Universal American Corp. Reports 2016 Third Quarter Results

WHITE PLAINS, N.Y.–(BUSINESS WIRE)–Universal American Corp. (NYSE:UAM) today announced financial results
for the quarter ended September 30, 2016.

Recent Developments

  • In June 2016, Universal American issued $115 million principal amount
    of convertible notes and used the proceeds, together with cash on
    hand, to repurchase approximately 20.2 million shares of our common
    stock for an aggregate purchase price of approximately $138 million,
    or an average price of $6.85 per share;
  • In August 2016, Universal American completed the sales of its Total
    Care Medicaid and Traditional Insurance businesses, generating cash
    proceeds of approximately $80 million;
  • In September 2016, Universal American entered into an agreement to
    fully resolve the litigation arising from the APS Healthcare
    acquisition in 2012 by acquiring all of the 6,272,104 shares of common
    stock held by the defendants for an aggregate payment of $13.0
    million. The result of this settlement and the June 2016 share
    repurchase was a 31% reduction in common shares outstanding; and
  • In October 2016, Universal American was notified that its flagship
    TexanPlus® HMO plan improved to a 4.5 Star Quality rating.

Results of Third Quarter 2016

Universal American’s reported net income for the third quarter of 2016
was $50.9 million, or $0.83 per share. Adjusted pre-tax loss was $0.8
million and adjusted net loss was $2.9 million, or $0.05 per
share, for the third quarter of 2016, which excludes the following
after-tax items:

  • $5.6 million, or $0.09 per share, of losses associated with our
    Management Services Organization (MSO) segment, which includes our
    Accountable Care Organization (ACO) business;
  • $0.1 million, or less than $0.01 per share, of net realized investment
    losses;
  • $0.7 million, or $0.01 per share, of non-cash interest on our
    Convertible Notes;
  • $0.3 million, or less than $0.01 per share, of tax expense;
  • $59.6 million or $0.97 per share of income from discontinued
    operations, including our Traditional Insurance and Total Care
    Medicaid businesses, which were sold in August 2016, and the APS
    Healthcare businesses, which were sold in 2015; and
  • $0.9 million or $0.01 per share, of legal and consulting costs related
    to the sold businesses that were reclassified to discontinued
    operations.

Total revenues for the third quarter of 2016 were approximately $343
million.

Results of Nine Months ended September 30, 2016

Universal American’s reported net income for the nine months ended
September 30, 2016 was $73.9 million, or $0.97 per share. Adjusted
pre-tax income was $25.3 million and adjusted net income was $9.4
million, or $0.12 per share, for the nine months ended September
30, 2016, which excludes the following after-tax items:

  • $2.7 million, or $0.04 per share, of income associated with our
    Management Services Organization (MSO) segment, which includes our
    Accountable Care Organization (ACO) business;
  • $1.5 million, or $0.02 per share, of net realized investment gains;
  • $0.7 million, or $0.01 per share, of non-cash interest on our
    Convertible Notes;
  • $0.3 million, or less than $0.01 per share, of tax benefits;
  • $62.7 million, or $0.83 per share, of income from discontinued
    operations, including our Traditional Insurance and Total Care
    Medicaid businesses, which were sold in August 2016, and the APS
    Healthcare businesses, which were sold in 2015; and
  • $2.0 million or $0.03 per share, of legal and consulting costs
    relating to corporate development activities.

Total revenues for the first nine months of 2016 were approximately $1.0
billion.

Management Comments

Richard A. Barasch, Chairman and CEO, commented, “Universal American has
had a positive and productive third quarter and year to date. We sold
the remaining businesses that didn’t fit with our core strengths,
settled the APS Healthcare litigation and reduced our outstanding share
count by 31%. After this activity, including the large stock buybacks,
we ended the quarter with more than $100 million of available cash at
the parent. Further, our business has become significantly less complex,
which will allow us to meaningfully lower our corporate expenses in 2017.

