Universal American Corp. Reports 2016 Second Quarter Results

WHITE PLAINS, N.Y.–(BUSINESS WIRE)–Universal American Corp. (NYSE:UAM) today announced financial results
for the quarter ended June 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 $6.84 per share;
  • On August 1, 2016, Universal American completed its
    previously-announced sale of its Total Care Medicaid business; and
  • On August 3, 2016, Universal American completed its
    previously-announced sale of its Traditional Insurance business.

Results of Second Quarter 2016

Universal American’s reported net income for the second quarter of 2016
was $22.8 million, or $0.27 per share. Adjusted net income for the
second quarter of 2016 was $5.0 million, or $0.06 per share,
which excludes the following after-tax items:

  • $13.7 million, or $0.17 per share, of income associated with our
    Management Services Organization (MSO) segment, which includes our
    Accountable Care Organization (ACO) business;
  • $1.1 million, or $0.01 per share of net realized investment gains;
  • $0.4 million, or less than $0.01 per share, of tax benefits;
  • $4.4 million, or $0.05 per share of income from discontinued
    operations, including our Traditional Insurance and Total Care
    Medicaid businesses, which are treated as held for sale, and the APS
    Healthcare businesses, which were sold in 2015; and
  • $1.8 million, or $0.02 per share of legal and consulting costs related
    to corporate development activities.

Total revenues for the second quarter of 2016 were approximately $346
million.

Results of Six Months ended June 30, 2016

Universal American’s reported net income for the six months ended June
30, 2016 was $23.0 million, or $0.28 per share. Adjusted net income for
the six months ended June 30, 2016 was $12.3 million, or $0.15 per
share, which excludes the following after-tax items:

  • $8.2 million, or $0.10 per share, of income associated with our
    Management Services Organization (MSO) segment, which includes our
    Accountable Care Organization (ACO) business;
  • $1.6 million, or $0.02 per share, of net realized investment gains;
  • $0.6 million, or less than $0.01 per share, of tax benefits;
  • $3.1 million, or $0.04 per share of income from discontinued
    operations, including our Traditional Insurance and Total Care
    Medicaid businesses, which are treated as held for sale, and the APS
    Healthcare businesses, which were sold in 2015; and
  • $2.8 million, or $0.03 per share, of legal and consulting costs
    related to corporate development activities.

Total revenues for the first half of 2016 were approximately $695
million.

Management Comments

Richard A. Barasch, Chairman and CEO, commented, “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.

“Our Medicare Advantage business is now concentrated in regions where we
have a meaningful market position, strong relationships with primary
care physicians and the ability to positively impact the quality and
cost of healthcare.

“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. Our second quarter
2016 results demonstrate the ongoing strength of this business.

“In partnership with many of our most experienced Houston doctors, we
were awarded a Next Generation ACO beginning in January 2016. This adds
approximately 14,000 full-risk Medicare beneficiaries to the 65,500
Medicare beneficiaries we are already serving in our Southeast Texas MA
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 are
encouraged that the Northeast, even factoring out prior period items,
has returned to profitability.

“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.

“With the completed sales of our Traditional Insurance and Medicaid
businesses, we have replenished our cash position after the buyback of
two large blocks of UAM stock and can now concentrate fully on our
Medicare Advantage and Medicare ACO businesses.”

2016 Membership (as of June 30, 2016)

  • Medicare Advantage:

    • 68,600 members in Texas
    • 45,300 members in upstate New York and Maine
  • Management Services Organization:

    • 14,000 Medicare beneficiaries in our Next Generation ACO in
      Houston, Texas
    • 60,100 Medicare beneficiaries in 6 ACOs that have selected Track 2
      (2-sided risk) in the Medicare Shared Savings Program (MSSP)
    • 165,000 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

June 30, 2016

      Six Months Ended

June 30, 2016

Financial Performance ($ in millions)

           
   
Premiums(1) $ 342.4 $ 688.5
Net investment income & other income 2.3 5.1
Revenue 344.7 693.6
 
Quality initiatives 5.6 1.6% 11.2 1.6%
Medical benefits 282.9 82.7% 566.0 82.2%
Total benefits 288.5 84.3% 577.2 83.8%
 
