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Universal American Corp (NYSE:UAM)

Q1 2014 Results Earnings Conference Call

May 6, 2014 8:30 AM ET

Executives

Richard Barasch - Chairman and CEO

Bob Waegelein - Chief Financial Officer

Tony Wolk - General Counsel

Analysts

Shawn Bevec - Deutsche Bank

Steve Baxter - Bank of America Merrill Lynch

Operator

Greetings. And welcome to the Universal American Corporation First Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Richard Barasch, Chairman and CEO. Thank you, sir. You may begin.

Richard Barasch

Thank you, and good morning, everyone. Thanks for joining us on our first quarter 2014 conference call. I’m here with our CFO, Bob Waegelein; and our General Counsel, Tony Wolk.

I’d now like to ask Tony to read our Safe Harbor language.

Tony Wolk

Good morning. Before we begin, I would like to remind you that we have posted a presentation for this call in the Investors section of our website at www.universalamerican.com. I would also like to remind all participants that our call this morning may contain forward-looking statements within the meaning of the federal securities laws.

These statements, which reflect management’s current expectations, projections and beliefs are subject to risks and uncertainties that may cause actual results to differ materially.

For a discussion of these risks and uncertainties, we recommend that you review the company’s Risk Factors and other disclosures set forth in our SEC filings. We undertake no obligation to update or revise any forward-looking statements to reflect events, developments or circumstances after the date hereof.

During the call, we will also be referring to certain non-GAAP financial measures. Please refer to the reconciliation tables listed in the press release for a discussion of these non-GAAP financial measures. Richard?

Richard Barasch

Thank you, Tony. Before I begin, I’d like to acknowledge the deep bipartisan backing for Medicare Advantage that was evident before and after the 45-day letter came out, and the support from both sides of the aisle for mitigation of some in more difficult aspects of the proposed rule. It’s not long ago that we all wondered about the future of MA. Now it’s 30% of Medicare beneficiaries in growing. It looks like a pretty safe back.

In the aggregate our financial results are clearly not where we want them to be, but this shouldn’t continue the growing value of our core businesses. Our job over the next several months is to cleanup and fixed the items that detract from the overall value of our company. There is a lot we can do, as I will discuss after Bob reports the financial results.

Bob Waegelein

Thank you, Richard. I’d like to remind you that we post additional information on our -- of our operating results in the financial supplement that can be found on our website in the Financial Reports tab of our Investors section.

Looking at slide four, you will see for the first quarter, we reported adjusted after-tax income from our operations of $4.8 million or $0.06 per share. Our Medicare Advantage business had a solid quarter with pre-tax profits of $24.9 million on $256 million of premium.

Our reported MBR was 81.5%, which includes $7.4 million of quality initiative expenses that was historically reported in administrative expenses. In addition, after taking into account positive prior year items in the QI expenses, our adjusted MBR was $85.1 including 213 basis points for this quality initiative expenses.

However, looking at slide five, you will note the disparity between our core and non-core MA businesses, including the rural markets. After eliminating the out of period items and excluding quality initiative expenses, the core markets MBRs for the quarter were 83.4% for our HMOs and 82.5% for our Northeast market. These MBRs were within our expectation.

As important, the continued development of the full year 2013 MBRs were favorably impacted by the positive prior period items, which provides the solid base for our bids for 2015.

Not surprisingly, the weakest results were in our non-core network and rural private fee-for-service businesses. For the quarter, the adjusted MBRs for these products were 92.3% in non-core and 101.5% in rural. As a result, we would likely consider exiting additional non-core markets in 2015.

Returning to slide four, our administrative expense ratio is 11.1 for the first quarter in MA. We recognize that the run rate level of administrative expenses in this business is too high, particularly as we reduce our footprint in the non-core markets. We need to continue to address our administrative scale and Richard, will comment more on that later.

For the quarter, the traditional business had breakeven results, not unexpected as our Medicare supplement business experiences high first quarter seasonal loss ratios. As a reminder, this business is in run-off and accordingly profits will reduce over time.

Finally, our corporate segment on slide four includes the result of APS Healthcare, the Total Care Medicaid plan and the operations of our parent holding company, including debt service.