Our core strength and the foundation of our strategy is partnering with
primary care physicians to improve health outcomes while reducing costs
in the Medicare population. Over the past 15 years, we have built a
platform that combines efficient use of data and care management
protocols with the critical work of establishing trust with our
physician partners. We now have over 350,000 Medicare beneficiaries on
this platform in Medicare Advantage, Medicare Shared Savings ACOs and
Next Generation ACOs.

“We are building on our successful 15-year history of working closely
with our physician partners in the Houston/Beaumont region to improve
quality and reduce cost for Medicare beneficiaries. This was again
validated by the recent award of 4.5 Stars for this plan.

“In partnership with many of our most experienced Houston doctors, we
were awarded a Next Generation ACO which began in January 2016. This
added approximately 13,600 full-risk Medicare beneficiaries to the
65,600 Medicare beneficiaries we are already serving in our Southeast
Texas Medicare Advantage business. We are pleased to report positive
current year results from this program.

“In the Northeast, especially upstate New York, we are in the process of
converting a fee-for-service market into a more value-based system by
introducing pay for performance to primary care physicians. We note that
the Northeast has improved from a $21.2 million pre-tax loss in 2015 to
an approximately $13.5 million pre-tax gain year to date.

“The results from the 2015 program year in our MSSP ACO business showed
significant improvement. Ten of our ACOs achieved shared savings in the
amount of $39.8 million, a 48% increase over PY2014. The net revenue to
UAM is $28.6 million, a 37% increase over PY2014. For the 2016 program
year, we have reduced the number of active MSSP ACOs, reduced our
operating expenses and have moved our most successful ACOs to 2-sided
risk with higher gain sharing. We are encouraged by the progress in cost
and quality shown by our physician partners and by the positive
regulatory changes in the MSSP program.”

2016 Membership (as of September 30, 2016)

  • Medicare Advantage:

    • 68,800 members in Texas
    • 45,600 members in upstate New York and Maine
  • Management Services Organization:

    • 13,600 Medicare beneficiaries in our Next Generation ACO in
      Houston, Texas
    • 59,700 Medicare beneficiaries in 6 ACOs that have selected Track 2
      (2-sided risk) in the Medicare Shared Savings Program (MSSP)
    • 163,500 Medicare beneficiaries in 16 ACOs that have selected Track
      1 (1-sided risk) in the MSSP
    • Approximately 3,200 physicians and 1,800 associated clinical
      professionals

Medicare Advantage

       

 

Three Months Ended

September 30, 2016

Nine Months Ended

September 30, 2016

Financial Performance ($ in millions)

   
 
Premiums(1) $ 340.6 $ 1,029.2
Net investment income & other income 2.3   7.3  
Revenue 342.9 1,036.5
 
Quality initiatives 6.0 1.7 % 17.3 1.7 %
Medical benefits 285.0   83.7 % 850.9   82.7 %
Total benefits 291.0 85.4 % 868.2 84.4 %
 
Admin expenses 38.8 11.4 % 104.3 10.1 %
ACA Fee 5.5   16.3  
 
Segment income before income taxes $ 7.6   $ 47.7  
 
Reported Recast** Reported Recast**
Texas HMOs Medical Benefit Ratio* 84.5 % 83.3 % 82.8 % 83.4 %
Upstate New York/Maine Medical Benefit Ratio 82.8 % 82.2 % 83.1 % 83.1 %
 

(1)  Effective January 1, 2016, we changed the way in which we
estimate changes in risk-adjusted premiums receivable from CMS,
which resulted in the accelerated recognition of additional
current year premium revenue of $7.7 million and $26.5 million for
the three months and nine months ended September 30, 2016,
respectively. See our Form 10-Q for the period ending September
30, 2016 for additional discussion.

* Excluding quality initiatives.
** Recast excludes the impact of prior period items.
 

Medicare Advantage pre-tax income for the three month period ended
September 30, 2016 was $7.6 million, including $2.1 million net
unfavorable prior period items. Medicare Advantage pre-tax income for
the nine month period ended September 30, 2016 was $47.7 million,
including $7.9 million net favorable prior period items. Our
administrative expense ratio was 11.4% for third quarter 2016 and 10.1%
for the nine months ended September 30, 2016.

