Our executive offices are located in Rye Brook, New York. Marketing and professional staff for our U.S. insurance subsidiaries occupy space in Lake Mary, Florida and Solon, Ohio. Our Administrative Services operations occupy office space in Pensacola and Weston, Florida. Our Medicare Advantage operations occupy office space in Houston, Beaumont and Dallas, Texas, as well as Oklahoma City, Oklahoma and Milwaukee, Wisconsin. Our Part D operations occupy space in Solon, Ohio and Pensacola, Florida. We lease over 655,000 square feet of office space. Management considers its office facilities suitable and adequate for the current level of operations. In addition to the above, Pennsylvania Life is the named lessee on over 30 properties occupied by career agents for use as field offices. Rent for these field offices is reimbursed by the agents. Additional information regarding our lease obligations is included in Note 26-Commitments and Contingencies in our consolidated financial statements included in this Annual Report on Form 10-K.
(2)Amounts originally reported in our Annual Report on Form 10K for 2005 have been adjusted to reflect the operations of our Canadian subsidiary as discontinued operations.
•For the 2010 Plan year, one or both of our Part D Plans bid under the benchmark in 30 of the 34 regions. We maintained all of our current auto-assigned regions and added three new regions and we were auto-assigned 148,604 additional dual-eligible members in 2010.
•Recorded restructuring charges of $3.0 million, after-tax, or $0.04 per share.
The following table presents our membership in Medicare Advantage and Part D products as of December 31, 2009 and 2008.
(1)2008 amount represents 50% of membership for the Prescription PathwaySM PDP, which was succeeded in 2009 by Prescriba RxSM (PRx). While membership in PRx is 100% retained by us, Prescription PathwaySM was operated in connection with a 50% joint venture partner. Actual membership at December 31, 2008 was 527,000.
Our Senior Managed Care-Medicare Advantage segment includes the operations of our private fee-for-service business, known as PFFS, which offers coverage to Medicare beneficiaries in 45 states and our Medicare coordinated care Plans including PPOs and HMOs. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas and the greater Dallas area, 15 counties in Oklahoma and 4 counties in Wisconsin. In January 2010, we expanded our PPO products to 126 counties in 17 states. As a result of the passage of the Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA, in 2008, the PFFS product will no longer be available as of January 1, 2011, except in areas that have met approved CMS network access requirements or in certain designated rural areas. We have begun to implement a strategy to develop network-based products in selected core markets to enable the migration of our PFFS membership to these products. These businesses provide managed care for seniors under contracts with CMS.
As of December 30, 2009, our enrollment in network-based plans (HMO and PPO) has increased to approximately 64,300 members from 54,300 members at December 31, 2008. As of December 31, 2009, our enrollment in PFFS plans has decreased to approximately 176,200 members, compared with 186,200 members at December 31, 2008.
Effective January 1, 2006, private insurers were permitted to sponsor insured stand-alone PDPs pursuant to Part D, which was established by the Medicare Modernization Act in 2003. The federal government pays a portion of the premium for this insurance, and the balance (if any) is due from the enrolled beneficiary. The federal government also provides additional subsidies in the form of premium support, coverage of the cost-sharing elements of the plan to specified low income Medicare beneficiaries and the federal reinsurance subsidy for claims in the catastrophic benefit phase. For the 2009 plan year, we offered through our insurance subsidiaries, our Community CCRxSM and
Net income for 2008 was $95.1 million, or $1.08 per diluted share, compared to $84.1million, or $1.18 per diluted share for 2007. Net income for 2008 reflects realized investment losses, net of tax, of $38.8 million, or $0.44 per diluted shares, relating primarily to the recognition of other-than-temporary impairment of some of our securities with exposure to subprime mortgages, other structured securities and corporate securities. Income from continuing operations for 2007 reflects realized investment losses, net of tax, of $26.1 million, or $0.37 per diluted shares, relating primarily to the recognition of other-than-temporary impairment of some of our securities with exposure to subprime mortgages.
