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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 September 30, 2016

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 November 3, 2016
Voting, par value $0.01 per share   58,735,918 shares

   


Table of Contents


TABLE OF CONTENTS

 
  Item   Description   Page  

PART I

     

Financial Information

     

  1  

Financial Statements (unaudited):

    3  

     

Consolidated Balance Sheets

    3  

     

Consolidated Statements of Operations

    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

    32  

  3  

Quantitative and Qualitative Disclosures About Market Risk

    49  

  4  

Controls and Procedures

    50  

PART II

     

Other Information

     

  1  

Legal Proceedings

    51  

  1A  

Risk Factors

    51  

  2  

Unregistered Sales of Equity Securities and Use of Proceeds

    51  

  3  

Defaults Upon Senior Securities

    51  

  4  

Mine Safety Disclosures

    51  

  5  

Other Information

    51  

  6  

Exhibits

    52  

     

Signatures

    53  

1


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


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PART I

ITEM 1—FINANCIAL STATEMENTS


UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 
  September 30,
2016
  December 31,
2015
 
 
  (Unaudited)
   
 

ASSETS

             

Investments:

             

Fixed maturities available for sale, at fair value (amortized cost: 2016, $215,761; 2015, $279,277)

  $ 221,009   $ 281,776  

Other invested assets

    9,717     9,734  

Total investments

    230,726     291,510  

Cash and cash equivalents

    264,046     70,546  

Accrued investment income

    2,147     2,307  

Reinsurance recoverables

    279     406  

Due and unpaid premiums

    14,816     25,518  

Goodwill and intangible assets

    71,078     71,423  

Deferred income tax asset

    21,840     48,704  

Income taxes receivable

    10,220     5,885  

Other healthcare receivables

    27,355     34,127  

Other assets

    34,434     29,866  

Assets of discontinued operations

    238,246     1,150,570  

Total assets

  $ 915,187   $ 1,730,862  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

LIABILITIES

   
 
   
 
 

Policy and contract claims

  $ 82,904   $ 86,976  

Premiums received in advance

    113,183     953  

Convertible Senior Notes due 2021, net of fees

    91,645      

Series A mandatorily redeemable preferred shares, net of fees

    39,893     39,755  

Net amounts payable to discontinued operations

    37     44,289  

Accounts payable and other liabilities

    59,994     60,455  

Liabilities of discontinued operations

    236,072     1,116,039  

Total liabilities

    623,728     1,348,467  

Commitments and contingencies (Note 9)

             

STOCKHOLDERS' EQUITY

   
 
   
 
 

Preferred stock (Authorized: 40 million shares)

         

Common stock—voting (Authorized: 400 million shares; issued and outstanding: 2016, 58.8 million shares; 2015, 81.3 million shares)

    588     813  

Common stock—non-voting (Authorized: 60 million shares; issued and outstanding: 2015, 3.3 million shares)

        33  

Additional paid-in capital

    443,323     608,804  

Accumulated other comprehensive income

    3,671     2,748  

Retained deficit

    (156,123 )   (230,003 )

Total stockholders' equity

    291,459     382,395  

Total liabilities and stockholders' equity

  $ 915,187   $ 1,730,862  

   

See Notes to unaudited Consolidated Financial Statements.

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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
September 30,
  For the nine months
ended
September 30,
 
 
  2016   2015   2016   2015  

Revenues:

                         

Net premiums

  $ 340,643   $ 304,178   $ 1,029,158   $ 924,242  

Net investment income

    1,926     4,112     6,289     9,754  

Fee and other income

    963     1,749     1,932     4,204  

Net realized (losses) gains

    (143 )   29,751     1,385     33,625  

Total revenues

    343,389     339,790     1,038,764     971,825  

Benefits, claims and expenses:

                         

Claims and other benefits

    290,982     267,652     868,148     801,848  

Amortization of intangible assets

    237     537     696     1,583  

Commissions

    5,265     4,826     14,593     13,131  

Interest expense

    3,046     1,142     4,825     3,849  

Affordable Care Act fee

    5,513     6,419     16,293     19,117  

Other operating costs and expenses

    42,437     38,772     122,086     117,657  

Total benefits, claims and expenses

    347,480     319,348     1,026,641     957,185  

(Loss) income before equity in (losses) earnings of unconsolidated subsidiaries

    (4,091 )   20,442     12,123     14,640  

Equity in (losses) earnings of unconsolidated subsidiaries

    (5,170 )   (7,446 )   14,504     (1,134 )

(Loss) income from continuing operations before income taxes

    (9,261 )   12,996     26,627     13,506  

(Benefit from) provision for income taxes

    (504 )   13,045     15,473     7,618  

(Loss) income from continuing operations

    (8,757 )   (49 )   11,154     5,888  

Discontinued operations:

                         

Income (loss) from discontinued operations before income taxes

    56,959     3,514     68,024     (15,097 )

Provision for (benefit from) income taxes

    (2,679 )   657     5,298     (6,796 )

Income (loss) from discontinued operations

    59,638     2,857     62,726     (8,301 )

Net income (loss)

  $ 50,881   $ 2,808   $ 73,880   $ (2,413 )

Income (loss) per common share:

                         

Basic:

                         

Continuing operations

  $ (0.14 ) $   $ 0.15   $ 0.07  

Discontinued operations

    0.97     0.03     0.83     (0.10 )

Net income (loss)

  $ 0.83   $ 0.03   $ 0.98   $ (0.03 )

Diluted:

                         

Continuing operations

  $ (0.14 ) $   $ 0.15   $ 0.07  

Discontinued operations

    0.97     0.03     0.82     (0.10 )

Net income (loss)

  $ 0.83   $ 0.03   $ 0.97   $ (0.03 )

Weighted average shares outstanding:

                         

Basic weighted average shares outstanding

    61,329     82,516     75,400     82,337  

Effect of dilutive securities

            739     1,199  

Diluted weighted average shares outstanding

    61,329     82,516     76,139     83,536  

   

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
September 30,
  For the nine
months ended
September 30,
 
 
  2016   2015   2016   2015  

Comprehensive income (loss):

                         

Net income (loss)

  $ 50,881   $ 2,808   $ 73,880   $ (2,413 )

Other comprehensive (loss) income, net of income taxes:              

                         

Unrealized (loss) gain on investments

    (9,355 )   (26 )   1,064     (5,025 )

Less: reclassification adjustment for gains included in net income (loss)

    (6 )   68     1,020     2,552  

Change in net unrealized (loss) gain on investments                   

    (9,349 )   (94 )   44     (7,577 )

Change in long-term claim reserve adjustment

    2,940     10     879     1,809  

Total other comprehensive (loss) income, net of income taxes

    (6,409 )   (84 )   923     (5,768 )

Comprehensive income (loss)

  $ 44,472   $ 2,724   $ 74,803   $ (8,181 )

   

See Notes to unaudited Consolidated Financial Statements.

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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  

2015

                                     

Balance at January 1, 2015

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

Net loss

                    (2,413 )   (2,413 )

Other comprehensive loss

                (5,768 )       (5,768 )

Net issuance of common stock

    3         186             189  

Stock-based compensation

            3,459             3,459  

Dividends to stockholders

            216         9     225  

Balance at September 30, 2015

  $ 807   $ 33   $ 670,887   $ 6,880   $ (68,450 ) $ 610,157  

2016

                                     

Balance at January 1, 2016

  $ 813   $ 33   $ 608,804   $ 2,748   $ (230,003 ) $ 382,395  

Net income

                    73,880     73,880  

Other comprehensive income

                923         923  

Net issuance of common stock

    6         (948 )           (942 )

Stock-based compensation

            1,623             1,623  

Dividends to stockholders

            1,656             1,656  

Share buyback/cancellation

    (231 )   (33 )   (180,657 )           (180,921 )

Equity component of convertible senior notes, net of deferred tax

            12,845             12,845  

Balance at September 30, 2016

  $ 588   $   $ 443,323   $ 3,671   $ (156,123 ) $ 291,459  

   

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 nine months
ended September 30,
 
 
  2016   2015  

Operating activities:

             

Net income (loss)

  $ 73,880   $ (2,413 )

(Income) loss from discontinued operations

    (62,726 )   8,301  

Income from continuing operations

    11,154     5,888  

Adjustments to reconcile net income (loss) to cash used for operating activities:

             

Deferred income taxes

    18,967     3,730  

Net realized gains on investments

    (1,385 )   (33,625 )

Amortization of intangible assets

    696     1,583  

Amortization of debt issuance costs

    348     1,825  

Amortization of debt discount on convertible notes

    1,081      

Net amortization of bond premium

    1,072     1,328  

Depreciation expense

    2,139     2,575  

Stock based compensation expense

    5,022     7,623  

Changes in operating assets and liabilities:

             

Prepaid ACA fee

    (5,431 )   (5,484 )

Policy and contract claims

    (4,072 )   (9,177 )

Reinsurance recoverables

    127     340  

Due and unpaid/advance premiums

    122,932     18,228  

Net amounts payable to discontinued operations

    11,062     68,748  

Income taxes receivable

    (4,335 )   21,335  

Other healthcare receivables

    6,772     (5,464 )

Other, net

    (1,908 )   (62,063 )

Cash provided by operating activities of continuing operations

    164,241     17,390  

Cash used for operating activities of discontinued operations

    (12,947 )   (60,066 )

Cash provided by operating activities

    151,294     (42,676 )

Investing activities:

             

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

    67,802     65,523  

Cost of fixed maturity investments acquired

    (57,373 )   (5,203 )

Change in short-term investments

        5,496  

Proceeds of sale of cost method investments

        35,620  

Purchase of fixed assets

    (534 )   (5,011 )

Other investing activities

    (2,807 )   (296 )

Cash provided by investing activities of continuing operations

    7,088     96,129  

Cash provided by investing activities of discontinued operations

    72,241     93,799  

Cash provided by investing activities

    79,329     189,928  

Financing activities:

             

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

    (2,113 )   105  

Share repurchase

    (151,271 )    

Dividends paid to stockholders

    898     (664 )

Principal payment on loan payable

        (58,567 )

Proceeds from the issuance of convertible senior notes

    115,000      

Payment of issue costs—convertible senior notes

    (4,877 )    

Distributions from discontinued operations

    64,534     23,409  

Cash provided by financing activities of continuing operations

    22,171     (35,717 )

Cash used for financing activities of discontinued operations

    (64,534 )   (23,409 )

Cash used for financing activities

    (42,363 )   (59,126 )

Net increase in cash and cash equivalents

    188,260     88,126  

Less: decrease (increase) in cash and cash equivalents from discontinued operations

    5,240     (10,324 )

Net increase in cash and cash equivalents from continuing operations

    193,500     77,802  

Cash and cash equivalents of continuing operations at beginning of period

    70,546     94,376  

Cash and cash equivalents of continuing operations at end of period

  $ 264,046   $ 172,178  

   

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, through our family of healthcare companies, provides health benefits to people covered by Medicare. We are dedicated to working collaboratively with healthcare professionals, especially primary care physicians, in order to improve the health and well-being of those we serve and reduce healthcare costs.

        Through our health plans and insurance subsidiary, 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 Network private fee-for-service products, known as PFFS Plans. Our Medicare Advantage plans currently serve approximately 114,400 members, including 68,800 members in our Texas HMOs and 45,600 members in upstate New York and Maine.

        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, or MSSP and Next Generation ACO model. We currently have twenty-two MSSP ACOs in eleven states previously approved for participation in the program by the Centers for Medicare & Medicaid Services, known as CMS and one Next Generation ACO operating in Houston, Texas. Based on data provided by CMS, these ACOs currently include approximately 5,200 participating providers with approximately 236,800 assigned Medicare fee-for-service beneficiaries, both within and outside our current Medicare Advantage footprint. 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.

