Caremark Ulysses Holding (UHCO) 10-Q 2005 Q2 Quarterly report

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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 June 30, 2005
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 No. 0-11321

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

New York (State or other jurisdiction of incorporation or organization)	11-2580136 (IRS Employer Identification No.)
Six International Drive, Suite 190 Rye Brook, New York (Address of principal executive offices)	10573 (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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        The number of shares of the registrant's common stock, par value $0.01 per share, outstanding as of August 1, 2005 was 58,622,591.

UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q

CONTENTS

		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations—Three Months	5
	Consolidated Statements of Operations—Six Months	6
	Consolidated Statements of Stockholders' Equity and Comprehensive Income	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosure of Market Risk	47
Item 4.	Controls and Procedures	49
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Submission of Matters to a Vote of Security Holders	50
Item 5.	Other Information	51
Item 6.	Exhibits	52
Signatures		53

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        As used in this Quarterly Report on Form 10-Q, "Universal American," "the Company," "we," "our," and "us" refer to Universal American Financial Corp. and its subsidiaries, except where the context otherwise requires or as otherwise indicated.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

        Portions of the information in this Quarterly Report on Form 10-Q and certain oral statements made from time to time by representatives of the Company may be considered "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. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, without limitation, the Company's future economic performance, plans and objectives for future operations and projections of revenue and other financial items. Forward-looking statements can be identified by the use of words such as "prospects," "outlook," "believes," "estimates," "intends," "may," "will," "should," "anticipates," "expects" or "plans," or the negative or other variation of these or similar words, or by discussion of trends and conditions, strategy or risks and uncertainties. Forward-looking statements are inherently subject to risks, trends and uncertainties, many of which are beyond the Company's ability to control or predict with accuracy and some of which the Company might not even anticipate. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, it can give no assurance that its expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

        Important factors that may cause actual results to differ materially from forward-looking statements include, but are not limited to, the risks and uncertainties set forth in this report in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as those other risks detailed in our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The Company assumes no obligation to update and supplement any forward-looking statements that may become untrue because of subsequent events, whether as a result of new information, future events or otherwise.

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PART 1.    FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited).

UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS

			June 30, 2005			December 31, 2004
			(Unaudited)
			(In thousands)
ASSETS
Investments (Notes 2 and 6):
	Fixed maturities available for sale, at fair value (amortized cost: 2005, $1,149,810; 2004, $1,109,678)		$	1,223,165		$	1,170,822
	Equity securities, at fair value (cost: 2005, $1,303; 2004, $749)			1,298			755
	Policy loans			23,672			24,318
	Other invested assets			1,080			1,187
		Total investments		1,249,215			1,197,082
Cash and cash equivalents				217,426			181,257
Accrued investment income				13,153			13,151
Deferred policy acquisition costs				241,557			208,281
Amounts due from reinsurers				208,169			212,501
Due and unpaid premiums				7,867			6,474
Present value of future profits and other amortizing intangible assets				54,760			60,804
Goodwill and other indefinite lived intangible assets (Note 4)				72,825			75,180
Income taxes receivable				4,925			865
Other assets				67,430			61,493
		Total assets	$	2,137,327		$	2,017,088
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policyholder account balances			$	489,540		$	478,373
Reserves for future policy benefits				764,815			759,325
Policy and contract claims—life				12,517			10,802
Policy and contract claims—health				98,264			94,526
Loan payable (Note 9)				98,438			101,063
Other long term debt (Note 10)				75,000			75,000
Amounts due to reinsurers				4,457			6,023
Deferred income tax liability				20,355			5,206
Other liabilities				60,478			67,349
		Total liabilities		1,623,864			1,597,667
STOCKHOLDERS' EQUITY (Note 8)
Common stock (Authorized: 100 million shares, issued: 2005, 58.0 million shares; 2004, 55.3 million shares)				580			553
Additional paid-in capital				223,318			172,525
Accumulated other comprehensive income				48,939			40,983
Retained earnings				241,049			206,329
Less: Treasury stock (2005, 0.1 million shares; 2004, 0.1 million shares)				(423	)		(969	)
		Total stockholders' equity		513,463			419,421
		Total liabilities and stockholders' equity	$	2,137,327		$	2,017,088

See notes to unaudited consolidated financial statements.

