under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(1)2010 includes capital and surplus for Pennsylvania Life Insurance Company which was transferred to CVS Caremark in April 2011 in connection with the Medicare Part D sale. At the time of the transfer on April 29, 2011, Pennsylvania Life had capital and surplus of $231.4 million of which $184.4 million was included in the amount distributed to Universal American shareholders in connection with the sale.
The following discussion and analysis presents a review of our financial condition as of December 31, 2014 and our results of operations for the years ended December 31, 2014, 2013 and 2012. As used in this report, except as otherwise indicated, references to the "Company," "Universal American," "we," "our," and "us" are to Universal American Corp., a Delaware corporation and its subsidiaries.
You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the consolidated financial statements and related consolidated footnotes included in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from management's expectations. Factors that could cause such differences include those set forth under Part I, Item 1A - Risk Factors.
Universal American, through our family of healthcare companies, provides health benefits to people covered by Medicare and/or Medicaid. Our core strength is our ability to partner with providers, especially primary care physicians, to improve health outcomes while reducing cost in the Medicare population. We currently are focused on three main businesses:
We have developed a successful primary care physician alignment strategy that we have branded as The Healthy Collaboration®. We work in collaboration with healthcare providers, especially primary care physicians, to help them assume and manage risk, in order to achieve measurably better quality and lower cost. Below are the key elements of the strategy:
• We engage the people we serve to help them make informed choices about their healthcare.
In 2014, we made a strategic decision to offer Medicare Advantage plans in markets where we can positively impact the cost and quality of healthcare through collaboration with providers. Accordingly, we reduced our footprint for 2015 and now offer plans in only three states (Texas, New York and Maine). In the Houston/Beaumont region, we currently maintain the leading market position with strong brand awareness, committed and aligned physician groups, and positive network presence. In upstate New York, we are in the process of converting this historically fee for service market into a more value-based system by introducing pay for performance to the primary care physicians in the region. We now have a complementary collection of businesses centered in upstate NY where we serve nearly 35,000 Medicare Advantage members, 17,000 FFS beneficiaries through our ACO, and 40,000 Medicaid lives through our Total Care plan. With these three programs, we are now the largest sponsor of government programs in central New York.
• Our HMO plans are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. We built this coordinated care product around contracted networks of providers who, in cooperation with the health plan, coordinate an active medical management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members for specified products.
• In connection with the HMOs, we operate separate Medicare Advantage Management Service Organizations that manage that business and affiliated Independent Physician Associations or IPAs. We participate in the net results derived from these affiliated IPAs.
Medicare Advantage-Northeast: Universal American's second largest market is upstate New York, primarily the ten counties that are considered part of the Syracuse market. Universal American markets its Medicare Advantage products using the Todays Options® brand. Enrollment in this market is generally supported by independent agents.
The products provided in our Northeast market include PPO and network PFFS plans.
• Our PPO plans are provided under the name "Today's Options® PPO." They are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. This coordinated care product is built around contracted networks of providers who, in cooperation with the health plan, coordinate an active medical management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members for specified products.
The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the ACA, established Medicare Shared Savings ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare Fee-for-Service, or FFS, program, which covers the majority of Medicare recipients. CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for FFS beneficiaries and reduce unnecessary costs. Eligible providers, hospitals, and suppliers may participate in the MSSP by creating or participating in an ACO.
The MSSP will reward ACOs that lower their health care costs while surpassing a minimum savings rate and meeting quality of care performance standards. Cost savings below the benchmark provided by CMS will be shared at least 50% with the ACOs. The minimum savings rate set by CMS varies depending on the number of patients assigned to the ACO, starting at 3.9% for ACOs with patients totaling 5,000 and grading to 2.0% for ACOs with patients totaling 10,000 or more.
CMS assigns a beneficiary to the preliminary roster of an ACO if the ACO physicians billed for a "plurality" of services during the calendar year preceding the performance period. A plurality means the ACO physicians provided a greater proportion of primary care services, measured in terms of allowed charges, than the physicians in any other ACO or Medicare-enrolled tax-identification number. CMS sets the benchmark for each ACO using the historical medical costs of the beneficiaries assigned to an ACO. At the end of the ACO performance period, CMS applies the same plurality definition but to a different time period, the actual performance period. CMS does not fully update the benchmark to reflect the new mix of beneficiaries assigned during the performance period. As a result, many beneficiaries originally assigned to an ACO at the beginning of a performance year (i.e. January 1) may no longer be on the ACOs roster at the end of a performance year (i.e. December 31) if they did not see a physician in the ACO during the performance year. As a result, many ACOs may experience a significant attrition of healthier patients in their ACO rosters that were included in the original benchmark set by CMS but had not received care during the performance period itself. This can have a significant adverse impact on an ACOs ability to achieve shared savings. Accordingly, it will be important for ACOs to ensure that all the assigned beneficiaries to an ACO continue to receive wellness and other services during the year to ensure they are assigned to the ACO at the end of the performance period. In 2015, CMS proposed new rules that will take effect for the 3-year period beginning on January 1, 2016. We expect the new rules to be finalized during 2015. In general, we believe the proposed new rules will enhance the overall attractiveness of the program.
