Add
UAM to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| UAM > SEC Filings for UAM > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Introduction
The following discussion and analysis presents a review of our Company as of September 30, 2008 and our results of operations for the three and nine months ended September 30, 2008 and 2007. 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, 2007. You should also read the following analysis in conjunction with the Risk Factors contained in the current report on Form 8-K that we filed with the Securities and Exchange Commission on August 8, 2008, as supplemented by the risk factors set forth in Part II, Item 1A "Risk Factors" below.
Overview
As a result of the MemberHealth acquisition and Medicare Advantage expansion discussed in the notes to our financial statements set forth above, we have modified the way we manage and report our business compared to that reported in the prior year. Our Senior Managed Care-Medicare Advantage segment remains unchanged and we continue to provide separate information on the results of our PFFS and HMO businesses contained in this segment. In addition, we are now including separate information regarding development of our preferred provider organization, or PPO, within this segment. We have split Part D from our Senior Market Health segment and formed a new segment to include both our Prescription PathwaySM product and our Community CCRxSM product. We have combined the remaining former Senior Market Health segment, primarily Medicare supplement, with the former Specialty Health and Life & Annuity segments to form a new combined segment, Traditional Insurance. The Senior Administrative Services segment remains unchanged and we continue to report the corporate activities of our holding company in a separate segment. We have made reclassifications to conform prior year amounts to the current year presentation. We began to use this segment reporting structure with our annual report on Form 10-K for the year ended December 31, 2007. See "Note 17-Business Segment Information" in our consolidated financial statements included in this quarterly report on Form 10-Q for a description of our segments.
We report inter-segment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These inter-segment 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 significant items eliminated are
º •
º inter-segment revenue and expense relating to services performed by
the Senior Administrative Services segment for our other segments,
º •
º inter-segment revenue and expense relating to PBM services performed
by the Part D segment for other segments, and
º •
º interest on notes payable or receivable between the Corporate segment
and the other operating segments.
Critical Accounting Policies
We have prepared our consolidated financial statements in accordance with U.S. generally accepted accounting principles, known as U.S. GAAP. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosures of assets and liabilities reported by us at the date of the financial statements and the revenues and expenses reported during the reporting period. As additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results. Actual results could differ from those estimates. The accounts that, in our judgment, are most critical to the preparation of our financial statements are:
º •
º future policy benefits and claim liabilities,
º •
º deferred policy acquisition costs,
º •
º goodwill,
º •
º present value of future profits and other intangible assets,
º •
º the valuation of specified investments, and
º •
º deferred income taxes.
There have been no changes in our critical accounting policies during the current quarter.
We calculate and maintain reserves for the estimated future payment of claims to our policyholders using actuarial assumptions that are consistent with actuarial assumptions we use in the pricing of our products. For our accident and health insurance business, we establish an active life reserve for expected future policy benefits, plus a liability for due and unpaid claims and incurred but not reported claims. Our net income depends upon the extent to which our actual claims experience is consistent with the assumptions we used in setting our reserves and pricing our policies. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would need to increase our liabilities, resulting in reduced net income and shareholders' equity.
A summary of our liabilities by category is presented in the following table:
Liability Type
September 30, 2008 December 31, 2007
% of % of
Total Total
Policy Policy
Amount Liabilities Amount Liabilities
($ in thousands)
Policyholder account balances $ 406,043 22 % $ 434,859 24 %
Future policy benefit reserves:
Traditional life insurance 209,680 11 % 202,258 11 %
Accident and health 414,079 23 % 414,192 23 %
Total future policy benefit 623,759 34 % 616,450 34 %
reserves
Policy and contract
claims-accident and health:
Due and unpaid claims 510,944 28 % 435,073 24 %
Incurred but not reported 272,899 15 % 302,116 17 %
claims ("IBNR")
Total accident and health claim 783,843 43 % 737,189 41 %
liabilities
Policy and contract claims-life 10,378 1 % 12,213 1 %
Total policy liabilities $ 1,824,023 100 % $ 1,800,711 100 %
|
Policyholder account balances represent the balance that accrues to the benefit of the policyholder, otherwise known as the account value, as of the financial statement date. Account values increase to reflect additional deposits received and interest credited based on the account value. Account values decline to reflect surrenders and other withdrawals, including withdrawals relating to the cost of insurance and expense charges. We review the interest crediting rates periodically and adjust them with certain minimum levels below which the crediting rate cannot fall as deemed necessary.
The liability for future policy benefits represents the present value of estimated future benefits to be paid to or on behalf of policyholders, less the future value of net premiums. We calculate this amount based on actuarially recognized methods using morbidity and mortality tables, which we modify to reflect our actual experience when appropriate.
The liability for future policy benefits represents the present value of estimated future benefits to be paid to or on behalf of policyholders, less the future value of net premiums. We calculate this amount based on actuarially recognized methods using morbidity and mortality tables, which we modify to reflect our actual experience when appropriate.