4

UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

			Three months ended June 30,
			2005			2004
			(In thousands, except per share amounts)
Revenues:
	Direct premiums and policyholder fees earned		$	251,464		$	199,517
	Reinsurance premiums assumed			8,127			8,786
	Reinsurance premiums ceded			(54,689	)		(61,706	)
		Net premiums and policyholder fees earned		204,902			146,597
	Net investment income			17,334			16,084
	Realized gains on investments			3,030			209
	Fee and other income			4,354			3,617
		Total revenues		229,620			166,507
Benefits, claims and expenses:
	Net change in future policy benefits			5,261			(271	)
	Net claims and other benefits			141,198			99,918
	Interest credited to policyholders			4,630			4,258
	Net increase in deferred acquisition costs			(17,569	)		(14,902	)
	Amortization of present value of future profits			1,193			948
	Commissions			37,672			34,417
	Commission and expense allowances on reinsurance			(14,392	)		(12,179	)
	Interest expense			2,670			1,762
	Other operating costs and expenses			41,279			32,631
		Total benefits, claims and expenses		201,942			146,582
Income before taxes				27,678			19,925
Income tax expense				9,030			6,874
Net income			$	18,648		$	13,051
Earnings per common share:
	Basic		$	0.33		$	0.24
	Diluted		$	0.32		$	0.23

See notes to unaudited consolidated financial statements.

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UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

			Six months ended June 30,
			2005			2004
			(In thousands, except per share amounts)
Revenues:
	Direct premiums and policyholder fees earned		$	504,807		$	389,823
	Reinsurance premiums assumed			17,197			18,319
	Reinsurance premiums ceded			(114,833	)		(125,694	)
		Net premiums and policyholder fees earned		407,171			282,448
	Net investment income			34,015			32,162
	Realized gains on investments			4,103			3,801
	Fee and other income			8,533			6,752
		Total revenues		453,822			325,163
Benefits, claims and expenses:
	Net change in future policy benefits			11,042			7,864
	Net claims and other benefits			278,854			186,389
	Interest credited to policyholders			9,175			8,478
	Net increase in deferred acquisition costs			(33,256	)		(31,223	)
	Amortization of present value of future profits			2,871			1,871
	Commissions			75,866			69,499
	Commission and expense allowances on reinsurance			(28,800	)		(24,528	)
	Interest expense			5,181			3,285
	Other operating costs and expenses			80,554			62,418
		Total benefits, claims and expenses		401,487			284,053
Income before taxes				52,335			41,110
Income tax expense				17,615			14,183
Net income			$	34,720		$	26,927
Earnings per common share:
	Basic		$	0.62		$	0.50
	Diluted		$	0.60		$	0.48

See notes to unaudited consolidated financial statements.

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UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)

Six months ended June 30,	Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Treasury Stock			Total
	(In thousands)
2004
Balance, January 1, 2004	$	541	$	164,355	$	39,774		$	142,458	$	(1,390	)	$	345,738
Net income		—		—		—			26,927		—			26,927
Other comprehensive loss (Note 7)		—		—		(19,296	)		—		—			(19,296	)
Comprehensive income														7,631
Issuance of common stock (Note 8)		7		2,405		—			—		—			2,412
Stock-based compensation		—		219		—			—		—			219
Loans to officers		—		38		—			—		—			38
Treasury shares purchased, at cost (Note 8)		—		—		—			—		(270	)		(270	)
Treasury shares reissued (Note 8)		—		215		—			—		636			851
Balance, June 30, 2004	$	548	$	167,232	$	20,478		$	169,385	$	(1,024	)	$	356,619
2005
Balance, January 1, 2005	$	553	$	172,525	$	40,983		$	206,329	$	(969	)	$	419,421
Net income		—		—		—			34,720		—			34,720
Other comprehensive income (Note 7)		—		—		7,956			—		—			7,956
Comprehensive income														42,676
Issuance of common stock (Note 8)		27		49,189		—			—		—			49,216
Stock-based compensation		—		985		—			—		—			985
Loans to officers				20		—			—		—			20
Treasury shares purchased, at cost (Note 8)		—		—		—			—		(31	)		(31	)
Treasury shares reissued (Note 8)		—		599		—			—		577			1,176
Balance, June 30, 2005	$	580	$	223,318	$	48,939		$	241,049	$	(423	)	$	513,463

See notes to unaudited consolidated financial statements.