This segment reported a loss of $12.7 million, the Total Care reporting a modest profit of $900,000, APS recording an $800,000 operating loss and corporate overhead expenses amounted to $11.1 million.

The operating costs for ACOs amounted to $13.1 million or $8.5 million after-tax. We are anticipating that we received information from CMS regarding results of the first program year in the coming months and expect that our results for 2013 will likely show some savings and revenue. However, we will need to determine what investment will be appropriate for the ACO program in the future.

Finally, we also incurred non-operating legal costs relating to our APS acquisition in our corporate segment of $1.3 million after-tax. Taking into account all these items we reported net loss of $5.1 or $0.06 per share.

Moving to page six, we show the balance sheet. As of March, we had $2.1 billion in total assets, including $79 million in unregulated cash at the parent. Pro forma adjusted for the stock buyback that we expect to close later this month our parent cash is $43 million.

We include all of our intangibles, deferred acquisition costs, goodwill and other intangible assets we ended the quarter with a tangible book value per share of $5.72. Finally, the total capitalization ratio as of March was 17.8%, increasing to 18.7% after the buyback. Richard?

Richard Barasch

Okay. Thanks, Bob. Excuse me, 2014 is the year which -- in which we will set the base for the future. Simply stated, we must fix or eliminate all of the items that detract from the solid businesses at the heart of Universal American.

Turning back to slide five for a second, I want to amplify couple of thoughts or remarks about Medicare Advantage. Three things standout, first, as Bob said, 2013 is completing more favorably than anticipated, which bodes well for 2015 bids. Second, the MBRs in our core markets, even backing out the prior period development are in good shape. And third as Bob said, it’s pretty clear from the financial results but adding in the low Star ratings that were likely not bid all of most of the non-core markets in our 2015 bids.

Turning back to slide seven, starting with Medicare Advantage, we’ve identified our core markets most of which are covered by plans with four Star ratings. And we will continue to concentrate our efforts to appropriately reduced medical costs and improve quality in those markets.

We were pleased with the results of the first quarter in the core markets, helped by the positive prior development from last year. This combined with the additional revenue defined, derived from a 4 Star rating in our core markets provide a solid base for 2015 bidding.

In the aggregate, our HMOs in the Southwest continue to perform well and not surprisingly the MBRs in Southeast Texas which includes Houston and Beaumont are lower than those in Dallas and Oklahoma. As I have often stated, Medicare Advantage will hold up well only where we can impact cost of care and improve quality.

In our HMOs, that’s largely accomplished through our partnership with primary care providers, a model that has been and will continue be vibrant through the reduction in benchmark rates enacted by the ACA.

In Houston and Beaumont in particular, we enjoy a market-leading position that is powered by long-standing and successful relationships with primary care providers and should be further solidified by our membership growth in 2014 and a positive affect of the increase in our Stars in 2015 bid. In our other HMO markets, we believe we can improve the profitability of the plans to network re-contracting and better relationships with our primary care docs.

Along with the Southwest HMOs, we’ve identified core markets in the Northeast and in particular, Upstate New York where we have history with providers through our concentration of membership and long history in the market going back to our med sup days.

We now have a complementary collection of assets centered in Upstate New York where we serve nearly 30,000 MA members, 13,000 Medicare fee-for-service beneficiaries through our ACO, nearly 40,000 Medicaid lives through our total care acquisition, which closed in December of 2013. The improvement in our Star ratings in the Northeast is a mark of improve quality but also a mark of greater cooperation with physicians in these markets.

Finally, we must accelerate our efforts to bring down our administrative expenses. Accomplishing the needed decrease in ALR, while reducing membership to get to our profitable core is even harder, but we know we have to do it. Our corporate expenses are also too high but as we more narrowly focus our business, we have to eliminate significant development expenses in this segment.

When the Medicare Shared Savings Program emerged from 2010 Health Care Reform bill, we anticipated that the sorts of techniques we have used successfully in Texas but also work in the fee-for-service population in the Medicare Shared Savings Program.

Tow years into the program, our challenge now is to determine the size and scope of our ongoing investment in our ACOs. We expect that our results for 2013 will likely show some savings in revenue, but potentially not enough to sustain the level of investment that we have made today.

