The table below provides selected financial data and other operating information as of and for the five years ended December 31, 2015. We derived the selected financial data presented below from our audited financial statements. Note that our Traditional Insurance business is currently held for sale and as of December 31, 2015 is being reported as discontinued operations. In addition, our APS Healthcare businesses were sold in 2015 and our Medicare Part D business was sold in 2011 and both are reported as discontinued operations. Our Consolidated Financial Statements and the selected financial data presented below have been restated for all periods to reflect these businesses as discontinued operations. See Note 21-Discontinued Operations for additional information on the 2015 transactions. We have prepared the following data, other than statutory data, in conformity with U.S. generally accepted accounting principles, known as GAAP. You should read this selected financial data together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements as well as the discussion under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(1)2015 and prior periods include capital and surplus for Constitution Life Insurance Company (Constitution) and The Pyramid Life Insurance Company (Pyramid) which will be transferred to Nassau Reinsurance Group Holdings, L.P. ("Nassau") in connection with the Traditional Insurance sale. 2014 and prior also include capital and surplus of Marquette National Life Insurance Company (Marquette) and American Pioneer Life Insurance Company (Pioneer) which were merged into Constitution during 2015. 2012 and prior also include capital and surplus of Union Bankers Insurance Company, or Union Bankers, which was merged into Constitution during 2013. At December 31, 2015, Constitution and Pyramid had combined capital and surplus of $82.7 million and combined asset valuation reserve of $1.9 million.
• Medicare Advantage: We currently serve the growing Medicare population by providing Medicare Advantage products to approximately 114,000 members. Approximately 32% of the Medicare population in the United States is currently enrolled in Medicare Advantage plans; a type of Medicare health plan offered by private companies that contract with the federal government to provide enrollees with health insurance. Our current focus is to grow our Medicare Advantage business in Texas (especially Houston/Beaumont), upstate New York (especially the Syracuse area) and Maine, regions in which we have meaningful market positions.
Approximately 97% of our 2016 membership is in plans that received a 4-Star Medicare quality rating. The Company earned a 4-Star rating for its flagship TexanPlus® plan in Houston/Beaumont and for its largest plans in New York and Maine, Today's Options PPO plan and Today's Options Network PFFS plan. Plans that achieve a 4-Star rating or better are entitled to additional bonus payments and higher rebate percentages from CMS which enables the plans to enhance their product offering to members and prospective members through reduced premiums, reduced member cost sharing amounts, and/or additional benefits.
Medicare Advantage-Texas: Universal American's largest Medicare Advantage market is Texas, primarily the Houston/Beaumont region and North Texas. We market our products using the TexanPlus® brand. The products provided in our Texas markets include only HMO plans, although we introduced a special needs plan for dual eligibles (dSNP) in 2016 which currently has nominal membership. Enrollment in this market is generally supported by career agents.
• 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 care
management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members enrolled in specified products.
The products provided in our Northeast market include PPO, Network PFFS, and our new HMO plan that was introduced in 2016. The HMO plan in upstate New York currently has nominal membership.
• Our Network PFFS plans, which are provided under the brand Today's Options® are offered under contracts with CMS and provide enhanced health care benefits compared to Medicare fee-for-service, subject to cost sharing and other limitations. Even though these plans allow the members more flexibility in the delivery of their health care services than other Medicare Advantage plans, we actively coordinate care for these members in a similar manner to our PPO and HMO plans. Some of these products include a defined prescription drug benefit. In addition to a fixed monthly payment per member from CMS, individuals in these plans may be required to pay a monthly premium in selected counties or for selected enhanced products.
• fostering better coordination of care for items and services provided under Medicare FFS; and
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 beneficiaries assigned to the ACO, starting at 3.9% for ACOs with
assigned beneficiaries totaling 5,000 and grading to 2.0% for ACOs with assigned beneficiaries totaling 60,000 or more.