Our Medicare Part D income increased by $10.6 million, compared to the year ended December 31, 2007. We acquired MemberHealth on September 21, 2007 and our results for the year
ended December 31, 2008 reflect income of $89.4 million on MemberHealth's business, which is an increase of $26.1 million over the prior year period. This was partially offset by a decrease in year to date earnings on Prescription PathwaySM business of $15.5 million compared with the prior year period, primarily as a result of increases in prescription drug costs and the impact of the government risk corridor.
The loss from our Corporate segment increased by $2.9 million, or 8%, for the year ended December 31, 2008 compared to the 2007. The increase was due primarily to an increase in interest costs and the cost of stock based compensation, partially offset by lower other parent company expenses, net of revenues and the non-recurring early extinguishment of debt costs incurred in 2007.
Our Senior Managed Care-Medicare Advantage segment includes the operations of our private fee-for-service business, known as PFFS, which offers coverage to Medicare beneficiaries in 45 states as well as our Medicare coordinated care Plans including PPOs and HMOs. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas and the surrounding Dallas area, 15 counties in Oklahoma and 4 counties in Wisconsin. In January 2010, we expanded our PPO products to 126 counties in 17 states. As a result of the passage of the Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA, the PFFS product will no longer be available as of January 1, 2011, except in areas that have met approved CMS network access requirements or in certain designated rural areas. We have developed network-based products in selected core markets to enable the migration of our PFFS membership to these products. These businesses provide managed care for persons with Medicare under contracts with CMS.
Our Senior Managed Care-Medicare Advantage segment generated income before taxes of $134.8 million for the year ended December 31, 2009, an increase of $40.2 million compared to the year ended December 31, 2008. These results reflect $21.1 million of favorable CMS reconciliations and reserve development in 2009 as compared to $42.1 million in 2008. The increase in earnings was driven by higher medical operating income generated by higher premium, an improvement in the medical benefit ratio of 80 basis points and higher net investment income, partially offset by the $3.5 million restructuring costs incurred during the second quarter and continued investment in the development of provider networks for our expansion PPO markets. The improvement in the medical benefit ratio is due primarily to higher premium per member related to changes in members' risk scoring process in 2009 and the $18.9 million in false claims submitted by fictitious providers, in our PFFS business during the fourth quarter of 2008.
Revenues. Net premiums for the Senior Managed Care-Medicare Advantage segment increased by $483.8 million compared to the year ended December 31, 2007, primarily due to premium growth in both our PFFS and HMO markets. Total member months in our Medicare Advantage Plans for the year ended December 31, 2008 was up from prior year with gains in membership in our HMO Plans and our PFFS Plans. This was partially offset by a decline in net investment income due to lower short term interest rates.
Benefits, Claims and Expenses. Medical expenses increased by $389.3 million compared to the year ended December 31, 2007, consistent with the higher level of earned premium. The Medicare
Advantage medical benefit ratio decreased to 83.2% for the year ended December 31, 2008 from 83.9% for the same period in 2007, primarily as a result of the items discussed above. Commissions and general expenses increased by $45.7 million compared to the year ended December 31, 2007 primarily as the result of an increase in expenses to support the development of provider networks for our PPO markets and growth in membership in our PFFS and HMO Plans. However, the ratio of commissions and general expenses to premiums decreased to 13.3% for the year ended December 31, 2008 from 14.3% in 2007 primarily due to increased efficiencies.
Other Part D income-PDMS represents our equity in the earnings of PDMS-see Note 10 of the notes to the Consolidated Financial Statements. We report this as revenue for segment reporting purposes because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, we reflect this amount as a separate line following income from continuing operations. See the reconciliation of segment revenues in Note 27 of the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K. Our strategic alliance with CVS/Caremark was terminated effective December 31, 2008. Upon termination of this strategic alliance, CVS/Caremark and Universal American were each assigned responsibility for the drug benefit of specific Prescription Pathway's Plan members in a manner to achieve an approximately equal distribution of the value of business that had been generated by the strategic alliance. Universal American has continued to operate PDPs derived from this business under the name PrescribaRx.