7

UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six months ended June 30,
		2005			2004
		(In thousands)
Cash flows from operating activities:
Net income		$	34,720		$	26,927
Adjustments to reconcile net income to net cash provided by operating activities, net of balances acquired (see Note 3—Business Combinations):
	Deferred income taxes		11,975			12,589
	Change in reserves for future policy benefits		5,122			7,311
	Change in policy and contract claims		8,124			(10,240	)
	Change in deferred policy acquisition costs		(33,256	)		(31,223	)
	Amortization of present value of future profits and other intangibles		2,871			1,871
	Net accretion of bond discount		(2,083	)		(1,601	)
	Amortization of capitalized loan origination fees		420			277
	Change in policy loans		647			409
	Change in accrued investment income		(2	)		323
	Change in reinsurance balances		1,914			2,208
	Realized gains on investments		(4,103	)		(3,801	)
	Change in income taxes payable		(2,639	)		(13,589	)
	Other, net		(3,371	)		(4,744	)
Net cash provided (used) by operating activities			20,339			(13,283	)
Cash flows from investing activities:
	Proceeds from sale or redemption of fixed maturities		182,802			146,195
	Cost of fixed maturities purchased		(219,796	)		(191,574	)
	Purchase of business, net of cash acquired (Note 3)		—			(65,961	)
	Other investing activities		(3,720	)		(1,397	)
Net cash used by investing activities			(40,714	)		(112,737	)
Cash flows from financing activities:
	Net proceeds from issuance of common stock		47,814			2,451
	Cost of treasury stock purchases		(31	)		(270	)
	Change in policyholder account balances		11,167			29,456
	Change in reinsurance on policyholder account balances		219			389
	Issuance of debt (Note 10)		—			66,519
	Principal repayment on loan payable		(2,625	)		(3,078	)
Net cash provided by financing activities			56,544			95,467
Net increase (decrease) in cash and cash equivalents			36,169			(30,553	)
Cash and cash equivalents at beginning of period			181,257			116,524
	Cash and cash equivalents at end of period	$	217,426		$	85,971
Supplemental cash flow information:
	Cash paid during the period for interest	$	5,149		$	3,219
	Cash paid during the period for income taxes	$	7,274		$	15,038

See notes to unaudited consolidated financial statements.

8

UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.     BASIS OF PRESENTATION

Basis of Presentation

        Universal American Financial Corp. (the "Company" or "Universal American") is a specialty health and life insurance holding company with an emphasis on providing a broad array of health insurance and managed care products and services to the growing senior population. Collectively, the insurance company subsidiaries are licensed to sell life and accident & health insurance and annuities in all fifty states, the District of Columbia, Puerto Rico and all the provinces of Canada. The principal insurance products currently sold by the Company are Medicare Supplement and Select, fixed benefit accident and sickness disability insurance, senior life insurance and fixed annuities. The Company distributes these products through an independent general agency system and a career agency system. The career agents focus on sales for Pennsylvania Life, Pyramid Life and Penncorp Life (Canada) while the independent general agents sell for American Pioneer, American Progressive, Constitution and Union Bankers. Heritage operates Medicare Advantage plans in Houston and Beaumont Texas through SelectCare of Texas, L.L.C., and our Medicare Advantage private fee-for-service plan in the northeastern portion of the United States. CHCS, the Company's administrative services company, acts as a service provider for both affiliated and unaffiliated insurance companies for senior market insurance and non-insurance programs.

        The interim financial information herein is unaudited, but in the opinion of management, includes all adjustments (consisting of normal, recurring adjustments) necessary to present fairly the financial position and results of operations for such periods. The results of operations for the three months or six months ended June 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements and notes should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

        Certain reclassifications have been made to prior year's financial statements to conform to current period classifications.

