue                                    75,431     71,542     46,425     38,217     28,823

Cost of Revenue, Total                           56,203     53,907     33,758     27,912     20,714
Sell/General/Admin. Expenses,Total                    --         --         --         --     4,875
Depreciation/Amortization                           796        670        453        374        299
Other Operat Expse, Total                        10,583      9,981      7,134      6,073          --
Total Operating Expense                          67,582     64,558     41,345     34,359     25,888

Operating Income                                  7,849      6,984      5,080      3,858      2,935

Interest Income (Exp), Net Non-Operating           (544)      (456)      (241)      (128)       (95)
Net Income Before Taxes                           7,305      6,528      4,839      3,730      2,840

Provision for Income Taxes                        2,651      2,369      1,756      1,319      1,015
Net Income After Taxes                            4,654      4,159      3,083      2,411      1,825

Net Income Before Extra. Items                    4,654      4,159      3,083      2,411      1,825

Net Income                                        4,654      4,159      3,083      2,411      1,825

Income Available to Common Excl. Extra. Items     4,654      4,159      3,083      2,411      1,825
Income Available to Common Incl. Extra. Items     4,654      4,159      3,083      2,411      1,825

Basic/Primary Weighted Average Shares             1,312      1,344      1,265      1,252      1,178
Basic/Primary EPS Excl. Extra. Items              3.547      3.094      2.437      1.926      1.549
Basic/Primary EPS Incl. Extra. Items              3.547      3.094      2.437      1.926      1.549
Dilution Adjustment                                   --        0.0         --         --        0.0
Diluted Weighted Average Shares                   1,361      1,402      1,333      1,316      1,234
Diluted EPS Excl. Extra. Items                    3.420      2.966      2.313      1.832      1.479
Diluted EPS Incl. Extra. Items                    3.420      2.966      2.313      1.832      1.479

DPS - Common Stock Primary Issue                   0.03       0.03       0.02       0.02       0.01
Gross Dividend - Common Stock                        40         41         19         18          9

Stock Based Compensation                              --         --         0          0        122
Pro Forma Net Income                                  --         --     3,083      2,411      1,703
Pro Forma Basic EPS                                   --         --     2.440      1.930      1.445
Pro Forma Diluted EPS                                 --         --     2.310      1.830      1.380

Interest Expense, Supplemental                      544        456        241        128         95
Depreciation, Supplemental                          604        489        359        312        281




          44
Normalized Income Before Tax                 7,305      6,528      4,839      3,730     2,840
Inc Tax Ex Impact of Sp Items                2,651      2,369      1,756      1,319     1,015
Normalized Income After Tax                  4,654      4,159      3,083      2,411     1,825
Normalized Inc Avail to Common               4,654      4,159      3,083      2,411     1,825
Basic Normalized EPS                         3.547      3.094      2.437      1.926     1.549
Diluted Normalized EPS                       3.420      2.966      2.313      1.832     1.479




Statement of Cash Flows
                                             2007       2006       2005       2004       2003
In Millions of U.S. Dollars               12/31/07   12/31/06   12/31/05   12/31/04   12/31/03
(except for per share items)

Net Income                                  4,654      4,159      3,083      2,411      1,825
Depreciation/Depletion                        796        670        453        374        299
Deferred Taxes                               (127)      (267)      (171)      (232)        91
Non-Cash Items                                505        404        306        244          --
Cash Taxes Pd, Supplemental                 2,277      1,729      1,377        898        783
Cash Interest Pd, Suppl                       553        409        219        100         94
Accounts Receivable                          (580)      (411)       (86)        30        (46)
Other Assets                                  149        597        196        282        276
Payable/Accrued                               457      1,284        602        692        547
Changes in Working Capital                     49      1,560        412      1,126        788
Total Cash from Operations                  5,877      6,526      4,083      3,923      3,003

Capital Expenditures                         (871)      (728)      (509)      (356)      (352)
Acquisition of Business                      (262)      (670)    (2,562)    (2,225)      (590)
Sale of Fixed Assets                            0         52          0          6          --
Sale/Maturity of Investment                 3,365      4,096      5,821      4,121      2,780
Purchase of Investments                    (6,379)    (4,851)    (5,876)    (3,190)    (2,583)
Other Investing Cash Flow                       0          0       (363)         0          0
Other Investment Cash Flow Items, Total    (3,276)    (1,373)    (2,980)    (1,288)      (393)
Total Cash from Investing                  (4,147)    (2,101)    (3,489)    (1,644)      (745)

Financing Cash Flow Items                    (827)     1,886        333        287          4
Total Cash Dividends Paid                     (40)       (41)       (19)       (18)        (9)
Sale/Issuance of Common                       712        397        423        583          --
Repurchase/Retirement Common               (6,599)    (2,345)    (2,557)    (3,446)    (1,607)
Common Stock, Net                          (5,887)    (1,948)    (2,134)    (2,863)    (1,607)
Options Exercised                               --         --         --         --       268
Issuance (Retirement) of Stock, Net        (5,887)    (1,948)    (2,134)    (2,863)    (1,339)
Short Term Debt, Net                          947     (2,332)     2,556        194       (382)
Long Term Debt Issued                       3,582      3,000        500      2,000        950
Long Term Debt Reduction                     (960)       (91)      (400)      (150)      (350)

          45
Long Term Debt, Net                                   2,622         2,909         100       1,850        600
Iss (Retirmnt) of Debt, Net                           3,569          577         2,656      2,044        218
Total Cash From Financing                           (3,185)          474          836        (550)    (1,126)