In 2008, the Prescription PathwaySM business was reinsured on a 50% coinsurance basis with PharmaCare Re, a subsidiary of CVS/Caremark, and we retained a 50% share in that business. There was no reinsurance for the PrescribaRx business in 2009, and therefore we retained 100%.
Our Medicare Part D segment income for the year ended December 31, 2009 increased by $50.9 million versus the comparable period in 2008. These results reflect favorable CMS reconciliations and reserve development of $0.5 million in 2009 as compared to net negative prior period development of $0.6 million in 2008. In addition, premium growth and improved benefit and expense ratios exceeded the elimination of income generated from our interest in PDMS and the amortization of the below market contract liability by approximately $50 million.
Revenues. Net premiums for the year ended December 31, 2009 increased by $178.8 million, or 10%, versus the comparable period in 2008. The increase in net premiums was primarily attributable to an increase in net retained membership of 125,000 members, offset by a decrease in the government risk corridor receivable. Net premiums for the year ended December 31, 2009 included items related to prior Plan years, which increased total revenue by approximately $14.7 million (net of the impact of government risk corridor). These items were comprised of $9.2 million in risk adjustment revenue related to our 2008 membership and $5.5 million related to the final CMS prescription drug event, known as PDE, reconciliations for prior Plan years. Net premiums for the year ended December 31, 2008 included items which reduced total revenue by approximately $3.9 million (net of the impact of the government risk corridor) related to final CMS PDE reconciliation for the 2007 Plan year. In addition, net premiums for the year ended December 31, 2008 included $39.2 million in amortization of a below market contract liability.
Benefits, Claims and Expenses. Pharmacy benefits for the year ended December 31, 2009, increased by $54.0 million, or 3.5%, compared to the year ended December 31, 2008. The ratio of incurred prescription drug benefits to net premium was 80.1% and 85.1% for the years ended December 31, 2009 and 2008, respectively. The improvement in the ratio of incurred prescription drug benefits to net premium is attributable to more competitive network rates available through our claims processor, combined with higher rebates that resulted from the consolidation of our Medicare Part D contracts with pharmaceutical manufacturers. In addition, pharmacy benefits for the year ended December 31, 2009 include $14.2 million in items related to prior plan years. These items increased benefits and are primarily attributable to co-pay refunds that will be issued to members for the 2008 plan year, partially offset by rebates earned in prior periods. Pharmacy benefits for the year ended December 31, 2008 included a $2.0 million reduction related to the final 2007 CMS PDE and plan to
plan membership reconciliations. Commissions and general expenses for the year ended December 31, 2009 decreased by $16.6 million versus the comparable period in 2008 with the decrease largely attributable to our restructuring of the Medicare Part D call center, other member services and PBM services which began during 2008 and was completed in 2009.
Our Medicare Part D income increased by $10.6 million, compared to the year ended December 31, 2007. We acquired MemberHealth on September 21, 2007 and our results for the year ended December 31, 2008 reflect income of $89.4 million on MemberHealth's business, which is an increase of $26.1 million over the prior year period. This was partially offset by a decrease in year to date earnings on Prescription PathwaySM business of $15.5 million compared with the prior year period, primarily as a result of increases in prescription drug costs and changes in the calculation of the government risk corridor.
Membership. At December 31, 2008, our net retained membership for Medicare Part D was 1,572,000 members compared to net retained membership of 1,429,000 members at December 31, 2007, an increase of 143,000 members or 10% over December 31, 2007. Net retained membership excludes members that were reinsured to CVS/Caremark. The increase is principally attributable to growth from open enrollment, and dual eligible members auto assigned to our plans in 2008. At December 31, 2008, our Part D membership reflects approximately 1,308,000 members enrolled in our Community CCRxSM PDP and retained membership of 264,000 members enrolled in our Prescription PathwaySM business, which we participate in on a 50% basis. Prior to January 1, 2008, we participated, on a 33.3% basis, in Arkansas BCBS which had approximately 25,000 members at December 31, 2007.