For our fixed benefit accident and sickness and our long term care products, we establish a reserve for future policy benefits at the time we issue each policy based on the present value of future benefit payments less the present value of future premiums. We have ceased issuing new long term care policies, although our current policies are renewable annually at the discretion of the policyholder, as evidenced by the policyholder continuing to make premium payments. In establishing these reserves, we must evaluate assumptions about mortality, morbidity, lapse rates and the rate at which new claims are submitted to us. We estimate the future policy benefits reserve for these products using the above assumptions and actuarial principles. For long-duration insurance contracts, we use these original assumptions throughout the life of the policy and generally do not subsequently modify them.
A portion of our reserves for long-term care products also reflect our estimates relating to members currently receiving benefits. We estimate these reserves primarily using recovery and mortality rates, as described above.
The policy and contract claims liability for our accident and health policies reflect a liability for unpaid claims, such as claims in the course of settlement, as well as a liability for incurred but not yet
reported claims, known as IBNR. Our accident & health claims liability by major product grouping is as follows:
Accident & Health Claims Liability
Net of Reserves Ceded to
Direct and Assumed Reinsurers
% of % of
Total Total
September 30, Policy December 31, Policy September 30, December 31,
2008 Liabilities 2007 Liabilities 2008 2007
($ In thousands)
Due & unpaid claims:
Medicare Part D $ 426,930 23 % $ 352,688 20 % $ 410,610 $ 336,218
Medicare
Advantage-HMO 74,403 4 % 59,058 3 % 70,779 53,563
Other-specialty 9,611 1 % 23,327 1 % 8,803 9,106
Total due & unpaid
claims 510,944 28 % 435,073 24 % 490,192 398,887
IBNR:
Medicare
supplement 46,314 2 % 46,834 3 % 33,088 33,653
Medicare
Advantage-PFFS 217,247 12 % 246,048 13 % 215,976 240,832
Other-specialty 9,338 1 % 9,234 1 % 7,424 7,240
Total IBNR 272,899 15 % 302,116 17 % 256,488 281,725
Total accident and
health claim
liabilities $ 783,843 43 % $ 737,189 41 % $ 746,680 $ 680,612
|
The following factors can affect these reserves and liabilities:
º •
º economic and social conditions,
º •
º inflation,
º •
º hospital and pharmaceutical costs,
º •
º changes in doctrines of legal liability,
º •
º premium rate increases,
º •
º extra contractual damage awards, and
º •
º other factors affecting health care and insurance generally.
Therefore, we establish the reserves and liabilities based on extensive estimates, assumptions and prior years' statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of acquired policy liabilities is subject to similar estimates and assumptions. Establishing reserves involves inherent uncertainties, and it is possible that actual claims could materially exceed our reserves and have a material adverse effect on our results of operations and financial condition.
We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim payment and claim receipt patterns, as well as historical medical cost trends. Depending on the period for which we are estimating incurred claims, we apply a different method in determining our estimate. For periods prior to the most recent three months, the key assumption used in estimating our IBNR is that the completion factor pattern, adjusted for known changes in claim inventory levels and claim payment processes, remains consistent over a specified rolling period. This period, ranging from 3 to 12 months, is dependent on the type of business valued. Completion factors
result from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For the most recent three months, we estimate the incurred claims primarily from a trend analysis based upon per member per month, known as PMPM, claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, product mix, and seasonality.
We use the completion factor method for the months of incurred claims prior to the most recent three months because the historical percentage of claims processed for those months is at a level sufficient to produce a consistently reliable result. Conversely, for the most recent three months of incurred claims, the volume of claims processed historically is not at a level sufficient to produce a reliable result, which therefore requires that we examine historical trend patterns as the primary method of evaluation. Due to the limited historical claims experience for PFFS, estimates for the most recent three months of incurred claims are based largely on our pricing assumptions for the product. The amounts above reflect the estimated potential medical and other expenses payable based upon assumptions used in determining the loss ratio for the pricing of our PFFS products.
Medical cost trends potentially are more volatile than other segments of the economy. The principal intrinsic drivers of medical cost trends are:
º •
º changes in the utilization of hospital facilities, physician services,
prescription drugs, and new medical technologies, and
º •
º the inflationary effect on the cost per unit of each of these expense
components.
Other external factors may impact medical cost trends, such as:
º •
º government-mandated benefits,
º •
º other regulatory changes,
º •
º increases in medical services,
º •
º an aging population,
º •
º natural disasters and other catastrophes, and
º •
º epidemics.
Factors internal to our company may also affect our ability to accurately predict estimates of historical completion factors or medical cost trends, such as:
º •
º claims processing cycle times,
º •
º changes in medical management practices, and
º •
º changes in provider contracts.
We consider all of these factors in estimating IBNR and in estimating the PMPM claims trend for purposes of determining the reserve for the most recent three months. Additionally, we continually prepare and review follow-up studies to assess the reasonableness of the estimates generated by our process and methods over time. We also consider the results of these studies in determining the reserve for the most recent three months. Each of these factors requires significant judgment by management.
Our historical assumptions have not varied significantly during the nine months ended September 30, 2008 from the actual amounts experienced to the extent that the variance resulted in a material adverse impact on reserves and net income, other than $32.9 million favorable development of 2007 claims experience on our PFFS business during the nine months ended September 30, 2008, which we discuss in connection with Segment Results-Senior Managed Care-Medicare Advantage, later in
this section. We have included a summary of the activity in our accident & health policy and contract claim liability in Note 9-Accident & Health Policy and Contract Claim Liabilities in the notes to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.
