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TABLE OF CONTENTS

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

Commission file number: 001-35149



UNIVERSAL AMERICAN CORP.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  27-4683816
(I.R.S. Employer
Identification No.)

44 South Broadway, Suite 1200, White Plains, New York 10601
(Address of principal executive offices and zip code)

(914) 934-5200
(Registrant's telephone number, including area code)



        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

        Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

Class of Common Stock   Outstanding at April 30, 2015
Non-voting, par value $0.01 per share   3,300,000 shares
Voting, par value $0.01 per share   80,733,013 shares

   


Table of Contents


TABLE OF CONTENTS

 
  Item   Description   Page  

PART I

       

Financial Information

     

    1  

Financial Statements:

     

       

Consolidated Balance Sheets

    3  

       

Consolidated Statements of Operations—Three Months

    4  

       

Consolidated Statements of Comprehensive Income (Loss)

    5  

       

Consolidated Statements of Stockholders' Equity

    6  

       

Consolidated Statements of Cash Flows

    7  

       

Notes to Consolidated Financial Statements

    8  

    2  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    24  

    3  

Quantitative and Qualitative Disclosures About Market Risk

    38  

    4  

Controls and Procedures

    40  

PART II

       

Other Information

     

    1  

Legal Proceedings

    41  

    1A  

Risk Factors

    41  

    2  

Unregistered Sales of Equity Securities and Use of Proceeds

    41  

    3  

Defaults Upon Senior Securities

    41  

    4  

Mine Safety Disclosures

    41  

    5  

Other Information

    41  

    6  

Exhibits

    41  

       

Signatures

    42  

Table of Contents

        As used in this quarterly report on Form 10-Q, except as otherwise indicated, references to the "Company," "we," "our," and "us" are to Universal American Corp., a Delaware corporation and its subsidiaries.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

        This report, including, without limitation, the information set forth or incorporated by reference under Part II, Item 1A "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other risks and uncertainties set forth in this report and oral statements made from time to time by our executive officers contains "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. Statements in this report that are not historical facts are hereby identified as forward-looking statements and are intended to be covered by the safe harbor provisions of the PSLRA. They can be identified by the use of the words "believe," "expect," "predict," "project," "potential," "estimate," "anticipate," "should," "intend," "may," "will" and similar expressions or variations of such words, or by discussion of future financial results and events, strategy or risks and uncertainties, trends and conditions in the Company's business and competitive strengths, all of which involve risks and uncertainties.

        Where, in any forward-looking statement, we or our management expresses an expectation or belief as to future results or actions, there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Our actual results may differ materially from our expectations, plans or projections. We warn you that forward-looking statements are only predictions and estimates, which are inherently subject to risks, trends and uncertainties, many of which are beyond our ability to control or predict with accuracy and some of which we might not even anticipate. We give no assurance that we will achieve our expectations and we do not assume responsibility for the accuracy and completeness of the forward-looking statements. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements as a result of many factors, including the risk factors described or incorporated by reference in Part II, Item 1A of this report. We caution readers not to place undue reliance on these forward-looking statements that speak only as of the date made.

        We undertake no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in these forward-looking statements are reasonable at the time made, any or all of the forward-looking statements contained in this report and in any other public statements that are made may prove to be incorrect. This may occur as a result of inaccurate assumptions as a consequence of known or unknown risks and uncertainties. All of the forward- looking statements are qualified in their entirety by reference to the factors discussed or incorporated by reference under the caption "Risk Factors" under Part II, Item 1A of this report. We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment that is highly complicated, regulated and competitive and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur. You should carefully read this report and the documents that we incorporate by reference in this report in its entirety. It contains information that you should consider in making any investment decision in any of our securities.

2


Table of Contents

PART I

ITEM 1—FINANCIAL STATEMENTS


UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 
  March 31,
2015
  December 31,
2014
 
 
  Unaudited
   
 

ASSETS

             

Investments:

   
 
   
 
 

Fixed maturities available for sale, at fair value (amortized cost: 2015, $785,671; 2014, $816,662)

  $ 819,261   $ 845,453  

Short-term investments

    1,500     8,994  

Other invested assets

    26,356     25,920  

Total investments

    847,117     880,367  

Cash and cash equivalents

    77,425     127,985  

Accrued investment income

    7,122     6,424  

Deferred policy acquisition costs

    74,530     77,814  

Reinsurance recoverables—life

    491,965     498,468  

Reinsurance recoverables—health

    137,003     136,805  

Due and unpaid premiums

    66,523     55,586  

Present value of future profits and other amortizing intangible assets

    12,933     14,010  

Goodwill and other indefinite lived intangible assets

    73,261     73,261  

Deferred income tax asset

    23,287     18,039  

Income taxes receivable

    13,299     31,085  

Other assets

    118,190     105,454  

Total assets

  $ 1,942,655   $ 2,025,298  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

LIABILITIES

   
 
   
 
 

Reserves and other policy liabilities—life

  $ 509,154   $ 514,440  

Reserves for future policy benefits—health

    452,587     453,784  

Policy and contract claims—health

    133,105     147,561  

Premiums received in advance

    5,315     6,093  

Series A mandatorily redeemable preferred shares

    40,000     40,000  

Loan payable

    44,880     103,447  

Amounts due to reinsurers

    4,855     4,196  

Other liabilities

    130,052     141,312  

Total liabilities

    1,319,948     1,410,833  

Commitments and contingencies (Note 8)

             

STOCKHOLDERS' EQUITY

   
 
   
 
 

Preferred stock (Authorized: 40 million shares)

         

Common stock—voting (Authorized: 400 million shares; issued and outstanding: 2015, 80.7 million shares; 2014, 80.4 million shares)

    807     804  

Common stock—non-voting (Authorized: 60 million shares; issued and outstanding: 3.3 million shares)

    33     33  

Additional paid-in capital

    670,570     667,026  

Accumulated other comprehensive income

    15,184     12,648  

Retained deficit

    (63,887 )   (66,046 )

Total stockholders' equity

    622,707     614,465  

Total liabilities and stockholders' equity

  $ 1,942,655   $ 2,025,298  

   

See Notes to unaudited Consolidated Financial Statements.

3


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

 
  For the three months
ended March 31,
 
 
  2015   2014  

Revenues:

             

Net premium and policyholder fees earned

  $ 412,863   $ 481,654  

Net investment income

    7,432     8,022  

Fee and other income

    24,380     21,943  

Net realized gains

    147     1,047  

Total revenues

    444,822     512,666  

Benefits, claims and expenses:

             

Claims and other benefits

    354,158     396,771  

Change in deferred policy acquisition costs

    3,284     3,021  

Amortization of intangible assets

    1,077     1,315  

Commissions

    5,390     7,280  

Reinsurance commissions and expense allowances

    1,687     1,942  

Interest expense

    1,557     1,542  

Affordable Care Act fee

    7,093     5,428  

Other operating costs and expenses

    70,066     89,040  

Total benefits, claims and expenses

    444,312     506,339  

Income before equity in losses of unconsolidated subsidiaries

    510     6,327  

Equity in losses of unconsolidated subsidiaries

    (7,435 )   (8,322 )

Loss before income taxes

    (6,925 )   (1,995 )

(Benefit from) provision for income taxes

    (9,079 )   3,055  

Net income (loss)

  $ 2,154   $ (5,050 )

Income (loss) per common share:

             

Basic

  $ 0.03   $ (0.06 )

Diluted

  $ 0.03   $ (0.06 )

Weighted average shares outstanding:

             

Basic weighted average shares outstanding

    82,019     87,542  

Effect of dilutive securities

    1,363      

Diluted weighted average shares outstanding

    83,382     87,542  

   

See Notes to unaudited Consolidated Financial Statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 
  For the three
months
ended March 31,
 
 
  2015   2014  

Comprehensive income (loss):

             

Net income (loss)

  $ 2,154   $ (5,050 )

Other comprehensive income, net of income taxes:

             

Unrealized gain on investments

    3,588     5,572  

Less: reclassification adjustment for gains included in net loss

    329     681  

Change in net unrealized gain on securities available for sale

    3,259     4,891  

Change in long-term claim reserve adjustment

    (723 )   (1,150 )

Total other comprehensive income, net of income taxes

    2,536     3,741  

Comprehensive income (loss)

  $ 4,690   $ (1,309 )

   

See Notes to unaudited Consolidated Financial Statements.

5


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(in thousands)

 
  Common Stock    
  Accumulated
Other
Comprehensive
Income
   
   
 
 
  Additional
Paid-in
Capital
  Retained
Deficit
   
 
 
  Voting   Non-Voting   Total  

2014

                                     

Balance at January 1, 2014

  $ 855   $ 33   $ 693,329   $ 7,329   $ (36,647 ) $ 664,899  

Net loss

                    (5,050 )   (5,050 )

Other comprehensive income

                3,741         3,741  

Net issuance of common stock

    11         7,432             7,443  

Stock-based compensation

            1,131             1,131  

Dividends to stockholders

            129         38     167  

Balance at March 31, 2014

  $ 866   $ 33   $ 702,021   $ 11,070   $ (41,659 ) $ 672,331  

2015

                                     

Balance at January 1, 2015

  $ 804   $ 33   $ 667,026   $ 12,648   $ (66,046 ) $ 614,465  

Net income

                    2,154     2,154  

Other comprehensive income

                2,536         2,536  

Net issuance of common stock

    3         2,074             2,077  

Stock-based compensation

            1,303             1,303  

Dividends to stockholders

            167         5     172  

Balance at March 31, 2015

  $ 807   $ 33   $ 670,570   $ 15,184   $ (63,887 ) $ 622,707  

   

See Notes to unaudited Consolidated Financial Statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 
  For the three months
ended March 31,
 
 
  2015   2014  

Operating activities:

             

Net income (loss)

  $ 2,154   $ (5,050 )

Adjustments to reconcile net income (loss) to cash used for operating activities, net of balances acquired:

             

Deferred income taxes

    (6,614 )   1,288  

Net realized gains on investments

    (507 )   (1,047 )

Realized losses on sale of business

    360      

Amortization of intangible assets

    1,077     1,315  

Amortization of debt issuance costs

    1,125     438  

Net amortization of bond premium

    1,149     1,234  

Depreciation expense

    1,392     1,971  

Stock based compensation expense

    3,292     2,540  

Changes in operating assets and liabilities:

   
 
   
 
 

Affordable Care Act fee

    7,093     5,428  

Deferred policy acquisition costs

    3,284     3,021  

Reserves and other policy liabilities—life

    (5,286 )   (3,146 )

Reserves for future policy benefits—health

    (2,310 )   (3,112 )

Policy and contract claims—health

    (5,312 )   (6,417 )

Reinsurance balances

    6,964     6,728  

Due and unpaid/advance premium, net

    (11,715 )   (24,577 )

Income taxes receivable

    16,635     2,843  

Other, net

    (29,946 )   (314 )

Cash used for operating activities

    (17,165 )   (16,857 )

Investing activities:

   
 
   
 
 

Proceeds from sale, maturity, call, paydown or redemption of fixed maturity investments

    68,589     97,455  

Cost of fixed maturity investments acquired

    (38,241 )   (33,122 )

Sale and maturity of short-term investments

    7,494      

Sale of business, net of cash sold

    (7,396 )    

Purchase of fixed assets

    (1,315 )   (1,605 )

Other investing activities

    (3,701 )   (3,808 )

Cash provided by investing activities

    25,430     58,920  

Financing activities:

   
 
   
 
 

Net proceeds from issuance of common stock, net of tax effect

    267     388  

Dividends paid to stockholders

    (525 )   (1,138 )

Principal payment on loan payable

    (58,567 )    

Cash used for financing activities

    (58,825 )   (750 )

Net (decrease) increase in cash and cash equivalents

    (50,560 )   41,313  

Cash and cash equivalents at beginning of period

    127,985     69,574  

Cash and cash equivalents at end of period

  $ 77,425   $ 110,887  

   

See Notes to unaudited Consolidated Financial Statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND COMPANY BACKGROUND

        Except as otherwise indicated, references to the "Company," "Universal American," "we," "our," and "us" are to Universal American Corp., a Delaware corporation, and its subsidiaries.

        Universal American is a specialty health and life insurance holding company with an emphasis on providing a broad array of health insurance and managed care products and services to people covered by Medicare and Medicaid. Collectively, our health plans and insurance company subsidiaries are licensed in all fifty states and in the District of Columbia and authorized to sell Medicare Advantage products, life, accident and health insurance and annuities and to provide comprehensive medical services through Medicaid.

        Through our Medicare Advantage subsidiaries, we sell Medicare Coordinated Care Plan products in Texas, which we call HMOs, and sell Medicare Coordinated Care products in New York and Maine that are built around contracted networks of providers, which we call PPOs and Medicare Advantage private fee-for-service products, known as PFFS Plans.

        Our subsidiary, Collaborative Health Systems, LLC, also known as CHS, works with physicians and other healthcare professionals to operate Accountable Care Organizations, or ACOs, under the Medicare Shared Savings Program ("Shared Savings Program"). During the first quarter of 2015, we added one new ACO. As of March 31, 2015, we had twenty-five active ACOs in eleven states previously approved for participation in the program by the Centers for Medicare & Medicaid Services, known as CMS. Based on data provided by CMS, these twenty-five ACOs currently include approximately 4,200 participating providers with approximately 292,000 assigned Medicare fee-for-service beneficiaries, both within and outside our current Medicare Advantage footprint, including southeast Texas and upstate New York. CHS provides these ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care and lower healthcare costs for their Medicare fee-for-service beneficiaries. The Company provides funding to CHS to support the operating activities of CHS and the ACOs.

        We operate the Total Care Medicaid managed care plan which provides Medicaid managed care services in upstate New York, currently serving approximately 40,000 members in Syracuse and surrounding areas.

        We discontinued marketing and selling Traditional insurance products, consisting of Medicare supplement products, fixed benefit accident and sickness insurance and senior life insurance after June 1, 2012. However, we continue to manage the block as the policies remain in force over the renewal period.

        Our APS Healthcare subsidiaries provide specialty health services focused on behavioral health benefits, disease and condition management, and quality review and improvement services to government agencies, such as state Medicaid programs, commercial health plans, employers and unions. On February 4, 2015, we completed the sale of our APS Healthcare Puerto Rico subsidiaries. See Note 10—Other Disclosures for further details. On May 1 2015, we completed the sale of our APS domestic subsidiaries. See note 11—Subsequent Event for further details.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION

        We have prepared the accompanying Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, for interim reporting in accordance with Article 10 of the Securities and Exchange Commission's Regulation S-X. Accordingly, they do not include all of the disclosures normally required by U.S. GAAP or those normally made in an Annual Report on Form 10-K. For our insurance and HMO subsidiaries, U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. We have eliminated all material intercompany transactions and balances. The interim financial information in this report is unaudited, but in the opinion of management, includes all adjustments, including normal, recurring adjustments necessary to present fairly the financial position and results of operations for the periods reported. The results of operations for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the results to be expected for the full year.

        Unconsolidated Subsidiaries:    We have entered into agreements with various healthcare providers to establish ACOs. These ACOs were generally formed as Limited Liability Companies. We own a majority interest in our ACOs but do not consolidate them because we share the power to direct the activities that most significantly impact the ACOs. Our share of the income of an ACO is generally 50% and our share of losses of an ACO is generally 100%. In the event of losses, we have the right to receive 100% of subsequent profits until our losses are recovered. Any remaining revenue are generally shared at 50%.

        The ACOs are considered variable interest entities, known as VIEs, under U.S. GAAP as these entities do not have sufficient equity to finance their own operations without additional financial support. We assess our contractual, ownership or other interests in a VIE to determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE. The power to direct the activities of the ACOs that most significantly impact their performance is shared between us and the healthcare providers that we have joined with to establish the ACOs pursuant to the structure of the Management Committee of each of the ACOs. Accordingly, we have determined that we are not the primary beneficiary of the ACOs, and therefore we cannot consolidate them. We account for our participation in the ACOs using the equity method. Gains and losses from our participation in the ACOs are reported as equity in losses of unconsolidated subsidiaries in the consolidated statements of operations. Our net investment in the ACOs is reported in other assets in the consolidated balance sheets.

        Use of Estimates:    The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported by us in our Consolidated Financial Statements and the accompanying Notes. Critical accounting policies require significant subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect the revisions in our operating results. In our judgment, the accounts involving estimates and assumptions that are most critical to the preparation of our financial statements are policy related

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

liabilities and expense recognition, deferred policy acquisition costs, goodwill and other intangible assets, investment valuation, revenue recognition, and income taxes. There have been no changes in our critical accounting policies during the current quarter.

        Reclassifications:    As a result of the growth of our ACOs and Total Care, effective with the filing of our December 31, 2014 Form10-K/A, we have modified the way we manage and report our business. Our Medicare Advantage and Traditional Insurance segments remain unchanged; however, we have split our ACO and Total Care businesses from the Corporate & Other segment to form two new segments—Management Services Organization, or MSO, and Medicaid, respectively. We will continue to report the activities of our holding company, the operations of APS Healthcare through their sale dates and other ancillary operations in our Corporate & Other segment. For segment reporting, we have made reclassifications to conform prior period amounts to the current period presentation.

        Significant Accounting Policies:    For a description of existing significant accounting policies, see Note 3—Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2014 and Note 3—Recently Issued and Pending Accounting Pronouncements herein.

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

        Simplifying the Presentation of Debt Issuance Costs:    In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. There is no change in recognition and measurement guidance for debt issuance costs.

        ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Adoption of ASU 2015-03 will not have an impact on our financial position, results of operations or cash flows in future periods, but will require us to reclassify debt issuance costs, which are currently included in other assets in our consolidated balance sheets and total approximately $1.8 million at March 31, 2015, as a reduction of our debt liabilities.

        Consolidation:    In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities, known as VIEs, or voting interest entities and affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating ASU 2015-02 and do not expect that adoption will have an impact on our financial position, results of operations or cash flows in future periods.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

        Discontinued Operations and Disclosure of Disposals of Components of an Entity:    In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity, which provides guidance on the presentation and disclosure of discontinued operations and added disclosure requirements for other disposal transactions. ASU 2014-08 is effective for annual periods beginning on or after December 15, 2014, and interim periods within those years, and is applied prospectively. We adopted ASU 2014-08 effective January 1, 2015. Adoption did not have an impact on our financial position, results or operations or cash flows.

4. INVESTMENTS

        The amortized cost and fair value of fixed maturity investments are as follows:

 
  March 31, 2015  
Classification
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 
 
  (in thousands)
 

U.S. Treasury securities and U.S. Government obligations

  $ 51,386   $ 227   $ (118 ) $ 51,495  

Government sponsored agencies

    1,543     27         1,570  

Other political subdivisions

    48,738     1,567     (10 )   50,295  

Corporate debt securities

    355,217     21,025     (182 )   376,060  

Foreign debt securities

    75,092     2,789     (262 )   77,619  

Residential mortgage-backed securities

    153,010     7,052     (198 )   159,864  

Commercial mortgage-backed securities

    68,196     1,287     (36 )   69,447  

Other asset-backed securities

    32,489     440     (18 )   32,911  

  $ 785,671   $ 34,414   $ (824 ) $ 819,261  

 

 
  December 31, 2014  
Classification
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  
 
  (in thousands)
 

U.S. Treasury securities and U.S. Government obligations

  $ 57,264   $ 102   $ (42 ) $ 57,324  

Government sponsored agencies

    1,546     29     (22 )   1,553  

Other political subdivisions

    52,104     1,412     (40 )   53,476  

Corporate debt securities

    354,852     18,151     (328 )   372,675  

Foreign debt securities

    74,126     2,583     (297 )   76,412  

Residential mortgage-backed securities

    161,043     6,229     (742 )   166,530  

Commercial mortgage-backed securities

    80,634     1,451     (54 )   82,031  

Other asset-backed securities

    35,093     384     (25 )   35,452  

  $ 816,662   $ 30,341   $ (1,550 ) $ 845,453  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

        The amortized cost and fair value of fixed maturity investments at March 31, 2015 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
  Amortized
Cost
  Fair
Value
 
 
  (in thousands)
 