Other Part D income-PDMS increased by $16.1 million compared to the year ended December 31, 2007 as a result of growth in business at Prescription PathwaySM and increased revenue rates. Net investment and other income increased by $14.0 million principally as a result of the inclusion of revenue earned by MemberHealth for third party services, partially offset by lower rates of return on investments.
Benefits, Claims and Expenses. Pharmacy benefits increased by $1,105.9 million compared to the year ended December 31, 2007. The MemberHealth business generated $1,262.2 million of benefits for the year ended December 31, 2008, which was an increase of $1,067.7 million over the prior year period due to the acquisition of MemberHealth on September 21, 2007. The 2008 pharmacy benefits reflect a $4.0 million reduction related to the final 2007 CMS PDE and Plan to Plan Membership reconciliations for MemberHealth. Pharmacy benefits for our Prescription PathwaySM business increased
Revenues. Net premiums declined by $72.9 million, or 18.5% compared to the year ended December 31, 2008. As a result of the reinsurance transaction with Commonwealth, life and annuity premium ceded increased by $31.8 million. The remaining decrease is primarily a result of the continued effect of lapsation of our senior market and specialty health in-force business. Gross and ceded premium for specialty health both declined by $171.8 million as the result of the June 30, 2008 termination of the reinsurance arrangement with PharmaCare Re for the state of Connecticut employees. The decrease in net investment income is primarily due to the decrease in invested assets as a result of the Commonwealth reinsurance transaction as well as lower yield on retained assets.
Commissions and general expenses, net of allowances, decreased by $19.5 million compared to the year ended December 31, 2008. The lower level of commissions is associated with the continued aging of our in-force renewal premium and less new business production that has higher commission rates. Other operating costs decreased $10.4 million for the year ended December 31, 2009, compared to the twelve months ended December 31, 2008. This is primarily due to the lower levels of business in-force. Allowances received from reinsurers decreased $1.4 million for the year ended December 31, 2009 from the year ended December 31, 2008, primarily due to the termination of the State of Connecticut
employees reinsurance arrangement with PharmaCare Re effective June 30, 2008 partially offset by an increase in allowances received on life and annuity business reinsured to Commonwealth.
Revenues. Net premiums declined by $47.9 million or 11% and was primarily caused by the continued effect of lapsation of our Medicare supplement in force products. Below is a summary of premium for the segment by major lines of business.
Benefits, Claims and Expenses. Policyholder benefits incurred and interest credited to policyholders declined by $33.4 million, or 10%, compared to 2007. This decline was principally caused by a net reduction in Medicare supplement benefits of $21.8 million as well as declines in the levels of Specialty Health and Life and Annuity benefits as a result of a decline in the business partially offset by an increase in the Medicare Supplement loss ratio to 75.2% for 2008 from 73.4% for 2007.
During our annual valuation of the recovery of goodwill, we concluded that the fair value of the Traditional reporting unit had declined, and as a result, we recorded an impairment charge of $3.9 million to eliminate its goodwill. For further discussion of this adjustment, refer to Note 7 of notes to consolidated financial statements elsewhere in this Annual Report on Form 10-K.
Revenue declined by $42.7 million, or 50%, during the year ended December 31, 2009 compared to 2008. Affiliated service fee revenue decreased by $32.5 million primarily as a result of the loss of fee income associated with the administration of our Part D business that is performed directly by the affiliated entities in 2009 as well as a reduction in fee levels and lower policies in-force for our affiliated Medicare supplement business, partially offset by growth in revenues on services performed for affiliated long term care and life insurance business. Unaffiliated service fee revenue decreased by $10.2 million, due primarily to a decrease in services performed for unaffiliated Medicare Advantage, long term care and Medicare supplement business. General expenses for the segment decreased by $29.0 million, or 46%, primarily due to the decline in the business discussed above.