Universal American currently sponsors 21 MSSP ACOs in ten States and one Next Generation ACO operating in Houston, Texas, which include 3,200 participating providers and approximately 236,000 Medicare FFS beneficiaries covering more than $2.5 billion of medical spend. Certain of our ACOs overlap a portion of our Medicare Advantage footprint (Houston, Dallas and New York) and Medicaid footprint (Syracuse) which capitalizes on our existing relationship with providers. The other ACOs have no overlap with existing operations, offering an opportunity for expansion into other products and services. For example, in 2016, we launched a Medicare Advantage PPO plan in Westchester County, NY in collaboration with CareMount Medical, formerly known as Mt. Kisco Medical Group, one of our existing ACO partners. In addition, in 2016, we also launched a new Medicare Advantage HMO plan in the Syracuse NY area in collaboration with the largest primary care group in the region, one our ACO partners.
• MSSP Track 2: Two-sided risk; up to 60% shared savings; retrospective attribution
• 9 ACOs, serving more than 105,000 Medicare beneficiaries, including our flagship ACO in Houston, qualified for shared savings totaling $26.9 million. Our share of these payments, recorded in the second quarter of 2015, after payments to our physician partners of $6.0 million,
During September 2014, we received notice that the ACOs generated $66 million in total program savings for CMS, as part of the MSSP for the first performance year of the MSSP (2012 and 2013). Of our 30 ACOs with start dates in 2012 and 2013, the results showed that:
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.
• implementation of a quality bonus for Star ratings, beginning in 2012;
In addition, CMS has indicated that plans with a Star rating of less than 3.0 for three consecutive years may be subject to termination. While we do not currently have any plans with a rating below 3.0, our inability to maintain Star ratings of 3.0 or better for a sustained period of time could ultimately result in plan termination by CMS which could have a material adverse impact on our business, cash flows and results of operations. Also, the CMS Star ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage plans that enable those plans to offer improved benefits and/or better pricing. Furthermore, lower quality scores compared to our competitors may result in us losing potential new business in new markets or dissuading potential members from choosing our plan in
Stipulated minimum MLRs-Beginning in 2014, the ACA stipulates a minimum MLR of 85% for Medicare Advantage plans. This MLR which is calculated at a plan level, takes into account benefit costs, quality initiative expenses, the ACA fee and taxes. Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the years ended December 31, 2015 and 2014 our Medicare Advantage plans exceeded the minimum MLR, as defined by CMS. Complying with such minimum ratio by increasing our medical expenditures or refunding any shortfalls to the federal government could have a material adverse effect on our operating margins, results of operations, and our statutory capital.
Limitation on the federal tax deductibility of compensation earned by individuals-Beginning in 2013, with respect to services performed during 2010 and afterward, for health insurance companies, the federal tax deductibility of compensation is limited under Section 162(m)(6) of the Code to $500,000 per individual and does not contain an exception for "performance-based compensation." In September 2014, the Internal Revenue Service issued final regulations on this compensation deduction limitation which provided additional information regarding the definition of a health insurance issuer. Based on our analysis of the final regulations, we believe we are not subject to the limitation. As a result, during the fourth quarter of 2014, we recorded a tax benefit of $3.2 million related to prior years and $1.7 million related to the first nine months of 2014. Prior to receiving the final regulations, our application of this limitation had increased our effective tax rate by approximately 60 basis points for the year ended December 31, 2013 and 200 basis points for the year ended December 31, 2012. However, there is a risk that the Internal Revenue Service or other regulators may disagree with our interpretation, which could result in higher taxes.
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 our ACO partners which may result in certain of the ACOs terminating our relationship, which will result in a potential loss of our investment.
On October 26, 2015, we paid a special cash dividend of $0.75 per share, to shareholders of record on October 19, 2015. The total dividend was $63.0 million. This dividend is a liquidating dividend and was recorded as a reduction of additional paid in capital.
The following table reflects income (loss) from each of our segments and contains a reconciliation to reported net loss:
Loss from continuing operations for the year ended December 31, 2015 was $4.8 million, or $0.06 per diluted share, compared to a loss from continuing operations of $25.0 million, or $0.30 per diluted share, for the year ended December 31, 2014. These amounts include realized gains (losses), net of taxes, of $25.3 million, or $0.31 per diluted share, and $(1.8) million, or $(0.02) per diluted share in 2015 and 2014, respectively.