Texan Plus®, recently designated a 4.5-Star plan, is the largest
Medicare HMO in Southeast Texas. Texan Plus® now has 65,500 members and
has achieved 9% compounded membership growth over the past four years.
Virtually all of our members in this plan are in value-based payment
arrangements. For the third quarter of 2016, the reported Medical
Benefit Ratio (MBR) in our Texas HMOs was 84.5%. Excluding negative
prior period items, the MBR was 83.3% for the third quarter. For the
nine months ended September 30, 2016, the reported MBR in our Texas HMOs
was 82.8% and 83.4% excluding prior period items.

Our Northeast markets experienced a 52% increase in membership since
2014 year-end and now have 45,600 members with a large concentration in
upstate New York. For the third quarter of 2016, the reported MBR in our
Northeast markets was 82.8%. Excluding positive prior period items, the
MBR was 82.2% for the third quarter. For the nine months ended September
30, 2016, the reported MBR in our Northeast markets was 83.1% and 83.1%
excluding prior period items.

Medicare Advantage 2016 Stars

The enrollment-weighted Star rating for Universal American’s Medicare
Advantage membership increased from 3.96 to 4.12 Stars reflecting the
quality of care delivered to our enrolled Medicare beneficiaries.
Approximately 70% of our members are currently enrolled in plans awarded
4 Stars or higher. A summary of these ratings is presented below:

             
2016 Universal American Medicare Advantage Plans
        Contract   Plan Name   Location  

September
2016
Members

 

2016 Star
Rating

 

2017 Star
Rating

H4506   Texan Plus HMO   Southeast Texas   65,600   4.0   4.5
H2775   Today’s Options PPO   Northeast   13,600   4.0   4.0
H0174   Today’s Options on Texas HMO   Southeast Texas   300   4.0   4.0
H2816   Today’s Options Network PFFS   Northeast   31,900   4.0   3.5
H5656   Texan Plus HMO   North Texas (Dallas)   3,000   3.0   3.0
         

The company’s flagship TexanPlus® HMO plan, serving Medicare
beneficiaries in Houston-Beaumont, Texas for more than 15 years and
representing 57% of current membership, has improved to a 4.5 Star
Quality Rating. Our PPO in the Northeast, Todays Options, maintained its
4 Star Quality Rating and our Network Private-Fee-For-Service plan in
the Northeast was reduced from 4 Stars to 3.5 Stars.

Management Services Organization (MSO)

       

Financial Performance ($ in millions)

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

2016

 

2015

2016

 

2015

Shared Savings Revenue:
Gross Shared Savings $ 0.1 $ $ 41.1 $ 26.9
ACO Partner Share   (0.2 )       (10.6 )   (6.0 )
Net Shared Savings Revenue (0.1 ) 30.5 20.9
Operating expenses   8.5     9.3     26.4     30.3  
Segment (loss) income before income taxes $ (8.6 ) $ (9.3 ) $ 4.1   $ (9.4 )
 

The MSO segment includes our ACO business, in which we collaborate with
primary care physicians and other healthcare professionals to operate
ACOs under the Medicare Shared Savings Program (MSSP) and the Next
Generation ACO model. At September 30, 2016, we had 22 MSSP ACOs and one
Next Generation ACO (in Houston, Texas) with approximately 236,800
assigned Medicare fee-for-service beneficiaries.

On July 29, 2016, the Centers for Medicare & Medicaid Services (CMS)
informed us that our Medicare Shared Savings Program (MSSP) ACOs
generated $97 million in gross savings for program year 2015. This
compared to $80 million in gross savings for program year 2014. Ten of
our ACO’s qualified for shared savings payments in program year 2015,
compared to nine in program year 2014, and received gross shared savings
payments of $39.8 million, compared to $26.9 million in program year
2014. Our share of these payments, after payments to our physician
partners increased to $28.6 million from $20.9 million in the prior
year, and is reflected in equity in earnings of unconsolidated
subsidiaries in our consolidated statements of operations. We received
these payments during the third quarter of 2016. Quality scores improved
for all of our ACOs with start dates prior to 2015, indicating an
improvement in healthcare management resulting from enhanced physician
engagement.