Segment income before taxes for our Senior Administrative Services segment decreased by $2.1 million, or 9%, to $22.0 million for the year ended December 31, 2008, as compared to 2007. This decrease is primarily the result of reduced levels of affiliated service fee revenues, net of a decrease in general expenses.
The decrease in interest expense of $3.8 million is due primarily to a reduction in the interest rates charged on the debt, as compared to 2008. The weighted average interest rate on our loan payable was 4.0% for 2009 compared to 4.6% for 2008. The weighted average interest rate on our other long term debt was 6.2% for 2009 compared to 7.4% for 2008. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.
The increase in stock-based compensation expense of $0.8 million resulted primarily from option awards, in the last quarter of 2008 and the first nine months of 2009, to directors, officers and other employees approved by the compensation committee.
Our contractual obligations as of December 31, 2009, are shown below.
(2)Trust preferred securities all have scheduled maturities of 30 years from the dates of issue; however they are all callable by us five years from the date of issuance. For the purpose of this schedule, we have assumed that the securities will be redeemed at their scheduled maturities, not the call date. Accordingly, the obligation for repayment of principal relating to these is included in the More than 5 Years column. The trust preferred securities generally have floating rate interest rates. However, the interest rate on $50 million of the trust preferred securities is fixed through its no call period and then converts to a floating rate. We did not project future changes in the base interest rates. For the purpose of this schedule, we applied the base rate in effect at December 31, 2009 to all future periods. Additionally, we assumed that, upon the expiration of the fixed rate, the rate for the respective trust preferred security adjusted to a variable rate using the current base rate.
(3)Reflects scheduled amortization through final maturity in 2012. The loan payable is floating rate debt, although we pay a fixed rate on $250 million through the use of swap agreements. We did not project future changes in the base interest rates. For the purpose of this schedule, we applied the rate in effect at December 31, 2009 to all future periods.
(5)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
We require cash at our parent company to support the growth of our insurance subsidiaries and HMO affiliates, meet our obligations under our credit facility, fund potential growth through acquisitions of other companies or blocks of business, and pay the operating expenses necessary to function as a holding company, as applicable insurance department regulations require us to bear our own expenses and fund other corporate finance activities.
The parent company's sources and uses of liquidity are derived from the following:
•the cash flows of our unregulated subsidiaries including our PBM subsidiary, our management service organizations ("MSO") under our senior managed care company and the senior administrative services company;
Unregulated subsidiary cash flows. The primary sources of liquidity for our unregulated subsidiaries are fees collected from clients for performing administrative, marketing and management services. The uses are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for the unregulated subsidiaries will exceed scheduled uses of cash and result in amounts available to dividend to our parent holding company.
Insurance subsidiaries and HMO affiliates-surplus note principal repayments, Dividends and Capital Contributions. We require cash at our insurance subsidiaries and HMO affiliates 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. Excess capital can be used to make dividend and surplus note principal payments to our parent company, subject to certain restrictions.
At December 31, 2009, we held cash and cash equivalents totaling $755 million and fixed maturity securities that could readily be converted to cash with carrying values of $965 million at our insurance companies and HMO affiliates. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.
Our parent holding company did not make capital contributions to American Exchange during 2009 and 2008. American Exchange did not make capital contributions to its subsidiaries during 2009 and made a $7.0 million capital contribution to its Pyramid subsidiary and a $6.5 million capital contribution to its Marquette subsidiary during 2008. Further, no dividends were declared nor paid to American Exchange from its subsidiaries during 2009 and 2008.
Debt principal and interest-Credit Facility, Swaps and Other Long Term Debt. We currently have a credit facility consisting of a $350 million term loan and a $150 million revolver. This Credit Facility has customary covenants and requirements including a leverage ratio test, minimum risk based capital requirements for our insurance companies and, under certain conditions, the ability to pose limitations on certain investments, dispositions and our ability to make restricted payments. Other than the limitations on restricted payments (see the ensuing paragraph and Note 14 - Loan Payable), as of December 31, 2009, we were well in excess of minimum requirements, such that there would be no material effect on our ability to operate our business or incur additional indebtedness and there were no covenant violations.