        On August 3, 2016 we completed the sale of our Traditional Insurance business to Nassau Reinsurance Group Holdings, L.P. ("Nassau Re"), known as the Traditional Sale. Under the terms of the agreement, Nassau Re acquired all of the shares of Constitution Life Insurance Company ("Constitution Life") and The Pyramid Life Insurance Company ("Pyramid"), as well as the Traditional Insurance business written by American Progressive Life & Health Insurance Company of New York ("Progressive") on a 100% coinsurance basis. As of December 31, 2015, we determined that our Traditional Insurance business should be classified as held for sale and reported as discontinued operations. Consequently, the related assets and liabilities were adjusted to fair value as of December 31, 2015 based on the estimated net amounts realizable upon sale and for all periods presented were classified as assets and liabilities of discontinued operations in our consolidated balance sheets. The related operating results and cash flows are reported in discontinued operations in our consolidated financial statements. See Note 12—Discontinued Operations for further details.

        On August 1, 2016, we completed the sale of our subsidiary, Today's Options of New York, Inc., ("TONY") which operates the Total Care Medicaid plan, to Molina Healthcare, Inc. ("Molina"). As of June 30, 2016, we determined that our Medicaid business should be classified as held for sale and reported as discontinued operations. Consequently, the related assets and liabilities were reclassified as assets and liabilities of discontinued operations in our consolidated balance sheets for all periods

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

1. ORGANIZATION AND COMPANY BACKGROUND (Continued)

presented. The related operating results and cash flows are reported in discontinued operations in our consolidated financial statements. See Note 12—Discontinued Operations for further details.

        On May 1, 2015, we sold our APS Healthcare domestic subsidiaries and we sold our APS Healthcare Puerto Rico subsidiaries on February 4, 2015 and these businesses are reported as discontinued operations. As a result, the related assets and liabilities for APS Healthcare have been reclassified as assets and liabilities of discontinued operations in our consolidated balance sheets. The related operating results and cash flows are reported in discontinued operations in our consolidated financial statements. See Note 12—Discontinued Operations for further details.

2. BASIS OF PRESENTATION

        We have prepared the accompanying Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, known as GAAP, for interim reporting in accordance with Article 10 of the Securities and Exchange Commission's Regulation S-X. Accordingly, the Consolidated Financial Statements 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. 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 and nine months ended September 30, 2016 and 2015 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 generally have the right to receive 100% of subsequent profits until our losses are recovered. Any remaining revenues are generally shared at 50%.

        The ACOs are considered variable interest entities, known as VIEs, under 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) earnings of unconsolidated subsidiaries in the consolidated statements of operations. Our net investment in the ACOs is reported in other assets in our consolidated balance sheets.

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(Unaudited)

2. BASIS OF PRESENTATION (Continued)

        ACO Revenue:    On July 29, 2016, CMS informed us that our MSSP ACOs generated $97 million in gross savings for program year 2015. This compares to $80 million in gross savings for program year 2014, which we reported in the second quarter of 2015. Ten of our ACO's qualified for shared savings payments, compared to nine in program year 2014, and received payments of $39.8 million, compared to $26.9 million in program year 2014. Our share of these payments for 2016, after payments to our physician partners of $11.3 million, is $28.5 million, compared to $20.9 million in 2015, and is reflected in equity in (losses) earnings of unconsolidated subsidiaries in our consolidated statements of operations.

        Statutory Accounting Practices:    For our insurance and HMO subsidiaries, U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. See Note 2—Basis of Presentation of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for additional information on these differences.

        Use of Estimates:    The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        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. 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 liabilities and expense recognition, goodwill and other intangible assets, investment valuation, revenue recognition and income taxes. All unamortized deferred acquisition costs, or DAC, were written off at December 31, 2015, in connection with the fair value adjustment on our Traditional Insurance business. As a result, we no longer consider accounting for DAC to be a critical accounting policy.

        Reclassifications:    In accordance with the provisions of Accounting Standards Codification, known as ASC, 205-20, Presentation of Financial Statements—Discontinued Operations, effective June 30, 2016, we determined that our Total Care business should be classified as held for sale and reported in discontinued operations. Also, effective December 31, 2015, we determined that our Traditional Insurance business should be classified as held for sale and reported in discontinued operations. Effective with the sale of the APS Healthcare domestic operations on May 1, 2015, we determined that our APS Healthcare businesses should be reported as discontinued operations. As a result, the results of operations and cash flows related to our Total Care, Traditional Insurance and APS Healthcare businesses are reported as discontinued operations for all periods presented. In addition, the related assets and liabilities have been segregated from the assets and liabilities related to our continuing operations and presented separately in our consolidated balance sheets. Unless otherwise noted, all disclosures in the notes accompanying our consolidated financial statements reflect only continuing

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(Unaudited)

2. BASIS OF PRESENTATION (Continued)

operations. For additional information on our discontinued operations, see Note 12—Discontinued Operations.

        We adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, effective January 1, 2016. Under this ASU, debt issuance costs related to a recognized debt liability are to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. As a result, we have reclassified unamortized deferred loan fees related to our Series A mandatorily redeemable preferred shares, or MRPS, from other assets to be offset against the MRPS liability balance. The unamortized costs amounted to $0.1 million at September 30, 2016 and $0.2 million at December 31, 2015.

        Change in Accounting Estimate:    CMS uses risk-adjusted rates per member to determine the monthly payments to Medicare Plans. CMS has implemented a risk adjustment model which apportions premiums paid to all health plans according to health diagnoses. The risk adjustment model uses health status indicators, or risk scores, to improve the accuracy of payment. The CMS risk adjustment model pays more for members with increasing health severity. Under this risk adjustment methodology, diagnosis data from inpatient and ambulatory treatment settings are used by CMS to calculate the risk adjusted premium payment to Medicare Plans. The monthly risk-adjusted premium per member is determined by CMS based on normalized risk scores of each member from the prior year. Annually, CMS provides the updated risk scores to the Plans and revises premium rates prospectively, beginning with the July remittance for current Plan year members. CMS will also calculate the retroactive adjustments to premium related to the revised risk scores for the current year for current Plan year members and for the prior year for prior Plan year members.

        Effective January 1, 2016, we changed the way we estimate changes in risk-adjusted premiums receivable from CMS, based on health diagnoses for our Medicare Advantage business. Under our previous methodology, we estimated changes in CMS premiums related to revenue adjustments based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. We believe this method resulted in a lag in recognizing revenue for changes in our members' medical condition that will ultimately be included in the final risk adjusted premium paid by CMS. During the first quarter of 2016, we completed the development and validation of a model that allows us to better estimate the risk-adjusted premiums that will ultimately be realized based upon our historical experience for members that have a full year of experience and members that have joined during the annual enrollment period or special election period. We believe this change serves to better reflect risk-adjusted premiums in the period in which they are earned and is considered a change in estimate under ASC 250, Accounting Changes. This change in estimate resulted in the accelerated recognition of $7.7 million and $26.5 million of additional current year premium revenue, or $0.08 and $0.23 per share after tax for the three months and nine months ended September 30, 2016, respectively. Under our previous estimation process, this revenue would not have been recognized until the related diagnosis data was submitted to and accepted by CMS, typically in the third and fourth quarters of the current year and the first and second quarters of the subsequent year.

        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

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(Unaudited)

2. BASIS OF PRESENTATION (Continued)

included in our Annual Report on Form 10-K for the year ended December 31, 2015 and Note 3—Recently Issued and Pending Accounting Pronouncements herein.

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

        Statement of Cash Flows:    In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on classification in the statement of cash flows for eight specific cash flow reporting issues and clarifies application of the predominance principle in determining classification within the statement of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. Retrospective application is required unless impracticable. We are currently evaluating the impact of adoption on our consolidated statements of cash flows.

4. INVESTMENTS

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

 
  September 30, 2016  
Classification
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  
 
  (in thousands)
 

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

  $ 21,321   $ 58   $ (5 ) $ 21,374  

Government sponsored agencies

    514     13         527  

Other political subdivisions

    26,760     657     (43 )   27,374  

Corporate debt securities

    89,233     4,518     (1,034 )   92,717  

Foreign debt securities

    28,444     434     (751 )   28,127  

Residential mortgage-backed securities

    22,300     1,154     (3 )   23,451  

Commercial mortgage-backed securities

    22,797     350     (103 )   23,044  

Other asset-backed securities

    4,392     35     (32 )   4,395  

  $ 215,761   $ 7,219   $ (1,971 ) $ 221,009  

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(Unaudited)

4. INVESTMENTS (Continued)


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

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

  $ 8,481   $ 5   $ (8 ) $ 8,478  

Government sponsored agencies

    516         (9 )   507  

Other political subdivisions

    35,253     771     (98 )   35,926  

Corporate debt securities

    144,772     4,076     (2,425 )   146,423  

Foreign debt securities

    28,287     471     (1,159 )   27,599  

Residential mortgage-backed securities

    34,973     1,254     (258 )   35,969  

Commercial mortgage-backed securities

    21,264     68     (181 )   21,151  

Other asset-backed securities

    5,731     33     (41 )   5,723  

  $ 279,277   $ 6,678   $ (4,179 ) $ 281,776  

        At September 30, 2016, gross unrealized losses were primarily driven by corporate debt securities and foreign debt securities. The fair values of certain callable, hybrid securities in these groups are depressed due to the expectation that these securities will not be called at their respective call dates, thus being extended and priced to their final maturity dates. However, we have evaluated these holdings with our investment managers and do not believe any individual holdings to be other-than-temporarily impaired. For additional information regarding our process for evaluating investments for potential other-than-temporary impairment see Note 3—Summary of Significant Accounting Policies—Investments of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

        The amortized cost and fair value of fixed maturity investments at September 30, 2016 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

  $ 8,100   $ 8,208  

Due after 1 year through 5 years

    79,073     81,434  

Due after 5 years through 10 years

    57,515     60,133  

Due after 10 years

    21,584     20,344  

Mortgage and asset-backed securities

    49,489     50,890  

  $ 215,761   $ 221,009  

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(Unaudited)

4. INVESTMENTS (Continued)

        The fair value and unrealized loss as of September 30, 2016 and December 31, 2015 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  
September 30, 2016
  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

  $ 11,957   $ (5 ) $   $   $ 11,957   $ (5 )

Other political subdivisions

            1,536     (43 )   1,536     (43 )

Corporate debt securities

    7,334     (53 )   5,321     (981 )   12,655     (1,034 )

Foreign debt securities

    6,992     (13 )   8,089     (738 )   15,081     (751 )

Residential mortgage-backed securities

            579     (3 )   579     (3 )

Commercial mortgage-backed securities

    8,015     (96 )   2,181     (7 )   10,196     (103 )

Other asset-backed securities

            2,171     (32 )   2,171     (32 )

Total fixed maturities

  $ 34,298   $ (167 ) $ 19,877   $ (1,804 ) $ 54,175   $ (1,971 )

Total number of securities in an unrealized loss position

                                  35  

 

 
  Less than 12 Months   12 Months or Longer   Total  
December 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

  $ 5,210   $ (8 ) $   $   $ 5,210   $ (8 )

Government sponsored agencies

    507     (9 )           507     (9 )

Other political subdivisions

    3,162     (98 )           3,162     (98 )

Corporate debt securities

    48,819     (2,392 )   1,396     (33 )   50,215     (2,425 )

Foreign debt securities

    6,528     (382 )   5,085     (777 )   11,613     (1,159 )

Residential mortgage-backed securities

    3,021     (41 )   6,701     (217 )   9,722     (258 )

Commercial mortgage-backed securities

    7,422     (151 )   2,108     (30 )   9,530     (181 )

Other asset-backed securities

    1,467     (22 )   928     (19 )   2,395     (41 )

Total fixed maturities

  $ 76,136   $ (3,103 ) $ 16,218   $ (1,076 ) $ 92,354   $ (4,179 )

Total number of securities in an unrealized loss position

                                  96  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

Realized Gains and Losses

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

 
  For the three
months ended
September 30,
  For the nine months ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Realized gains:

                         

Fixed maturities

  $   $ 359   $ 1,563   $ 4,175  

Realized gain on sale of equity investment(1)

        29,620         29,620  

Other

            119     120  

        29,979     1,682     33,915  

Realized Losses:

                         

Fixed maturities

        (228 )   (154 )   (290 )

Other

    (143 )       (143 )    

    (143 )   (228 )   (297 )   (290 )

Net realized (losses) gains

  $ (143 ) $ 29,751   $ 1,385   $ 33,625  

(1)
Represents a gain on the sale of our cost-method investment in naviHealth in the third quarter of 2015.