The MSSP is relatively new and therefore has limited historical experience. This impacts our ability to accurately accumulate and interpret the data available for calculating the ACOs' shared savings. Therefore, we were not able to recognize revenue for the year ended December 31, 2013 until we received the final settlement results from CMS in September 2014. Similarly, we were not able to recognize revenue for the year ended December 31, 2014 in the 2014 financial statements. We expect that revenue, if any, for the program year ended December 31, 2014 will be reported in 2015 when the MSSP revenue is either known or estimable with reasonable certainty. Based on the ACO operating agreements, we bear all costs of the ACO operations until revenue is recognized. At that point, we share in up to 100% of the revenue to recover our costs incurred. Any remaining revenue is generally shared equally with our ACO provider partners.
Established in 1965, Medicaid is the largest publicly funded program in the United States, and provides health insurance to low-income families and individuals with disabilities. Authorized by Title XIX of the Social Security Act, Medicaid is an entitlement program funded jointly by the federal and state governments and administered by the states. The majority of funding is provided at the federal level. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within federal standards. Eligibility is based on a combination of household income and assets, often determined by an income level relative to the federal poverty level. Historically, children have represented the largest eligibility group. Our APS Healthcare segment provides a variety of healthcare services to Medicaid members in numerous states.
Total Care NY Medicaid Plan-On December 1, 2013, we acquired the Total Care Medicaid health plan. Total Care provides Medicaid managed care services to approximately 40,000 members in three counties in upstate New York that overlap with our existing Medicare Advantage footprint. Roughly 80% of its members are located in Onondaga County. In addition to the Medicaid program, Total Care also participates in the Child Health Plus program for low-income, uninsured children.
Reduced Medicare Advantage reimbursement rates-The ACA made several changes to Medicare Advantage. Beginning in 2012, the Medicare Advantage "benchmark" rates began the transition to target Medicare fee-for-service cost benchmarks of 95%, 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period is 2, 4 or 6 years depending upon the applicable county. The counties are divided into quartiles based on each county's fee-for-service Medicare costs. We estimate that approximately 65% and 35%, respectively, of our January 1, 2015 membership resides in counties where the Medicare Advantage benchmark rate will equal 95% and 115%, respectively, of the calculated Medicare fee-for-service costs at the end of the 6 year transition period in 2017.
Medicare Advantage payment benchmarks have been cut over the last several years, with additional funding reductions to be phased in as noted above. On February 20, 2015, CMS issued its 2016 45 Day Call Letter (the "45 Day Call Letter") detailing preliminary 2016 Medicare Advantage benchmark payment rates. As is customary, CMS has invited public comment on these preliminary rates before issuing its final rates for 2016 in April 2015. The 45 Day Call Letter proposes to reduce Medicare rates for 2016 and make other changes that could negatively impact our business. At this time, CMS is not implementing the proposed policy of excluding for risk adjustment purposes the diagnosis codes obtained from in-home health risk assessments unless such codes are subsequently validated by a clinical encounter with a qualified provider. If implemented, this change would have resulted in significant additional funding declines for the Company. We will continue to evaluate proposed changes detailed in the 45 Day Call Letter, some of which could result in further rate reductions that would adversely affect our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in the future.
Non-deductible health insurance industry fee ("ACA Fee")-Beginning in 2014, the new healthcare reform legislation imposed an annual aggregate health insurance industry fee of $8.0 billion (with increasing annual amounts thereafter) on health insurance premiums, including Medicare Advantage
Accountable Care Organizations-The ACA established Accountable Care Organizations, or ACOs, as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for- service program. CMS established the Shared Savings Program to facilitate coordination and cooperation among providers to improve the quality of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs. To date, we have partnered with numerous groups of healthcare providers and currently participate in twenty-four active ACOs previously approved to participate in the MSSP. ACOs are entities that contract with CMS to serve the Medicare fee-for-service population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. We provide a variety of services to the ACOs, including care coordination, analytics and reporting, technology and other administrative services to enable these physicians and their associated healthcare providers to deliver better quality care, improved health and lower healthcare costs for their Medicare fee-for-service patients.