Admin expenses 32.9 9.6% 65.6 9.5%
ACA Fee 5.4 10.8
 
Pre-Tax operating income $ 17.9 $ 40.0
 
Reported Recast** Reported Recast**
Texas HMOs Medical Benefit Ratio* 81.6% 82.1% 81.9% 82.9%
Upstate New York/Maine Medical Benefit Ratio** 84.8% 86.3% 83.2% 84.8%

(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 $9.1 million and $18.8 million for the three months and six months
ended June 30, 2016, respectively. See our Form 10-Q for the period
ending June 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 June
30, 2016 was $17.9 million, including $4.2 million of net favorable
prior period items. Medicare Advantage pre-tax operating income during
the first half of 2016 was $40.0 million, including $11.2 million of net
favorable prior period items. Our administrative expense ratio was 9.6%
for second quarter 2016 and 9.5% for the six months ended June 30, 2016.

Texan Plus®, a 4-Star plan, is the largest Medicare HMO in Southeast
Texas. Texan Plus® now has 65,300 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 second
quarter of 2016, the reported Medical Benefit Ratio (MBR) in our Texas
HMOs was 81.6%. Excluding positive prior period items, the MBR was 82.1%
for the second quarter. For the six months ended June 30, 2016, the
reported MBR in our Texas HMOs was 81.9% and 82.9% excluding prior
period items.

Our Northeast markets experienced a 52% increase in membership since
2014 year-end and now have 45,300 members with a large concentration in
upstate New York. For the second quarter of 2016, the reported MBR in
our Northeast markets was 84.8%. Excluding positive prior period items,
the MBR was 86.3% for the second quarter. For the six months ended June
30, 2016, the reported MBR in our Northeast markets was 83.2% and 84.8%
excluding prior period items.

Management Services Organization (MSO)

Financial Performance ($ in millions)

Three Months Ended

June 30,

Six Months Ended

June 30,

2016

 

2015

 

2016

 

2015

Shared Savings Revenue:
Gross Shared Savings $ 41.0 $ 26.9 $ 41.0 $ 26.9
ACO Partner Share   (11.2)   (6.0)   (10.5)   (6.0)
Net Shared Savings Revenue 29.8 20.9 30.5 20.9
Operating expenses   8.7   9.3   17.8   21.0
Segment income (loss) before income taxes $ 21.1 $ 11.6 $ 12.7 $ (0.1)
 

The MSO segment includes our ACO business, which collaborates with
primary care physicians and other healthcare professionals to operate
ACOs under the Medicare Shared Savings Program (MSSP) and the Next
Generation ACO model in Houston, Texas. At June 30, 2016, we had 22 MSSP
ACOs and one Next Generation ACO with approximately 239,100 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
compares 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 will receive 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 expect to
receive these payments during the third quarter of 2016.

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 14,000 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. Based on information
from CMS, we reported positive current year results from this program.

Our MSO segment generated pre-tax income of $21.1 million for the
quarter ended June 30, 2016 compared to $11.6 million in the same period
of 2015. Operating expenses for the quarter were $8.7 million compared
to $9.3 million for the quarter ended June 30, 2015, reflecting fewer
active ACOs.

Corporate & Other

  Three Months Ended

June 30,

 

Six Months Ended

June 30,

Financial Performance ($ in millions)   2016   2015

2016

  2015
       
Revenue $ 0.4 $ 2.6 $ 0.6 $ 3.5
 
Pre-tax operating loss $ (9.5) $ (11.4) $ (18.3) $ (22.0)
 

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
through Transition Services Agreements which ended in 2015.

Corporate expenses for the three and six months ended June 30, 2016
included $2.3 million and $4.3 million of legal and consulting costs
related to corporate development activities. Dividends on our Preferred
Stock were $0.8 million and $1.6 million for the three and six month
periods ending June 30, 2016, respectively.

Convertible Senior Notes Offering

On June 27, 2016, the Company completed a private offering of $115
million principal amount of Convertible Senior Notes due 2021. The notes
are unsecured, senior obligations of Universal American bearing interest
at 4.00% per annum, payable in cash semi-annually in arrears, beginning
on December 15, 2016. The notes are convertible, subject to certain
conditions, into cash, shares of Universal American’s common stock or a
combination of cash and shares of Universal American’s common stock, at
Universal American’s option. The initial conversion rate per $1,000
principal amount of notes is equivalent to 105.8890 shares of common
stock, which is equivalent to a conversion price of approximately $9.44
per share, subject to adjustment in certain circumstances. After
accounting for the equity component of the notes, the carrying value on
the Balance Sheet at June 30, 2016 was $90.3 million.

