Insurer boosts reserve, but health is an issue.

Financially troubled Universal Care Inc. fried papers with state regulators last week showing that an infusion of equity capital had brought a key measure of its reserve strength above the state minimum following a year-end loss.

But the health of the Signal Hill-based insurer, with more than 300,000 members in Southern California, remained questionable as state regulators conducted an audit of its books and A.M. Best Co. continued to rate the company as financially weak, following a downgrade last month to "C" from "B-" (fair).

"They are still under review with negative implications," said Isabelle Roman-Barrio, an A.M. Best analyst who noted in a rating analysis that three consecutive years of losses had depleted company reserves.

The family-owned firm, one of the largest Medi-Cal managed care insurers in the region, reported a loss of $5.1 million for the fiscal year ended June 30, dropping its tangible net equity--a key measure of its fiscal strength related to its capital or surplus position--to $3.9 million. The company's required tangible net equity at fiscal year end was $9.8 million, leaving Universal Care $5.9 million short.

The filing prompted regulators with the state Department of Managed Health Care to move up what had been planned as a routine audit, which is now underway, according to department spokeswoman Jan Mendoza. Being under the required tangible net equity requirement subjects an insurer to a state takeover.

Jay Davis, Universal's executive vice president and the son of owner Howard Davis, said that once the family realized it would be under the minimum, it made a series of equity cash infusions from September through November that rectified the problem. "The cash was infused as soon as we identified we had a (net equity) issue," he said.

The infusion totaled $8.2 million, according to the company, raising its tangible net equity to $13 million, which is $3.6 million more than the $9.6 million required, the regulatory filing said.

Davis maintained that the company's financial position going forward was stronger than last year following rate increases in its commercial lines. For the first quarter ended Sept. 30, Universal Care reported net income of $786,383, compared with $1.5 million for the like period a year ago.

Davis attributed the full-year $5.1 million loss to two one-time events. First, the company lost about $2 million in the first half of the year stemming from an unfavorable contract it had with the California Public Employees' Retirement System that ended in December 2002, he said.

The company also wrote down $3 million in payments it had expected to receive for management services rendered to its Tennessee affiliate, which was liquidated earlier this year, he said.

Universal Care set up a separate affiliate company in 2001 called Universal Care of Tennessee Inc. to participate in that state's Medicaid program. But the company ran into financial problems and was liquidated by Tennessee in July. Davis, who served as chief executive of the Tennessee affiliate, claimed that the plan ran into problems after being assigned a disproportionate number of sick patients.

Roman-Barrio said A.M. Best was not prepared to change its rating of the California company, noting that even if Universal had met state minimum tangible net equity requirements it still rated low on another key measure of its surplus or capital position.

The company had a net worth of $2.1 million at its fiscal year end, yet had nearly $450 million in premium revenue, a ratio of more than 200-to-1. Roman-Barrio said A.M. Best likes that ratio to be 10-to-1 or under, meaning the company's net worth should be over $40 million.

A.M. Best has lowered Universal's rating from B+ (very good) to its current status as it recorded losses of $2.7 million in fiscal year 2001, $1.3 million in 2002 and then the $5.1 million this past year.

However, Jeff Davis, the company's chief financial officer and brother of Jay, said the company expects to refile its 2002-2003 yearend statement, which will show losses of just $3.5 million due to lower-than-estimated claims payments.

Universal Care is not the only small health insurer to encounter financial problems, even as larger insurers such as WellPoint Health Networks Inc. have made big profits.

Last year, San Jose-based Lifeguard Inc. was seized by state regulators, while locally based Tower Health and Maxicare Health Plans failed in 2001. Analysts say bigger plans have more leverage in negotiating favorable contracts with medical care providers.

As a big Medi-Cal insurer, Universal Care also may be facing payment cutbacks due to California's budget crisis. However, the company just launched a Medicare managed care plan that it believes will be a future profit driver under the recently passed Medicare reform act.

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