Due in 1 year or less

  $ 33,647   $ 34,087  

Due after 1 year through 5 years

    239,975     250,269  

Due after 5 years through 10 years

    183,438     193,701  

Due after 10 years

    74,916     78,982  

Mortgage and asset-backed securities

    253,695     262,222  

  $ 785,671   $ 819,261  

        The fair value and unrealized loss as of March 31, 2015 and December 31, 2014 for fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are shown below:

 
  Less than 12 Months   12 Months or Longer   Total  
March 31, 2015
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
 
 
  (in thousands)
 

U.S. Treasury securities and U.S. Government obligations

  $ 8,120   $ (112 ) $ 995   $ (6 ) $ 9,115   $ (118 )

Other political subdivisions

            1,476     (10 )   1,476     (10 )

Corporate debt securities

    17,620     (120 )   4,592     (62 )   22,212     (182 )

Foreign debt securities

    19,135     (262 )   25         19,160     (262 )

Residential mortgage-backed securities

    280         20,972     (198 )   21,252     (198 )

Commercial mortgage-backed securities

    5,112     (36 )           5,112     (36 )

Other asset-backed securities

    6,272     (18 )           6,272     (18 )

Total fixed maturities

  $ 56,539   $ (548 ) $ 28,060   $ (276 ) $ 84,599   $ (824 )

Total number of securities in an unrealized loss position

                                  49  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)


 
  Less than 12 Months   12 Months or Longer   Total  
December 31, 2014
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
 
 
  (in thousands)
 

U.S. Treasury securities and U.S. Government obligations

  $ 19,706   $ (16 ) $ 7,484   $ (26 ) $ 27,190   $ (42 )

Government sponsored agencies

            1,014     (22 )   1,014     (22 )

Other political subdivisions

    3,465     (21 )   1,476     (19 )   4,941     (40 )

Corporate debt securities

    34,812     (188 )   7,103     (140 )   41,915     (328 )

Foreign debt securities

    16,535     (287 )   2,041     (10 )   18,576     (297 )

Residential mortgage-backed securities

    327     (1 )   37,571     (741 )   37,898     (742 )

Commercial mortgage-backed securities

    15,526     (54 )           15,526     (54 )

Other asset-backed securities

    15,279     (25 )           15,279     (25 )

Total fixed maturities

  $ 105,650   $ (592 ) $ 56,689   $ (958 ) $ 162,339   $ (1,550 )

Total number of securities in an unrealized loss position

                                  87  

    Realized Gains and Losses

        Gross realized gains and losses included in the consolidated statements of operations are as follows:

 
  For the three
months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

Realized gains on investments:

             

Fixed maturities

  $ 577   $ 1,484  

Realized losses on investments:

             

Fixed maturities

    (70 )   (437 )

Realized loss on sale of business(1)

    (360 )    

    (430 )   (437 )

Net realized gains

  $ 147   $ 1,047  

(1)
Represents loss realized upon the sale of APS Puerto Rico. For further discussion of this transaction, see Note 10—Other Disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS

        We carry fixed maturity investments and equity securities at fair value in our Consolidated Financial Statements. These fair value disclosures consist of information regarding the valuation of these financial instruments followed by the fair value measurement disclosure requirements of Fair Value Measurements and Disclosures Topic, ASC 820-10. For further discussion, see Note 7—Fair Value Measurements included in our Annual Report on Form 10-K/A for the year ended December 31, 2014.

        The following table presents our recurring fair value measurements by ASC-820-10 hierarchy levels (in thousands):

 
  Total   Level 1   Level 2   Level 3  

March 31, 2015

                         

Assets:

                         

Fixed maturities, available for sale

  $ 819,261   $   $ 818,935   $ 326  

Equity securities

    14,295         14,295      

Total assets

  $ 833,556   $   $ 833,230   $ 326  

December 31, 2014

                         

Assets:

                         

Fixed maturities, available for sale

  $ 845,453   $   $ 845,179   $ 274  

Equity securities

    14,081         14,081      

Total assets

  $ 859,534   $   $ 859,260   $ 274  

        The following table provides a summary of changes in the recurring fair value measurement of our Level 3 financial instruments:

 
  Fixed Maturities  
 
  (in thousands)
 

Fair value as of December 31, 2014

  $ 274  

Paydowns

    (28 )

Unrealized gains included in AOCI(1)(2)

    80  

Fair value as of March 31, 2015

  $ 326  

(1)
AOCI: Accumulated other comprehensive income.

(2)
Unrealized gains represent changes in values of Level 3 financial instruments only for the periods in which the instruments are classified as Level 3.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. ACCUMULATED OTHER COMPREHENSIVE INCOME

        The components of accumulated other comprehensive income are as follows (in thousands):

 
  Net Unrealized
Gains on
Investments
Available for Sale
  Gross
Unrealized
OTTI
  Long-Term
Claim Reserve
Adjustment
  Accumulated Other
Comprehensive
Income
 

March 31, 2015

                         

Balance as of January 1, 2015

  $ 19,088   $   $ (6,440 ) $ 12,648  

Other comprehensive income before reclassifications

    3,588         (723 )   2,865  

Less: Amounts reclassified from other comprehensive income

    329             329  

Net current-period other comprehensive income

    3,259         (723 )   2,536  

Balance as of March 31, 2015

  $ 22,347   $   $ (7,163 ) $ 15,184  

March 31, 2014

                         

Balance as of January 1, 2014

  $ 13,909   $ (1,107 ) $ (5,473 ) $ 7,329  

Other comprehensive income before reclassifications

    5,595     (23 )   (1,150 )   4,422  

Less: Amounts reclassified from other comprehensive income

    681             681  

Net current-period other comprehensive income

    4,914     (23 )   (1,150 )   3,741  

Balance as of March 31, 2014

  $ 18,823   $ (1,130 ) $ (6,623 ) $ 11,070  

        Table amounts are presented net of tax at a rate of 35%.

7. STOCK-BASED COMPENSATION

        In April 2011, we established the Universal American Corp. 2011 Omnibus Equity Award Plan (the "2011 Equity Plan"). The 2011 Equity Plan is the sole active plan for providing equity compensation to eligible employees, directors and other third parties. We issue shares upon the exercise of options granted under the plan. Detailed information for activity in our stock-based incentive plan can be found in Note 19—Stock-Based Compensation in our Annual Report on Form 10-K/A for the year ended December 31, 2014.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. STOCK-BASED COMPENSATION (Continued)

        Compensation expense, included in other operating costs and expenses, and the related tax benefit were as follows:

 
  Three Months
Ended March 31,
 
 
  2015   2014  
 
  (in thousands)
 

Stock options

  $ 1,303   $ 1,131  

Restricted stock awards

    1,989     1,409  

Total stock-based compensation expense

    3,292     2,540  

Tax benefit recognized(1)

    1,152     751  

Stock-based compensation expense, net of tax

  $ 2,140   $ 1,789  

(1)
Tax benefit recognized includes the estimated effect of non-deductible compensation costs for the quarter ended March 31, 2014. See Note 10, Other Disclosures—Income Taxes for further information on our treatment of compensation costs for income tax purposes.

    Stock Option Awards

        We recognize compensation cost for share-based payments to employees, directors and other third parties based on the grant date fair value of the award, which we amortize over the grantees' service period in accordance with the provisions of Compensation—Stock Compensation Topic, ASC 718-10. We use the Black-Scholes valuation model to value stock options, except in the case of performance-based stock options, where we use a Monte Carlo valuation approach.

        We estimated the fair value for options granted during the period at the date of grant with the following range of assumptions:

 
  For options granted
 
  2015

Weighted-average grant date fair value

  $2.42 - $2.63

Risk free interest rates

  1.28% - 1.32%

Dividend yields

  0.00%

Expected volatility

  34.58% - 34.60%

Expected lives of options (in years)

  3.75 - 5.00

        We did not capitalize any cost of stock-based compensation. Future expense may vary based upon factors such as the number of awards granted by us and the then-current fair value of such awards.

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(Unaudited)

7. STOCK-BASED COMPENSATION (Continued)

        A summary of option activity for the three months ended March 31, 2015 is set forth below:

Options
  Options
(in thousands)
  Weighted
Average
Exercise
Price
 

Outstanding at January 1, 2015

    5,993   $ 7.37  

Granted

    560     9.16  

Exercised

    (214 )   7.58  

Forfeited or expired

    (67 )   7.22  

Outstanding at March 31, 2015

    6,272   $ 7.52  

        The total intrinsic value of stock options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised was $0.4 million and less than $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

        We received proceeds of $1.6 million and $0.1 million from the exercise of stock options for the three months ended March 31, 2015 and 2014, respectively.

        As of March 31, 2015, the total compensation cost related to non-vested option awards not yet recognized was $6.7 million, which we expect to recognize over a weighted average period of 2.5 years.

    Restricted Stock Awards

        In accordance with our 2011 Equity Plan, we may grant restricted stock to employees, directors and other third parties. These awards generally vest ratably over a four-year period. We generally value restricted stock awards at an amount equal to the market price of our common stock on the date of grant, except in the case of performance-based awards, which we value using a Monte Carlo valuation approach. We recognize compensation expense for restricted stock awards on a straight line basis over the vesting period.

        A summary of non-vested restricted stock award activity for the three months ended March 31, 2015 is set forth below:

Non-Vested Restricted Stock
  Shares
(in thousands)
  Weighted
Average
Grant-Date
Fair Value
 

Non-vested at January 1, 2015

    1,997   $ 7.90  

Granted

    654     9.16  

Vested

    (703 )   7.90  

Forfeited

    (148 )   8.12  

Non-vested at March 31, 2015

    1,800   $ 8.34  

        The fair value of restricted stock vested during the three months ended March 31, 2015 was $6.5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. STOCK-BASED COMPENSATION (Continued)

    Tax Benefits of Stock-Based Compensation

        ASC 718-10 requires us to report the benefits of tax deductions in excess of recognized compensation cost of equity awards as a financing cash flow. We recognized $0.3 million and $0.4 million of financing cash flows for these excess tax deductions for the three months ended March 31, 2015 and 2014, respectively.