Consolidation

        The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and consolidate the accounts of Universal American Financial Corp. ("Universal American") and its subsidiaries (collectively the "Company"), American Progressive Life & Health Insurance Company of New York ("American Progressive"), American Pioneer Life Insurance Company ("American Pioneer"), American Exchange Life Insurance Company ("American Exchange"), SelectCare of Oklahoma, Inc. (formerly Eagle Life Insurance Company), Pennsylvania Life Insurance Company ("Pennsylvania Life"), Peninsular Life Insurance Company ("Peninsular"), Union Bankers Insurance Company ("Union Bankers"), Constitution Life Insurance Company ("Constitution"), Marquette National Life Insurance Company ("Marquette"), Penncorp Life Insurance Company, a Canadian company ("Penncorp Life (Canada)"), The Pyramid Life Insurance Company ("Pyramid Life"), Heritage Health Systems, Inc ("Heritage") and CHCS Services, Inc. ("CHCS"). Heritage was acquired on May 28, 2004. Operating results for Heritage prior to the date of its acquisition are not included in Universal American's consolidated results of operations. All material intercompany transactions and balances between Universal American and its subsidiaries have been eliminated.

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Use of Estimates

        The preparation of our financial statements in conformity with 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, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates. In our judgment, the accounts involving estimates and assumptions that are most critical to the preparation of our financial statements are future policy benefits and claim liabilities, deferred policy acquisition costs, goodwill, present value of future profits and other intangibles, the valuation of certain investments and income taxes. There have been no changes in our critical accounting policies during the current year.

Significant Accounting Policies

        For a description of significant accounting policies, see Note 2—Summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K.

2.     RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

        The Company has various stock-based incentive plans for its employees, non-employee directors and its agents. Detailed information for activity in the Company's stock plans can be found in Note 9—Stock-Based Compensation, to the consolidated financial statements in the Company's Annual Report on Form 10-K. As permitted by SFAS 123, the Company measures its stock-based compensation for employees and directors using the intrinsic value approach under APB 25. Accordingly, the Company does not recognize compensation expense upon the issuance of its stock options because the option terms are fixed and the exercise price equaled the market price of the underlying common stock on the grant date. The Company complies with the provisions of SFAS 123 by providing pro forma disclosures of net income and related per share data giving consideration to the fair value method provisions of SFAS 123. The Company uses a modified Black-Scholes option pricing model to estimate fair value. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied during each period presented.

		Three months ended June 30,						Six months ended June 30,
		2005			2004			2005			2004
		(In thousands)
Reported net income		$	18,648		$	13,051		$	34,720		$	26,927
Add back: Stock-based compensation expense included in reported net income, net of tax			471			33			752			47
Less: Stock based compensation expense determined under fair value based method for all awards, net of tax			(1,083	)		(491	)		(1,698	)		(695	)
Pro forma net income		$	18,036		$	12,593		$	33,774		$	26,279
Net income per share:
	Basic, as reported	$	0.33		$	0.24		$	0.62		$	0.50
	Basic, pro forma	$	0.32		$	0.23		$	0.60		$	0.48
	Diluted, as reported	$	0.32		$	0.23		$	0.60		$	0.48
	Diluted, pro forma	$	0.31		$	0.22		$	0.59		$	0.47

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        Pro forma compensation expense reflected for prior periods is not indicative of future compensation expense that would be recorded by the Company if it were to adopt the fair value based recognition provisions of SFAS 123 for stock based compensation for its employees and directors. Future expense may vary based upon factors such as the number of awards granted by the Company and the then-current fair market value of such awards.

Pending Accounting Standards

        In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123(R) requires all companies to recognize compensation costs for share-based payments to employees based on the grant-date fair value of the award for financial statements for annual periods beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition.

        As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the above disclosure of pro forma net income and earnings per share. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized for such excess tax deductions were $1.4 million for the six months ended June 30, 2005. There were no operating cash flows recognized for such excess tax deductions for the six months ended June 30, 2004.

3.     BUSINESS COMBINATIONS

Acquisition of Heritage Health Systems, Inc.