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 6—Fair Value Measurements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

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(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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

September 30, 2016
  Total   Level 1   Level 2   Level 3(1)  

Assets:

                         

Fixed maturities, available for sale

  $ 221,009   $   $ 220,958   $ 51  

Equity securities

    6,404         6,404      

Total assets

  $ 227,413   $   $ 227,362   $ 51  

 

December 31, 2015
   
   
   
   
 

Assets:

                         

Fixed maturities, available for sale

  $ 281,776   $   $ 281,674   $ 102  

Equity securities

    6,352         6,352      

Total assets

  $ 288,128   $   $ 288,026   $ 102  

(1)
Level 3 securities are all mortgage-backed and asset-backed securities at September 30, 2016 and December 31, 2015 and represent private-placement securities that are thinly traded and priced using an internal model or modeled by independent brokers.

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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
  Long-Term
Claim Reserve
Adjustment
  Accumulated
Other
Comprehensive
Income
 

Three months ended September 30, 2016

                   

Balance as of July 1, 2016

  $ 15,483   $ (5,403 ) $ 10,080  

Other comprehensive loss before reclassifications          

    (9,355 )   2,940     (6,415 )

Less: Amounts reclassified from other comprehensive loss(1)

    (6 )       (6 )

Net current-period other comprehensive loss

    (9,349 )   2,940     (6,409 )

Balance as of September 30, 2016

  $ 6,134   $ (2,463 ) $ 3,671  

Three months ended September 30, 2015

                   

Balance as of July 1, 2015

  $ 11,605   $ (4,641 ) $ 6,964  

Other comprehensive loss before reclassifications          

    (26 )   10     (16 )

Less: Amounts reclassified from other comprehensive loss(1)

    68         68  

Net current-period other comprehensive loss

    (94 )   10     (84 )

Balance as of September 30, 2015

  $ 11,511   $ (4,631 ) $ 6,880  

Nine months ended September 30, 2016

                   

Balance as of January 1, 2016

  $ 6,090   $ (3,342 ) $ 2,748  

Other comprehensive income before reclassifications

    1,064     879     1,943  

Less: Amounts reclassified from other comprehensive income(1)

    1,020         1,020  

Net current-period other comprehensive loss

    44     879     923  

Balance as of September 30, 2016

  $ 6,134   $ (2,463 ) $ 3,671  

Nine months ended September 30, 2015

                   

Balance as of January 1, 2015

  $ 19,088   $ (6,440 ) $ 12,648  

Other comprehensive loss before reclassifications          

    (5,025 )   1,809     (3,216 )

Less: Amounts reclassified from other comprehensive loss(1)

    2,552         2,552  

Net current-period other comprehensive loss

    (7,577 )   1,809     (5,768 )

Balance as of September 30, 2015

  $ 11,511   $ (4,631 ) $ 6,880  

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

(1)
Reclassed from net realized gains in the Consolidated Statements of Operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. STOCK-BASED COMPENSATION

        In April 2011, we established the Universal American Corp. 2011 Omnibus Equity Award Plan, known as 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 2011 Equity Plan. Detailed information for activity in our stock-based incentive plan can be found in Note 15—Stock-Based Compensation in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

 
  Three Months
ended
September 30,
  Nine Months
ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Stock options

  $ 433   $ 734   $ 1,623   $ 3,459  

Restricted stock awards

    1,083     1,166     3,508     5,420  

Total stock-based compensation expense

    1,516     1,900     5,131     8,879  

Less: stock-based compensation expense—discontinued operations

    (22 )   72     109     1,256  

Stock-based compensation expense—continuing operations

    1,538     1,828     5,022     7,623  

Tax benefit recognized

    538     640     1,757     2,668  

Stock-based compensation expense—continuing operations, net of tax

  $ 1,000   $ 1,188   $ 3,265   $ 4,955  

    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
 
  2016

Weighted-average grant date fair value

  $1.54 - $2.04

Risk free interest rates

  0.65% - 1.09%

Dividend yields

  0.00%

Expected volatility

  33.15% - 33.86%

Expected lives of options (in years)

  3.75 - 4.00

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(Unaudited)

7. STOCK-BASED COMPENSATION (Continued)

        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.

        A summary of option activity for the nine months ended September 30, 2016 is set forth below:

Options
  Options
(in thousands)
  Weighted
Average
Exercise Price
 

Outstanding at January 1, 2016

    4,871   $ 6.80  

Granted

    755     6.13  

Exercised

    (1,324 )   6.09  

Forfeited or expired

    (208 )   7.34  

Outstanding at September 30, 2016

    4,094   $ 6.89  

        Options granted during 2016 included 358,000 performance options which vest ratably over a four-year period, but only if our stock price meets specified targets at the vesting dates. Vesting is cumulative, such that if a stock price target is missed on a vesting date, but a subsequent stock price target is met on a future vesting date, all previously unvested options would then vest. In addition, in the event of a Change in Control (as defined in the 2011 Equity Plan), all performance options will no longer vest in accordance with the performance-based criteria but instead shall vest as if such grants were originally granted as four-year time vested grants where 25% of such awards would vest on each of the first four anniversaries of the date of grant. These options were determined to contain a market condition for vesting under ASC 718—Compensation—Stock Compensation, and were valued using a Monte Carlo valuation approach.

        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 $1.6 million and $3.4 million for the nine months ended September 30, 2016 and 2015, respectively.

        As of September 30, 2016, the total compensation cost related to non-vested option awards not yet recognized was $2.5 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.

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(Unaudited)

7. STOCK-BASED COMPENSATION (Continued)

        A summary of non-vested restricted stock award activity for the nine months ended September 30, 2016 is set forth below:

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

Non-vested at January 1, 2016

    2,012   $ 5.66  

Granted

    805     4.84  

Vested

    (443 )   8.41  

Forfeited

    (149 )   6.43  

Non-vested at Setpember 30, 2016

    2,225   $ 4.76  

        The fair value of restricted stock vested during the nine months ended September 30, 2016 was $2.6 million.

        Shares granted during 2016 included 382,000 performance shares which vest in the same manner as the performance options discussed above. These shares were determined to contain a market condition for vesting under ASC 718—Compensation—Stock Compensation, and were valued using a Monte Carlo valuation approach.

    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 ($2.1) million and $0.1 million of financing cash flows for these excess tax deductions for the nine months ended September 30, 2016 and 2015, respectively.

8. CONVERTIBLE SENIOR NOTES DUE 2021; STOCK REPURCHASE

        On June 27, 2016, we completed an offering of $115.0 million of our 4.00% Convertible Senior Notes due 2021 (the "Convertible Notes"). The Convertible Notes are senior unsecured obligations of the Company. Interest on the Convertible Notes is payable on June 15 and December 15 of each year, commencing on December 15, 2016 until their maturity date of June 15, 2021. We may not redeem the Convertible Notes prior to the maturity date.

        Prior to the close of the business day immediately preceding December 15, 2020, the Convertible Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the daily volume-weighted average price, or VWAP, of the common stock for at least 20 trading days (whether or not consecutive) during a period of thirty consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the daily VWAP of our common stock and the conversion rate on each such trading day; or

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(3) upon the occurrence of specified corporate events. The Convertible Notes were not convertible at any time during the three month or nine month periods ended September 30, 2016 and did not result in any dilution in our calculation of earnings per share.

        On or after December 15, 2020 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, we may satisfy our conversion obligation by paying or delivering, as applicable, cash, shares of our voting common stock or a combination of cash and shares of voting common stock, at our election.

        The Convertible Notes will be convertible at an initial conversion rate of 105.8890 shares of our voting common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $9.44. The conversion rate will be subject to adjustment in certain events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances, including customary conversion rate adjustments in connection with a "make-whole fundamental change."

        We allocated the principal amount of the Convertible Notes between its liability and equity components (see table below). The carrying amount of the liability component was determined by measuring the fair value of a similar debt instrument of similar credit quality and maturity that did not have the conversion feature. The carrying amount of the equity component, representing the embedded conversion option, was determined by deducting the fair value of the liability component from the principal amount of the Convertible Notes as a whole. The equity component was recorded to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the Convertible Notes over the carrying amount of the liability component was recorded as a debt discount, and is being amortized to interest expense using an effective interest rate of 8.5% over the term of the Convertible Notes. We allocated the total amount of transaction costs incurred to the liability and equity components using the same proportions as the proceeds from the Convertible Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the liability component of the Convertible Notes, and are being amortized and recorded in other operating expenses using the effective interest method through the maturity date. Transaction costs attributable to the equity component were netted with the equity component of the Convertible Notes in additional paid-in capital.

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8. CONVERTIBLE SENIOR NOTES DUE 2021; STOCK REPURCHASE (Continued)

        The Convertible Notes consist of the following components (in thousands):

 
  September 30,
2016
 

Liability component:

       

Principal

  $ 115,000  

Conversion feature

    (20,637 )

Amortization

    1,081  

Principal balance in liabilities

    95,444  

Liability portion of debt issuance costs

    (3,799 )

Net carrying amount

  $ 91,645  

Equity component:

       

Conversion feature

  $ 20,637  

Equity portion of debt issuance costs

    (875 )

Deferred taxes

    (6,917 )

Net carrying amount

  $ 12,845  

        We used the net proceeds from the Convertible Notes, together with cash on hand, to (i) repurchase all (a)11,011,515 shares of our common stock held by certain affiliates of Perry Capital ("Perry") and (b) 7,098,775 shares of our common stock held by certain affiliates of Welsh, Carson, Anderson & Stowe ("WCAS"), at a purchase price of $6.80 per share, for an aggregate purchase price of approximately $123.0 million, and (ii) repurchase 2,082,800 shares of our common stock for an aggregate purchase price of approximately $15.1 million from purchasers of the convertible notes in privately negotiated transactions. Richard C. Perry, Chief Executive Officer of Perry Corp., and Sean M. Traynor, General Partner at WCAS, each resigned from our Board of Directors in connection with the repurchase of common stock from Perry and WCAS.

        We recognized interest expense on the Convertible Notes issued June 27, 2016 of $2.2 million for the three months ended September 30, 2016 and $2.3 million for the nine months ended September 30, 2016, which included $1.0 million and $1.1 million, respectively, of non-cash interest expense, representing amortization of the discount on the carrying amount of the Convertible Notes.

9. COMMITMENTS AND CONTINGENCIES

    Legal Proceedings

        In addition to the matters discussed below, we are also subject to a variety of legal proceedings, arbitrations, governmental investigations, including SEC 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 statements.