8. COMMITMENTS AND CONTINGENCIES

    Legal Proceedings

        In addition to the matters discussed below, we are also subject to a variety of legal proceedings, arbitrations, investigations, audits, claims and litigation, including claims under the False Claims Act and claims for benefits under insurance policies and claims by members, providers, customers, employees, regulators and other third parties. In some cases, plaintiffs seek punitive damages. It is not possible to accurately predict the outcome or estimate the resulting penalty, fine or other remedy that may result from any current or future legal proceeding, investigation, audit, claim or litigation. Nevertheless, the range of outcomes and losses could be significant and could have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

        On October 22, 2013, we filed a lawsuit in the United States District Court for the District of Delaware against funds affiliated with the private equity firm GTCR ("GTCR"), David Katz, a former managing director of GTCR, and former senior management of APS Healthcare (Gregory Scott, Jerome Vaccaro and John McDonough, all such defendants, collectively, the "Defendants"). The lawsuit, which alleges securities fraud, multiple material breaches of contract and common law fraud, seeks substantial damages, including punitive damages. The lawsuit arises out of our acquisition of APS Healthcare from GTCR in March 2012. The Defendants filed a motion to dismiss the complaint. In a decision issued on July 24, 2014, the court denied the motion with respect to the breach of contract claim. The court granted the motion with respect to the securities fraud claims and portions of the common law fraud claims on the ground that they did not provide enough detail about each Defendant's specific role in the alleged fraud. On September 22, 2014, the Company filed an Amended Complaint to provide additional details regarding each Defendant's role in the alleged fraud. We are awaiting a decision from the court on the Defendant's motion to dismiss.

Government Regulations

        Laws and regulations governing Medicare, Medicaid and other state and federal healthcare and insurance programs are complex and subject to significant interpretation. As part of the ACA, CMS, State regulatory agencies and other regulatory agencies have been exercising increased oversight and regulatory authority over our Medicare and other businesses. Compliance with such laws and regulations is subject to CMS audit, other governmental review and investigation and significant and complex interpretation. CMS audits our Medicare Advantage plans with regularity to ensure we are in compliance with applicable laws, rules, regulations and CMS instructions. There can be no assurance that we will be found to be in compliance with all such laws, rules and regulations in connection with these audits, reviews and investigations, and at times we have been found to be out of compliance. Failure to be in compliance can subject us to significant regulatory action including significant fines,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. COMMITMENTS AND CONTINGENCIES (Continued)

penalties, cancellation of contracts with governmental agencies or operating restrictions on our business, including, without limitation, suspension of our ability to market to and enroll new members in our Medicare plans, termination of our contracts with CMS, exclusion from Medicare and other state and federal healthcare programs and inability to expand into new markets or add new products within existing markets.

        Certain of our subsidiaries provide products and services to various government agencies. As a government contractor, we are subject to the terms of the contracts we have with those agencies and applicable laws governing government contracts. As such, we may be subject to False Claim Act litigation (also known as qui tam litigation) brought by individuals who seek to sue on behalf of the government, alleging that the government contractor submitted false claims to the government. In 2014 and 2015, Innovative Resources Group, LLC ("IRG"), a subsidiary of APS Healthcare, resolved three False Claims Act matters relating to IRG's historical contracts in Missouri, Tennessee and Nevada. It is possible that IRG, other APS Healthcare subsidiaries or other Universal American companies could be the subject of additional False Claims Act investigations and litigation in the future that could have a material adverse effect on our business and results of operations.

9. BUSINESS SEGMENT INFORMATION

        As of March 31, 2015 our business segments are based on product and consist of:

    Medicare Advantage,

    MSO,

    Medicaid, and

    Traditional Insurance.

        Our remaining segment, Corporate & Other, reflects the activities of our holding company, the operations of APS Healthcare and other ancillary operations. We have made reclassifications to conform prior period amounts to the current period presentation.

        We report intersegment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These intersegment revenues and expenses affect the amounts reported on the individual financial statement line items, but we eliminate them in consolidation and they do not change income before taxes. The most significant items eliminated are intersegment revenue and expense relating to commissions earned by agency subsidiaries in our Corporate & Other segment from insurance subsidiaries in our Traditional segment and interest on intercompany loans which cross segments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. BUSINESS SEGMENT INFORMATION (Continued)

        Financial data by segment, with a reconciliation of segment revenues and segment income (loss) before income taxes to total revenue and loss before income taxes in accordance with U.S. GAAP is as follows:

 
  Three months ended March 31,  
 
  2015   2014  
 
  Revenues   Income (loss)
before
Income Taxes
  Revenues   Income (loss)
before
Income Taxes
 
 
  (in thousands)
 

Medicare Advantage

  $ 307,821   $ 8,978   $ 359,775   $ 24,879  

MSO

        (11,709 )       (13,099 )

Medicaid

    46,432     142     39,230     899  

Traditional Insurance

    49,259     1,309     54,001     (105 )

Corporate & Other

    42,630     (5,792 )   59,400     (15,616 )

Intersegment revenues

    (1,467 )       (787 )    

Adjustments to segment amounts:

                         

Net realized gains(1)

    147     147     1,047     1,047  

Total

  $ 444,822   $ (6,925 ) $ 512,666   $ (1,995 )

(1)
We evaluate the results of operations of our segments based on income (loss) before realized gains and losses and income taxes. We believe that realized gains and losses are not indicative of overall operating trends.

10. OTHER DISCLOSURES

        Income Taxes:    For interim financial reporting, except in circumstances as described in the following paragraph we estimate our annual effective tax rate based on projected taxable income for the full year and record a quarterly tax provision based on that estimated annual effective tax rate.

        In situations where uncertainty surrounding possible future events or transactions precludes our ability to make a reliable estimate of pre-tax income for the full year, projected pre-tax income for the full year is close to break-even, or permanent differences are significant when compared to projected pre-tax income, our estimated annual effective tax rate may become volatile and could distort the income tax provision for an interim period. When this happens, we calculate our interim income tax provision using actual year-to-date financial results.

        As the year progresses, we refine our estimate of full year pre-tax income as new information becomes available, including actual year-to-date financial results. This continual estimation process could result in a change to our estimated annual effective tax rate, or cause us to change between use of an estimated annual effective tax rate and actual year-to-date financial results in calculating our year-to-date income tax provision. When this occurs, we adjust the income tax provision during the quarter in which the change occurs so that the year-to-date income tax provision reflects the current estimates and methodology used. In both cases, the tax effect of realized gains and losses as well as

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. OTHER DISCLOSURES (Continued)

non-recurring tax items are reported in the interim period in which they occur. Significant judgment is required in determining our annual estimated effective tax rate and in evaluating our tax positions.

        For the three months ended March 31, 2015, we determined our income tax provision using our estimated annual effective tax rate based on projected taxable income for the full year for our domestic and foreign jurisdictions. For the three months ended March 31, 2014, we determined our income tax provision using actual year-to-date financial results for our domestic and foreign tax jurisdictions.

        Our effective tax rate was a benefit of 131.1%, resulting in an income tax benefit of $9.1 million, for the quarter ended March 31, 2015 compared with an effective tax rate of 153.1% resulting in an income tax provision of $3.1 million for the quarter ended March 31, 2014.

        For the quarter ended March 31, 2015, the tax benefit was driven primarily by $5.4 million in foreign tax credit carryforwards created in connection with the February 2015 sale of APS Puerto Rico. Excluding the foreign tax credit carryforwards, the effective tax rate was 52.9%, driven by permanent items, including the non-deductible ACA Fee and non-deductible interest expense. State and foreign income taxes also contributed to the variance in the effective tax rate.

        For the quarter ended March 31, 2014, the tax effect of permanent items exceeded the tax effect of our loss from operations, resulting in income tax expense. Permanent items include the non-deductible ACA fee, non-deductible executive compensation and non-deductible interest expense. State and foreign income taxes also contributed to the variance in the effective tax rate.

        In September 2014, the Internal Revenue Service issued final regulations on the ACA's executive compensation deduction limitation for health insurance providers under Code section 162(m)(6), which provided additional information regarding the definition of a health insurance issuer. Based on our analysis of the final regulations, we no longer believe we are subject to the limitation. As a result, during the fourth quarter of 2014, we stopped treating this as a non-deductible expense and recorded a tax benefit related to amounts previously considered non-deductible. Income tax expense for the quarter ended March 31, 2014 includes $0.6 million related to such costs.

        Restructuring Charges:    A summary of our restructuring liability balance as of March 31, 2015 follows:

 
  Segment   January 1,
Balance
  Charge to
Earnings(1)
  Cash Paid   Non-cash   March 31,
Balance
 
 
   
  (in thousands)
 

2015

                                   

Workforce reduction

  Corporate & Other   $ 3,730   $ 775   $ (1,661 ) $   $ 2,844  

NY Exchange exit

  Corporate & Other     804         (128 )       676  

Facility consolidation

  Corporate & Other         230             230  

Facility consolidation

  Traditional     106             (40 )   66  

Total

      $ 4,640   $ 1,005   $ (1,789 ) $ (40 ) $ 3,816  

(1)
Included in other operating costs and expenses in our consolidated statements of operations.

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(Unaudited)

10. OTHER DISCLOSURES (Continued)

        For further discussion of our restructuring initiatives, see Note 22—Other Operational Disclosures—Restructuring Charges in our Annual Report on Form 10-K/A for the year ended December 31, 2014.

        Sale of APS Puerto Rico:    On February 4, 2015, we completed the sale of our APS Healthcare Puerto Rico subsidiaries to an affiliate of the Metro Pavia Health System. APS Puerto Rico provides managed behavioral health services under the Government Health Plan Medicaid program under a contract that terminated on March 31, 2015 and had $151 million of revenue in 2014. The purchase price at closing was $26.5 million, which was settled in cash, and is subject to a balance sheet true-up. The transaction resulted in a pre-tax realized loss of approximately $0.4 million. The transaction also generated an additional foreign tax credit carryforward of $5.4 million that has been recorded as a deferred tax asset.

        Loan Payable:    On March 31, 2015, we repaid $58.6 million of principal on our Term Loan under the 2012 Credit Facility. $3.6 million of this payment was the regularly scheduled principal payment, $38.4 million was a mandatory prepayment from subsidiary sale proceeds, fulfilling our obligation to prepay principal from these proceeds by February 2016, and the balance of $16.6 million was a voluntary prepayment which provided additional restricted payment flexibility under the 2012 Credit Facility. After ratably applying these prepayments to the remaining amortization payments, the Company will no longer need to make principal payments until the final bullet payment of $44.9 million in January 2017. During the three months ended March 31, 2015, we made interest payments totaling $0.7 million and other fee payments totaling $0.2 million.

