United Healthcare 2002 Annual Report Download - page 46

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UnitedHealth Group
We reflect adjustments to medical costs payable estimates in the operating results of the period in
which we identify the changes in estimates. Each period, our operating results reflect revisions in estimates
related to all prior periods, based on actual claims processed and paid. Management believes the amount
of medical costs payable is reasonable and adequate to cover the company’s liability for unpaid claims as of
December 31, 2002; however, actual claim payments may differ from established estimates.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents are highly liquid investments with an original maturity of three months or less.
The fair value of cash and cash equivalents approximates their carrying value because of the short
maturity of the instruments. Investments with a maturity of less than one year are classified as short-term.
We may sell investments classified as long-term before their maturity to fund working capital or for other
purposes. Because of regulatory requirements, certain investments are included in long-term invest-
ments regardless of their maturity date. We classify these investments as held to maturity and report them
at amortized cost. All other investments are classified as available for sale and reported at fair value based
on quoted market prices.
We exclude unrealized gains and losses on investments available for sale from earnings and report it as a
separate component of shareholders’ equity, net of income tax effects. We continually monitor the difference
between the cost and estimated fair value of our investments. If any of our investments experiences a decline
in value that is determined to be other than temporary, based on analysis of relevant factors, we record a
realized loss in Investment and Other Income in our Consolidated Statement of Operations. To calculate
realized gains and losses on the sale of investments, we use the specific cost of each investment sold.
ASSETS UNDER MANAGEMENT
We administer certain aspects of AARP’s insurance program (see Note 4). Pursuant to our agreement,
AARP assets are managed separately from our general investment portfolio and are used to pay costs
associated with the AARP program. These assets are invested at our discretion, within investment guidelines
approved by AARP. At December 31, 2002, the assets were invested in marketable debt securities. We do not
guarantee any rates of investment return on these investments and, upon transfer of the AARP contract to
another entity, we would transfer cash equal in amount to the fair value of these investments at the date of
transfer to that entity. Because the purpose of these assets is to fund the medical costs payable, the rate stabi-
lization fund liabilities and other related liabilities associated with the AARP contract, assets under
management are classified as current assets, consistent with the classification of these liabilities. Interest
earnings and realized investment gains and losses on these assets accrue to AARP policyholders through the
rate stabilization fund. As such, they are not included in our earnings. Interest income and realized gains
and losses related to assets under management are recorded as an increase to the AARP rate stabilization
fund and were $102 million and $113 million in 2002 and 2001, respectively. Assets under management are
reported at their fair market value, and unrealized gains and losses are included directly in the rate stabilization
fund associated with the AARP program. As of December 31, 2002 and 2001, the AARP investment portfolio
and rate stabilization fund included net unrealized gains of $117 million and $56 million, respectively.
PROPERTY, EQUIPMENT AND CAPITALIZED SOFTWARE
Property, equipment and capitalized software is stated at cost, net of accumulated depreciation and
amortization. Capitalized software consists of certain costs incurred in the development of internal-use
software, including external direct costs of materials and services and payroll costs of employees devoted
to specific software development.