The 10 ACOs that qualified for shared savings payments for program year
2015 met quality standards and savings thresholds established by
Medicare. In addition to the 10 ACOs that will receive shared savings,
eight other ACOs achieved savings but did not exceed the minimum savings
threshold in order to qualify for a shared savings payment. Together
these 18 ACOs generated $97 million in total savings for the Medicare
program.

Effective January 1, 2016, in partnership with a high-performing group
of our Houston physicians, our Houston-based ACO was selected by CMS to
become a Next Generation ACO, a value-based payment model that
encourages providers to assume greater risk and reward in coordinating
the healthcare of Medicare Fee-For-Service (FFS) beneficiaries. The Next
Generation ACO adds approximately 13,600 beneficiaries in a full-risk
program that allows us to use many of the same techniques, including
creating preferred networks and negotiating discounts that have worked
well for our Medicare Advantage plan in Houston.

Our MSO segment generated pre-tax income of $4.1 million for the nine
month period ended September 30, 2016 compared to a loss of $9.4 million
in the same period of 2015. Operating expenses for the quarter were $8.5
million compared to $9.3 million for the quarter ended September 30,
2015.

Corporate & Other

       
Three Months Ended

September 30,

 

Nine Months Ended

September 30,

Financial Performance ($ in millions)

2016

 

2015

2016

 

2015

 
Revenue $ 0.8   $ 3.4   $ 1.4   $ 6.9  
 
Segment loss before income taxes $ (8.1 ) $ (7.4 ) $ (26.5 ) $ (29.3 )
 

Our Corporate & Other segment reflects the activities of our parent
holding company, debt service and other ancillary operations including
support services provided to the buyers of the APS Healthcare
businesses, Total Care Medicaid and Traditional business through
Transition Services Agreements.

Dividends on our Preferred Stock were $0.8 million and $2.4 million for
the three and nine month periods ending September 30, 2016,
respectively. Interest expense on our Convertible Notes was $2.2 million
and $2.3 million, respectively, for the three and nine month periods
ending September 30, 2016, including $1.0 million and $1.1 million,
respectively, of non-cash interest expense.

Discontinued Operations

Discontinued Operations includes our Traditional Insurance and Total
Care Medicaid businesses, which were sold in August 2016, and the APS
businesses, which were sold in 2015.

The following table presents the components comprising the income (loss)
from discontinued operations before income taxes:

       

Financial Performance ($ in millions)

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

2016

 

2015

2016

 

2015

Total Care Medicaid:
Operating results $ 0.2 $ 0.5 $ (4.1 ) $ (0.9 )
Gain on Sale 20.4 20.4    
Total Medicaid 20.6 0.5 16.3   (0.9 )
 
Traditional Insurance:
Operating results $ 0.1 $ 1.8 $ 11.4 $ 7.4
Realized gains 0.2 0.1
Amortization of HFS reserve (2.2 )
Gain on Sale 2.8 2.8    
Total Traditional 2.9 1.8 12.2   7.5  
 
APS Healthcare:        
Total APS Healthcare (1) $ 33.5 $ 1.2 $ 39.5   $ (21.7 )
 
Income (loss) before income taxes $ 57.0 $ 3.5 $ 68.0   $ (15.1 )
 
(1)   2016 amounts include earn-out revenues and litigation settlement,
while 2015 amounts include initial gain (loss) on sale of APS
Healthcare.
 