Net Change in Cash                                  (1,455)         4,899        1,430      1,729      1,132
Net Cash - Begin Balance/Rsvd for Future Use         10,320         5,421        3,991      2,262      1,130
Net Cash - End Balance/Rsrv for Future Use            8,865       10,320         5,421      3,991      2,262




Balance Sheet

                                                  2007           2006          2005         2004        2003
In Millions of U.S. Dollars                    12/31/07       12/31/06      12/31/05     12/31/04    12/31/03
(except for per share items)

Cash & Equivalents                               8,865         10,320         5,421        3,991       2,262
Short Term Investments                             754            620           590          514         486
Cash and Short Term Investments                  9,619         10,940         6,011        4,505       2,748
Trade Accounts Receivable, Gross                     --         1,443         1,315        1,007         833
Provision for Doubtful Accounts                      --          (120)         (108)        (101)        (88)
Total Receivables, Net                           1,574          1,323         1,207          906         745
Deferred Income Tax                                386            561           650          353         269
Other Current Assets                             3,965          3,220         2,679        2,477       2,358
Other Curr. Assets, Total                        4,351          3,781         3,329        2,830       2,627
Total Current Assets                            15,544         16,044        10,547        8,241       6,120
Property/Plant/Equipment – Gross                 3,699          3,109         2,613        1,799       1,570
Accumulated Depreciation                        (1,578)        (1,215)         (966)        (660)       (538)
Property/Plant/Equipment - Net                   2,121          1,894         1,647        1,139       1,032
Goodwill, Net                                   16,854         16,822        16,238        9,470       3,509
Intangibles, Gross                               2,290          2,277         2,212        1,308         223
Accum. Intangible Amort.                          (553)          (373)         (192)        (103)        (43)
Intangibles, Net                                 1,737          1,904         2,020        1,205         180
Long Term Investments                           12,667          9,642         8,971        7,748       6,729
Other Long Term Assets                           1,976          2,014         1,865           76          64
Total Assets                                    50,899         48,320        41,288       27,879      17,634

Payable/Accrued                                  3,654          3,713         3,285        2,107       1,575
Notes Payable/Short Term Debt                    1,946          1,483         3,261          673         229
Customer Advances                                1,354          1,268         1,000        1,076         695
Other Payables                                   8,331          8,076         7,262        5,540       4,152
Other Current Liabilities                        3,207          3,957         1,845        1,933       2,117
Other Current Liabilities, Total                12,892         13,301        10,107        8,549       6,964
Total Current Liabilities                       18,492         18,497        16,653       11,329       8,768
Total Long Term Debt                             9,063          5,973         3,834        3,350       1,750
          46
Total Debt                                 11,009    7,456    7,095    4,023    1,979
Deferred Income Tax                         1,432    1,190    1,225     814        --
Pension Benefits - Underfunded              1,849    1,850    1,761    1,669    1,517
Other LT Liabilities                           --       --       --       --     471
Other Liabilities, Total                    1,849    1,850    1,761    1,669    1,988
Total Liabilities                          30,836   27,510   23,473   17,162   12,506

Common Stock                                  13       13       14       13        6
Additional Paid-In Capital                  1,023    6,406    7,510    3,088      58
Retained Earnings (Accumulated Deficit)    18,929   14,376   10,258    7,484    4,915
Unrealized Gain (Loss)                        98       15       33      132      149
Total Equity                               20,063   20,810   17,815   10,717    5,128
Total Liabilities & Shareholders’ Equity   50,899   48,320   41,288   27,879   17,634
Total Common Shares Outstanding             1,253    1,345    1,358    1,286    1,166




          47
Appendix
   48
Company’s Performance Outlook:
2008 Outlook:
    o   Revenue: $82.5 Billion - $83 Billion
            o Medical Cost Ratio: 80.5% +/- 50 bps
            o Operating Cost Ratio: 13.6% +/- bps
            o Diluted Weighted-Average Shares: 1.25 Billion – 1.28 Billion
    o   Operating Income: $8.5 Billion - $8.7 Billion
            o Operating Margins: 10.2% - 10.5%
    o   Earnings Per Share: $3.95-$4.00
    o   FCFF: $5.8 Billion - $6 Billion

3-5 Year Outlook:
    o   Organic Revenue Growth = Upper Single-Digits.
            o In comparison, we anticipated organic revenue growth below 5% over the entire projection horizon.
    o   Operating Margins = Double-Digits (although they'll "ebb and flow" over time dependent on business mix).
            o We projected operating margins of 6.8% in 2008, 7.25% in 2009, and 8% thereafter.
    o   ROE = > 25%.
    o   EPS Growth = 13%-16% annually.
            o Looking from 2007 forward, we were merely expecting annual EPS growth of 3.5% - and even with these
                meager expectations, UNH still appeared to be a buy.



Two Additional Valuations:
I.- Very Conservative Valuation
All inputs remain the same as discussed in the original “EBIT Method” except for the following:
- Changing premium price increases to only 5% post-2009
- Putting risk-based-enrollment declines at 5% a year (instead of approximately 4.25%-4.5%) post-2009
- Putting non-risk-based-enrollment growth to about 3% a year (instead of 3.75% a year) post-2009
- Using a discount rate of 9.45% (Ke = 9.55%, We = .80, Kd = 5.24%, Wd = .20). Note that the after-tax cost of debt used
here is almost equal to the firms' current before-tax cost of debt on a 10-year UNH bond.
Target Price: $46.46


II.- Most Conservative Valuation
Same basic inputs as used discussed directly above, except that we add an addition 1% risk premium to the firms' WACC,
bringing the WACC up to 10.45%.
Target Price: $40.15




        49

				
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