Universal American used the net proceeds from the offering of the notes,
together with cash on hand, to repurchase: (i) 18.1 million shares of
Universal American common stock from existing large shareholders at a
purchase price of $6.80 per share, for an aggregate purchase price of
approximately $123 million, and (ii) 2.1 million shares of its common
stock in connection with the offering for an aggregate purchase price of
approximately $15.1 million.

As of June 30, 2016, there were 65.1 million common shares outstanding.

Divestitures

Total Care Medicaid Plan – On August 1, 2016, the Company
completed the sale of the Total Care health plan to Molina Healthcare,
Inc. The purchase price paid was approximately $38 million which is
subject to post-closing balance sheet adjustments.

Traditional Insurance – On August 3, 2016, the Company completed
the sale of its Traditional Insurance business to Nassau Reinsurance
Group. The purchase price paid was approximately $30.5 million which is
subject to post-closing price adjustments.

Discontinued Operations

Discontinued Operations includes our Traditional Insurance and Total
Care Medicaid businesses, which are treated as held for sale, 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

June 30,

  Six Months Ended

June 30,

2016

 

2015

2016

 

2015

Total Care Medicaid:
Operating results $ (2.3) $ (1.6) $ (4.3) $ (1.4)
 
Traditional Insurance:
Operating results $ 6.5 $ 4.3 $ 9.2 $ 5.6
Realized gains 0.1 0.2 0.1
Fair value adjustment   2.1      
Total Traditional   8.6   4.4   9.3   5.7
 
APS Healthcare:
Operating results $ (1.1) $ (8.5) $ (1.7) $ (4.2)
Gain (loss) on Sale 6.5 (18.3) 7.7 (18.7)
Total APS Healthcare   5.4   (26.8)   6.0   (22.9)
 
Segment income (loss) before income taxes $ 11.7 $ (24.0) $ 11.1 $ (18.6)
 

Investment Portfolio

As of June 30, 2016, Universal American had $290.1 million of cash and
invested assets as follows:

  • 21% is invested in U.S. Government and agency securities;
  • The average credit quality of the investment portfolio is A+; and
  • Less than 1% of the investment portfolio is non-investment grade.

A complete listing of our fixed income investment portfolio as of June
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 June 30, 2016, Universal American’s Balance Sheet had the
following characteristics:

  • Unregulated cash and investments of $29.8 million, or $98.3 million
    Proforma for the two recently completed divestitures;
  • Total cash and investments were $290.1 million and total assets were
    $1.7 billion, including $1.2 billion in assets of discontinued
    operations;
  • Total policyholder liabilities were $83.0 million and total
    liabilities were $1.5 billion, including $1.1 billion in liabilities
    of discontinued operations;
  • Stockholders’ equity was $287.8 million and book value was $4.41 per
    diluted common share;
  • Tangible book value per diluted common share (excluding accumulated
    other comprehensive income, goodwill, amortizing intangibles and
    deferred acquisition costs) was $3.14;
  • $115 million of convertible senior notes with a carrying value of
    $90.3 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%.

As of June 30, 2016, the ratio of debt to total capital, excluding the
effect of accumulated other comprehensive income and including Universal
American’s mandatorily redeemable preferred stock and convertible note
principal balances as debt, was 37.6%.

Conference Call

Universal American will host a conference call at 8:30 a.m. Eastern Time
on Thursday, August 4, 2016 to discuss financial results and other
corporate developments. 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: 56394348. 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 2nd Quarter 2016 Investor Presentation and
supplemental financial data in connection with its quarterly earnings
release. You can access the 2nd 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

The Equity Group Inc.
Adam C. Thackery, 914-597-2939
Chief
Financial Officer
or
Investor Relations Counsel:
The
Equity Group Inc.
Fred Buonocore, 212-836-9607
or
Linda
Latman, 212-836-9609
www.theequitygroup.com

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