reimbursements totaling approximately $13 million to date. We also expect to incur significant costs during 2015. Under the MSSP, CMS will not make any payments to ACOs for a measurement year until the second half of the following year, which will negatively impact our cash flows. In order to receive revenues from CMS under the MSSP, the ACO must meet certain minimum savings rates (i.e. save the federal government money) and meet certain quality measures. More specifically, an ACOs medical expenses for its assigned beneficiaries during a relevant measurement year must be below the benchmark established by CMS for such ACO. On the quality side, the MSSP requires ACOs to meet thirty-three quality measures, which CMS may vary from time to time. Notwithstanding our efforts, our ACOs may be unable to meet the required savings rates or may not satisfy the quality measures, which may result in our receiving no revenues and losing our substantial investment. In addition, as the MSSP is a new program, it presents challenges and risks associated with the timeliness and accuracy of data and interpretation of complex rules, which may impact the timing and amount of revenue we can recognize and could have a material adverse effect on our ability to recoup any of our investment in this new business. Further, there can be no assurance that we will maintain positive relations with each of our twenty-four ACO partners which may result in certain of the ACOs terminating our relationship, which will result in a potential loss of our investment.
On March 28, 2014, we entered into a definitive agreement to repurchase six million shares of our voting common stock directly from funds associated with Capital Z Partners Management, LLC at a price of $6.03 per share. The transaction closed in May 2014. We used cash on hand to fund the repurchase of these shares.
(2)Non-Core Network and Rural markets were exited as of January 1, 2015.
We report intersegment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These intersegment revenues and expenses affect the amounts reported on the individual financial statement line items, but we eliminate them in consolidation and they do not change income before taxes. The most significant items eliminated are intersegment revenue and expense relating to commissions earned by agency subsidiaries in our Corporate & Other segment from insurance subsidiaries in our Traditional segment and in 2013 for services provided by APS Healthcare to our Medicare Advantage segment.
The following table reflects income (loss) from each of our segments and contains a reconciliation to reported net (loss) income:
(1)We evaluate the results of operations of our segments based on income (loss) before realized gains and losses and income taxes. We believe that realized gains and losses are not indicative of overall operating trends. This differs from U.S. generally accepted accounting principles, which reflects the effect of realized gains and losses and income taxes in the determination of net income (loss). The schedule above reconciles our segment income (loss), to net (loss) income in accordance with U.S. generally accepted accounting principles.
Net loss for the year ended December 31, 2014 was $29.5 million, or $0.35 per diluted share, compared to net loss of $192.3 million, or $2.20 per diluted share, for the year ended December 31, 2013. These amounts include realized (losses) gains, net of taxes, of $(2.3) million, or $(0.03) per diluted share, and $9.0 million, or $0.10 per diluted share in 2014 and 2013, respectively. 2013 also includes asset impairment charges of $178.1 million, or $2.04 per diluted share related to APS Healthcare.
Our Medicare Advantage segment generated income before income taxes of $47.8 million for the year ended December 31, 2014, a decrease of $5.7 million compared to the year ended December 31, 2013. The decrease in earnings was driven by the new ACA fee of $22.9 million (effective in 2014), lower membership and lower net investment income; offset by an improved medical benefit ratio, or MBR, of 84.0% for the full year 2014 compared to 85.1% for 2013 and a decrease in our administrative expense ratio from 12.7% in 2013 to 12.0% in 2014. The year ended December 31, 2014, included $33.0 million of net favorable prior year items compared to $23.3 million for the year ended December 31, 2013.
Net loss for the year ended December 31, 2013 was $192.3 million, or $2.20 per diluted share, compared to net income of $53.0 million, or $0.61 per diluted share, for the year ended December 31, 2012. These amounts include asset impairment charges, net of taxes, of $178.1 million, or $2.04 per diluted share, in 2013 as well as realized investment gains, net of taxes, of $9.0 million, or $0.10 per diluted share, and $10.8 million, or $0.12 per diluted share in 2013 and 2012, respectively.
Our MSO segment generated a loss before income taxes of $41.6 million for the year ended December 31, 2013, an increase of $19.9 million compared to 2012. This was due to increased operating costs, as there were thirty-one ACO entities in operation in 2013 compared to sixteen at
December 31, 2012 and only nine months of operations in 2012. We did not recognize any ACO revenue for the year ended December 31, 2013. Revenue for the initial program periods ending December 31, 2013 was reported in 2014.
Our Traditional Insurance segment generated income before taxes of $10.9 million for 2013, a decrease of $7.1 million compared to 2012. The decrease in earnings is driven by the reduction of business in-force which resulted in lower underwriting income and lower net investment income as well as higher consulting and outside services costs.
Our Medicare Advantage segment includes the operations of our Medicare coordinated care HMO, PPO and Network PFFS Plans (collectively, the "Plans"). Our HMOs offer coverage to Medicare members primarily in Southeastern Texas, and the area surrounding Dallas/Ft. Worth. For 2015, we have not re-bid the PFFS contracts for our non-core markets, resulting in coverage to be provided to Medicare members in our markets in Southeastern Texas (especially Houston/Beaumont), the area surrounding Dallas/Ft. Worth, upstate New York and Maine.