        On May 28, 2004, the Company acquired 100% of the outstanding common stock of Heritage, a privately owned managed care company that operates Medicare Advantage plans in Houston and Beaumont Texas, for $98 million in cash plus transaction costs of $2.0 million. Heritage generates its revenues and profits from three sources. First, Heritage owns an interest in SelectCare of Texas, L.L.C. ("SelectCare"), a health plan that offers health insurance coverage to Medicare beneficiaries under a contract with CMS. Next, Heritage operates three separate Management Service Organizations ("MSO's") that manage the business of SelectCare and two affiliated Independent Physician Associations ("IPA's"). Last, Heritage participates in the net results derived by these IPA's. The acquisition was financed with $66.5 million of net proceeds derived from the amendment of the Company's credit facility (See Note 9—Loan Payable) and $33.5 million of cash on hand. As of the date of acquisition, Heritage had approximately 16,000 Medicare members and annualized revenues of approximately $140 million. Operating results generated by Heritage prior to May 28, 2004, the date of acquisition, are not included in the Company's consolidated financial statements.

        As of May 28, 2005, the company finalized the purchase accounting for the acquisition, resulting in an increase in the fair value of net tangible assets of Heritage of $4.8 as of the date of acquisition to $28.0 million, as a result of the resolution of pre-acquisition contingencies. The excess of the purchase price over the fair value of net tangible assets acquired was $72.0 million, which the Company allocated to identifiable intangible assets. Based on this allocation, approximately $12.2 million was assigned to

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amortizing intangible assets, including $10.0 million (net of deferred income taxes of $5.4 million), which was assigned to the value of the membership in force and determined to have a weighted average life of 6 years and $2.2 million (net of deferred taxes of $1.2 million), which was assigned to the value of the IPA's, and determined to have a weighted average lives of between 6 and 13 years. Approximately $5.2 million was allocated to non-amortizing intangible assets, including $4.4 million assigned to the value of trademarks and $0.8 million assigned to the value of Heritage's licenses. Each of these items was determined to have indefinite lives. The balance of $54.3 million was assigned to goodwill.

        The consolidated pro forma results of operations, assuming that Heritage was purchased on January 1, 2004 are as follows:

		Three months ended June 30,				Six months ended June 30,
		2005		2004		2005		2004
		(In thousands, except per share amounts)
Total revenue		$	229,620	$	188,994	$	453,822	$	382,203
Income before taxes		$	27,678	$	20,904	$	52,335	$	45,247
Net income		$	18,648	$	13,688	$	34,720	$	29,616
Earnings per common share:
	Basic	$	0.33	$	0.26	$	0.62	$	0.55
	Diluted	$	0.32	$	0.25	$	0.60	$	0.53

        The pro forma results of operations reflect management's best estimate based upon currently available information. The pro forma adjustments are applied to the historical financial statements of Universal American and Heritage to account for the acquisition of Heritage under the purchase method of accounting. In accordance with SFAS No. 141, "Business Combinations", the total purchase cost was allocated to the assets and liabilities of Heritage based on their relative fair values. These allocations are subject to valuations as of the date of the acquisition based upon appraisals and other information at that time. Management has provided its best estimate of the fair values of assets and liabilities for the purpose of this pro forma information. The pro forma information presented above is for disclosure purposes only and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been consummated on the dates assumed, nor is the pro forma information intended to be indicative of Universal American's future results of operations.

4.    INTANGIBLE ASSETS

        The following table shows the Company's acquired intangible assets that continue to be subject to amortization and accumulated amortization expense.

			June 30, 2005				December 31, 2004
			Value Assigned		Accumulated Amortization		Value Assigned		Accumulated Amortization
			(In thousands)
Senior Health Insurance:
	Present value of future profits ("PVFP")		$	18,472	$	4,697	$	18,472	$	3,628
	Distribution Channel			22,055		1,654		22,055		1,287
Life Insurance/Annuity—PVFP				4,127		1,500		4,127		1,308
Senior Managed Care—Medicare Advantage:
	PVFP			15,381		2,470		18,554		1,667
	Value of IPA's			3,459		435		3,459		234
Senior Administrative Services
	PVFP			7,672		7,138		7,672		7,035
	Value of future override fees			1,796		308		1,796		172
		Total	$	72,962	$	18,202	$	76,135	$	15,331

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        The following table shows the changes in the present value of future profits and other amortizing intangible assets.