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9. COMMITMENTS AND CONTINGENCIES (Continued)

        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, known as GTCR, David Katz, a former managing director of GTCR, and former senior management of APS Healthcare (Gregory Scott, Jerome Vaccaro and John McDonough). The lawsuit arose out of our acquisition of APS Healthcare from GTCR in March 2012.

        On September 9, 2016, we entered into a Settlement Agreement with funds affiliated with GTCR and the other individual defendants to fully resolve all of the parties' respective outstanding claims arising from the Company's acquisition of APS Healthcare from GTCR in 2012.

        Pursuant to the Settlement Agreement:

    We acquired all of the 6,272,104 shares of common stock held by the funds affiliated with GTCR and the other individuals for an aggregate payment of $13.0 million. In addition, we received $1.6 million that was held in an escrow account relating to the acquisition. GTCR received $749,000 that was held in such escrow account.

    George Sperzel, GTCR's designee on our board of directors, resigned from the Company's board of directors and the Letter Agreement dated as of March 2, 2012 between the Company and GTCR regarding board representation was terminated.

    Governmental Regulation

        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 Affordable Care Act, known as 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, including SEC investigations 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. Our Medicare Advantage plans will likely be subject to audit in 2016 or 2017. 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, 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.

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9. COMMITMENTS AND CONTINGENCIES (Continued)

During 2015, we sold our APS Healthcare business. However, it is possible that we 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.

10. BUSINESS SEGMENT INFORMATION

        Our business segments are based on product and consist of

    Medicare Advantage; and

    Management Services Organization, or MSO.

Our remaining segment, Corporate & Other, reflects the activities of our holding company and other ancillary operations.

        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 intersegment activity relates to interest on intercompany loans between segments.

        Financial data by segment, with a reconciliation of segment revenues and segment income (loss) before income taxes to total revenue and income from continuing operations before income taxes in accordance with U.S. generally accepted accounting principles is as follows:

 
  Three months ended September 30,  
 
  2016   2015  
 
  Revenues   Pre-tax Income
(Loss) from
Continuing
Operations
  Revenues   Pre-tax Income
(Loss) from
Continuing
Operations
 
 
  (in thousands)
 

Medicare Advantage

  $ 342,887   $ 7,624   $ 306,807   $ (72 )

MSO

        (8,594 )       (9,320 )

Corporate & Other

    841     (8,148 )   3,406     (7,363 )

Intersegment revenues

    (196 )       (174 )    

Adjustments to segment amounts:

                         

Net realized (losses) gains(1)

    (143 )   (143 )   29,751     29,751  

Total

  $ 343,389   $ (9,261 ) $ 339,790   $ 12,996  

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10. BUSINESS SEGMENT INFORMATION (Continued)


 
  Nine months ended September 30,  
 
  2016   2015  
 
  Revenues   Pre-tax Income
(Loss) from
Continuing
Operations
  Revenues   Pre-tax Income
(Loss) from
Continuing
Operations
 
 
  (in thousands)
 

Medicare Advantage

  $ 1,036,489   $ 47,664   $ 931,906   $ 18,628  

MSO

        4,072         (9,409 )

Corporate & Other

    1,410     (26,494 )   6,895     (29,338 )

Intersegment revenues

    (520 )       (601 )    

Adjustments to segment amounts:

                         

Net realized gains(1)

    1,385     1,385     33,625     33,625  

Total

  $ 1,038,764   $ 26,627   $ 971,825   $ 13,506  

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

11. 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 non-recurring tax differences 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 and nine months ended September 30, 2016 and 2015, due to the significance of permanent differences compared to projected pre-tax income for 2016, we determined our income tax provision using actual year-to-date financial results from continuing operations.

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11. OTHER DISCLOSURES (Continued)

        For the quarter ended September 30, 2016, our effective tax rate on continuing operations was 5.5%, resulting in an income tax benefit of $0.5 million. For the same period in 2015, our effective tax rate on continuing operations exceeded 100%, resulting in an income tax provision of $13.0 million. The difference in the effective tax rate from the statutory rate in both periods was driven by permanent differences, primarily the non-deductible ACA Fee and non-deductible interest expense on our preferred stock. State income taxes also contributed to the variance in the effective tax rate.

        For the nine months ended September 30, 2016, our effective tax rate on continuing operations was 58.1%, resulting in an income tax provision of $15.5 million. For the same period in 2015, our effective tax rate on continuing operations was 56.4%, resulting in an income tax provision of $7.6 million. The effective tax rate for the nine months ended September 30, 2016 was driven by permanent differences, primarily the non-deductible ACA Fee and non-deductible interest expense on our preferred stock. State income taxes also contributed to the variance in the effective tax rates. For the nine months ended September 30, 2015, the tax benefit included $5.1 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 94.4%, 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.

        The significance of non-deductible permanent differences (primarily ACA fee and interest on our preferred stock) in relation to our pre-tax income results in a high effective tax rate, which may continue.

        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. We recognized equity in losses of our unconsolidated ACOs of $5.2 million and 7.4 million for the three months ended September 30, 2016 and 2015, respectively, and equity in earnings (losses) of $14.5 million and $(1.1) million for the nine months ended September 30, 2016 and 2015, respectively.

        The condensed financial information for 100% of our unconsolidated ACOs is as follows:

 
  For the
three months
ended
September 30,
  For the nine months
ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Total revenue

  $ 70   $   $ 41,057   $ 26,924  

Total expenses

    5,093     7,446     15,948     22,018  

Net (loss) income

  $ (5,023 ) $ (7,446 ) $ 25,109   $ 4,906  

        During the second quarter ended June 30, 2016, we recognized $41.0 million of gross shared savings revenue from our ACOs. $39.8 million related to program year 2015 shared savings from 10 of our MSSP ACOs and $1.2 million of program year 2016 shared savings revenue for our new Next

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11. OTHER DISCLOSURES (Continued)

Generation ACO. During the quarter ended September 30, 2016, we adjusted MSSP program year 2015 revenues by $0.1 million, reflecting a true up to the actual cash received from CMS during the quarter. We also determined that no change in the program year 2016 shared savings revenue accrual for the Next Generation ACO was required. This compares with $26.9 million of program year 2014 gross shared savings revenue recognized from 9 of our MSSP ACOs during the second quarter ended June 30, 2015. For additional information on our ACOs, see Note 1—Organization and Company Background and Note 2—Basis of Presentation.

        Common Stock:    In connection with the stock purchase agreements and the stock repurchase discussed in Note 8, and the litigation settlement discussed in Note 9, we retired 23.2 million shares of our voting common stock and all 3.3 million shares of our non-voting common stock. Changes in the number of shares of voting common stock issued and outstanding for the nine months ended September 30, 2016 were as follows (in thousands):

Balance at January 1, 2016

    81,312  

Issuance of common stock

    472  

Exercise of stock options

    137  

Share buyback/cancellation

    (23,165 )

Balance at September 30, 2016

    58,756  

        Earnings Per Common Share Computation:    Under ASC 260, Earnings Per Share, income (loss) from continuing operations is the trigger for determining whether potential common stock equivalents are dilutive or anti-dilutive when calculating diluted earnings per share. Diluted EPS includes the dilutive effect of the unvested restricted stock and stock options outstanding during the period. For the three months ended September 30, 2016 and 2015, we had losses from continuing operations and accordingly, excluded common stock equivalents of 0.7 million from the calculation of diluted earnings per share for both periods.

12. DISCONTINUED OPERATIONS

        Sale of Traditional Insurance Business:    On August 3, 2016 we completed the sale of our Traditional Insurance business to Nassau Re. Under the terms of the agreement, Nassau Re acquired all of the shares of Constitution Life and Pyramid, as well as the Traditional Insurance business written by Progressive on a 100% coinsurance basis. At closing, we received approximately $30.5 million in cash, which, under the terms of the agreement, is subject to post-closing price adjustments based on actual capital and surplus of Constitution Life and Pyramid compared to the target statutory capital and surplus of $68.5 million. We were also entitled to receive potential earn-out payments through June 30, 2018 that we agreed to settle currently for $11.4 million in cash, which we received in October 2016.

        As of December 31, 2015, in accordance with ASC 360-10, Property, Plant and Equipment and ASC 205-20, Presentation of Financial Statements—Discontinued Operations, we determined that our Traditional Insurance business should be classified as held for sale and reported in discontinued operations. Under ASC 360-10-35, a long-lived asset classified as held for sale shall be measured at the lower of its carrying amount or fair value less cost to sell. We determined fair value at the balance sheet date, by calculating estimated net proceeds, using actual statutory surplus, estimating the

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12. DISCONTINUED OPERATIONS (Continued)

likelihood of receiving any earn-out and estimating closing costs. Estimated net proceeds were compared to the GAAP book value of the entities being sold and the business being reinsured. At December 31, 2015, our analysis indicated a pre-tax loss of $149.2 million, generating a deferred tax benefit of $40.9 million, against which we recorded a $25.6 million valuation allowance, resulting in an after-tax loss of $133.8 million. We adjusted the carrying value to estimated fair value at September 30, 2016, which resulted in an after tax gain of $3.9 million and $0.4 million for three months and nine months ended September 30, 2016, respectively. The gain recorded in the third quarter included the reclassification of $4.8 million, after tax, of AOCI related to the sale of the Traditional Insurance business to the cumulative loss on the transaction. This was partially offset by a $1.0 million after-tax adjustment to reflect the early cash settlement of the earn-out. Additionally, discontinued operations treatment requires that the related assets and liabilities for the current period and all historical periods presented are reclassified as assets and liabilities held for sale in our consolidated balance sheets, and the related operating results and cash flows for the current period and all historical periods presented have been reclassified as discontinued operations in our consolidated financial statements.

        In connection with the sale of our Traditional Insurance business, we agreed to provide certain support services to Nassau Re under a transition service agreement, or TSA. During the three and nine months ending September 30, 2016, we recognized fee income of $0.4 million.

        Sale of Total Care Medicaid Plan:    On August 1, 2016, we completed the sale of TONY, which operates the Total Care Medicaid plan, to Molina for an adjusted purchase price of $38.0 million, subject to closing date balance sheet adjustments, resulting in a pre-tax gain of $20.4 million.

        As of June 30, 2016, in accordance with ASC 360-10 and ASC 205-20, we determined that our Total Care business should be classified as held for sale and reported in discontinued operations. Additionally, discontinued operations treatment requires that the related assets and liabilities for all historical periods presented are reclassified as assets and liabilities held for sale in our consolidated balance sheets, and the related operating results and cash flows for the current period and all historical periods presented have been reclassified as discontinued operations in our consolidated financial statements.

        In connection with the sale of the Total Care business, we agreed to provide certain support services to Molina under a TSA. During the three and nine months ending September 30, 2016, we recognized fee income of $0.2 million.

        Sale of APS Healthcare:    On February 4, 2015, we sold 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. The purchase price at closing was $26.5 million, which was settled in cash, 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 was recorded as a deferred tax asset.

        On May 1, 2015, we sold 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, which was settled in cash at closing, subject

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(Unaudited)

12. DISCONTINUED OPERATIONS (Continued)

to a working capital true up, which was finalized during the quarter ended September 30, 2015. The transaction resulted in a pre-tax realized loss of $17.0 million in 2015, including the working capital true up.

        In addition, the transaction included a potential earn-out based on certain contract renewals. Due to the variability in the length of time over which the contract renewals could occur and the difficulty of estimating the success of such renewals, we considered the potential earn-out to be a contingent gain which was recorded only if and when we determined it to be realizable. We recorded earn-out revenue of $4.4 million and $12.1 million based on amounts received from the buyer during the three and nine months ended September 30, 2016, respectively. The amounts received in the third quarter of 2016 represented the final settlement of earn-out revenue.