Sensitivity Analysis
The following table illustrates the sensitivity of our accident and health
IBNR payable at September 30, 2008 to identified reasonably possible changes to
the estimated weighted average completion factors and health care cost trend
rates. However, it is possible that the actual completion factors and health
care cost trend rates will develop differently from our historical patterns and
therefore could be outside of the ranges illustrated below.
Completion Factor(1): Claims Trend Factor(2):
Increase (Decrease)
(Decrease) in Increase in
(Decrease) Net Accident (Decrease) Net Accident
Increase & Health Increase & Health
in Factor IBNR in Factor IBNR
($ in thousands)
(3)% $ 2,144 (3 )% $ (11,513 )
(2)% $ 1,429 (2 )% $ (7,675 )
(1)% $ 714 (1 )% $ (3,838 )
1% $ (714 ) 1 % $ 3,850
2% $ (1,427 ) 2 % $ 7,699
3% $ (2,130 ) 3 % $ 11,549
----------------------------------------------------------------------
º (1)
|
º (2)
º 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.
The liability for unpaid claims, including IBNR, reflects estimates of amounts to fully settle known reported claims as well as claims related to insured events that we estimate have been incurred, but have not yet been reported to us.
We defer the following costs of acquiring new business:
º •
º non-level commissions,
º •
º agency production costs,
º •
º policy underwriting costs,
º •
º policy issue costs,
º •
º associated issuance costs, and
º •
º other costs that vary with, and are primarily related to, the
production of new and renewal business.
We refer to these costs as deferred acquisition costs or DAC. For interest-sensitive life and annuity products, we amortize these costs in relation to the present value of expected gross profits on the policies arising principally from investment, mortality and expense margins in accordance with FAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The determination of expected gross profits for interest-sensitive products is an inherently uncertain process that relies on assumptions regarding:
º •
º projected interest rates,
º •
º the persistency of the policies issued,
º •
º anticipated benefits,
º •
º anticipated commissions,
º •
º anticipated expenses, and
º •
º other factors regarding these products.
It is possible that the actual profits from the business may vary materially from the assumptions used in the determination and amortization of DAC.
For other life and health products, we amortize DAC in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with FAS No. 60, "Accounting and Reporting by Insurance Enterprises." Under FAS No. 60, when a policy lapses, we must amortize the remaining balance of DAC relating to that policy as of the date of the lapse. During 2007, we experienced an increase in the amount of lapses on our Medicare supplement business, resulting in an increased level of DAC amortization. During 2008, we have seen improved persistency on this business, requiring less amortization of DAC.
We write off deferred policy acquisition costs to the extent that we determine that the present value of future policy premiums and investment income or the net present value of expected gross profits would not be adequate to recover the unamortized costs.
Business combinations accounted for as a purchase result in the allocation of the purchase consideration to the fair values of the assets and liabilities acquired, including the present value of future profits, establishing such fair values as the new accounting basis. The present value of future profits is based on an estimate of the cash flows of the in force business acquired, discounted to reflect the present value of those cash flows. The discount rate we select depends upon the general market conditions at the time of the acquisition and the inherent risk in the transaction. We allocate purchase consideration in excess of the fair value of net assets acquired, including the present value of future profits and other identified intangibles, for a specific acquisition, to goodwill. We perform the allocation of purchase price in the period in which we consummate the purchase. Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies, tax matters and refinements made to estimates of fair value in connection with the preliminary allocation.
Set forth below are our annual amortization policies for each of the main categories of amortizing intangible assets:
Weighted Average
Life At
Description Acquisition Amortization Basis
Insurance policies 7-9 The pattern of projected
acquired future cash flows for the
policies acquired over the
estimated weighted average
life of the policies
acquired.
Distribution 30 Straight line over the
channel acquired estimated life of the asset.
Membership base 7-10 Straight line over the
acquired estimated weighed average
life of the membership base.
Trademarks/trade 9 Straight line over the
names estimated weighted average
life of the trademarks/trade
names.
Licenses 15 Straight line over the
estimated weighed average
life of the licenses.
Provider contracts 10 Straight line over the
estimated weighted average
life of the contracts
Non-compete 7 Straight line over the
length of the agreement.
Administrative 6 The pattern of projected
service contracts future cash flows for the
customer contracts acquired
over the estimated weighted
average life of the
contracts
Hospital network 10 The pattern of projected
contracts future cash flows for the
hospital network contracts
acquired over the estimated
weighted average life of the
contracts
|
At least annually, we review the unamortized balances of present value of future profits, goodwill and other identified intangibles to determine whether events or circumstances indicate the carrying value of these assets is not recoverable, in which case we would recognize an impairment charge. We believe that no impairment of the present value of future profits, goodwill or other identified intangibles existed as of September 30, 2008.
Investment valuation
The fair value for the majority of our fixed maturity and equity securities is determined by third party pricing service market prices. Third party pricing . . .
|
|