Our Medicare Advantage segment generated income before income taxes of $47.8 million for the year ended December 31, 2014, a decrease of $5.7 million compared to the year ended December 31, 2013. The decrease in earnings was driven by the new ACA fee of $22.9 million (effective in 2014), lower membership and lower net investment income; offset by an improved medical benefit ratio of 84.0% for the full year 2014 compared to 85.1% for 2013 and a decrease in our administrative expense ratio from 12.7% in 2013 to 12.0% in 2014. The year ended December 31, 2014, included $33.0 million of net favorable prior year items compared to $23.3 million for the year ended December 31, 2013.
Net investment and other income. Net investment and other income decreased $2.8 million primarily due to lower invested asset levels resulting from the payment of dividends to the parent in 2013.
Quality improvement initiative costs of $28.4 million in each of the years ended December 31, 2014 and 2013, respectively, are included in medical expenses in connection with the reporting of minimum medical loss ratios under the ACA. These costs were previously reported in commissions and
general expenses. The following table provides a breakdown of medical expenses and the related medical benefit ratios:
Adjusting for the prior year items discussed above in premiums and medical expenses, for the year ended December 31, 2014, our medical benefit MBR, excluding quality initiative costs was 84.2%. Our medical benefit MBRs for the year ended December 31, 2014, as reported and revised to exclude prior year items, are summarized in the table below:
Commissions and general expenses. Commissions and general expenses for the year ended December 31, 2014 decreased $37.4 million compared to the year ended December 31, 2013, primarily due to cost reduction initiatives and lower membership. Our administrative expense ratio improved to 12.0% for the year ended December 31, 2014 from 12.7% in 2013 primarily as a result of our cost reduction efforts. Commissions and general expenses for the year ended December 31, 2013 were adjusted to exclude $28.4 million of quality initiative expenses, which have been reclassified to medical expenses to be consistent with 2014 classification, as discussed above.
Net investment and other income. Net investment and other income decreased $4.7 million due to the payment of dividends to the parent in 2013 and the maturity of higher yielding assets with the proceeds being reinvested in lower yielding securities due to the low interest rate environment.
Quality improvement initiative costs of $28.4 million and $27.3 million in the years ended December 31, 2013 and 2012, respectively, are included in medical expenses in connection with the reporting of minimum medical loss ratios under the ACA. These costs were previously reported in commissions and general expenses. The following table provides a breakdown of medical expenses and the related medical benefit ratios:
Adjusting for the prior year items discussed above in premiums and medical expenses, for the year ended December 31, 2013, our medical benefit MBR, excluding quality initiative costs was 86.3%.
Commissions and general expenses. Commissions and general expenses for the year ended December 31, 2013 decreased $12.3 million compared to the year ended December 31, 2012, primarily as the result of the decreased level of membership. Our administrative expense ratio improved to 12.7% for the year ended December 31, 2013 from 13.5% in 2012 primarily as a result of our cost reduction efforts. Commissions and general expenses for the years ended December 31, 2013 and 2012 were adjusted to exclude $28.4 million and $27.3 million, respectively, of quality initiative expenses, which have been reclassified to medical expenses to be consistent with 2014 classification, as discussed above.
The following table represents the operating results of our MSO segment, consolidating the ACOs in which we participate with the operations of our CHS subsidiary:
The 3 ACOs qualifying for savings received payments of $20.4 million, part to be paid to physicians and part to reimburse a portion of the costs that we have incurred. Our share of these savings, including expense recovery, amounted to $13.4 million, which is reflected in equity in losses of
unconsolidated subsidiaries in our consolidated statements of operations. We received these payments in October 2014. We did not recognize any shared savings revenue in 2013.
Our MSO segment generated a loss before income taxes of $41.6 million for the year ended December 31, 2013, an increase of $19.9 million compared to 2012. This was due to increased operating costs, as there were thirty-one ACO entities in operation in 2013 compared to sixteen at December 31, 2012 and only nine months of operations in 2012. We did not recognize any ACO revenue for the years ended December 31, 2013 and 2012. Revenue for the initial program periods ending December 31, 2013 was reported in 2014.
Net premiums. Net premium declined by $28.0 million, or 13.1%. This is the result of the continued effect of lapsation across all lines of business. The following tables detail premium for the segment by major lines of business:
Net investment income. Net investment income decreased by $1.4 million, primarily due to a lower invested asset base due to the payment of dividends to the parent in 2013 and the declining blocks of business.
Policyholder benefits. Policyholder benefits incurred declined by $16.6 million, or 10.3%, compared to 2013. This decline was principally due to the overall decline of insurance in-force, while medical trend was relatively stable. For 2014, the policyholder benefit ratio for senior market health was 68.9% compared with 67.2% in 2013, and for specialty health was 111.0% in 2014, compared with 107.4% in 2013.