        During 2014, we were not required to make any principal payments as all scheduled 2014 principal payments, totaling $14.3 million, were prepaid in 2013, in connection with the amendment of our credit facility on November 4, 2013. During the three months ended March 31, 2014, we made interest payments totaling $0.7 million and other fee payments totaling $0.2 million.

        In connection with the 2012 Credit Facility, we incurred loan origination fees which were capitalized and are being amortized over its 5-year term. In connection with the prepayment discussed above, we recorded additional amortization of $0.8 million during the quarter ended March 31, 2015, leaving an unamortized balance of $1.4 million.

        Unconsolidated Subsidiaries:    We account for our participation in the ACOs using the equity method. Gains and losses from our participation in the ACOs are reported as equity in losses of unconsolidated subsidiaries in the consolidated statements of operations. Our net investment in the ACOs is reported in other assets in the consolidated balance sheets. During the three months ended March 31, 2015 and 2014, we recognized $7.4 million and $8.3 million, respectively, of losses from our ACO arrangements, primarily related to operating expenses. For additional information on the ACOs, see Note 1—Organization and Company Background and Note 2—Basis of Presentation.

        Stock Repurchase Plan:    On August 1, 2013, our Board of Directors authorized the repurchase of up to $40 million of our outstanding common stock. Purchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise as market conditions permit. On May 13, 2014 we repurchased and retired six million shares of our common stock directly from funds

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. OTHER DISCLOSURES (Continued)

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.

        Earnings Per Common Share Computation:    The calculation of the diluted loss per common share for the three months ended March 31, 2014 presented in the consolidated statements of operations excludes 0.2 million common stock equivalents from stock options and unvested restricted stock that are potentially dilutive because to include them would be antidilutive when reporting a net loss.

11. SUBSEQUENT EVENT

        Sale of APS Healthcare Domestic Business:    On May 1, 2015, we consummated the sale of our remaining APS Healthcare operating subsidiaries to KEPRO, Inc., a company that provides quality improvement and care management services to both government clients and the private sector. The purchase price was $5.0 million at closing plus a potential earn-out of up to an additional $19.0 million based on certain contract renewals.

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ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

        The following discussion and analysis presents a review of our financial condition as of March 31, 2015 and our results of operations for the three months ended March 31, 2015 and 2014. As used in this quarterly report, except as otherwise indicated, references to the "Company," "Universal American," "we," "our," and "us" are to Universal American Corp., a Delaware corporation and its subsidiaries.

        You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the consolidated financial statements and related consolidated footnotes included elsewhere in this Quarterly Report on Form 10-Q as well as the Consolidated Financial Statements and related consolidated footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2014. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from management's expectations. Factors that could cause such differences include those set forth or incorporated by reference in our Annual Report on Form 10-K/A for the year ended December 31, 2014 filed on March 31, 2015 under Part II, Item 1A—Risk Factors.

Overview

        Universal American, through our family of healthcare companies, provides health benefits to people covered by Medicare and/or Medicaid. Our core strength is our ability to partner with providers, especially primary care physicians, to improve health outcomes while reducing cost in the Medicare population. We currently are focused on three main businesses:

    Medicare Advantage:  We serve the growing Medicare population by providing Medicare Advantage products to approximately 105,000 members as of March 31, 2015. Approximately 31% 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.

    Management Services Organization (MSO):  We believe there is an opportunity to address the high cost of health care for the majority of the Medicare population enrolled in traditional fee-for-service Medicare and have joined primarily with primary-care and multi-specialty provider groups to operate twenty-five Accountable Care Organizations, or ACOs, pursuant to the Medicare Shared Saving Program, known as the MSSP.

    Medicaid.  We also provide services to Medicaid agencies and health plans through APS Healthcare and through our Total Care Medicaid health plan serving approximately 40,000 members in upstate New York.

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Membership/Beneficiaries

        The following table presents our membership/beneficiaries in our three main businesses:

 
  March 31,
2015
  December 31,
2014
 
 
  (in thousands)
 

Medicare Advantage

             

Texas HMOs

    66.9     61.8  

Upstate New York/Maine

    37.9     29.7  

Core Markets

    104.8     91.5  

Non-Core Network(1)

        20.7  

Rural(1)

        1.9  

Total Medicare Advantage

    104.8     114.1  

Management Service Organizations

             

ACOs

    292.0     285.0  

Medicaid

             

Total Care

    39.8     40.0  

(1)
We did not renew our non-core network and rural markets for 2015.

Results of Operations—Consolidated Overview

        The following table reflects loss before income taxes from each of our segments and contains a reconciliation to reported net income (loss) in accordance with U.S. GAAP. We evaluate the results of operations of our segments based on income (loss) before realized gains (losses) and income taxes. We believe that realized gains (losses) are not indicative of overall operating trends. This differs from U.S. GAAP, which includes the effect of realized gains (losses) and income taxes in the determination of net income (loss).

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands, except per share amounts)
 

Medicare Advantage

  $ 8,978   $ 24,879  

MSO

    (11,709 )   (13,099 )

Medicaid

    142     899  

Traditional Insurance

    1,309     (105 )

Corporate & Other

    (5,792 )   (15,616 )

Net realized gains

    147     1,047  

Loss before income taxes

    (6,925 )   (1,995 )

(Benefit from) provision for income taxes

    (9,079 )   3,055  

Net income (loss)

  $ 2,154   $ (5,050 )

Income (loss) per common share (diluted):

             

Net income (loss)

  $ 0.03   $ (0.06 )

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    Three months ended March 31, 2015 and 2014

        Net income for the quarter ended March 31, 2015 was $2.2 million, or $0.3 per diluted share, compared to a net loss of $5.1 million, or $(0.06) per diluted share, for the quarter ended March 31, 2014.

        Our Medicare Advantage segment generated income before income taxes of $9.0 million for the quarter ended March 31, 2015, a decrease of $15.9 million compared to the quarter ended March 31, 2014. The decrease in earnings was driven by expected lower membership, as we exited non-core markets, and a decrease in the impact of favorable prior period items as well as lower net investment income. This was partially offset by a decrease in commissions and general expense levels driven by our cost reduction initiatives and lower membership. The quarter ended March 31, 2015, included $4.6 million of net favorable prior year items compared to $21.2 million for the quarter ended March 31, 2014.

        Our MSO segment, which includes the operations of our ACOs, generated a loss before income taxes of $11.7 million for the quarter ended March 31, 2015, a decrease of $1.4 million compared to the same period in 2014. This decrease was driven by a reduction in the number of ACOs in which we are participating in 2015 compared to the same period in 2014.

        Our Medicaid segment, principally the operations of our Total Care plan, generated income before income taxes of $0.1 million for the three months ended March 31, 2015 compared to $0.9 million for the quarter ended March 31, 2014. This decrease was primarily due to an increase in medical expenses caused by increased utilization.

        Our Traditional Insurance segment generated income before taxes of $1.3 million for the quarter ended March 31, 2015, an increase of $1.4 million compared to the same period in 2014. The increase in earnings is primarily driven by the reduction of operating expenses.

        Our Corporate & Other segment reported loss decreased by $9.8 million for the three months ended March 31, 2015 compared to the same period in 2014. This was primarily due to improved profitability of our APS Healthcare business and corporate expense reduction initiatives as well as lower legal and settlement costs related to our non-core business.

        Our effective tax rate was a benefit of 131.1%, resulting in an income tax benefit of $9.1 million, for the quarter ended March 31, 2015 compared with an effective tax rate of 153.1% for the quarter ended March 31, 2014.

        For the quarter ended March 31, 2015, the tax benefit was driven primarily by $5.4 million in foreign tax credit carryforwards created in connection with the February 2015 sale of APS Puerto Rico. Excluding the foreign tax credit carryforwards, the effective tax rate was 52.9%, driven by permanent items, including the non-deductible ACA Fee and non-deductible interest expense. State and foreign income taxes also contributed to the variance in the effective tax rate.

        For the quarter ended March 31, 2014, the tax effect of permanent items exceeded the tax effect of our loss from operations, resulting in income tax expense. Permanent items include the non-deductible ACA fee of $5.4 million, non-deductible executive compensation and non-deductible interest expense. State and foreign income taxes also contributed to the variance in the effective tax rate.

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Segment Results—Medicare Advantage

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

Net premiums

  $ 305,246   $ 355,862  

Net investment and other income

    2,575     3,913  

Total revenue

    307,821     359,775  

Medical expenses

    263,072     290,008  

ACA fee

    6,262     5,385  

Commissions and general expenses

    29,509     39,503  

Total benefits, claims and other deductions

    298,843     334,896  

Segment income before income taxes

  $ 8,978   $ 24,879  

        Our Medicare Advantage segment includes the operations of our Medicare coordinated care HMO, PPO and Network PFFS Plans (collectively, the "Plans"). Our HMOs offer coverage to Medicare members primarily in Southeastern Texas (especially Houston/Beaumont), and the Dallas/Ft. Worth area. For 2015, our PPO and Network PFFS Plans offer coverage primarily in upstate New York and Maine. Effective January 1, 2015, we exited non core markets, resulting in a reduction in membership of approximately 22,600 members.

    Three months ended March 31, 2015 and 2014

        Our Medicare Advantage segment generated income before income taxes of $9.0 million for the quarter ended March 31, 2015, a decrease of $15.9 million compared to the quarter ended March 31, 2014. The decrease in earnings was driven by expected lower membership, as we exited non-core markets, and a decrease in the impact of favorable prior period items as well as lower net investment income. This was partially offset by a decrease in commissions and general expense levels driven by our cost reduction initiatives and lower membership. The quarter ended March 31, 2015, included $4.6 million of net favorable prior year items compared to $21.2 million for the quarter ended March 31, 2014.

        Net premiums.    Net premiums for the Medicare Advantage segment decreased by $50.6 million in 2015 compared with 2014, primarily driven by lower membership as a result of exiting non-core markets. Net premiums for the quarter ended March 31, 2015 included $10.9 million of favorable prior period items compared to $7.2 million of favorable prior period items for the quarter ended March 31, 2014.

        Net investment and other income.    Net investment and other income decreased $1.3 million primarily due to lower invested asset levels.