Our Medicare Advantage segment generated income before income taxes of $21.5 million for the year ended December 31, 2015; a decrease of $26.6 million compared to the year ended December 31, 2014. The decrease in earnings was primarily driven by higher utilization in our Northeast markets, expected lower membership as we exited non-core markets, a decrease in favorable prior period items and lower net investment income, partially offset by a decrease in commissions and general expense levels driven by our cost reduction initiatives. Our administrative expense ratio improved to 10.8% for the year ended December 31, 2015 from 12.1% in 2014 due to the cost reduction initiatives. The year ended December 31, 2015, included $4.0 million of net favorable prior period items compared to $33.0 million of favorable items for the year ended December 31, 2014.
Our Corporate & Other segment reported a loss of $40.3 million for the year ended December 31, 2015 compared to a loss of $49.4 million in 2014. This improvement was primarily due to corporate expense reduction initiatives, the discontinuation of our Exchange business and lower legal and debt service costs.
Our after-tax loss from discontinued operations was $159.2 million and $4.5 million for the years ended December 31, 2015 and 2014, respectively. 2015 included a pre-tax write down to fair value of $149.2 million, on our Traditional Insurance business, which is considered held for sale at December 31, 2015, a realized loss of $17.4 million, pre-tax, on the sale of APS Healthcare's domestic and foreign businesses and a restructure charge of $5.6 million related to the shutdown of facilities, run out of the retained managed behavioral health (MBH) business and severance. The 2015 loss also included operating results for Traditional Insurance for the year and APS Healthcare for the period prior to the sale and a return to provision adjustment related to the 2014 income tax return of the disposed businesses. 2014 income represents operating results of the disposed businesses. For further information on the Traditional Insurance transaction and the sale of APS Healthcare's businesses, see Note 21-Discontinued Operations and Note 18-Restructuring Charges in the Notes to Consolidated Financial Statements.
Loss from continuing operations for the year ended December 31, 2014 was $25.0 million, or $0.30 per diluted share, compared to a loss from continuing operations of $11.9 million, or $0.14 per diluted share, for the year ended December 31, 2013. These amounts include realized (losses) gains, net of taxes, of $(1.8) million, or $(0.02) per diluted share, and $9.0 million, or $0.10 per diluted share in 2014 and 2013, respectively.
Net realized gains of $13.8 million for the year ended December 31, 2013 included a $9.9 million realized gain on an interest rate swap with the balance primarily driven by sales of securities in our fixed maturity investment portfolio.
Our effective tax rate from continuing operations was a benefit of 17% for 2014 compared with a benefit of 29% for 2013. The effective rate in 2014 differs from the expected benefit of the 35% federal rate due to permanent items, primarily the ACA fee (new in 2014) and preferred dividends, as well as state income taxes, net of non-recurring tax benefits of $5.8 million. The 2014 non-recurring tax benefit primarily relates to the reversal of executive compensation previously considered non-deductible under Code section 162(m)(6) that resulted in the recording of a $3.2 million benefit for amounts considered non-deductible in our prior year tax return, recording of $1.3 million of foreign tax credits and a $0.7 million reserve release related to items on which the statute of limitations has expired. The variance in the 2013 effective tax rate compared with the expected benefit of the 35% federal rate was driven by permanent items relating primarily to non-deductible goodwill impairment, the limitation on the deductibility of executive compensation for health insurers enacted in the ACA, interest on the mandatorily redeemable preferred stock, state income taxes and non-recurring tax expenses of $1.4 million. The 2013 non-recurring tax expense primarily relates to the establishment of a valuation allowance against deferred tax assets principally related to foreign tax credits.