Our Traditional Insurance segment generated income before taxes of $10.9 million for 2013, a decrease of $7.1 million compared to 2012. The decrease in earnings is driven by the reduction of business in-force which resulted in lower underwriting income and lower net investment income, as well as higher consulting and outside services costs.
Net premiums. Net premium declined by $28.0 million, or 11.6%. This is primarily the result of the continued effect of lapsation across all lines of business, but primarily driven by Medicare supplement. The following tables detail premium for the segment by major lines of business:
Net investment income. Net investment income decreased by $1.2 million, primarily due to the maturity of higher yielding assets with the proceeds being reinvested in lower yielding securities because of the low interest rate environment, as well as a lower invested asset base due to the payment of dividends in 2013 and the declining blocks of business.
Claims and other benefits. Claims and other benefits increased by $2.3 million for the year ended December 31, 2014 compared to 2013, primarily due to the Exchange product we launched in upstate New York on January 1, 2014. The following table details claims and other benefits for our Corporate & Other segment:
Commissions and general expenses. Total commissions and general expenses decreased by $12.3 million for the year ended December 31, 2014 compared to 2013. This was driven by a $30.8 million decrease at APS Healthcare primarily related to expense reduction initiatives and lower
levels of business. General corporate expenses increased $18.6 million compared with 2013, primarily related to higher legal and settlement costs related to our non-core business, primarily APS Healthcare, Traditional Insurance and the Exchange. The following table details commissions and general expenses for our Corporate & Other segment:
The loss before income taxes from our Corporate & Other segment increased by $211.2 million for the year ended December 31, 2013 compared to 2012. This was due primarily to asset impairment charges related to APS Healthcare totaling $189.4 million, as well as an increase in business development costs, legal costs related to APS Healthcare, restructuring charges and lower profitability of our APS Healthcare business. The following table details the loss before income taxes for our Corporate & Other segment:
Fee and other income. Fee and other income decreased by $23.6 million for the year ended December 31, 2013 compared to 2012 primarily due to lower levels of fee for service business at APS Healthcare, partially offset by including a full year of APS Healthcare results in 2013, compared with
ten months in 2012. The following table details fee and other income for our Corporate & Other segment:
Our contractual obligations as of December 31, 2014, are shown below.
(1)These obligations include contractual interest, unused commitment fees and annual administrative fees and the table reflects scheduled maturities for contractual obligations existing as of December 31, 2014.
(3)Our obligations for policy related liabilities represent those payments we expect to make on death, disability and health insurance claims and policy surrenders, net of amounts recovered from reinsurers. These projected values contain assumptions for future policy persistency, mortality and morbidity comparable with our historical experience. The distribution of payments for policy and contract claims reflects assumptions as to the timing of policyholders reporting claims for prior periods and the amounts of those claims. Actual amounts and timing of both future policy benefits and policy and contract claims may differ significantly from the estimates above. We anticipate that our reserves for policy liabilities and policy and contract claims, along with future net premiums, investment income and recoveries from our reinsurers will be sufficient to fund our policy related obligations. On our consolidated balance sheets in Part II, Item 8 of this annual report on Form 10-K, we report our policy related liabilities gross of amounts recoverable from reinsurers, which are reported as assets. We are obligated to pay claims in the event that a reinsurer fails to meet its obligations under the reinsurance agreements. However, as of December 31, 2014, all of our primary reinsurers were rated "A-"(Excellent) or better by A.M. Best with the exception of one reinsurer. For that reinsurer, which is not rated, a trust containing assets at 106% of policy reserve levels is maintained. We are not aware of any instances where any of our reinsurers have been unable to pay any policy claims on reinsured business. Therefore, we have presented our obligations in the table above net of amounts recoverable from reinsurers. Our obligations for policy related liabilities before amounts recovered from reinsurers amount to $1.6 billion.
The parent company's ongoing sources and uses of liquidity are derived primarily from the following:
• dividends from and capital contributions to our Insurance and HMO subsidiaries-During 2014, our Insurance and HMO subsidiaries paid $53.1 million in ordinary dividends to their holding companies. Based on current estimates, we expect the aggregate amount of dividends that may be paid to our parent company in 2015 without prior approval by state regulatory authorities is approximately $27 million. In addition, in 2014, we made an initial capital contribution of $1.6 million to a new HMO licensed subsidiary and a $15.5 million capital contribution to one of our Insurance subsidiaries, which was funded in February 2015.
• loans from and interest payments to our Insurance subsidiaries to support investments in our ACO business-During 2013, our Insurance subsidiaries loaned $22 million to our parent company. During 2014, the parent company paid interest totaling $0.8 million to our Insurance subsidiaries.
• the cash flows of our other subsidiaries, including our Medicare Advantage management service organization-Net cash flows available to our parent company amounted to approximately $13.9 million during 2014.
difference between claims payments and premium receipts from New York State Department of Health. These loans are immediately repaid upon receipt of premiums. As of December 31, 2014, TONY had an outstanding loan balance of $0.5 million due to the parent company.