        In connection with the sales of the APS businesses, we agreed to provide certain support services to the buyers under TSA's. During the three and nine months ending September 30, 2015, we recognized fee income of $1.2 million and $2.9 million respectively. All APS-related TSA services were completed as of December 31, 2015.

        Effective with the sale of our APS Healthcare businesses, in accordance with ASC 205-20, the results of operations and cash flows related to APS Healthcare are reported as discontinued operations for all periods presented. In addition, the related assets and liabilities have been segregated from the assets and liabilities related to our continuing operations and are presented separately in our consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively.

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(Unaudited)

12. DISCONTINUED OPERATIONS (Continued)

        Discontinued Operations Summary Financial Information:    Summarized financial information for our discontinued operations is presented below:

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Revenues:

                         

Net premiums

  $ 28,575   $ 89,525   $ 198,194   $ 285,627  

Net investment income

    1,324     4,038     9,145     13,532  

Fee and other income

    140     403     914     32,127  

Net realized (losses) gains

    (11 )   (27 )   160     41  

Total revenues

    30,028     93,939     208,413     331,327  

Benefits, claims and expenses:

                         

Claims and other benefits

    25,324     75,976     172,427     242,269  

Change in deferred policy acquisition costs

        2,621         8,489  

Amortization of intangible assets

    67     267     470     1,191  

Affordable Care Act fee

    279     891     1,919     2,551  

Other operating costs and expenses

    4,651     12,036     30,518     74,621  

Total benefits, claims and expenses

    30,321     91,791     205,334     329,121  

Operating income

    (293 )   2,148     3,079     2,206  

Non-operating results:

   
 
   
 
   
 
   
 
 

Total Care—gain on sale

    20,407         20,407      

APS Healthcare(1)

    34,069     1,366     41,746     (17,303 )

Traditional Insurance—gain on sale

    2,776         2,792      

Income (loss) from discontinued operations before income taxes

    56,959     3,514     68,024     (15,097 )

Provision for (benefit from) income taxes

    (2,679 )   657     5,298     (6,796 )

Income (loss) from discontinued operations

  $ 59,638   $ 2,857   $ 62,726   $ (8,301 )

(1)
2016 amounts include earn-out revenues and litigation settlement, while 2015 amounts represent initial gain (loss) on Sale of APS Healthcare. See Note 9—Commitments and Contingencies for additional information.

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(Unaudited)

12. DISCONTINUED OPERATIONS (Continued)

        Total assets and liabilities of discontinued operations are as follows:

 
  September 30,
2016
  December 31,
2015
 
 
  (in thousands)
 

Assets

             

Fixed maturities available for sale, at fair value

  $ 53,425   $ 427,690  

Other invested assets

        12,800  

Total investments

    53,425     440,490  

Cash and cash equivalents

    1,388     6,628  

Accrued investment income

    501     3,196  

Reinsurance recoverables—life

    109,361     476,863  

Reinsurance recoverables—health

    57,157     130,501  

Due and unpaid premiums

    443     27,565  

Goodwill and intangible assets

        4,197  

Deferred income tax asset

    3,696      

Income taxes receivable

        10,194  

Other healthcare receivables

        2,045  

Net amounts receivable from continuing operations

    37     44,289  

Other assets

    12,238     4,602  

Total assets

  $ 238,246   $ 1,150,570  

Liabilities

             

Reserves and other policy liabilities—life

  $ 109,526   $ 495,518  

Reserves for future policy benefits—health

    54,493     539,307  

Policy and contract claims—health

    2,867     38,482  

Premiums received in advance

    399     2,000  

Amounts due to reinsurers

    1,665     2,325  

Deferred income tax liability

        7,491  

Other liabilities

    67,122     30,916  

Total liabilities

  $ 236,072   $ 1,116,039  

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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 September 30, 2016 and our results of operations for the three months and nine months ended September 30, 2016 and 2015. 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 for the year ended December 31, 2015. 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 for the year ended December 31, 2015 filed on March 10, 2016 under Part II, Item 1A—Risk Factors, as modified by the changes to those risk factors included in our first and second quarter Form 10-Qs we filed with the SEC subsequent to March 10, 2016.

Overview

        Universal American, through our family of healthcare companies, provides health benefits to people covered by Medicare. 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 two main businesses:

    Medicare Advantage:  We serve the growing Medicare population by providing Medicare Advantage products to approximately 114,400 members as of September 30, 2016. Approximately 32% of the Medicare population in the United States is currently enrolled in Medicare Advantage plans; a type of Medicare health plan offered by private companies that contract with the federal government to provide enrollees with health insurance. Our current focus is to grow our Medicare Advantage business in Texas (primarily Houston/Beaumont), upstate New York and Maine, regions in which we have meaningful market positions.

    Management Services Organization (MSO):  We believe there is a significant opportunity to address the high cost and lack of coordination of health care for the majority of the Medicare fee-for-service population and have joined with provider groups to operate Accountable Care Organizations, or ACOs, that participate in the Medicare Shared Savings Program, known as the MSSP and the Next Generation ACO model. We currently operate twenty-two MSSP ACOs and one Next Generation ACO, including approximately 5,200 participating providers with approximately 236,800 assigned Medicare fee-for-service beneficiaries.

Recent Developments

        ACO Revenue:    On July 29, 2016, CMS informed us that our MSSP ACOs generated $97 million in gross savings for program year 2015. This compares to $80 million in gross savings for program year 2014, which we reported in the second quarter of 2015. 10 of our ACO's qualified for shared savings payments, compared to 9 in program year 2014, and received payments of $39.8 million, compared to $26.9 million in program year 2014. Our share of these payments for 2016, after payments to our

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physician partners of $11.3 million, is $28.5 million, compared to $20.9 million in 2015, and is reflected in equity in earnings (losses) of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments during the third quarter of 2016. In addition, during the second quarter ended June 30, 2016, we recorded $1.2 million of program year 2016 shared savings revenue for our new Next Generation ACO. We determined that no change in the program year 2016 shared savings revenue accrual for the Next Generation ACO was required during the quarter ended September 30, 2016.

        Sale of Traditional Insurance Business:    On August 3, 2016 we completed the sale of our Traditional Insurance business to Nassau Reinsurance Group Holdings, L.P. ("Nassau Re"). Under the terms of the agreement, Nassau Re acquired all of the shares of Constitution Life Insurance Company ("Constitution Life") and The Pyramid Life Insurance Company ("Pyramid"), as well as the Traditional Insurance business written by American Progressive Life & Health Insurance Company of New York ("Progressive") on a 100% coinsurance basis. See Note 12—Discontinued Operations in the Notes to Consolidated Financial Statements for further details.

        Sale of Total Care Medicaid Plan:    On August 1, 2016, we completed the sale of all the outstanding equity interests of Today's Options of New York, Inc., ("TONY"), which operates the Total Care Medicaid plan to Molina Healthcare, Inc. ("Molina"). For further discussion of this transaction, see Note 12—Discontinued Operations in the Notes to Consolidated Financial Statements.

Membership/Beneficiaries

        The following table presents our membership in Medicare Advantage products:

 
  September 30,
2016
  December 31,
2015
 
 
  (in thousands)
 

Houston/Beaumont

    65.5     63.0  

Dallas

    3.0     3.6  

SETX dSNP

    0.3      

Texas

    68.8     66.6  

Upstate New York/Maine

    45.6     40.5  

Medicare Advantage

    114.4     107.1  

Results of Operations—Consolidated Overview

        The following table reflects (loss) income 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 and income taxes. We believe that realized gains are not indicative of overall operating trends. This differs from

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U.S. GAAP, which includes the effect of realized gains and income taxes in the determination of net income.

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands, except per share amounts)
 

Medicare Advantage

  $ 7,624   $ (72 ) $ 47,664   $ 18,628  

MSO

    (8,594 )   (9,320 )   4,072     (9,409 )

Corporate & Other

    (8,148 )   (7,363 )   (26,494 )   (29,338 )

Net realized (losses) gains

    (143 )   29,751     1,385     33,625  

(Loss) income before income taxes

    (9,261 )   12,996     26,627     13,506  

(Benefit from) provision for income taxes

    (504 )   13,045     15,473     7,618  

(Loss) income from continuing operations

    (8,757 )   (49 )   11,154     5,888  

Income (loss) from discontinued operations

    59,638     2,857     62,726     (8,301 )

Net income (loss)

  $ 50,881   $ 2,808   $ 73,880   $ (2,413 )

Income (loss) per common share (diluted):

                         

(Loss) income from continuing operations

  $ (0.14 ) $   $ 0.15   $ 0.07  

Income (loss) from discontinued operations

    0.97     0.03     0.82     (0.10 )

Net income (loss)

  $ 0.83   $ 0.03   $ 0.97   $ (0.03 )

    Three months ended September 30, 2016 and 2015

        Loss from continuing operations was $8.8 million, or $0.14 per diluted share, for the quarter ended September 30, 2016 compared to a loss of less than $0.1 million, or less than $0.01 per diluted share for the quarter ended September 30, 2015.

        Our Medicare Advantage segment generated income before income taxes of $7.6 million for the quarter ended September 30, 2016; an increase of $7.7 million compared to the quarter ended September 30, 2015. The increase in earnings was driven primarily by higher premium per member, membership growth, lower MBR, a decrease in unfavorable prior period items and lower ACA fee expense; partially offset by lower net investment income and a membership-driven increase in commissions and general expenses. The quarter ended September 30, 2016 included $2.1 million of net unfavorable prior period items compared to $3.3 million of net unfavorable items for the quarter ended September 30, 2015. Effective January 1, 2016, we changed the way we estimate changes in risk-adjusted premiums receivable from CMS, which resulted in the accelerated recognition of approximately $7.7 million of additional current year premium revenue in third quarter 2016 compared to third quarter 2015.

        Our MSO segment generated a loss before income taxes of $8.6 million for the three months ended September 30, 2016, compared to a loss of $9.3 million for the same period of 2015, a decrease of $0.7 million. We also determined that no change in the program year 2016 shared savings revenue accrual for the Next Generation ACO was required. Operating expenses for the quarter were $8.5 million compared to $9.3 million for the quarter ended September 30, 2015, reflecting fewer active ACOs in 2016.

        Our Corporate & Other segment reported a loss of $8.1 million for the three months ended September 30, 2016 compared to a loss of $7.4 million in the same period in 2015. This was primarily due to lower net investment income and higher debt service costs due to the convertible notes issued in June 2016, partially offset by lower legal and consulting costs. Fee and other income and commissions

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and general expenses both declined in 2016 due to the elimination of TSA fees and related expenses related to APS Healthcare.

        For the quarter ended September 30, 2016, our effective tax rate on continuing operations was 5.5%, resulting in an income tax benefit of $0.5 million. For the same period in 2015, our effective tax rate on continuing operations exceeded 100%, resulting in an income tax provision of $13.0 million. The difference in the effective tax rate from the statutory rate in both periods was driven by permanent differences, primarily the non-deductible ACA Fee and non-deductible interest expense on our preferred stock. State income taxes also contributed to the variance in the effective tax rate.

        Income from discontinued operations, after tax, was $59.6 million and $2.9 million for the three months ended September 30, 2016 and 2015, respectively. Discontinued Operations includes the results of our Total Care Medicaid Plan and Traditional Insurance business which were sold in August 2016 and APS Healthcare, which was sold during 2015. For further information on these businesses, see Note 12—Discontinued Operations in the Notes to Consolidated Financial Statements.

    Nine months ended September 30, 2016 and 2015

        Income from continuing operations was $11.2 million, or $0.15 per diluted share, for the nine months ended September 30, 2016 compared to income of $5.9 million, or $0.07 per diluted share for the nine months ended September 30, 2015.