Similar to Medicare Advantage, we are identifying the ACOs -- excuse me, where we can truly impact the cost and quality of medical care, 2014 results will be crucial in making this determination. And we believe we have a group of highly engaged ACOs with whom we will generate positive results.

We’re actively working with the ACO provider partners to deploy the care ordination techniques to close gaps in care and reduce overall cost. Specifically, excuse me -- we have identified the higher risk members with chronic conditions and are actively coordinating their care with on the ground case managers in corporation with their primary care physicians.

We’re also rolling out a new portal that will provide actionable data in analytics to the physicians which will enable them to manage the care of their patients more efficiently. In addition, we are working on creative approaches to enhance our engagement with the healthier beneficiaries so that they can take in more active role in the overall quality and cost of their health care.

It’s important to reach out to these individuals as well to allow the primary care physicians to stay informed as to their health conditions. Even though the results were emerging slower than we had hoped, we believe that we are building a distinctive and important business for Universal American.

It’s also worth noting that CMS has recently issued an RFI, a request for information regarding turning ACOs into risk-bearing entities. If implemented, this could represent a very interesting expansion of our ACO efforts.

APS continues to be a drag in our earnings but we are prepared to take appropriate actions to mitigate or eliminate this drag going forward. Despite these financial results, there are many hardworking and talented people in APS and we remain committed to providing the highest level of service to our existing state and healthcare clients.

In addition, Puerto Rico is in the midst of an RFP process, in which the management behavioral health program that APS is currently performing will now be carved into the overall Medicaid benefit. We are partnered with one of the bidders and expect to hear the results in the several weeks.

A few comments on capital. As we have done, we will continue to return excess capital to our shareholders. And one benefit of shrinking our MA footprint is a reduction in the amount of capital needed to support the business.

As of March 31st, a tangible book value per share was $5.72 and after this stock buyback that is scheduled to close shortly, we have a $130 million of excess capital, not yet factoring in the additional excess capital that will generate some further reducing our MA footprint.

We expect to close our 6 million share buyback in the second quarter. We’re purchasing shares at just over $6 a share which is just over tangible book value. These actions are consistent with our commitment to use our capital prudently and return capital to our shareholders that we are not fully employing in our business.

Bob and I are happy to have had the opportunity to participate in this deal to acquire all the shares, the capital we acquired nearly 15 years ago. We know we have work to do to restore Universal American to a path of creating value.

Specifically over the next several months, we are committed to reducing our MA business to its profitable core, reducing our expenses, rightsizing the net investment in the ACO, eliminating the drag from the APS transaction and of course, using our capital appropriately. As I said at the top, we have a base of excellent core businesses, more than sufficient capital and the commitment to eliminate the financial and strategic distractions.

Thanks for your time this morning. Bob and I will be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today is coming from Scott Fidel from Deutsche Bank. Please proceed with your question. Mr. Fidel, your line is now live, perhaps your phone is on mute.

Shawn Bevec - Deutsche Bank

Sorry about that. This is Shawn Bevec in for Scott. I first wanted to ask about the 2015 MA rates, and specifically what the pressure you guys are seeing for UAM specifically?

Richard Barasch

Yes. When we look, our overall, it affects us mostly in the fact that we’re still in the latter part of the six-year phase down because most of our markets, including our better markets, are in the six-year phase down. So we continue to have that drag. For us, specifically, we have the benefit of the Star, so that kind of helped us quite a bit because that adds close to 3.5% to our revenues. So yes, there is pressure. We feel like everyone else we are in bid process right now and looking at everything as carefully as we possibly can. But I think one other things that I mentioned before is that we’re really looking at getting down to our core where we really do have the ability to impact cost and quality. And I think by doing that that will give us some help in the bids as well. We are seeing the same numbers that everybody else is seeing and there is pressure. And we are going to have to react to that pressure as well.

Shawn Bevec - Deutsche Bank

Okay. And then turning to the ACOs, it sounds like you guys are looking at potentially rationalizing your ACO investments, but the investments have accelerated in the last couple quarters. So I’m just wondering what’s going on there? And then, do you think the initial revenues that you will see from the ACOs later this year will at least recoup the investments that you made through the end of 2013?