• payment of dividends to shareholders-We do not currently pay a regular dividend to our shareholders, however, we have paid special dividends in the past, most recently in August 2013. Payment of any future dividends would be dependent upon an evaluation of excess capital, as discussed below.
• As of December 31, 2014, we had approximately $110 million of cash and investments in our parent company and unregulated subsidiaries.
We continually evaluate the potential use of any excess capital, which may include the following:
Insurance and HMO subsidiaries. We require cash at our insurance and HMO subsidiaries to meet our policy-related obligations and to pay operating expenses, including the cost of administration of the policies, and to maintain adequate capital levels. The primary sources of liquidity are premiums received from CMS and policyholders and investment income generated by our invested assets.
In 2014, we made an initial capital contribution of $1.6 million to a new HMO licensed subsidiary and a $15.5 million capital contribution to one of our Insurance subsidiaries, which was funded in February 2015. Based on statutory capital and surplus levels at December 31, 2014, the aggregate amount of dividends that may be paid to our parent company during 2015 without prior approval by state regulatory authorities was approximately $27 million. During 2014, our insurance and HMO subsidiaries paid $53.1 million to their holding companies.
APS Healthcare. The primary sources of liquidity for APS Healthcare are fees from its customers, including health plans, state agencies and related organizations for performing a range of healthcare services. The primary uses of liquidity are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for APS Healthcare will not cover scheduled uses of cash and therefore APS Healthcare will continue to need to borrow funds from our parent company, to the extent such funding continues to be made available.
mortgage-backed securities and corporate fixed maturity securities with investment grade ratings of BBB- or higher by S&P or Baa3 or higher by Moody's Investor Service. As of December 31, 2014, approximately 99% of our fixed income investment portfolio had investment grade ratings from S&P or Moody's.
At December 31, 2014, cash and cash equivalents represent approximately 13% of our total cash and invested assets. Approximately 25% of cash and invested assets were held in securities backed by the U.S. government or its agencies and the average credit quality of our total investment portfolio was AA-.
The 2012 Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants. Negative covenants include, among others, limitations on the incurrence of indebtedness, limitations on the incurrence of liens and limitations on acquisition, dispositions, investments and restricted payments. In addition, the 2012 Credit Facility contains certain financial covenants relating to minimum risk-based capital, consolidated leverage ratio, and consolidated debt service ratio. The 2012 Credit Facility also contains customary events of default. Upon the occurrence and during the continuance of an event of default, the Lenders may declare the outstanding advances and all other obligations under the 2012 Credit Facility immediately due and payable.
On November 4, 2013, we entered into an amendment to our 2012 Credit Facility. The amendment, which was effective beginning with the quarter ended September 30, 2013, suspends certain financial covenants, including the consolidated leverage and debt service ratios, replacing them with total debt to capitalization and minimum liquidity ratios. As of December 31, 2014, and throughout the entire amendment period, we were in compliance with all financial covenants, as amended. These new financial covenants terminated December 31, 2014 and effective January 1, 2015 the original financial covenants were reinstated.
As a result of the recent subsidiary sale activity, under the 2012 Credit Facility, we have 12 months from receipt of the proceeds to either reinvest those proceeds or make a principal prepayment. If the proceeds are not reinvested, we would need to make prepayments totaling approximately $38 million by February 2016. We have elected to prepay $55 million on March 31, 2015, which will fulfill this obligation and provide additional restricted payment flexibility under the 2012 Credit Facility. We are required to ratably apply this prepayment and any other future prepayments through the remaining scheduled repayments which would change the amount of the quarterly and bullet payments through 2017.
Our obligations under the Credit Agreement are secured by a first priority security interest in 100% of the capital stock of our material subsidiaries and are also guaranteed by certain of our subsidiaries.
The 2012 Credit Facility bears interest at rates equal to, at our election, LIBOR or the base rate, plus an applicable margin that varies based on our consolidated leverage ratio from 1.75% to 2.50%, in the case of LIBOR loans, and from 0.75% to 1.50% in the case of base rate loans. Effective December 31, 2014, the interest rate on the term loan portion of the 2012 Credit Facility was 2.76% based on a spread of 2.50% above LIBOR.