        Our Medicare Advantage segment generated income before income taxes of $47.7 million for the nine months ended September 30, 2016; an increase of $29.0 million compared to the nine months ended September 30, 2015. The increase in earnings was driven primarily by higher premium per member, membership growth, lower MBR, an increase in favorable prior period items and lower ACA fee expense; partially offset by lower net investment income, and a membership-driven increase in commissions and general expenses. The nine months ended September 30, 2016 included $7.9 million of net favorable prior period items compared to $6.2 million of net favorable items for the nine months ended September 30, 2015. Effective January 1, 2016, we changed the way we estimate changes in risk-adjusted premiums receivable from CMS, which resulted in the accelerated recognition of approximately $26.5 million of additional current year premium revenue in the first nine months of 2016.

        Our MSO segment generated income before income taxes of $4.1 million for the nine months ended September 30, 2016, compared to a loss of $9.4 million for the nine months ended September 30, 2015, an increase of $13.5 million. During the nine months ended September 30, 2016, we recognized $29.6 million of net shared savings revenue from our ACOs. $27.7 million related to program year 2015 shared savings from 10 of our MSSP ACOs and $1.2 million related to program year 2016 shared savings revenue for our new Next Generation ACO. 2016 revenue also includes additional program year 2014 revenue of $0.7 million recognized in the first quarter of 2016 as a result of the restructuring of the program year 2014 shared savings distribution for two ACOs during the first quarter of 2016. This compares with $20.9 million of program year 2014 net shared savings revenue recognized from 9 of our MSSP ACOs during the nine months ended September 30, 2015. Operating expenses for the nine months ended September 30, 2016 were $26.4 million compared to $30.3 million for the nine months ended September 30, 2015, reflecting fewer active ACOs in 2016.

        Our Corporate & Other segment reported a loss of $26.5 million for the nine months ended September 30, 2016 compared to a loss of $29.3 million in the same period in 2015. This was primarily due to continuation of our expense reduction initiatives and lower legal and consulting costs partially offset by lower net investment income and higher debt service. Fee and other income and commissions and general expenses both declined in 2016 due to the elimination of TSA fees and related expenses related to APS Healthcare.

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        For the nine months ended September 30, 2016, our effective tax rate on continuing operations was 58.1%, resulting in an income tax provision of $15.5 million. For the same period in 2015, our effective tax rate on continuing operations was 56.4%, resulting in an income tax provision of $7.6 million. The effective tax rate for the nine months ended September 30, 2016 was driven by permanent differences, primarily the non-deductible ACA Fee and non-deductible interest expense on our preferred stock. State income taxes also contributed to the variance in the effective tax rates. For the nine months ended September 30, 2015, the tax benefit included $5.1 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 94.4%, 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.

        Income from discontinued operations, after tax, was $62.7 million for the nine months ended September 30, 2016 compared to a loss of $8.3 million for the nine months ended September 30, 2015. Discontinued Operations includes the results of our Total Care Medicaid Plan and Traditional Insurance business, which were sold in August 2016 and APS Healthcare, which was sold during 2015. For further information on these businesses, see Note 12—Discontinued Operations in the Notes to Consolidated Financial Statements.

Segment Results—Medicare Advantage

        The following table presents the results of our Medicare Advantage segment:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Net premiums

  $ 340,643   $ 304,311   $ 1,029,158   $ 923,925  

Net investment and other income

    2,244     2,496     7,331     7,981  

Total revenue

    342,887     306,807     1,036,489     931,906  

Medical expenses

    290,982     267,652     868,150     801,981  

ACA fee

    5,516     6,413     16,293     19,098  

Commissions and general expenses

    38,765     32,814     104,382     92,199  

Total benefits, claims and other deductions

    335,263     306,879     988,825     913,278  

Segment income (loss) before income taxes

  $ 7,624   $ (72 ) $ 47,664   $ 18,628  

        Our Medicare Advantage segment includes the operations of our Medicare coordinated care HMO, PPO and Network PFFS Plans (collectively known as the Plans). Our HMOs offer coverage to Medicare members primarily in Southeastern Texas (primarily Houston/Beaumont) and the Dallas area. Our PPO and Network PFFS Plans offer coverage primarily in upstate New York and Maine.

    Three months ended September 30, 2016 and 2015

        Our Medicare Advantage segment generated income before income taxes of $7.6 million for the quarter ended September 30, 2016; an increase of $7.7 million compared to the quarter ended September 30, 2015. The increase in earnings was driven primarily by higher premium per member, membership growth, lower MBR, a decrease in unfavorable prior period items and lower ACA fee expense; partially offset by lower net investment income and a membership-driven increase in commissions and general expenses. The quarter ended September 30, 2016 included $2.1 million of net unfavorable prior period items compared to $3.3 million of net unfavorable items for the quarter ended September 30, 2015. Effective January 1, 2016, we changed the way we estimate changes in risk-adjusted premiums receivable from CMS, which resulted in the accelerated recognition of

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approximately $7.7 million of additional current year premium revenue in third quarter 2016 compared to third quarter 2015.

        Net premiums.    Net premiums for the Medicare Advantage segment increased by $36.3 million for the quarter ended September 30, 2016 compared with the same period in 2015, due to membership growth, an increase in premium per member driven by the change in revenue recognition policy in 2016 described above and an increase in favorable prior period items. The quarter ended September 30, 2016 included $2.4 million of net favorable prior period items recognized in Net premiums. There were no prior period items recognized during the quarter ended September 30, 2015.

        Medical expenses.    Medical expenses increased by $23.3 million for the quarter ended September 30, 2016 compared to the quarter ended September 30, 2015. The increase was driven by membership growth, an increase in utilization and an increase in unfavorable prior period items. Medical expenses for the quarter ended September 30, 2016 included $4.5 million of net unfavorable items related to prior periods, compared to $3.3 million of net unfavorable items related to prior periods for the quarter ended September 30, 2015.

        Quality improvement initiative costs are included in medical 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 September 30,  
 
  2016   2015  
 
  ($ in thousands)
 

Quality Initiatives

  $ 6,011     1.7 % $ 5,791     1.9 %

Medical Benefits

    284,971     83.7 %   261,861     86.1 %

Total Benefits

  $ 290,982     85.4 % $ 267,652     88.0 %

        Adjusting for the prior year items discussed above in net premiums and medical expenses, for the quarter ended September 30, 2016, our medical benefit ratio MBR, excluding quality initiative costs, was 82.9%. Our medical benefit MBRs for the quarter ended September 30, 2016, as reported and recast to exclude prior period items, are summarized in the table below:

 
  Reported   Recast  

Texas HMOs

    84.5 %   83.3 %

Upstate New York/Maine

    82.8 %   82.2 %

Total Medicare Advantage

    83.7 %   82.9 %

        ACA fee.    The ACA fee for the three months ended September 30, 2016 amounted to $5.5 million or 1.8% of 2015 net premiums compared to $6.4 million or 1.9% of 2014 net premiums. The ACA fee is based on prior year premiums and is included in the calculation of minimum medical loss ratios under the ACA. The decrease in the ACA fee is due to lower full year premiums in 2015 compared to 2014, which was the result of lower membership in 2015 due to service area reductions effective January 1, 2015.

        Commissions and general expenses.    Commissions and general expenses for the three months ended September 30, 2016 increased $6.0 million compared to the same period in 2015, primarily due to higher membership and current period expenses. Our administrative expense ratio increased to 11.4% for the three months ended September 30, 2016 compared to 10.8% for the three months ended September 30, 2015.

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    Nine months ended September 30, 2016 and 2015

        Our Medicare Advantage segment generated income before income taxes of $47.7 million for the nine months ended September 30, 2016; an increase of $29.0 million compared to the nine months ended September 30, 2015. The increase in earnings was driven primarily by higher premium per member, membership growth, lower MBR, an increase in favorable prior period items and lower ACA fee expense; partially offset by lower net investment income, and a membership-driven increase in commissions and general expenses. The nine months ended September 30, 2016 included $7.9 million of net favorable prior period items compared to $6.2 million of net favorable items for the nine months ended September 30, 2015. Effective January 1, 2016, we changed the way we estimate changes in risk-adjusted premiums receivable from CMS, which resulted in the accelerated recognition of approximately $26.5 million of additional current year premium revenue in the first nine months of 2016.

        Net premiums.    Net premiums for the Medicare Advantage segment increased by $105.2 million for the nine months ended September 30, 2016 compared with the same period in 2015, due to membership growth and an increase in premium per member driven by the change in our revenue recognition policy in 2016 described above; partially offset by a $2.7 million reduction in favorable prior period items. The nine months ended September 30, 2016 included $12.4 million of net favorable prior period items recognized in net premiums as compared to $15.1 million of net favorable prior period items recognized for the nine months ended September 30, 2015.

        Medical expenses.    Medical expenses increased by $66.2 million for the nine months ended September 30, 2016 compared to the same period ended September 30, 2015. The increase was driven by membership growth and increased utilization; partially offset by lower unfavorable prior period items. Medical expenses for the nine months ended September 30, 2016 included $4.5 million of net unfavorable items related to prior periods, compared to $8.9 million of net unfavorable items related to prior periods for the nine months ended September 30, 2015.

        Quality improvement initiative costs are included in medical 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:

 
  Nine months ended September 30,  
 
  2016   2015  
 
  ($ in thousands)
 

Quality Initiatives

  $ 17,250     1.7 % $ 18,777     2.0 %

Medical Benefits

    850,900     82.7 %   783,204     84.8 %

Total Benefits

  $ 868,150     84.4 % $ 801,981     86.8 %

        Adjusting for the prior year items discussed above in net premiums and medical expenses, for the nine months ended September 30, 2016, our medical benefit ratio MBR, excluding quality initiative costs, was 83.3%. Our medical benefit MBRs for the nine months ended September 30, 2016, as reported and recast to exclude prior year items, are summarized in the table below:

 
  Reported   Recast  

Texas HMOs Medical Benefit Ratio

    82.8 %   83.4 %

Upstate New York/Maine Medical Benefit Ratio

    83.1 %   83.1 %

Total Medicare Advantage

    82.7 %   83.3 %

        ACA fee.    The ACA fee for the nine months ended September 30, 2016 amounted to $16.3 million or 1.8% of 2015 net premiums compared to $19.1 million or 1.8% of 2014 net premiums. The ACA fee is based on prior year premiums and is included in the calculation of minimum medical loss ratios

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under the ACA. The decrease in the ACA fee is due to lower full year premiums in 2015 compared to 2014, which was the result of lower membership in 2015 due to service area reductions effective January 1, 2015.

        Commissions and general expenses.    Commissions and general expenses for the nine months ended September 30, 2016 increased $12.2 million compared to the same period in 2015, primarily due to higher membership and current period expenses. Our administrative expense ratio increased to 10.1% for the nine months ended September 30, 2016 compared to 10.0% for the nine months ended September 30, 2015.

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 Collaborative Health Systems (CHS) subsidiary:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Shared Savings Revenue:

                         

Gross Shared Savings(1)

  $ 70   $   $ 41,057   $ 26,924  

ACO Partner Share(2)

    (147 )       (10,606 )   (6,040 )

Net Shared Savings Revenue

    (77 )       30,451     20,884  

Operating expenses

    8,517     9,320     26,379     30,293  

(Loss) income before income taxes

  $ (8,594 ) $ (9,320 ) $ 4,072   $ (9,409 )

(1)
2016 represents shared savings revenues recorded in 2016 related to program year 2015 as well as estimated program year 2016 shared savings revenue for our new Next Generation ACO for the three and nine month periods ended September 30, 2016. 2015 represents shared savings revenues recorded in 2015 related to program year 2014.