        Medical expenses.    Medical expenses decreased by $26.9 million compared to the quarter ended March 31, 2014. The decrease was driven by lower membership (as a result of exiting non-core markets), partially offset by unfavorable prior period items, resulting in a medical benefit ratio of 86.2% for the quarter ended March 31, 2015 compared with 81.5% for the quarter ended March 31, 2014. Medical expenses for the quarter ended March 31, 2015 included $6.3 million of net unfavorable items related to prior periods, compared to $14.0 million of net favorable items related to prior periods for the quarter ended March 31, 2014. Quality improvement initiative costs are included in medical

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expenses in connection with the reporting of minimum medical loss ratios under the ACA. The following table provides a breakdown of medical expenses and the related medical benefits ratios:

 
  Three months ended March 31,  
 
  2015   2014  
 
  ($ in thousands)
 

Quality Initiatives

  $ 6,052     2.0 % $ 7,429     2.1 %

Medical Benefits

    257,020     84.2 %   282,579     79.4 %

Total Medical Expenses

  $ 263,072     86.2 % $ 290,008     81.5 %

        Adjusting for the prior year items discussed above in net premiums and medical expenses, for the quarter ended March 31, 2015, our medical benefit MBR, excluding quality initiative costs, was 85.2%. Our medical benefit MBRs for the quarter ended March 31, 2015, as reported and recast to exclude prior year items, are summarized in the table below:

 
  Reported   Recast  

Texas HMOs

    82.3 %   83.5 %

Upstate New York/Maine

    92.9 %   88.9 %

Total Medicare Advantage

    84.2 %   85.2 %

        ACA fee.    The ACA fee for the three months ended March 31, 2015 amounted to $6.3 million, or 2.1% of 2015 net premiums compared to $5.4 million or 1.5% of net premiums for the same period in 2014. The ACA fee is based on prior year premiums and is included in the calculation of minimum medical loss ratios under the ACA. The increase in the ACA fee is due to the scheduled increase in the industry-wide total fee from $8.0 billion in 2014 to $11.3 billion in 2015. The 2015 ACA fee includes approximately $0.8 million related to 2014 premium in non-core markets that we exited in 2015.

        Commissions and general expenses.    Commissions and general expenses for the three months ended March 31, 2015 decreased $10.0 million compared to the same period in March, 2014, primarily due to cost reduction initiatives and lower membership. Our administrative expense ratio improved to 9.7% for the three months ended March 31, 2015 from 11.1% for the three months ended March 31, 2014 primarily as a result of our cost reduction efforts.

Segment Results—Management Services Organization

        The following table represents the operating results of our MSO segment, consolidating the ACOs in which we participate with the operations of our CHS subsidiary:

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

Operating Expenses

  $ 11,709   $ 13,099  

Segment loss before income taxes

  $ (11,709 ) $ (13,099 )

        Formerly included in our Corporate & Other segment, our MSO segment includes our CHS subsidiary, which collaborates with physicians and other healthcare professionals to operate ACOs under the MSSP. As of March 31, 2015 we sponsored twenty-five active ACOs in eleven states previously approved for participation in the program by CMS. Based on data provided by CMS, these twenty-five ACOs currently include approximately 4,200 participating providers with approximately 292,000 assigned Medicare fee-for-service beneficiaries, both within and outside our current Medicare

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Advantage footprint, including southeast Texas and upstate New York. CHS provides these ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care and lower healthcare costs for their Medicare fee-for-service beneficiaries. 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 the results of operations.

        The MSSP is relatively new and therefore has limited historical experience. This impacts our ability to accurately accumulate and interpret the data available for calculating the ACOs' shared savings. Therefore, we were not able to recognize revenue for the year ended December 31, 2013 until we received the final settlement results from CMS in September 2014. Similarly, we were not able to recognize revenue for the year ended December 31, 2014 in the 2014 financial statements. We expect that revenue, if any, for the program year ended December 31, 2014 will be reported in 2015 when the MSSP revenue is either known or estimable with reasonable certainty. Based on the ACO operating agreements, we bear all costs of the ACO operations until revenue is recognized. At that point, we have the right to receive 100% of subsequent profits until our losses are recovered. Any remaining revenue is generally shared equally with our ACO provider partners.

    Three months ended March 31, 2015 and 2014

        Our MSO segment generated a loss before income taxes of $11.7 million for the quarter ended March 31, 2015, a decrease in the loss of $1.4 million compared to the same period in 2014. This decrease was driven by a reduction in the number of ACOs in which we are participating in 2015 compared to the same period in 2014.

Segment Results—Medicaid

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

Net premiums

  $ 46,390   $ 39,230  

Net investment and other income

    42      

Total revenue

    46,432     39,230  

Medical expenses

    41,317     34,732  

Amortization of intangible assets

    201     202  

ACA fee

    825     43  

Commissions and general expenses

    3,947     3,354  

Total benefits, claims and other deductions

    46,290     38,331  

Segment income before income taxes

  $ 142   $ 899  

        Our Medicaid segment includes the operations of our Total Care Medicaid health plan. Total Care provides Medicaid managed care services in three counties in upstate New York that overlap with our existing Medicare Advantage footprint. Roughly 80% of its members are located in Onondaga County. In addition to the Medicaid program, Total Care also participates in the Child Health Plus program for low-income, uninsured children.

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    Three months ended March 31, 2015 and 2014

        Our Medicaid segment generated income before income taxes of $0.1 million for the three months ended March 31, 2015 compared to $0.9 million for the quarter ended March 31, 2014. This decrease was primarily due to an increase in medical expenses caused by increased utilization.

        Net premiums.    Net premiums increased by $7.1 million, or 18%, compared to the three months ended March 31, 2014 primarily as a result of growth in membership.

        Medical expenses.    Medical expenses increased by $6.6 million, or 19% compared to the three months ended March 31, 2014. The increase was driven by higher membership and higher claims cost per member, resulting in a medical benefit ratio of 89.1% for the three months ended March 31, 2015 compared with 88.5% for the three months ended March 31, 2014.

        ACA fee.    The ACA fee for the three months ended March 31, 2015 increased by $0.8 million. The ACA fee is based on prior year premium. The full year 2014 ACA fee was based on Total Care's 2013 premium since December 1, 2013, the date of acquisition. The full year 2015 ACA fee is based on Total Care's premium for the full year ended December 31, 2014.

        Commissions and general expenses.    Commissions and general expenses increased $0.6 million compared to the three months ended March 31, 2014, primarily due to the growth in membership. Our administrative expense ratio was 8.5% for both the three months ended March 31, 2015 and 2014.

Segment Results—Traditional Insurance

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

Net premiums

  $ 43,823   $ 49,400  

Net investment and other income

    5,436     4,601  

Total revenue

    49,259     54,001  

Policyholder benefits

    35,245     38,619  

Change in deferred policy acquisition costs

    3,283     3,021  

Commissions and general expenses, net of allowances

    9,422     12,466  

Total benefits, claims and other deductions

    47,950     54,106  

Segment income (loss) before income taxes

  $ 1,309   $ (105 )

        Our Traditional Insurance segment consists of three major lines of business. Senior Market includes Medicare supplement, senior dental and hospital indemnity products. Specialty Health includes disability, specified disease, hospital, surgical and long-term care products. Life Insurance includes senior life products. We discontinued marketing and selling Traditional insurance products after June 1, 2012.

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    Three months ended March 31, 2015 and 2014

        Our Traditional Insurance segment generated income before taxes of $1.3 million for the quarter ended March 31, 2015, an increase of $1.4 million compared to the same period in 2014. The increase in earnings is primarily driven by the reduction of operating expenses.

        Net premiums.    Net premiums declined by $5.6 million, or 11%. This is the result of the continued effect of lapsation across all lines of business. The following tables detail premium for the segment by major lines of business:

 
  Three months ended March 31,  
 
  2015   2014  
 
  Gross   Ceded   Net   Gross   Ceded   Net  
 
  (in thousands)
 

Senior market

  $ 39,851   $ (8,476 ) $ 31,375   $ 46,133   $ (9,915 ) $ 36,218  

Specialty health

    10,912     (1,477 )   9,435     11,516     (1,665 )   9,851  

Life insurance and annuity

    10,314     (7,301 )   3,013     11,489     (8,158 )   3,331  

Total premium

  $ 61,077   $ (17,254 ) $ 43,823   $ 69,138   $ (19,738 ) $ 49,400  

        Policyholder benefits.    Policyholder benefits incurred declined by $3.4 million, or 9%, compared to 2014. This decline was principally due to the overall decline in insurance in-force, however medical trend was slightly higher on senior market health but was partially offset by favorable experience on specialty health. For 2015, the policyholder benefit ratio for senior market health was 73.3% compared with 70.5% in 2014, and for specialty health was 104.6% in 2015, compared with 109.3% in 2014.

        Commissions and general expenses, net of allowances.    Commissions and general expenses, net of allowances, decreased by $3.0 million from 2014. This decrease is primarily attributed to lower commissions on less insurance in-force as well as lower costs required to run a smaller book of business in-force. In addition, 2014 included consulting costs related to the transition and outsourcing of certain functions.

Segment Results—Corporate & Other

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

Net premiums

  $ 17,404   $ 37,162  

Net investment income

    30     224  

Fee and other income

    25,196     22,014  

Total revenue

    42,630     59,400  

Claims and other benefits

    14,525     33,413  

Amortization of intangible assets

    281     281  

Interest expense

    1,752     1,735  

Commissions and general expenses

    31,864     39,587  

Total benefits, claims and other deductions

    48,422     75,016  

Segment loss before income taxes

  $ (5,792 ) $ (15,616 )

        Corporate & Other includes the activities of our holding company, the operations of APS Healthcare, our participation in the New York Health Benefits Exchange (the "Exchange") and other ancillary operations. We are not participating in the Exchange for 2015.

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    Three months ended March 31, 2015 and 2014

        The loss before income taxes from our Corporate & Other segment decreased by $9.8 million for the three months ended March 31, 2015 compared to the same period in 2014. This was primarily due to improved profitability of our APS Healthcare business and corporate expense reduction initiatives as well as lower legal and settlement costs related to our non-core business.