Share Count Reduction

Over the past five months, Universal American retired more than 26
million common shares, reflecting a 31% reduction in its outstanding
share count through the following transactions:

  • Share Repurchase: On June 27, 2016, Universal American used the net
    proceeds from the offering of $115 million of Convertible Notes,
    together with cash on hand, to repurchase: (i) 18.1 million shares of
    Universal American common stock from existing large shareholders and
    (ii) 2.1 million shares of its common stock in connection with the
    offering, for an average price of $6.85.
  • APS Litigation Settlement: On September 9, 2016, Universal American
    entered into a Settlement Agreement to fully resolve the litigation
    arising from the Company’s acquisition of APS Healthcare in 2012.
    Pursuant to the Settlement Agreement, we acquired all of the 6.3
    million shares of common stock held by the defendants for an aggregate
    payment of $13.0 million. In addition, we received $1.6 million that
    was held in an escrow account relating to the acquisition. Certain
    defendants received $0.75 million that was held in such escrow account.

As of September 30, 2016, there were 58.8 million common shares
outstanding.

Investment Portfolio

As of September 30, 2016, Universal American had $494.8 million of cash
and invested assets as follows:

  • 67% is invested in U.S. Government and agency securities, primarily
    due to cash equivalents from the early receipt of our October 2016 CMS
    payment;
  • The average credit quality of the investment portfolio is AA; and
  • Less than 1% of the investment portfolio is non-investment grade.

A complete listing of our fixed income investment portfolio as of
September 30, 2016 is available for review in the financial supplement
located in the Investors – Financial Reports section of our website, www.UniversalAmerican.com.

Balance Sheet and Liquidity

As of September 30, 2016, Universal American’s Balance Sheet had the
following characteristics:

  • Unregulated cash and investments of $119.6 million;
  • Total cash and investments were $494.8 million and total assets were
    $915.2 million, including $238.2 million in assets of discontinued
    operations;
  • Total policyholder liabilities were $82.9 million and total
    liabilities were $623.7 million, including $236.1 million in
    liabilities of discontinued operations;
  • Stockholders’ equity was $291.5 million and book value was $4.96 per
    diluted common share;
  • Tangible book value per diluted common share (excluding accumulated
    other comprehensive income, goodwill and amortizing intangibles) was
    $3.70;
  • $115 million of convertible senior notes with a carrying value of
    $95.4 million which bear cash interest of 4.0% per annum and an annual
    effective interest rate of 8.5%; and
  • $40.0 million of mandatorily redeemable preferred stock, reported as a
    liability, with an annual dividend rate of 8.5%, which will mature in
    May 2017.

As of September 30, 2016, the ratio of debt to total capital, excluding
the effect of AOCI and including Universal American’s mandatorily
redeemable preferred stock as debt, was 36.6%.

Conference Call

Universal American will host a conference call at 8:30 a.m. Eastern Time
on Tuesday, November 8, 2016 to discuss financial results. Interested
parties may participate in the call by dialing (661) 378-9883. Please
call in 10 minutes before the scheduled time and mention conference ID:
11918476. This conference call will also be available live over the
Internet and can be accessed at Universal American’s website at www.UniversalAmerican.com,
and clicking on the “Investors” link in the upper right. To listen to
the live call on the website, please go to the website at least 15
minutes early to download and install any necessary audio software. A
replay of the call will be available on the investor relations section
of the Company’s website for approximately two weeks following the call.

Prior to the conference call, Universal American will make available on
its website a Third Quarter 2016 Investor Presentation and supplemental
financial data in connection with its quarterly earnings release. You
can access the Third Quarter 2016 Investor Presentation and supplemental
financial data at www.UniversalAmerican.com
in the “Investors” section under the “Presentations” and “Financial
Reports” sections.

About Universal American Corp.

Universal American (NYSE: UAM), through our family of healthcare
companies, provides health benefits to people covered by Medicare. We
are dedicated to working collaboratively with healthcare professionals,
especially primary care physicians, in order to improve the health and
well-being of those we serve and reduce healthcare costs. For more
information on Universal American, please visit our website at www.UniversalAmerican.com.