We are required to pay a commitment fee on unused availability under the Revolving Facility that varies based on our consolidated leverage ratio, from 0.40% to 0.50% per year. As of the date of this report, we had not drawn on the Revolving Facility.
reported by us in our consolidated financial statements and the accompanying notes. Critical accounting policies are ones that require significant subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results. We believe that the following accounting policies are critical, as they involve the most significant judgments and estimates used in the preparation of our consolidated financial statements:
Reserves and other policy liabilities-life represents the gross amount of liabilities on our life insurance business, including policyholder account balances on our investment and universal life-type policies, future policy benefit reserves on our traditional life insurance policies and policy and contract
We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim payment and claim receipt patterns, as well as historical medical cost trends. Depending on the period for which we are estimating incurred claims, we apply a different method in determining our estimate. For aged service months (more than two or three months prior to the valuation date, depending on type of business), the key assumption we use in estimating our IBNR is that the completion factor pattern, adjusted for known changes in claim inventory levels and claim payment processes, remains consistent over a specified rolling period. This period, ranging from three to twelve months, is dependent on the type of business with respect to which we are estimating reserves or liabilities. Completion factors result from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For recent service months (either two or three months, depending on type of business), we estimate the incurred claims
We consider all of these factors in estimating IBNR and in estimating the PMPM claims trend for purposes of determining the reserve for the most recent three months. Additionally, we continually prepare and review follow-up studies to assess the reasonableness of the estimates generated by our process and methods over time. We also consider the results of these studies in determining the reserve for the most recent three months. Each of these factors requires significant judgment by management.
The prior year development incurred in the table above represents (favorable) or unfavorable adjustments as a result of prior year claim estimates being settled or currently expected to be settled, for amounts that are different than originally anticipated. This prior year development occurs due to differences between the actual medical utilization and other components of medical cost trends, and actual claim processing and payment patterns compared to the assumptions for claims trend and completion factors used to estimate our claim liabilities.
The following table illustrates the sensitivity of our health IBNR payable at December 31, 2014 to identified reasonably possible changes to the estimated weighted average completion factors and healthcare cost trend rates. However, it is possible that the actual completion factors and healthcare
• incremental direct costs of a successful contract acquisition, such as non-level commissions; and
• portions of employee salaries and benefits directly related to time spent performing specified acquisition activities for a contract that has been acquired;
The determination of deferability must be made on a contract-level basis. We refer to these costs as deferred acquisition costs or DAC.
For our net retained traditional life and health products, we amortize DAC in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with ASC 944, Financial Services-Insurance. Under ASC 944, any unamortized DAC relating to lapsed policies must be amortized as of the date of the lapse.
We test for the recoverability of DAC at least annually. To the extent that we determine that the present value of future policy premiums and investment income or the net present value of expected gross profits would not be adequate to recover the unamortized costs, we would write off the excess deferred policy acquisition costs. Based on our annual tests, we determined that DAC was recoverable in 2014 and 2013.
Goodwill. Goodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not amortized, but
The passage of time and the availability of additional information regarding areas of uncertainty in regards to the reporting units' operations could cause these assumptions used in our analysis to change materially in the future. If our assumptions differ from actual, the estimates underlying our goodwill impairment tests could be adversely affected.
Changes in the carrying amounts of goodwill and intangible assets with indefinite lives (primarily trademarks and licenses) are shown below:
(6)Represents a Total Care acquisition accounting adjustment to increase our estimated fair value of the provider networks with a corresponding adjustment to eliminate goodwill.
• Certain of APS Healthcare's existing contracts were terminated, not renewed or we learned that they were likely to terminate in the next several months; and
• Due to the general increase in interest rates during the second quarter, the discount rate used in the impairment analysis was increased by 50 basis points compared to the rate used in the prior impairment testing analysis.
Additionally, during the fourth quarter of 2013, certain events occurred and circumstances changed which indicated that it was more likely than not that goodwill for APS Healthcare was further impaired, including the following:
• We learned that the APS Puerto Rico Contract, which represents a significant portion of APS Healthcare's historical revenue, would terminate effective June 30, 2014 as a result of a new request for proposal, or RFP, being issued that would integrate behavioral health services and physical health services into one managed care contract. Additionally, the Commonwealth of Puerto Rico continues to experience deterioration in its economic environment and certain of the major rating agencies cut Puerto Rico's credit rating to junk status. In addition, we began to experience an increase in the cost of care of our Puerto Rico managed behavioral health business, which reduced the profitability of that business. We evaluated opportunities to participate in the new RFP but there could be no assurance that we would be successful, which, if we were not successful would end our participation in the Mi Salud program.
• We learned that APS Healthcare was not going to be awarded a previously anticipated contract.
• We learned that the anticipated membership to be serviced in another contract was significantly reduced; thereby lowering the future expected cash flows of that contract.
• Substantially all of the services APS Healthcare had provided to Universal American's affiliates were discontinued. The affiliates replaced those services with their own direct staff.