ACA fee. The ACA fee for the year ended December 31, 2015 amounted to $25.5 million, or 2.0% of 2015 net premiums compared to $22.9 million or 1.6% of net premiums for the year ended December 31, 2014. The ACA fee is included in the calculation of minimum medical loss ratios under the ACA. The increase in the ACA fee is due to the industry-wide total fee increasing from $8 billion in 2014 to $11.4 billion in 2015
Our Medicare Advantage segment generated income before income taxes of $48.1 million for the year ended December 31, 2014; a decrease of $5.9 million compared to the year ended December 31, 2013. The decrease in earnings was primarily driven by the then 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
Medical expenses. Medical expenses decreased by $206.6 million compared to the year ended December 31, 2013. The decrease was driven by lower membership and lower claims cost per member (as a result of exiting non-core markets that incurred higher claims cost per member) as well as favorable prior period items, resulting in a medical benefit ratio of 84.0% in 2014 compared with 85.1% in 2013. During 2014, medical expenses included $18.4 million of net favorable items related to prior periods, compared to $9.9 million of net unfavorable items related to prior periods in 2013.
(1)2015 revenue represents shared savings revenues received in 2015 related to program year 2014 and 2014 revenue represents shared savings revenues received in 2014 related to program year 2012/2013.
We have determined that we cannot consolidate the ACOs and therefore, include our share of their operating results in Equity in losses of unconsolidated subsidiaries on our Consolidated Statements of Operations. In the table above, we have presented our share of the results of the ACOs combined with the results of CHS to provide a better understanding of our MSO segment's results of operations.
Our MSO segment generated a loss before income taxes of $30.8 million for the year ended December 31, 2014; a decrease of $10.8 million compared to the year ended December 31, 2013. This improvement was primarily driven by the receipt of $13.4 million of revenue in 2014 related to the initial ACO program period ended December 31, 2013, partially offset by an increase in ACO operating expenses as we had four new ACOs start up on January 1, 2014.
Our Medicaid segment includes the operations of our Total Care Medicaid health plan, which we acquired on December 1, 2013. Total Care provides Medicaid managed care services to approximately 39,000 members in upstate New York. Total Care also participates in the Child Health Plus program for low-income, uninsured children.
Our Medicaid segment generated income before income taxes of $0.1 million for the year ended December 31, 2015 compared to income of $2.6 million for the year ended December 31, 2014. This decrease was as a result of higher medical benefits primarily related to increased inpatient utilization and unfavorable claims run-out from prior periods as well as an increase in operating expenses, partially offset by an increase in net premiums due to higher state capitation rates.
Medical expenses. Medical expenses increased by $9.3 million, or 6% compared to the year ended December 31, 2014. The increase was driven by higher claims costs, caused primarily by higher membership as well as an increase in inpatient utilization, and unfavorable claims run-out from prior periods. The medical benefit ratio was 89.4% for the year ended December 31, 2015 compared with 90.2% for the year ended December 31, 2014.
ACA fee. The ACA fee for the year ended December 31, 2015 increased by $3.1 million. The ACA fee is based on prior year premium. The 2014 ACA fee was based on Total Care's 2013 premium since December 1, 2013, the date of acquisition, while the 2015 ACA fee is based on Total Care's premium for the year ended December 31, 2014.
Commissions and general expenses. Commissions and general expenses increased $2.0 million compared to the year ended December 31, 2014, primarily due to increased compliance, personnel and technology costs. Our administrative expense ratio was 8.8% and 8.3% for the year ended December 31, 2015 and 2014, respectively.
Claims and other benefits. Claims and other benefits decreased by $1.7 million for the year ended December 31, 2015 compared to 2014, due to the Company no longer participating in the Exchange. Additionally, in 2015, we received larger than anticipated recoveries from the Federal transitional reinsurance program related to the Exchange business in 2014.
Fee and other income. Fee and other income decreased by $4.1 million for the year ended December 31, 2014 compared to 2013 primarily due to a decrease in revenue from our corporate agencies.
Traditional Insurance: On October 8, 2015, we entered into a definitive agreement to sell our Traditional Insurance business to Nassau Reinsurance Group Holdings, L.P. ("Nassau"). Our Traditional Insurance business includes Medicare supplement, long-term care, disability, life, and other ancillary insurance products, all of which have been in run-off since 2012. As of December 31, 2015, we determined that this business should be classified as held for sale and reported in discontinued operations.
Traditional Insurance-Operating Results: Traditional Insurance had an operating loss of $16.3 million for the year ended December 31, 2015 compared with a gain of $2.5 million for the same
period in 2014. The 2015 loss was primarily driven by an increase in claim reserves on our Disability Income line of business as a result of an updated claim termination study, as well as recording additional amortization of our deferred acquisition costs (DAC) asset as a result of loss recognition testing deficiencies.