* * *

Forward Looking Statements

This news release and oral statements made from time to time by our
executive officers may contain “forward-looking” statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995, known
as the PSLRA. Such statements that are not historical facts are hereby
identified as forward-looking statements and intended to be covered by
the safe harbor provisions of the PSLRA and can be identified by the use
of the words “believe,” “expect,” “predict,” “project,” “potential,”
“estimate,” “anticipate,” “should,” “intend,” “may,” “will,” and similar
expressions or variations of such words, or by discussion of future
financial results and events, strategy or risks and uncertainties,
trends and conditions in our business and competitive strengths, all of
which involve risks and uncertainties.

Where, in any forward-looking statement, we or our management expresses
an expectation or belief as to future results or actions, there can be
no assurance that the statement of expectation or belief will result or
be achieved or accomplished. Our actual results may differ materially
from our expectations, plans or projections. We warn you that
forward-looking statements are only predictions and estimates, which are
inherently subject to risks, trends and uncertainties, many of which are
beyond our ability to control or predict with accuracy and some of which
we might not even anticipate. We give no assurance that we will achieve
our expectations and we do not assume responsibility for the accuracy
and completeness of the forward-looking statements. Future events and
actual results, financial and otherwise, may differ materially from the
results discussed in the forward-looking statements as a result of many
factors, including the risk factors described in the risk factor section
of our SEC reports.

A summary of the information set forth in the “Risk Factors” section of
our SEC reports and other risks includes, but is not limited to the
following: the impact of the Centers for Medicare and Medicaid Services’
(“CMS”) final Medicare Advantage reimbursement rates for calendar year
2017 could have a material adverse effect on Universal American’s MA
business; we are subject to extensive government regulation and the
potential that CMS and/or other regulators could impose significant
fines, penalties or operating restrictions on Universal American,
including with respect to False Claims Act matters or Risk Adjustment
Data Validation (“RADV”) audits; the results of the 2016 presidential
election, the Affordable Care Act and subsequent rules promulgated by
CMS could have a material adverse effect on our opportunities for growth
and our financial results; we are investing significant capital and
management attention in new and unproven business opportunities,
including our Accountable Care Organizations (“ACOs”), where we will
begin to take two-sided risk in 2016, that may not be profitable; we may
experience higher than expected medical loss ratios or lower revenues,
especially with our new members in our Northeast markets, which could
materially adversely affect our results of operations; If we are unable
to develop and maintain satisfactory relationships with the providers of
care to our members and ACO beneficiaries, our business and overall
profitability could be materially adversely affected; if we fail to
design and price our products properly and competitively or if the
premiums and fees we charge are insufficient to cover the cost of health
care services delivered to our members, our profitability may be
materially adversely affected; our significant shareholders may have
interests that are different than other shareholders and may sell or
distribute their stock which could cause the price of our stock to
decline; changes in governmental regulation or legislative reform could
increase our costs of doing business and adversely affect our
profitability; reductions in funding for Medicare programs could
materially reduce our profitability; failure to reduce our operating and
corporate costs could have a material adverse effect on our financial
position, results of operations and cash flows; we may not be able to
maintain or improve our CMS Star ratings which may cause certain of our
plans to receive less bonuses or rebates than our competitors; changes
in governmental regulation or legislative reform, including the impact
of Sequestration, could reduce our revenues, increase our costs of doing
business and adversely affect our profitability; a substantial portion
of our revenues are tied to our Medicare businesses and regulated by CMS
and if our government contracts are not renewed or are terminated, our
business could be substantially impaired; any failure by us to manage
our operations or to successfully complete or integrate acquisitions,
dispositions and other significant transactions could harm our financial
results, business and prospects; we could be subject to a cyber-attack
or similar network breach that could damage our reputation and have a
material adverse effect.

Contacts

Universal American Corp.
Adam C. Thackery, (914) 597-2939
Chief
Financial Officer
or
Investor Relations Counsel:
The
Equity Group Inc.
www.theequitygroup.com
Fred
Buonocore, (212) 836-9607
Kevin Towle, (212) 836-9620

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