We incorporated the impact of the above items into our projections for APS Healthcare for our annual assessment of goodwill as of October 1, 2014, that included lowered expectations for future
revenue growth and new business development. Based on the results of the step one impairment test, we determined that as of October 1, 2013 the carrying value of APS Healthcare exceeded its fair value. We then proceeded to the second step of the impairment test to estimate the implied fair value of the APS Healthcare goodwill. Based on the October 1, 2013 step two analysis, the carrying amount of the APS Healthcare goodwill exceeded its implied fair value, resulting in a pre-tax impairment charge of $73.0 million, representing the remaining goodwill for APS Healthcare. A portion of the goodwill was taxable, resulting in a tax benefit of approximately $0.9 million. Separately, we determined that the identified amortizing intangibles and other fixed assets were not fully recoverable and recorded additional impairments of $16.1 million and $8.5 million, respectively.
We have engaged an investment advisor to manage a portion of our portfolio, perform investment accounting and provide valuation services. Securities prices are obtained by the advisor from independent pricing vendors, which are chosen based on their ability to support and price specified asset classes following the procedures outlined in the valuation policy reviewed and approved by us. The following are examples of typical inputs used by third party pricing vendors:
Due to a general lack of transparency in the process that brokers use to develop prices, we classify most securities that have prices that are based on broker's prices as Level 3. We also classify internal model priced securities, primarily consisting of private placement asset-backed securities, as Level 3 because this model pricing reflects significant non-observable inputs.
below the amortized cost basis to be other-than-temporary. The evaluation includes the intent and ability to hold the security to recovery, and we consider it on an individual security basis, not on a portfolio basis. We generally recognize impairment losses for mortgage-backed and asset-backed securities when an adverse change in the amount or timing of estimated cash flows occurs, unless the adverse change is solely a result of changes in estimated market interest rates. We also recognized impairment losses when we determine declines in fair values based on quoted prices to be other-than-temporary.
Premiums received pursuant to Medicare contracts with CMS are recorded as revenue in the month in which members are entitled to receive benefits. Premiums collected in advance are deferred. Receivables from CMS and Plan members are recorded net of estimated uncollectible amounts and are reported as due and unpaid premiums in the consolidated balance sheets. We routinely monitor the collectability of specific accounts, the aging of member premium receivables, historical retroactivity trends and prevailing and anticipated economic conditions.
Recognition of Premium Revenues and Policy Benefits-Medicare Plans. We receive monthly payments from CMS related to members in our Medicare coordinated care Plans. The recognition of the premium and cost reimbursement components under these Plans is described below:
Member Premium. We receive a monthly premium from members based on the Plan year bid we submitted to CMS. The member premium, which is fixed for the entire Plan year, is recognized over the contract period and reported as premium revenue. We establish a reserve for member premium that is past due that reflects our estimate of the collectability of the member premium.
Coverage Gap Discount Program. We receive advance payments from CMS as subsidies for members of our Plans with Part D coverage who reach the coverage gap. The Medicare Coverage Gap Discount Program, or CGDP, makes manufacturer discounts available to eligible Medicare members receiving applicable, covered Part D drugs, while in the coverage gap. In general, the discount on each applicable covered Part D drug is fifty percent of an amount equal to the negotiated price. Members will continue to receive these discounts and they will grow until the coverage gap is closed in 2020.
Catastrophic Reinsurance. We receive payments from CMS for catastrophic reinsurance for members of our Plans with Part D benefits.
In our consideration of all the available evidence, we provided more weight to evidence that was more objectively verifiable. In 2014, significant weight was given to our cumulative income/loss position. Our cumulative loss position at December 31, 2014 was due in large part to the recognition of
cumulative ACO expenditures in excess of cumulative revenues for the 2013 and 2014 program years, the recognition of significant legal/settlement costs related to our non-core businesses, primarily APS Healthcare and Traditional Insurance and the recognition of the APS Healthcare goodwill impairment in 2013. While the Company is in a cumulative net loss position over the last three years from a financial reporting perspective, the Company has cumulative pre-tax income over the same period, after these adjustments are made, as shown in the following table:
We carried valuation allowances on our deferred tax assets of $15.5 million at December 31, 2014 and, as reclassified, $11.3 million at December 31, 2013, primarily related to foreign tax credit carryforwards that we acquired in connection with our purchase of APS Healthcare in 2012, deferred tax assets of APS Healthcare's Puerto Rico subsidiaries, state net operating loss carryforwards and deferred income tax assets for various states.
During the third quarter of 2014, the Internal Revenue Service issued updated tax regulations regarding the deduction and capitalization of expenditures related to tangible property. These regulations provide additional guidance on the application of IRC Sections 1.62(a), 263(a), 167 and 168. We have reviewed our tax policies and methods related to the capitalization and expensing of fixed assets, repairs and other expenditures related to these updated tax regulations. Our assessment indicates that its current tax methods appear to be materially consistent with the updated regulations. At this time we do not intend to request any accounting method changes that would require any material IRC Section 481(a) adjustments for tax year 2014. Additionally, the changes in the regulations are not expected to result in any material decrease or increase of our reserve for uncertain tax positions as required by ASC 740.