On December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in fixed rate of 4.14% and receive a floating rate based on LIBOR. During 2009, we paid a net amount of $6.3 million in association with these swap agreements.
In 2003 and 2007, we formed statutory business trusts, in order to issue a combined $125.0 million in thirty year trust preferred securities, with $110 million currently outstanding. $60 million of these
securities have floating interest rates based on LIBOR and are currently at an average rate of 4.33%. The remaining $50 million is fixed at 7.68% until March 2012. We made interest payments on the trust preferred securities totaling $7.2 million during the year ended December 31, 2009.
future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, resulting in reduced net income and shareholders' equity.
The policy and contract claims liability for our health policies include a liability for unpaid claims, including claims in the course of settlement, as well as a liability for IBNR claims. Our policy and contract claims-health liability by major product grouping is as follows:
Policy and contract claims-health decreased by $120.1 million at December 31, 2009 from December 31, 2008. This decrease was due primarily to a change in our Part D claims processing that resulted in reducing days' claims payable for Part D claims at December 31, 2009 compared to December 31, 2008.
The claim reserve balances at December 31, 2008 settled during 2009 for $3.6 million more than originally estimated, representing 0.1% of the incurred claims recorded in 2008.
During 2007, the claim reserve balances at December 31, 2006 ultimately settled for $1.5 million less than originally estimated, representing 0.2% of the incurred claims recorded in 2006.
The following table illustrates the sensitivity of our health IBNR payable at December 31, 2009 to identified reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health care cost trend rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.
gross profits would not be adequate to recover the unamortized costs, we would write off the excess deferred policy acquisition costs. Based on our review of DAC recoverability as October 1, 2009, we determined the DAC was recoverable.
Business combinations accounted for as a purchase result in the allocation of the purchase consideration to the fair values of the assets and liabilities acquired, including the present value of future profits, establishing these fair values as the new accounting basis. We base the present value of future profits on an estimate of the cash flows of the in-force business acquired, discounted to reflect the present value of those cash flows. The discount rate we select depends upon the general market conditions at the time of the acquisition and the inherent risk in the transaction. We allocate purchase consideration in excess of the fair value of net assets acquired, including the present value of future profits and other identified intangibles, for a specific acquisition, to goodwill. We perform the allocation of purchase price in the period in which we consummate the purchase. Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies, tax matters and refinements made to estimates of fair value in connection with the preliminary allocation.
(1)Goodwill eliminated as a result of impairment at December 31, 2008. See discussion below.
Our businesses participate in the U.S. health care economy, which comprises a significant portion of the gross domestic product and which has grown consistently for many years. Management expects overall spending on health care in the U.S. to continue to rise in the future, based on inflation, demographic trends in the U.S. population and national interest in health and well-being. The rate of market growth may be impacted by a variety of factors, including macro-economic conditions and proposed health care reforms, which could also impact our results of operations.
having the federal or one or more state governments assume a larger role in the health care system such as competing with private health insurers, imposing new taxes on health insurers, or restructuring of the Medicare or Medicaid programs. Any health care reforms enacted may be phased in over a number of years, but, if enacted, could increase our costs, expose us to expanded liability and require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition, our operating results, financial position and cash flows could be materially adversely affected by such changes even if we correctly predict their occurrence. The current administration and various congressional leaders have expressed their interest in reducing payments to private plans offering Medicare Advantage over the intermediate term. On February 19, 2010, CMS released preliminary 2010 Medicare Advantage payment rates which represent a modest growth rate in the base payment of 1.38%. The growth rate is offset by other factors including a FFS normalization factor to account for the faster pace of risk score development among MA plans relative to fee for service Medicare and the phase out of IME payments. Overall, the increase in the base payment is insufficient to cover our projected trend in medical expense. Management believes that there are a number of annual adjustments we can make to our operations which may serve to partially offset any impact from these rate reductions. For example, we can adjust members' benefits and/or premiums, decide on a county-by-county basis which geographies to participate in and seek to intensify our medical and operating cost management. There can be no assurance that we will be able to successfully execute on these or other strategies to address changes in the Medicare Advantage program. The reduction of payments to private plans may also cause declines in the number of seniors participating in Medicare Advantage and the industry-wide revenues and earnings derived from these plans. Our operating results, financial position and cash flows could be materially adversely affected by such declines. If industry-wide Medicare Advantage membership declines, there is likely to be increased demand for Medicare Supplemental insurance and Part D prescription drug coverage, and in both categories Universal American is a market leader.