        The following table details the loss before income taxes for our Corporate & Other segment:

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

APS Healthcare

  $ 2,697   $ (842 )

Interest expense

    (1,752 )   (1,735 )

Amortization of debt issuance costs

    (1,128 )   (438 )

Legal/settlement costs

    (238 )   (2,014 )

Corporate

    (5,371 )   (10,587 )

Total segment loss before income taxes

  $ (5,792 ) $ (15,616 )

        Net premiums.    Net premiums decreased by $19.8 million for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to the sale of APS Healthcare Puerto Rico on February 4, 2015.

        Fee and other income.    Fee and other income increased by $3.2 million for the quarter ended March 31, 2015 compared to same period in 2014 primarily related to an increase in fee for service business in APS Healthcare, partially offset by the sale of APS Puerto Rico during the first quarter of 2015.

        Claims and other benefits.    Claims and other benefits decreased by $18.9 million for the quarter ended March 31, 2015 compared to the same period in 2014, primarily due to the sale of APS Puerto Rico.

        Commissions and general expenses.    Commissions and general expenses decreased by $7.7 million for the quarter ended March 31, 2015 compared to the same period in 2014. Expenses at APS Healthcare declined due to expense reduction initiatives, lower levels of domestic business and the sale of APS Puerto Rico. General corporate expenses decreased by $3.5 million compared to the same period in 2014, driven by our expense reduction initiatives, partially offset by $0.8 million of accelerated amortization of deferred financing fees as a result of our Term Loan prepayment on March 31, 2015. The following table details commissions and general expenses for our Corporate & Other segment:

 
  Three months ended
March 31,
 
 
  2015   2014  
 
  (in thousands)
 

APS Healthcare

  $ 22,893   $ 25,051  

Amortization of debt issuance costs

    1,128     438  

Legal/settlement costs

    238     2,014  

Corporate

    7,605     12,084  

Total commissions and general expenses

  $ 31,864   $ 39,587  

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    Liquidity and Capital Resources

        Sources and Uses of Liquidity to the Parent Company, Universal American Corp.    We require cash at our parent company to support the operations and growth of our HMO, insurance, MSO and and other subsidiaries, fund new business opportunities through acquisitions or otherwise and pay the operating expenses necessary to function as a holding company, as applicable insurance department regulations require us to bear our own expenses.

        The parent company's ongoing sources and uses of liquidity are derived primarily from the following:

    dividends from and capital contributions to our Insurance and HMO subsidiaries—During the first quarter of 2015, our Insurance subsidiary, Pyramid Life, declared a $75 million extraordinary dividend which was subsequently paid to the holding company in April 2015. No other dividends were declared or paid by our other Insurance and HMO subsidiaries in the first quarter. See below for further discussion of first quarter activity.

    loans from and interest payments to our Insurance subsidiaries to support investments in our ACO business—During 2013, our Insurance subsidiaries loaned $22 million to our parent company. During the first quarter of 2015, the parent company paid interest totaling $0.2 million to our Insurance subsidiaries on such loans. The company repaid $9 million of this loan to its Insurance subsidiary, Pyramid Life, in April 2015.

    the cash flows of our other subsidiaries, including our Medicare Advantage management service organization—Net cash flows available to our parent company amounted to approximately $3.0 million during the first quarter of 2015.

    the cash flows of our ACO business and other growth initiatives—For the three months ended March 31, 2015, we incurred losses of approximately $11.7 million, pre-tax, related to our ACO business.

    payment of dividends to holders of our mandatorily redeemable preferred shares—In the first quarter of 2015, we paid $0.9 million of dividends to holders of our mandatorily redeemable preferred shares. The $40 million face value of those shares cannot be redeemed prior to 2017, unless there is a change of control of the Company.

    payment of debt principal, interest and fees required under our 2012 Credit Facility—see below for discussion of first quarter activity.

    working capital loans to our Medicaid health plan—Periodically, our parent company lends cash to our Medicaid subsidiary, Today's Options of New York, Inc., known as TONY, to bridge the timing difference between claims payments and premium receipts from New York State Department of Health. These loans are immediately repaid upon receipt of premiums. As of March 31, 2015, TONY had no outstanding loan balance due to the parent company.

    payment of certain corporate overhead costs and public company expenses, net of revenues, which amounted to $3.9 million for the quarter ended March 31, 2015.

        In addition, the parent company from time-to-time engages in corporate finance activities that generate the following sources and uses of liquidity:

    payment of dividends to shareholders—We do not currently pay a regular dividend to our shareholders, however, we have paid special dividends in the past, most recently in August 2013. Payment of any future dividends would be dependent upon an evaluation of excess capital, as discussed below.

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    repurchase of our common stock under our stock repurchase plan—On August 1, 2013, our Board of Directors authorized the repurchase of up to $40 million of our outstanding common stock. Purchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise as market conditions permit. 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. 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. See Note 10—Other Disclosures in the Notes to Consolidated Financial Statements.

    As of March 31, 2015, we had approximately $67 million of cash and investments in our parent company and unregulated subsidiaries.

        We continually evaluate the potential use of any excess capital, which may include the following:

    reinvestment in existing businesses;

    acquisitions, investments or other strategic transactions;

    return to shareholders through share repurchase, dividend or other means;

    paydown of debt; or

    other appropriate uses.

        Any such use is dependent upon a variety of factors and there can be no assurance that any one or more of these uses will occur.

    Sources and Uses of Liquidity of Our Subsidiaries

        Insurance and HMO subsidiaries.    We require cash at our insurance and HMO subsidiaries to meet our policy-related obligations and to pay operating expenses, including the cost of administration of the policies, and to maintain adequate capital levels. The primary sources of liquidity are premiums received from CMS and policyholders and investment income generated by our invested assets.

        The National Association of Insurance Commissioners, known as the NAIC, imposes regulatory risk-based capital, known as RBC, requirements on insurance companies. The level of RBC is calculated and reported annually. A number of remedial actions could be enforced if a company's total adjusted capital is less than 200% of authorized control level RBC. However, we generally consider target surplus to be 350% of authorized control level RBC. At December 31, 2014, all but one of our insurance subsidiaries had total adjusted capital in excess of our target of 350% of authorized control level RBC. One insurance company fell below our target surplus with a 240% ratio, but still has total adjusted capital in excess of the NAIC's 200%. Excess capital can be used by the insurance and HMO subsidiaries to make dividend payments to their respective holding companies, subject to certain restrictions, and from there to our parent company.

        At March 31, 2015, we held cash and invested assets of approximately $853 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 the first quarter of 2015, our Insurance subsidiary, Pyramid Life, declared a $75 million extraordinary dividend which was subsequently paid to their respective holding company in April 2015. No other dividends were declared or paid by our other Insurance and HMO subsidiaries in the first quarter. Based on current estimates, we expect the aggregate additional amount of dividends that may be paid to our parent company in 2015 without prior approval by state regulatory authorities is

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approximately $18 million. In addition, in the first quarter of 2015, we funded a total of $17.1 million in capital contributions to one of our Insurance subsidiaries and $0.3 million to our Medicaid health plan.

        Medicare Advantage Management Service Organizations.    The primary sources of liquidity for these subsidiaries are fees collected from affiliates for performing administrative, marketing and management services for our Medicare Advantage business. The primary uses of liquidity are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for these subsidiaries will exceed scheduled uses of cash and result in amounts available to dividend to our parent company.

        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 and members. Total Care is required to maintain a contingent reserve equal to a percentage of premium that grades from 7.25% for 2013, ultimately to 12.5%. In the quarter ended March 31, 2015, we made a capital contribution of $0.3 million to the plan to meet this contingent reserve requirement.

        APS Healthcare.    The primary sources of liquidity for APS Healthcare are fees from its customers, including health plans, state agencies and related organizations for performing a range of healthcare services. The primary uses of liquidity are the payments for salaries and expenses associated with providing these services.

        Investments.    We invest primarily in fixed maturity securities of the U.S. Government and its agencies, U.S. state and local governments, 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 March 31, 2015, approximately 99% of our fixed income investment portfolio had investment grade ratings from S&P or Moody's.

        At March 31, 2015, cash and cash equivalents represent approximately 8% of our total cash and invested assets. Approximately 24% of cash and invested assets were held in securities backed by the U.S. government or its agencies and the average credit quality of our total investment portfolio was AA–.

        The average book yield of our investment portfolio was 3.1% at March 31, 2015 and 3.0% at December 31, 2014. The increase in our average book yield is principally driven by the lower percentage of our assets being held in lower yielding cash and cash equivalents as of March 31, 2015 versus December 31, 2014.

        2012 Credit Facility.    In connection with the acquisition of APS Healthcare, on March 2, 2012, we entered into a new credit facility (the "2012 Credit Facility") consisting of a five-year $150 million senior secured term loan and a $75 million senior secured revolving credit facility.

        The 2012 Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants. Negative covenants include, among others, limitations on the incurrence of indebtedness, limitations on the incurrence of liens and limitations on acquisition, dispositions, investments and restricted payments. In addition, the 2012 Credit Facility contains certain financial covenants relating to minimum risk-based capital, consolidated leverage ratio, and consolidated debt service ratio. The 2012 Credit Facility also contains customary events of default. Upon the occurrence and during the continuance of an event of default, the Lenders may declare the outstanding advances and all other obligations under the 2012 Credit Facility immediately due and payable.

        On November 4, 2013, we entered into an amendment to our 2012 Credit Facility. The amendment, which was effective beginning with the quarter ended September 30, 2013, suspended

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certain financial covenants, including the consolidated leverage and debt service ratios, replacing them with total debt to capitalization and minimum liquidity ratios. As of December 31, 2014, and throughout the entire amendment period, we were in compliance with all financial covenants, as amended. These new financial covenants terminated December 31, 2014 and effective January 1, 2015 the original financial covenants were reinstated. As of March 31, 2105, we were compliant with the original financial covenants.

        In connection with the amendment, we had prepaid all scheduled 2013 and 2014 principal payments, including the final 2013 payment due December 31, 2013 of $3.6 million and all 2014 scheduled payments totaling $14.3 million. We also paid fees and expenses of approximately $0.5 million in 2013.

        On March 31, 2015, we repaid $58.6 million of principal on our Term Loan under the 2012 Credit Facility. $3.6 million of this payment was the regularly scheduled principal payment, $38.4 million was a mandatory prepayment from subsidiary sale proceeds, fulfilling our obligation to prepay principal from these proceeds by February 2016, and the balance of $16.6 million was a voluntary prepayment which provided additional restricted payment flexibility under the 2012 Credit Facility. After ratably applying these prepayments to the remaining amortization payments, the Company will no longer need to make regularly scheduled principal payments until the final bullet payment of $44.9 million in January 2017.