APS Healthcare-Legal/Settlement Costs: APS Healthcare's 2014 results included litigation and settlement costs related to APS Healthcare matters.
APS Healthcare-Restructure Charge: During 2015, we recorded a restructure charge of $5.6 million related to the sale of our APS Healthcare domestic business. In connection with the sale, we retained certain office space which we have exited and certain MBH contracts which we have terminated and are operating at a loss as the business runs off. Our restructure charge for facilities represents the estimated costs to close the facilities, including lease buyout costs and rent costs, net of estimated sublease revenue, on non-cancellable leases prior to termination. The related leases run through 2021. The charge related to the MBH contracts represents the estimated operating losses on the terminated contracts through the end of the contractual period, March 31, 2016.
APS Healthcare-Operating Results: APS Healthcare had an operating profit of $10.3 million for the year ended December 31,
APS Healthcare-Legal/Settlement Costs: APS Healthcare's 2014 and 2013 results included litigation and settlement costs related to APS Healthcare matters.
Our contractual obligations as of December 31, 2015, are shown below.
(3)Our obligations for policy related liabilities represent those payments we expect to make on health insurance claims, net of amounts recovered from reinsurers. These projected values contain assumptions 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 policy and contract claims may differ significantly from the estimates above. We anticipate that our 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. 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 $102 million from continuing operations and $562 million from discontinued operations.
• dividends from and capital contributions to our Insurance and HMO subsidiaries-During 2015, our Insurance and HMO subsidiaries paid a total of approximately $101 million in dividends. Additionally, the parent company made capital contributions totaling approximately $29 million to various Insurance and HMO subsidiaries. See below for further discussion of 2015 activity.
• the cash flows of our ACO business and other growth initiatives-For the year ended December 31, 2015, we funded expenses of approximately $40.9 million, pre-tax, related to our ACO business. In the second quarter of 2015, we accrued our share of program year 2014 shared saving revenues of $20.9 million, which was received in October 2015.
• payment of certain corporate overhead costs and public company expenses, net of revenues, which amounted to $15.3 million for the year ended December 31, 2015.
• payment of dividends to shareholders-We do not currently pay a regular dividend to our shareholders, however, on October 26, 2015, we paid a special cash dividend of $0.75 per share. Payment of any future dividends would be dependent upon an evaluation of excess capital, as discussed below.
• repurchase of our common stock under our stock repurchase plan-On May 13, 2014 we repurchased and retired six million shares of our common stock directly from funds associated with Capital Z Partners Management, LLC at a price of $6.03 per share for total consideration of $36.2 million. We used cash on hand to fund the repurchase of these shares.
• proceeds from the sale of subsidiaries-During the first quarter of 2015, we completed the sale of our APS Healthcare Puerto Rico subsidiaries for $26.5 million in cash. During the second quarter of 2015, we completed the sale of our domestic APS subsidiaries for $5 million in cash. During the fourth quarter of 2015, we entered into a definitive agreement for the sale of our Traditional Insurance business to a third party. We expect this transaction to close in the first half of 2016. See Note 21-Discontinued Operations in the Notes to Consolidated Financial Statements.
• proceeds from the sale of and distributions received on investments-In August 2015, we sold our interest in our cost-basis investment in naviHealth for $35.6 million and received cash proceeds of $33.1 million, with the balance of $2.5 million held in escrow and booked a pre-tax realized gain of $29.6 million. In November 2015, we sold our interest in our cost-basis investment in DDDS for $6.6 million and received cash proceeds of $3.1 million, with the balance of $3.4 million representing the discounted fair value of a put option, exercisable in November 2018, and booked a pre-tax realized gain of $6.1 million. In addition, in 2015, we received a total of $2.0 million in cash distributions from DDDS.
• As of December 31, 2015, we had approximately $70 million of cash and investments in our parent company and unregulated subsidiaries.
At December 31, 2015, we held cash and invested assets of approximately $307 million at our insurance and HMO subsidiaries that could readily be converted to cash. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.