CMS has preliminarily proposed a modest increase in Medicare Advantage reimbursements for 2011 to be finalized by April 1, 2010.
Our revenues are also impacted by U.S. monetary and fiscal policy as it effects interest rates, which impacts the interest income earned on our investments. Beginning in late 2008, the U.S. Federal Reserve decreased and has maintained the target federal funds rate to a range of zero to 25 basis points. As of December 31, 2009 our $1.8 billion portfolio of cash and investments is substantially composed of high quality securities and cash, and has a relatively short aggregate duration, which has been directly impacted by this interest rate reduction. Changes in federal monetary policy have reduced the level of investment income received from this portfolio on a year-over-year basis. In total, management believes that economic recessions will slow our revenue growth rate and could impact our operating profitability. Management also believes that government funding pressure, coupled with recessionary economic conditions, will impact the financial positions of hospitals, physicians and other care providers and could therefore increase medical cost trends experienced by our businesses.
We operate a diversified set of health care businesses focused on the senior market. This business model has been designed to address a multitude of market sectors. We could see simultaneous increases and decreases in demand for our various products and services, depending on the scope, shape and timing of health care reforms. It is difficult to predict the outcome of reform discussions with precision over the mid- to long-term time horizon. For additional discussions regarding our risks related to health care reforms and Medicare Advantage reimbursement changes, see "Item 1A. Risk Factors" in Part I of this Annual Report on Form 10-K.
During each quarter, we perform a review of certain key components of our valuation of our reporting units, including the operating performance of the reporting units compared to plan (which was the primary basis for the prospective financial information included in our last goodwill impairment test as of October 1, 2009), the company's weighted average cost of capital and the company's stock price and market capitalization. Based on our review of these items through the reporting date, we believe that our estimate of fair value for each of our reporting units remains reasonable.
•If we intend to sell a debt security, or it is more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis, we recognize an OTTI in earnings equal to the entire difference between the debt security's amortized cost basis and its fair value at the balance sheet date.
We have a security monitoring process overseen by our Investment Committee, consisting of investment and accounting professionals who identify securities that, due to specified characteristics, as described below, we subject to an enhanced analysis on a quarterly basis. We review our fixed maturity securities at least quarterly to determine if an other-than-temporary impairment is present based on specified quantitative and qualitative factors. The primary factors that we consider in evaluating whether a decline in value is other-than-temporary are
As of December 31, 2009, we held subprime securities with par values of $136.2 million, an amortized cost of $52.6 million and a market value of $25.9 million representing approximately 1.4% of our cash and invested assets, with collateral comprised substantially of first lien mortgages. The majority of these securities are in senior or senior-mezzanine level tranches, which have preferential liquidation characteristics, and have an average rating of A+ by Standard & Poors, a division of the McGraw Hill Companies, Inc., known as S&P, or equivalent.
We continuously review our subprime holdings stressing multiple variables, such as cash flows, prepayment speeds, default rates and loss severity, and comparing current base case loss expectations to the loss required to incur a principal loss, or breakpoint. This breakpoint currently exceeds the base case loss expectation for 14 out of a total of 32 holdings to varying degrees. We expect delinquency and loss rates in the subprime mortgage sector to continue to increase in the near term but at a decreasing rate. Those securities with a greater variance between the breakpoint and base case can withstand this further deterioration. However, holdings where the base case is closer to the breakpoint are more likely to incur a principal loss. We utilize third party pricing services to provide or estimate market prices. The major inputs used by third party pricing services include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and estimated cash flows and prepayment speeds. If there are no recent reported trades, the third party pricing services may use matrix or model processes to develop a security price, as has recently been the case with many of our subprime holdings.