(2)
2016 revenue includes our ACO partners' share of program year 2015 shared savings as well as additional program year 2014 revenue due to CHS as a result of the restructuring of the program year 2014 shared savings distribution for two ACOs during the first quarter of 2016.

        Our MSO segment supports our healthcare provider partnerships in the development of value-based healthcare models, such as ACOs, with a variety of capabilities and resources including technology, analytics, clinical care coordination, regulatory compliance and program administration. This segment includes our CHS subsidiary and affiliated ACOs. CHS works with physicians and other healthcare professionals to operate ACOs under the MSSP and Next Generation ACO model. 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 have determined that we cannot consolidate the ACOs and therefore, include our share of their operating results in Equity in losses of unconsolidated subsidiaries in our Consolidated Statements of Operations. In the table above, we have presented our share of the results of the ACOs combined with the results of CHS to provide a better understanding of our MSO segment's results of operations.

        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, during 2016 and 2015, we recognized our portion of ACO shared savings revenue when

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notified by CMS. Such notification lags the Program Year to which the revenue relates by six to nine months. Revenue for the 2015 Program Year, which ended on December 31, 2015, was recorded in the quarter ended June 30, 2016, and trued up in the quarter ended September 30, 2016. Revenue for the 2014 Program Year, which ended on December 31, 2014, was recorded in the quarter ended June 30, 2015. Based on the ACO operating agreements, we bear all costs of the ACO operations until revenue is recognized. At that point, we generally share in up to 100% of the revenue to recover our costs incurred. Any remaining revenue is generally shared equally with our ACO provider partners.

        Effective January 1, 2016, we commenced ACO operations in Houston, Texas under CMS' new Next Generation ACO model, which operates differently from our MSSP ACOs. Based on the year-to-date June 30, 2016 financial report received from CMS during the third quarter and current quarter claims information, we are able to estimate and record shared savings revenue related to ACO operations. Based on our analysis, we determined that no change in the program year 2016 shared savings revenue accrual for the Next Generation ACO was required during the quarter ended September 30, 2016.

    Three months ended September 30, 2016 and 2015

        Our MSO segment generated a loss before income taxes of $8.6 million for the three months ended September 30, 2016, compared to a loss of $9.3 million for the same period of 2015, a decrease of $0.7 million. We also determined that no change in the program year 2016 shared savings revenue accrual for the Next Generation ACO was required. Operating expenses for the quarter were $8.5 million compared to $9.3 million for the quarter ended September 30, 2015, reflecting fewer active ACOs in 2016.

    Nine months ended September 30, 2016 and 2015

        Our MSO segment generated income before income taxes of $4.1 million for the nine months ended September 30, 2016, compared to a loss of $9.4 million for the nine months ended September 30, 2015, an increase of $13.5 million. During the nine months ended September 30, 2016, we recognized $29.6 million of net shared savings revenue from our ACOs. $27.7 million related to program year 2015 shared savings from 10 of our MSSP ACOs and $1.2 million related to program year 2016 shared savings revenue for our new Next Generation ACO. 2016 revenue also includes additional program year 2014 revenue of $0.7 million recognized in the first quarter of 2016 as a result of the restructuring of the program year 2014 shared savings distribution for two ACOs during the first quarter of 2016. This compares with $20.9 million of program year 2014 net shared savings revenue recognized from 9 of our MSSP ACOs during the nine months ended September 30, 2015. Operating expenses for the nine months ended September 30, 2016 were $26.4 million compared to $30.3 million for the nine months ended September 30, 2015, reflecting fewer active ACOs in 2016.

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Segment Results—Corporate & Other

        The following table presents the operating results of our Corporate & Other segment:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Net investment income

  $ 49   $ 1,974   $ 216   $ 2,967  

Fee and other income

    792     1,432     1,194     3,928  

Total revenue

    841     3,406     1,410     6,895  

Interest expense

    3,087     1,260     5,093     4,277  

Commissions and general expenses

    5,902     9,509     22,811     31,956  

Total benefits, claims and other deductions

    8,989     10,769     27,904     36,233  

Segment loss before income taxes

  $ (8,148 ) $ (7,363 ) $ (26,494 ) $ (29,338 )

        Corporate & Other reflects the activities of our holding company and other ancillary operations.

    Three months ended September 30, 2016 and 2015

        Our Corporate & Other segment reported a loss of $8.1 million for the three months ended September 30, 2016 compared to a loss of $7.4 million in the same period in 2015. This was primarily due to lower net investment income and higher debt service costs due to the convertible note issued in June 2016, partially offset by lower legal and consulting costs. Fee and other income and commissions and general expenses both declined in 2016 due to the elimination of TSA fees and related expenses related to APS Healthcare.

        Net investment income.    Net investment income decreased by $1.9 million. In 2015, we received a distribution of $1.9 million on a cost-method minority investment that was subsequently sold.

        Fee and other income.    Fee and other income decreased by $0.6 million for the three months ended September 30, 2016 compared to the same period in 2015. In 2015, the segment recognized income for transition services provided to the acquirers of our APS Healthcare subsidiaries which were sold during the first half of 2015. These revenues are offset by expenses recognized in commissions and general expenses as noted below.

        Interest expense.    Interest expense increased by $1.8 million, as a result of the convertible notes issued in June 2016, which resulted in $2.2 million of interest expense, compared with the term loan paid off in October 2015, which had interest expense of $0.3 million.

        Commissions and general expenses.    Commissions and general expenses decreased by $3.6 million for the three months ended September 30, 2016 compared to the same period in 2015. The decrease was primarily due to lower legal and consulting costs, and expenses incurred in 2015 in connection with transition services provided to the acquirers of our APS Healthcare subsidiary, which are largely offset by fee and other income as noted above.

    Nine months ended September 30, 2016 and 2015

        Our Corporate & Other segment reported a loss of $26.5 million for the nine months ended September 30, 2016 compared to a loss of $29.3 million in the same period in 2015. This was primarily due to continuation of our expense reduction initiatives and lower legal and consulting costs partially offset by lower net investment income and higher debt service. Fee and other income and commissions

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and general expenses both declined in 2016 due to the elimination of TSA fees and related expenses related to APS Healthcare.

        Net investment income.    Net investment income decreased by $2.8 million for the nine months ended September 30, 2016 compared to the same period in 2015. In 2015, we received a distribution of $1.9 million on a cost-method minority investment that was subsequently sold and the segment received investment income on a loan to our APS Healthcare subsidiary which is reported in discontinued operations and was sold in 2015.

        Fee and other income.    Fee and other income decreased by $2.7 million for the nine months ended September 30, 2016 compared to the same period in 2015. In 2015, the segment recognized income for transition services provided to the acquirers of our APS Healthcare subsidiaries which were sold during the first half of 2015. These revenues are offset by expenses recognized in commissions and general expenses as noted below.

        Interest expense.    Interest expense increased by $0.8 million for the nine months ended September 30, 2016 compared to the same period in 2015 primarily as a result of the convertible notes issued in June 2016, which resulted in $2.3 million of interest expense, compared with the term loan paid off in October 2015, which had interest expense of $1.3 million.

        Commissions and general expenses.    Commissions and general expenses decreased by $9.1 million for the nine months ended September 30, 2016 compared to the same period in 2015. The decrease was primarily due to reduced amortization of deferred financing costs, continuation of our expense reduction initiatives, lower legal and consulting costs and expenses incurred in 2015 in connection with our transition services provided to the acquirers of our APS Healthcare subsidiary in 2015, partially offset by decreased recoveries of agent receivables that were previously written off.

Discontinued Operations

        The following table presents the primary components comprising income (loss) from discontinued operations:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2016   2015   2016   2015  
 
  (in thousands)
 

Medicaid:

                         

Operating results

  $ 168   $ 510   $ (4,134 ) $ (906 )

Gain on sale

    20,407         20,407      

    20,575     510     16,273     (906 )

Traditional Insurance:

                         

Operating results

    122     1,815     9,282     7,448  

Realized gains

    (11 )   (27 )   160     41  

Gain on sale

    2,776         2,792      

    2,887     1,788     12,234     7,489  

 

                         

APS Healthcare

    33,497     1,216     39,517     (21,680 )

 

                         

Income (loss) before income taxes

  $ 56,959   $ 3,514   $ 68,024   $ (15,097 )

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        Discontinued Operations includes the results of our Medicaid business, Traditional Insurance business and APS Healthcare. For further discussion of these businesses and our determination of their reporting as discontinued operations, see Note 12—Discontinued Operations in the Notes to Consolidated Financial Statements.

    Three months ended September 30, 2016 and 2015

        Universal American reported income from discontinued operations of $60.1 million for the quarter ended September 30, 2016 compared to $3.5 million for the quarter ended September 30, 2015.

        Medicaid—Gain on Sale:    On August 1, 2016, we completed the sale of TONY, which operates the Total Care Medicaid plan, to Molina for an adjusted purchase price of $38.0 million, subject to closing date balance sheet adjustments, resulting in a pre-tax gain of $20.4 million.

        Traditional Insurance—Operating Results:    Traditional Insurance had operating income of $0.1 million for the three months ended September 30, 2016 compared to $1.8 million for the same period in 2015. 2016 results only reflect one month of operations, as this business was sold on August 3, 2016.

        Traditional Insurance—Gain on Sale:    The gain recorded in the third quarter included the reclassification of $4.8 million of AOCI related to the sale of the Traditional Insurance business to adjust the cumulative loss on the transaction. This was partially offset by a $1.6 million adjustment to reflect the early cash settlement of the earn-out.

        APS Healthcare—    2016 amounts include earn-out revenues and litigation settlement, while 2015 amounts represent initial gain (loss) on sale of APS Healthcare. See Note 9—Commitments and Contingencies for additional information.

    Nine months ended September 30, 2016 and 2015

        Universal American reported income from discontinued operations of $71.2 million for the nine months ended September 30, 2016 compared to a loss of $15.1 million for the nine months ended September 30, 2015.

        Medicaid—Operating Results:    Medicaid had an operating loss of $4.1 million for the nine months ended September 30, 2016 compared to a loss of $0.9 million for the same period in 2015. This decrease was primarily due to higher claims costs, including unfavorable prior period items and higher expenses during 2016.

        Medicaid—Gain on Sale:    On August 1, 2016, we completed the sale of TONY, which operates the Total Care Medicaid plan, to Molina for an adjusted purchase price of $38.0 million, subject to closing date balance sheet adjustments, resulting in a pre-tax gain of $20.4 million.

        Traditional Insurance—Operating Results:    Traditional Insurance had operating income of $9.3 million for the nine months ended September 30, 2016 compared to $7.4 million for the same period in 2015. The increase was primarily driven by the absence of DAC amortization in 2016, since all DAC was written off at December 31, 2015 in connection with the Traditional Insurance fair value adjustment as well as lower levels of operating expenses, partially offset by lower earnings from a smaller block of in-force business.

        Traditional Insurance—Gain on Sale:    The gain recorded in the third quarter included the reclassification of $4.8 million of AOCI related to the sale of the Traditional Insurance business to adjust the cumulative loss on the transaction. This was partially offset by a $1.6 million adjustment to reflect the early cash settlement of the earn-out.

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        APS Healthcare—Operating Results:    APS Healthcare had an operating gain of $27.4 million for the nine months ended September 30, 2016 compared with a loss of $4.4 million for the same period in 2015. Operating results for 2016 include the litigation settlement with GTCR. See Note 9—Commitments and Contingencies in the Notes to Consolidated Financial Statements for further details. .2015 results included one month of operating results for Puerto Rico and four months of results for the domestic business, which were both sold in 2015.