During 2015, our Insurance subsidiaries, Pyramid, Constitution, and Marquette (which was merged into Constitution in May 2015) declared and paid dividends totaling approximately $92 million. These subsidiaries are being sold as part of the sale of our Traditional Insurance subsidiaries to Nassau (see Note 21-Discontinued Operations). In June 2015, our HMO subsidiary, SelectCare of Texas, declared a $9.0 million ordinary dividend, which was subsequently paid to the holding company in July 2015. No other dividends were declared or paid by our other Insurance and HMO subsidiaries in 2015. Based on current estimates, we expect the aggregate amount of dividends that may be paid to our parent company in 2016 without prior approval by state regulatory authorities to be approximately $10.0 million, which excludes dividends available from the Traditional Insurance subsidiaries.
Total Care. We require cash at Total Care to pay claims and other benefits for our members, to pay operating expenses, to maintain adequate capital levels. The primary sources of liquidity are premiums received from the New York Department of Health. Total Care is required to maintain statutory net worth equal to or in excess of a contingent reserve requirement that is equal to 7.25% of premium. As discussed previously, during the year ended December 31, 2015, we made capital contributions totaling $8.3 million.
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, 2015, approximately 99% of our fixed income investment portfolio had investment grade ratings from S&P or Moody's.
The average book yield of our investment portfolio was 2.7% at December 31, 2015 and 2.6% at December 31, 2014. The increase in our average book yield is principally driven by the higher percentage of our assets being held in higher yielding, longer term fixed income securities as of December 31, 2015 versus December 31, 2014.
2012 Credit Facility. On October 14, 2015, we repaid the outstanding balance on our term loan of $44.9 million and terminated our credit facility, including the unused revolver. See Note 12-Loan Payable for more information.
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 primarily from a trend analysis based upon per member per month, known as PMPM, claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, product mix, and seasonality.
We use the completion factor method for aged service months because the historical percentage of claims processed for those months is at a level sufficient to produce a consistently reliable result. Conversely, for the most recent service months of incurred claims, the volume of claims processed historically is not at a level sufficient to produce a reliable result, which therefore requires that we examine historical trend patterns as the primary method of evaluation. Because cumulative claims payment development often fluctuates widely close to the incurred date of claims, estimates for the most recent service months of incurred claims are based on emerging claims trend experience. The amounts above reflect the estimated potential medical and other expenses payable based upon assumptions used in determining the loss ratio for the pricing of our products.
Activity in the liability for policy and contract claims is as follows:
The liability for policy and contract claims decreased from $108.4 million to $102.0 million during the year ended December 31, 2015. The decrease in the liability was primarily attributable to the decrease in IBNR for our Medicare Advantage business due to lower membership levels.
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 944-40, Financial Services-Insurance-Claim Costs and Liabilities for Future Policy Benefits. Under ASC 944, any unamortized DAC relating to lapsed policies must be amortized as of the date of the lapse.
gross profits would not be adequate to recover the unamortized costs, we would write off the excess DAC. Based on our annual tests, we wrote off $12.2 million on DAC that we determined was not recoverable at December 31, 2015. As a result of the adjustment of the assets and liabilities of the Traditional Insurance business to fair value as of December 31, 2015 based on the net amounts realizable, the DAC balance remaining as of December 31, 2015 was written off. We determined that DAC was recoverable at December 31, 2014.
Although we believe that the financial projections used are reasonable and appropriate, the use of different assumptions and estimates could materially impact the analysis and resulting conclusions. In addition, due to the long term nature of the forecasts there is significant uncertainty inherent in those projections. That uncertainty is increased by the impact of healthcare reforms as discussed in Item 1, "Business-Regulation." For additional discussions regarding how the enactment or implementation of healthcare reforms and how other factors could affect our business and the related long term forecasts, see Item 1A, "Risk Factors" in Part I of this Annual Report on Form 10-K.
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
• increases in the amount of required capital for a reporting unit.
(2)Represents a Total Care acquisition accounting adjustment to increase our estimated fair value of the provider networks with a corresponding adjustment to eliminate goodwill.