The following table summarizes, on a pre-tax basis, our other-than-temporary impairments recorded since the subprime deterioration began in 2007:
At December 31, 2007, we recognized an other-than-temporary impairment on fourteen 2006 and 2007 vintage year subprime holdings. As of December 31, 2008, we recognized an additional other-than-temporary impairment on the same fourteen securities impaired at December 31, 2007 plus four additional subprime holdings that were initially impaired during the first quarter of 2008. In addition, during 2008, we have recognized an other-than-temporary impairment on five other structured securities and three corporate securities. The corporate other-than-temporary impairment includes $6.1 million on two Lehman Brothers securities. During the year ended December 31, 2009, we recognized an additional other-than-temporary impairment on twelve subprime securities impaired in 2007 and 2008, plus one additional subprime holding in 2009.
Part A-Hospitalization benefits are provided under Part A. These benefits are financed largely through Social Security taxes. Beneficiaries are not required to pay any premium for Part A benefits; however, they are still required to pay out-of- pocket deductibles and coinsurance.
Low-Income Premium Subsidy-For qualifying low-income status, or LIS, members of our Medicare Advantage Health Benefit Plans with Part D benefits, CMS pays us for some or all of the LIS member's monthly premium. The CMS payment is dependent upon a member's income level which is
Low-Income Cost Sharing Subsidy-For qualifying LIS members of our Medicare Advantage Health Benefit Plans with Part D benefits, CMS will reimburse the Plans for all or a portion of the LIS member's deductible, coinsurance and co-payment amounts above the out of pocket threshold for low income beneficiaries. Low-income cost sharing subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid we submitted to CMS. After the close of the annual Plan year, CMS reconciles actual experience to low-income cost sharing subsidies paid to the Plan and any differences are settled between CMS and the Plan. The low-income subsidy is accounted for as deposit accounting and therefore not recognized in operations.
Catastrophic Reinsurance-We receive payments from CMS for catastrophic reinsurance for members of our Medicare Advantage Health Benefit Plans with Part D benefits.
We carried valuation allowances on deferred tax assets of $5.8 million at December 31, 2009 and $4.4 million at December 31, 2008 primarily related to the tax benefits associated with a New York state net operating loss carryforward. At December 31, 2009, we recorded our deferred tax assets based on the amount that was more likely than not to be realized under ASC 740, Income Taxes.
We file a consolidated life-nonlife return for Federal income tax purposes that reflects all US subsidiaries, as well as Heritage and its subsidiaries and American Exchange and its subsidiaries. At December 31, 2009, the Company had a net operating loss carryforward of approximately $1.0 million that expires in 2025.
Management believes it is more likely than not that the Company will realize the recorded value of its net deferred tax assets.
Some of our U.S. insurance company subsidiaries are taxed as life insurance companies as provided in the Internal Revenue Code. The Omnibus Budget Reconciliation Act of 1990 amended the Internal Revenue Code to require a portion of the expenses incurred in selling insurance products be capitalized and amortized over a period of years, as opposed to an immediate deduction in the year incurred. Instead of measuring actual selling expenses, the amount capitalized for tax purposes is based on a percentage of premiums. In general, the capitalized amounts are subject to amortization over a
ten-year period. Since this change only affects the timing of the deductions, it does not, assuming stability of income tax rates, affect the provisions for taxes reflected in our financial statements prepared in accordance with GAAP. However, by deferring deductions, the change has the effect of increasing our current tax expense and reducing statutory surplus. There was no material increase in our current income tax provision for any of the three years in the period ended December 31, 2009.