        APS Healthcare—    2016 amounts include earn-out revenues and litigation settlement, while 2015 amounts represent initial gain (loss) on sale of APS Healthcare. See Note 9—Commitments and Contingencies for additional information.

    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 other subsidiaries, fund new business opportunities through acquisitions or otherwise, fund debt service 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 nine months ended September 30, 2016, SelectCare of Texas, Inc. ("SCOT") declared a $9.6 million dividend which was paid on July 21, 2016. No other dividends were declared or paid during 2016. In the third quarter of 2016, we made a capital contribution of $0.6 million to our Medicaid subsidiary, TONY, and a $0.1 million of capital contribution to our Texas-based dual-eligible special needs plan ("dSNP"), Today's Options of Texas, Inc. ("TOTX").

    loans from and interest payments to our Insurance subsidiaries to support investments in our ACO business—During 2013, our Insurance subsidiaries loaned $22.0 million to our parent company. The parent company repaid $9.0 million of this loan in April 2015. The remaining $13.0 million loan payable was paid in August 2016. During the nine months ended September 30, 2016, the parent company paid interest totaling $0.3 million to our Insurance subsidiaries on such loans.

    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 $18.7 million during the nine months ended September 30, 2016.

    the cash flows of our ACO business and other growth initiatives—For the nine months ended September 30, 2016, we funded expenses of approximately $26.4 million, pre-tax, related to our ACO business. Additionally, in September 2016, we received $39.8 million of gross proceeds from CMS for the 2015 program year. Distributions from these proceeds to our physician partners are expected to be completed in the fourth quarter of 2016.

    payment of dividends to holders of our mandatorily redeemable preferred shares—In the nine months ended September 30, 2016, we paid $2.6 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 in control of the Company.

    payment of debt principal, interest and fees related to our convertible senior notes.

    working capital loans to our Medicaid health plan—Prior to the sale of our Medicaid business, our parent company periodically provided loans to our Medicaid subsidiary, TONY, to bridge the timing difference between claims payments and premium receipts from New York State Department of Health. These loans were immediately repaid upon receipt of premiums. Upon

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      closing of the sale of TONY to Molina Healthcare on August 1, 2016, TONY had no outstanding loan balance or unpaid accrued interest due to the parent company and the agreement was terminated.

    payment of certain corporate overhead costs and public company expenses, net of revenues, which amounted to $18.6 million for the nine months ended September 30, 2016.

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

    issuance of convertible senior notes—On June 27, 2016, we completed an offering of $115.0 million of our 4.00% Convertible Senior Notes due 2021 (the "Convertible Notes"). The Convertible Notes are senior unsecured obligations of the Company. Interest on the Convertible Notes is payable on June 15 and December 15 of each year, commencing on December 15, 2016 until their maturity date of June 15, 2021. We may not redeem the Convertible Notes prior to the maturity date. The notes are convertible, subject to certain conditions, into cash, shares of Universal American's common stock or a combination of cash and shares of Universal American's common stock, at Universal American's option. The initial conversion rate per $1,000 principal amount of notes is equivalent to 105.8890 shares of common stock, which is equivalent to a conversion price of approximately $9.44 per share, subject to adjustment in certain circumstances.

    repurchases of our common stock—We used the net proceeds from the Convertible Notes, together with cash on hand, to (i) repurchase all (a)11,011,515 shares of our common stock held by certain affiliates of Perry Capital ("Perry") and (b) 7,098,775 shares of our common stock held by certain affiliates of Welsh, Carson, Anderson & Stowe ("WCAS"), at a purchase price of $6.80 per share, for an aggregate purchase price of approximately $123.0 million, and (ii) repurchase 2,082,800 shares of our common stock for an aggregate purchase price of approximately $15.1 million from purchasers of the convertible notes in privately negotiated transactions.

    payment of dividends to shareholders—We do not currently pay a regular dividend to our shareholders, however, on October 26, 2015, we paid a special cash dividend of $0.75 per share. Payment of any future dividends would be dependent upon an evaluation of excess capital, as discussed below.

    proceeds from the sale of subsidiaries—During the first quarter of 2015, we completed the sale of our APS Healthcare Puerto Rico subsidiaries for $26.5 million in cash. During the second quarter of 2015, we completed the sale of our domestic APS subsidiaries for $5.0 million in cash. On August 3, 2016 we completed the sale of our Traditional Insurance business to Nassau Re. At closing, we received approximately $30.5 million in cash, which, under the terms of the agreement, is subject to post-closing price adjustments based on actual capital and surplus of Constitution Life and Pyramid compared to the target statutory capital and surplus of $68.5 million. In October 2016, we received $11.4 million representing final settlement of all potential earn-out payments from this sale. On August 1, 2016, we completed the sale of all the outstanding equity interests of TONY, which operates the Total Care Medicaid plan to Molina for an adjusted purchase price of $38.0 million, subject to closing date balance sheet adjustments.

    proceeds from the sale of and distributions received on investments—In August 2015, we sold our interest in our cost-basis investment in naviHealth for $35.6 million and received cash proceeds of $33.1 million, with the balance of $2.5 million held in escrow until fourth quarter 2016, and recorded a pre-tax realized gain of $29.6 million. In November 2015, we sold our interest in our cost-basis investment in DDDS for $6.6 million and received cash proceeds of $3.1 million, with the balance of $3.4 million representing the discounted fair value of a put

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      option, exercisable in November 2018, and recorded a pre-tax realized gain of $6.1 million. Subsequently, in October 2016, we negotiated and received final settlement of this put option for $3.3 million. In addition, in 2015, we received a total of $2.0 million in cash distributions from DDDS.

    As of September 30, 2016, we had approximately $119.6 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 (as applicable); 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 plan-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 members 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, 2015, all of our insurance and HMO subsidiaries had total adjusted capital in excess of our target of 350% of authorized control level RBC except for SCOT which had approximately 300%. 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 September 30, 2016, we held cash and invested assets of approximately $374 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 nine months ended September 30, 2016, SCOT declared a $9.6 million dividend which was paid on July 21, 2016. No other dividends were declared or paid during 2016. During 2015, our Insurance subsidiaries, Pyramid, Constitution, and Marquette (which was merged into Constitution Life in May 2015) declared and paid dividends totaling approximately $92 million. These subsidiaries were sold as part of the sale of our Traditional Insurance subsidiaries to Nassau. See Note 12—Discontinued Operations in the Notes to Consolidated Financial Statements. In June 2015, SCOT declared a $9.0 million ordinary dividend, which was subsequently paid to the holding company in July 2015. No other dividends were declared or paid by our other Insurance and HMO subsidiaries in 2015.

        In the third quarter of 2016, we made a capital contribution of $0.6 million to our Medicaid subsidiary, TONY, and a $0.1 million of capital contribution to TOTX, in order to maintain its $5.0 million minimum capital requirement. No capital contributions were made to our Insurance or HMO subsidiaries in the first half of 2016. In the first half of 2015, we funded a total of $17.1 million in capital contributions to one of our Insurance subsidiaries, which was merged into Constitution Life, one of the entities included in the sale of our Traditional Insurance business. During 2015, we made a

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total of $8.3 million in capital contributions to TONY in support of our Total Care Medicaid health plan; $3.2 million of which was done in the form of a surplus note, bearing interest at a rate of 5.0%. This note was converted to capital effective June 30, 2016 and all accrued and unpaid interest was settled in cash in July 2016. Additionally, in the fourth quarter of 2015, we made a $3.5 million capital contribution to TOTX.

        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.

        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 September 30, 2016, approximately 99% of our fixed income investment portfolio had investment grade ratings from S&P or Moody's.

        At September 30, 2016, cash and cash equivalents represent approximately 53% of our total cash and invested assets. The increase from 14% at June 30, 2016 is primarily driven by the early receipt of our October 2016 CMS payment on September 30, 2016 plus cash payments received from our asset sales. Approximately 67% of cash and invested assets were held in securities backed by the U.S. government or its agencies. The increase from 21% at June 30, 2016, is due to the larger cash balances held as a result of the transactions mentioned previously, plus the conversion of our "prime" money market fund holdings to U.S. government money market funds, which was driven by the money market fund reforms going into effect in October 2016. The average credit quality of our total investment portfolio was AA, up from A+ due to an increase in our AAA rated cash balances.

        The average book yield of our investment portfolio decreased to 1.7% at September 30, 2016 from 2.9% December 31, 2015, which was driven by the significant increase in our lower yielding cash balances at September 30, 2016 vs. December 31, 2015.

    Critical Accounting Policies

        In our judgment, the accounts involving estimates and assumptions that are most critical to the preparation of our financial statements are policy related liabilities and expense recognition, goodwill and other intangible assets, investment valuation, revenue recognition and income taxes. All unamortized deferred acquisition costs, or DAC, were written off at December 31, 2015, in connection with the fair value adjustment on our Traditional Insurance business. As a result, we no longer consider accounting for DAC to be a critical accounting policy. 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 for the year ended December 31, 2015.

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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:

 
  Nine months
ended
September 30,
 
 
  2016  
 
  (in thousands)
 

Balance at beginning of period

  $ 86,976  

Incurred related to:

       

Current year

    868,493  

Prior year development

    (345 )

Total incurred

    868,148  

Paid related to:

       

Current year

    811,626  

Prior year

    60,594  

Total paid

    872,220  

Balance at end of period

  $ 82,904  

        The liability for policy and contract claims at September 30, 2016 decreased by $4.1 million during the nine months ended September 30, 2016. The decrease in the liability was primarily attributable to faster claims processing times.

        The prior year development incurred in the table above represents favorable 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 nine months ended September 30, 2016, claim reserves settled, or are currently expected to be settled, for $0.3 million less than estimated at December 31, 2015. Prior period development represents less than 0.1% of the incurred claims recorded in 2015.

Sensitivity Analysis

        The following table illustrates the sensitivity of our accident and health IBNR payable at September 30, 2016 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

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factors and 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 % $ 130     –3 % $ (4,779 )
  –2 %   87     –2 %   (3,186 )
  –1 %   43     –1 %   (1,593 )
  1 %   (43 )   1 %   1,593  
  2 %   (87 )   2 %   3,186  
  3 %   (130 )   3 %   4,779  

(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 September 30, 2016, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest rates at September 30, 2016. 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.

 
  September 30, 2016   Effect of Change in Market Interest Rates on Fair Value
of Fixed Income Portfolio as of September 30, 2016
 
 
  Fair Value of
Fixed Income
Portfolio
  200 Basis
Point
Decrease
  100 Basis
Point
Decrease
  100 Basis
Point
Increase
  200 Basis
Point
Increase
 
 
  (in millions)
 
    $ 221.0   $ 11.1   $ 8.4   $ (8.5 ) $ (16.8 )

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, Chief Financial Officer and Chief Accounting 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, Chief Financial Officer and Chief Accounting Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based on this evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30, 2016, 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 September 30, 2016 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 9—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 for the fiscal year ended December 31, 2015, filed with the SEC on March 10, 2016, as modified by the changes to those risk factors included in our first and second quarter Form 10-Qs we filed with the SEC subsequent to March 10, 2016.

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.

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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.

 

31.3

 

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

 

32.1

 

Certification of the Chief Executive Officer, Chief Financial Officer and Chief Accounting 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.

November 8, 2016

 

/s/ RICHARD A. BARASCH

Richard A. Barasch
Chief Executive Officer

November 8, 2016

 

/s/ ADAM C. THACKERY

Adam C. Thackery
Chief Financial Officer

November 8, 2016

 

/s/ DAVID R. MONROE

David R. Monroe
Chief Accounting Officer

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