In accordance with ASC 350, Intangibles-Goodwill and Other, we periodically review amortizing intangible assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. If these estimates or their related assumptions change in the future, we may be required to record impairment losses for these assets.
• the effects of changes in interest rates or credit spreads; and
After the recognition of an OTTI, we account for the debt security as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.
• the financial condition, credit rating and near-term prospects of the issuer;
• whether the debtor is current on contractually obligated interest and principal payments; and
Medicare is a federal program that provides eligible persons age 65 and over and certain eligible persons with disabilities under age 65 with a variety of hospital, prescription drug, and medical insurance benefits. The Medicare program consists of four parts, labeled Parts A - D.
Part A-Hospitalization benefits are provided under Part A. These benefits are financed largely through Social Security taxes. Members are not required to pay any premium for Part A benefits. However, they are still required to pay out-of-pocket deductibles and coinsurance.
other insurance coverage. Star rating quality bonus revenues are included in the CMS Direct Premium subsidy which is reported as premium revenue and recognized over the contract period.
CGDP subsidies are paid by CMS as a fixed amount per member per month, and are determined based upon the Plan year bid we submitted to CMS. The subsidies made to Part D sponsors will be taken back equal to the amount of discounts invoiced to manufacturers. Manufacturers must pay the invoiced amounts to Part D sponsors within 15 days of receipt of invoice from CMS to offset the recouped amounts by CMS.
For members of our PFFS Plans with Part D benefits, CMS makes prospective monthly catastrophic reinsurance payments to the Plans based on estimated average reinsurance payments to other Medicare Advantage-Prescription Drug (MA-PD) Plans that provide Part D benefits. Based upon the current guidelines from CMS, these Plans are at risk for the variance between their actual expense and the CMS payments. As a result, we do not follow deposit accounting for these payments.
CMS Risk Corridor Provisions for the Part D benefits of our HMO and PPO Plans -Premiums from CMS for members of our HMO and PPO Plans with Part D benefits are subject to risk corridor provisions. The CMS risk corridor calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual Plan bid (target amount) to actual experience. Variances of more than 5% above the target amount will result in CMS making additional payments to us, and variances of more than 5% below the target amount will require us to refund to CMS a portion of the premiums we received. Risk corridor payments due to or from CMS are estimated throughout the year and are recognized as adjustments to premium revenues and due and unpaid premiums. This estimate requires us to consider factors that may not be certain, including: membership, risk scores, prescription drug events, or PDEs, and rebates. After the close of the annual Plan year, CMS reconciles actual experience to the target amount and any differences are settled between CMS and the Plan.
Claims-Policy and contract claims include actual claims reported but not paid and estimates of healthcare services and prescription drug claims incurred but not reported. The estimated claims incurred but not reported are based upon current enrollment, historical claim receipt and payment patterns, historical medical cost trends and health service utilization statistics. These estimates and assumptions are derived from and are continually evaluated using per member per month trend analysis, claims trends developed from our historical experience in the preceding month (adjusted for known changes in estimates of recent hospital and drug utilization data), provider contracting changes, benefit level changes, product mix and seasonality. 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.
Stipulated minimum MLRs-Beginning in 2014, the ACA stipulates MLR of 85% for Medicare Advantage plans. This MLR, which is calculated at a plan level, takes into account benefit costs, quality initiative expenses, the ACA fee and taxes. Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the years ended December 31, 2015 and 2014 our Medicare Advantage plans exceeded the minimum MLR, as defined by CMS.
We establish valuation allowances based on the consideration of both positive and negative evidence. We weigh such evidence through an analysis of future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years, and our ability to implement prudent and feasible tax planning strategies.
At December 31, 2015, we had unrecognized tax benefits of $1.2 million, net of federal income tax, primarily related to refund claims filed in various state jurisdictions during 2010 and various pre-acquisition benefits related to APS Healthcare. During the years ended December 31, 2015, 2014 and 2013, we recognized less than $0.1 million, $0.7 million and $1.3 million, respectively, of refund claims filed in 2010.
A summary of recent and pending accounting pronouncements is provided in Note 4-Recent and Pending Accounting Pronouncements in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K.