Richard Barasch

No, the answer to your second question is, no. But the answer I think which is more important to your first question is after making this investment over this period of time what will we have. And it’s our intention to have a good core and profitable ACOs, stop making investments where we don’t think the return is going to justify it. The reason that the expenses are higher now than they were is because we have more than we had in 2013. And now the process is to as I said get down to the core, good ones. And by the way, there are plenty of them. I am not signaling a massive change, but I am signaling it’s going to be it -- it’s going to be a process of figuring out who the ACOs are that are really committed to this and have the raw material to make this work. And frankly, I think, the techniques that we have are employing are better now than they were last year. So I am still -- we are still committed to the program which is might be on the smaller scale. And look by ’14, hopefully the ’14 results, we are already talking getting revenue for’13. It’s our hope that the ’14 results will in fact cover our expenses.

Shawn Bevec - Deutsche Bank

Okay, great. Thanks.

Operator

(Operator Instructions) Our next question today is coming from Kevin Fischbeck from Bank of America Merrill Lynch. Please proceed with your question.

Steve Baxter - Bank of America Merrill Lynch

Hi. Yes. This is Steve Baxter on for Kevin. I was wondering if you could help us think about the MA MLR for the balance of the year. Given the 87.2% adjusted number that you reported in the quarter and whether you feel like in the first quarter that there was any impact from weather. I know with your markets, mostly the core markets in Texas, it wouldn’t be as much of an impact but you do have a presence in the northeast, which was pretty affected this year.

Richard Barasch

Right. I think what we are seeing is a new membership coming in that we’re trying to get our arms around. Some folks have noted that revenue is impacted a little negatively to the quarter as a result of some of the mix of the business and new membership coming in. So we have to see how that new membership rationalizes itself.

This period of the time it's not fully developed. So we'll see in the next month or so, the cost behavior of these individuals and two things will happen, we’ll identify that there is opportunity to improve the risk scores and the quality of care or that in fact the risk scores are appropriate and the benefit should fall in line.

So we need a little bit of time for development for the new mix of business we had. As we recall, we did have -- dropped out of the rural markets and some of the non-core markets but when we do look at our core markets, the MBRs are in line with where come our feeling should be on this.

Steve Baxter - Bank of America Merrill Lynch

Okay. So for the consolidated MR, you think it could be lower throughout the year or some of the early reduction cost stabilize?

Richard Barasch

On Slide 5, really focusing on our core HMO and our northeast core markets, those are coming in at 83.1 and that’s in line with what our expectations are for the year.

Steve Baxter - Bank of America Merrill Lynch

Okay. So asking that question differently, is there a reason to expect that the non-core or rural MRs will improve throughout the year or do you think this is probably the run rate?

Richard Barasch

It’s a very disparate -- spread out group of individuals that we have no real opportunity to medical manage. So no, I would not look for improvement in those markets. It could be up, it could be down. It’s a volatile group.

Steve Baxter - Bank of America Merrill Lynch

Okay. Thanks. And then you guys have done remarkable job especially compared to the fourth quarter at the lower end of your G&A cost. But I was wondering if there is any specific initiatives you can talk about as you’re looking at the balance of 2014, the mix you are comfortable that as you kind of run off these non-core businesses. You’ll be able to at least maintain your G&A structure and potentially improve it in the ways that you’ve talked about?

Bob Waegelein

Look this is hard work and there is no easy way to do it. We’re looking at every -- we're looking at outsourcing, we’re looking at each one of our contracts, we’re looking at work flow. I think that again the focus on the core is going to help us because we’re going to have a less geographically dispersed membership and I think that will help us run our cost. And we’ll likely have fewer plans in 2015, fewer H numbers which makes it easier to administer. So the list of initiatives is several pages long and it’s just grindingly hard work to do this. There is no magic bullet to this.

Steve Baxter - Bank of America Merrill Lynch

Of course, and I appreciate all the color.

Operator

Thank you. That does conclude our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Richard Barasch

Okay. I just like to thank everyone for their time this morning. As always, Bob, Adam and I are available to speak to you and we look forward to hearing from you and seeing you at the next several conferences. Thanks a lot.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

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Source: Universal American's (UAM) CEO Richard Barasch on Q1 2014 Results - Earnings Call Transcript

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