Universal American reports net loss of $101.8 million for fourth quarter 2013

Universal American Corp. (NYSE:UAM) today announced financial results for the quarter and year ended December 31, 2013.

Fourth Quarter 2013

Universal American's reported net loss for the fourth quarter of 2013 was $101.8 million, or $1.16 per share. Adjusted net loss for the fourth quarter of 2013 was $4.1 million, or $0.05 per share, which excludes the following after-tax items:

• $0.4 million, or $0.01 per share, of net realized investment gains;
• $2.0 million, or $0.02 per share, of non-recurring tax expense;
• $8.6 million, or $0.10 per share, of costs associated with our Accountable Care Organization (ACO) business; and
• $87.5 million, or $1.00 per share, of non-cash asset impairment charges relating to APS Healthcare.

Total revenues for the fourth quarter of 2013 were approximately $539.2 million.

Full Year 2013

Universal American's reported net loss for the full year 2013 was $192.3 million, or $2.20 per share. Adjusted net income for the full year 2013 was $4.7 million, or $0.05 per share, which excludes the following after-tax items:

• $9.0 million, or $0.10 per share, of net realized investment gains;
• $1.2 million, or $0.01 per share, of non-recurring tax expense;
• $26.7 million, or $0.30 per share, of ACO costs; and
• $178.1 million, or $2.04 per share, of non-cash asset impairment charges relating to APS Healthcare.

Total revenues for full year 2013 were approximately $2.2 billion.

Management Comments

Richard A. Barasch, Chairman and CEO commented, "2013 was a difficult year for Universal American. Along with weaker than expected operating results, the APS Healthcare acquisition has been extremely disappointing.

"Nevertheless, there were several positive developments during the year. After some early issues, the medical benefit ratios in our core markets came back into line. We saw membership growth in our core markets, powered by a 13% increase in membership in our flagship Southeast Texas market. Most notably for the future, our Star ratings improved significantly, resulting in approximately 75% of our core membership being served by plans with 4 Stars.

"Our biggest challenge in Medicare Advantage, and the subject of intense focus, is our administrative expense ratio. As we reduce our footprint to participate only in markets in which we can impact medical costs and improve quality, we must also reduce our administrative cost structure.

"We remain optimistic that our investment in the ACO program will begin to show results in 2014.

"Our capital position remains strong. Even after the payment of the $1.60 per share special dividend in August, we have $5.72 per share of tangible capital as of the year end and $200 million of excess capital."

For the full year 2013, our reported Medicare Advantage medical benefit ratio ("MBR") was 83.4%, which included positive prior year items of $23.3 million, pre-tax. Excluding these prior year items, the adjusted MBR was 84.5% for 2013.

Our core markets had an adjusted MBR of 83.3%. The adjusted MBR in the non-core markets was 85.8%. The rural markets, which include approximately 10,700 members whose plans have not been renewed in 2014, had an adjusted MBR of 90.9%.

The administrative expense ratio for the full year 2013 was 14.5% compared to 15.1% in 2012.

Our reported Medicare Advantage MBR for the fourth quarter of 2013 was 80.8%, which included positive prior period items of $9.2 million, pre-tax. Excluding these prior period items, the adjusted MBR was 83.1% for the fourth quarter of 2013.

For the fourth quarter, our adjusted MBR was 83.4% in our core markets, 80.1% in our non-core markets and 85.3% in the rural markets.

The administrative expense ratio for the fourth quarter 2013 was 17.4% compared to 18.6% in 2012.

Revenue and Operating Income in our Traditional segment declined in both the three month and full year periods ended December 31, 2013 due to the continued run-off of our legacy insurance products, which we stopped marketing and selling after June 1, 2012. In the fourth quarter of 2013, we recorded approximately $3.0 million of non-cash reserves on certain of our long duration products.

Our Corporate & Other segment includes the results of APS Healthcare, the Total Care Medicaid plan since its acquisition on December 1, 2013, ongoing expenses related to the development of our ACOs, and the operations of our parent holding company, including debt service.

Our Corporate & Other segment operating loss for the year ended December 31, 2013 increased year-over-year primarily due to the $189.4 million asset impairment charge relating to APS Healthcare, as well as increases in ACO and business development costs, and weaker results of our APS Healthcare business.

Our Corporate & Other segment operating loss for the three months ended December 31, 2013 increased year-over-year primarily due to a $97.7 million asset impairment charge relating to APS Healthcare, as well as an increase in ACO and business development costs.

Investment Portfolio

As of December 31, 2013, Universal American had $1.0 billion of cash and invested assets as follows:

• 25% is invested in U.S. Government and agency securities;
• The average credit quality of the fixed income portfolio is AA - and
• Approximately 1% of the portfolio is non-investment grade.

A complete listing of our fixed income investment portfolio as of December 31, 2013 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 December 31, 2013, Universal American's Balance Sheet had the following characteristics:

• Total cash and investments were $1.0 billion and total assets were $2.1 billion;
• Total policyholder liabilities were $1.2 billion and total liabilities were $1.4 billion;
• Stockholders' equity was $664.9 million and book value was $7.48 per diluted common share;
• Tangible book value per diluted common share (excluding accumulated other comprehensive income, goodwill, amortizing intangibles and deferred acquisition costs) was $5.72;
• Unregulated cash and investments of $96.2 million;
• $103.4 million of bank debt; and
• $40 million of mandatorily redeemable preferred stock, reported as a liability, with an annual dividend rate of 8.5%.

The ratio of debt to total capital, excluding the effect of Accumulated Other Comprehensive Income and including Universal American's mandatorily redeemable preferred stock as debt was 17.9%.