        Our obligations under the Credit Agreement are secured by a first priority security interest in 100% of the capital stock of our material subsidiaries and are also guaranteed by certain of our subsidiaries.

        The 2012 Credit Facility bears interest at rates equal to, at our election, LIBOR or the base rate, plus an applicable margin that varies based on our consolidated leverage ratio from 1.75% to 2.50%, in the case of LIBOR loans, and from 0.75% to 1.50% in the case of base rate loans. Effective March 31, 2015, the interest rate on the term loan portion of the 2012 Credit Facility was 2.68% based on a spread of 2.50% above LIBOR.

        We are required to pay a commitment fee on unused availability under the Revolving Facility that varies based on our consolidated leverage ratio, from 0.40% to 0.50% per year. As of the date of this report, we had not drawn on the Revolving Facility.

    Critical Accounting Policies

        There have been no changes to our critical accounting policies during the current quarter ended March 31, 2015. For a description of our significant accounting policies, see Note 3—Summary of Significant Accounting Policies included in our Annual Report on Form 10-K/A for the year ended December 31, 2014.

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Policy and Contract Claims—Accident and Health Policies

        The following table presents the components of the change in our liability for policy and contract claims—health:

 
  Three months
ended
March 31,
 
 
  2015  
 
  (in thousands)
 

Balance at beginning of period

  $ 147,561  

Less reinsurance recoverable

    (6,503 )

Net balance at beginning of period

    141,058  

Balances sold

    (9,154 )

Incurred related to:

       

Current year

    352,622  

Prior year development

    653  

Total incurred

    353,275  

Paid related to:

       

Current year

    244,635  

Prior year

    113,574  

Total paid

    358,209  

Net balance at end of period

    126,970  

Plus reinsurance recoverable

    6,135  

Balance at end of period

  $ 133,105  

        The liability for policy and contract claims—health at March 31, 2015 decreased by $14.5 million during the three months ended March 31, 2015. The decrease in the liability was primarily attributable to the sale of the APS Healthcare Puerto Rico business.

        The prior year development incurred in the table above represents (favorable) or unfavorable adjustments as a result of prior year claim estimates being settled or currently expected to be settled, for amounts that are different than originally anticipated. This prior year development occurs due to differences between the actual medical utilization and other components of medical cost trends, and actual claim processing and payment patterns compared to the assumptions for claims trend and completion factors used to estimate our claim liabilities.

        During the three months ended March 31, 2015, claim reserves settled, or are currently expected to be settled, for $0.7 million more than estimated at December 31, 2014. Prior period development represents less than 0.1% of the incurred claims recorded in 2014.

Sensitivity Analysis

        The following table illustrates the sensitivity of our accident and health IBNR payable at March 31, 2015 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

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health care cost trend rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):   Claims Trend Factor(2):  
(Decrease)
Increase
in Factor
  Increase
(Decrease) in
Net
Health
IBNR
  (Decrease)
Increase
in Factor
  (Decrease)
Increase in
Net
Health
IBNR
 
($ in thousands)
 
  –3 % $ 525     –3 % $ (4,600 )
  –2 %   350     –2 %   (3,068 )
  –1 %   175     –1 %   (1,534 )
  1 %   (175 )   1 %   1,535  
  2 %   (350 )   2 %   3,071  
  3 %   (525 )   3 %   4,609  

(1)
Reflects estimated potential changes in medical and other expenses payable, caused by changes in completion factors for incurred months prior to the most recent three months.

(2)
Reflects estimated potential changes in medical and other expenses payable, caused by changes in annualized claims trend used for the estimation of per member per month incurred claims for the most recent three months.

Effects of Recently Issued and Pending Accounting Pronouncements

        A summary of recent and pending accounting pronouncements is provided in Note 3—Recently Issued and Pending Accounting Pronouncements.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        In general, market risk to which we are subject relates to changes in interest rates that affect the market prices of our fixed income securities.

Investment Interest Rate Sensitivity

        Our profitability could be affected if we were required to liquidate fixed income securities during periods of rising and/or volatile interest rates. We attempt to mitigate our exposure to adverse interest rate movements through a combination of active portfolio management, the use of interest rate swaps and by staggering the maturities of our fixed income investments to assure sufficient liquidity to meet our obligations and to address reinvestment risk considerations. Our investment policy is to balance our portfolio duration to achieve investment returns consistent with the preservation of capital and to meet payment obligations of policy benefits and claims.

        Some classes of mortgage-backed securities are subject to significant prepayment risk. In periods of declining interest rates, individuals may refinance higher rate mortgages to take advantage of the lower rates then available. We monitor and adjust our investment portfolio mix to mitigate this risk.

        We regularly conduct various analyses to gauge the financial impact of changes in interest rate on our financial condition. The ranges selected in these analyses reflect our assessment as being reasonably possible over the succeeding twelve-month period. The magnitude of changes modeled in the accompanying analyses should not be construed as a prediction of future economic events, but rather, be treated as a simple illustration of the potential impact of such events on our financial results.

        The sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100 and 200 basis

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points from their levels as of March 31, 2015, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest rates at March 31, 2015. Due to the current low interest rate environment, when estimating the effect of market interest rate decreases on fair value we have set an interest rate floor of 0% and have not allowed interest rates to go negative.

March 31, 2015   Effect of Change in Market Interest Rates on Fair Value
of Fixed Income Portfolio as of March 31, 2015
 
Fair Value of
Fixed Income Portfolio
  200 Basis
Point Decrease
  100 Basis
Point Decrease
  100 Basis
Point Increase
  200 Basis
Point Increase
 
(in millions)
 
$ 819.3   $ 44.9   $ 28.1   $ (31.2 ) $ (62.7 )

    Debt

        We pay interest on our term loan based on LIBOR over one, two, three or nine month interest periods. Due to the variable interest rate, we would be subject to higher interest costs if short-term interest rates rise. We regularly conduct various analyses to gauge the financial impact of changes in interest rates on our financial condition. The ranges selected in these analyses reflect our assessment as being reasonably possible over the succeeding twelve-month period. The magnitude of changes modeled in the accompanying analyses should not be construed as a prediction of future economic events, but rather, be treated as a simple illustration of the potential impact of such events on our financial results.

        The sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the three months ended March 31, 2015, and with all other variables held constant. The following table summarizes the impact of changes in LIBOR. Due to the current low interest rate environment, when estimating the effect of LIBOR decreases on pre-tax income, we have set an interest rate floor of 0% and have not allowed LIBOR to go negative.

 
   
   
  Effect of Change in LIBOR on Pre-tax Income
for the period ended March 31, 2015
 
 
   
  Weighted
Average
Balance
Outstanding
 
Description of Floating Rate Debt
  Weighted
Average
Interest Rate
  200 Basis
Point
Decrease(1)
  100 Basis
Point
Decrease(1)
  100 Basis
Point
Increase
  200 Basis
Point
Increase
 
 
   
  (in millions)
 

Loan payable

    2.75 % $ 102.8   $ 0.1   $ 0.1   $ (0.3 ) $ (2.1 )

(1)
The LIBOR rate from January to September on our Loan payable was approximately 25 basis points and, for the purposes of this illustration, decreases in monthly rates over this period have been limited to this rate.

        We have floating rate debt outstanding of $44.9 million as of March 31, 2015 which is exposed to rising interest rates. In addition, we had approximately $77.4 million of cash and cash equivalents as of March 31, 2015. Our exposure to rising interest costs on our debt would be partially mitigated by the increase in net investment income on our cash and cash equivalents.

        The magnitude of changes reflected in the above analysis regarding interest rates should not be construed as a prediction of future economic events, but rather as an illustration of the potential impact of such events on our financial results.

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ITEM 4—CONTROLS AND PROCEDURES

    Disclosure Controls and Procedures

        We maintain disclosure controls and procedures that are designed to ensure that we record, process, summarize and report the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 within the time periods specified in the SEC's rules and forms, and that we accumulate this information and communicate it to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

    Inherent Limitations on Effectiveness of Controls

        Our disclosure controls and procedures and our internal controls over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and we must consider the benefits of controls relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that we have detected all control issues and instances of fraud, if any, within Universal American. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. The individual acts of some persons or collusion of two or more people can also circumvent controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

    Evaluation of Effectiveness of Controls

        We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2015, at a reasonable assurance level, to timely alert management to material information required to be included in our periodic filings with the Securities and Exchange Commission.

    Changes in Internal Control over Financial Reporting

        There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

ITEM 1—LEGAL PROCEEDINGS

        For information relating to litigation affecting us, see Note 8—Commitments and Contingencies in Part I—Item 1 of this report, which is incorporated into this Part II—Item 1—Legal Proceedings by reference.

ITEM 1A—RISK FACTORS

        There have been no material changes to the risk factors included in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2015, filed with the SEC on March 31, 2015.

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

        None.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4—MINE SAFETY DISCLOSURES

        None.

ITEM 5—OTHER INFORMATION

        None.

ITEM 6—EXHIBITS

        Each exhibit identified below is filed as a part of this report.

  31.1   Certification of Chief Executive Officer, as required by Rule 13a- 14(a) of the Securities Exchange Act of 1934.

 

31.2

 

Certification of Chief Financial Officer, as required by Rule 13a- 14(a) of the Securities Exchange Act of 1934.

 

32.1

 

Certification of the Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

 

101.INS—XBRL

 

Instance Document.

 

101.SCH—XBRL

 

Taxonomy Extension Schema Document.

 

101.CAL—XBRL

 

Taxonomy Extension Calculation Linkbase Document.

 

101.LAB—XBRL

 

Taxonomy Extension Label Linkbase Document.

 

101.PRE—XBRL

 

Taxonomy Extension Presentation Linkbase Document.

 

101.DEF—XBRL

 

Taxonomy Extension Definition Linkbase Document.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    UNIVERSAL AMERICAN CORP.

May 5, 2015

 

/s/ RICHARD A. BARASCH

Richard A. Barasch
Chief Executive Officer

May 5, 2015

 

/s/ ROBERT A. WAEGELEIN

Robert A. Waegelein
President and Chief Financial Officer
(Principal Accounting Officer)

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