		Three months ended June 30,						Six months ended June 30,
		2005			2004			2005			2004
		(In thousands)
Balance, beginning of year		$	59,126		$	43,100		$	60,804		$	44,047
	Additions and adjustments		(3,173	)		20,200			(3,173	)		20,176
	Amortization, net of interest		(1,193	)		(948	)		(2,871	)		(1,871	)
Balance, end of year		$	54,760		$	62,352		$	54,760		$	62,352

        Estimated future net amortization expense (in thousands) is as follows:

2005 (remainder of year)	$	3,418
2006		6,376
2007		6,060
2008		5,674
2009		4,612
Thereafter		28,620
	$	54,760

        The carrying amounts of goodwill and intangible assets with indefinite lives are shown below.

		June 30, 2005		December 31, 2004
		(In thousands)
Senior Market Health Insurance		$	8,760	$	8,760
Senior Managed Care—Medicare Advantage			59,708		62,063
Senior Administrative Services			4,357		4,357
	Total	$	72,825	$	75,180

5.    EARNINGS PER SHARE

        The reconciliation of the numerators and the denominators for the computation of basic and diluted EPS is as follows:

	Three months ended June 30,
	2005						2004
	Income Numerator		Shares Denominator		Per Share Amount		Income Numerator		Shares Denominator		Per Share Amount
	(In thousands)
Weighted average common stock outstanding			55,986						54,624
Less: Weighted average treasury shares			(51	)					(146	)
Basic earnings per share	$	18,648	55,935		$	0.33	$	13,051	54,478		$	0.24
Effect of dilutive securities			2,055						1,992
Diluted earnings per share	$	18,648	57,990		$	0.32	$	13,051	56,470		$	0.23

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	Six months ended June 30,
	2005						2004
	Income Numerator		Shares Denominator		Per Share Amount		Income Numerator		Shares Denominator		Per Share Amount
	(In thousands)
Weighted average common stock outstanding			55,686						54,447
Less: Weighted average treasury shares			(76	)					(177	)
Basic earnings per share	$	34,720	55,610		$	0.62	$	26,927	54,270		$	0.50
Effect of dilutive securities			2,027						2,016
Diluted earnings per share	$	34,720	57,637		$	0.60	$	26,927	56,286		$	0.48

6.     INVESTMENTS

        Fixed maturity securities are classified as investments available for sale and are carried at fair value, with the unrealized gain or loss, net of tax and other adjustments (deferred policy acquisition costs), included in accumulated other comprehensive income.

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

	June 30, 2005
Classification	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
U.S. Treasury securities and obligations of U.S. government	$	139,447	$	1,326	$	(418	)	$	140,355
Corporate debt securities		453,102		26,373		(691	)		478,784
Foreign debt securities(1)		201,789		39,976		(9	)		241,756
Mortgage and asset-backed securities		355,472		7,190		(392	)		362,270
	$	1,149,810	$	74,865	$	(1,510	)	$	1,223,165

	December 31, 2004
Classification	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
U.S. Treasury securities and obligations of U.S. government	$	87,552	$	718	$	(327	)	$	87,943
Corporate debt securities		486,142		27,467		(1,830	)		511,779
Foreign debt securities(1)		209,583		28,797		(33	)		238,347
Mortgage and asset-backed securities		326,401		6,879		(527	)		332,753
	$	1,109,678	$	63,861	$	(2,717	)	$	1,170,822

(1)

Primarily Canadian dollar denominated bonds owned by our Canadian insurance subsidiary.

        The amortized cost and fair value of fixed maturities by contractual maturity at June 30, 2005 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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	Amortized Cost		Fair Value
	(In thousands)
Due in 1 year or less	$	78,435	$	78,839
Due after 1 year through 5 years		230,338		239,305
Due after 5 years through 10 years		298,708		319,777
Due after 10 years		186,857		222,974
Mortgage—and asset-backed securities		355,472		362,270
	$	1,149,810	$	1,223,165

        The Company did not write down the value of any fixed maturity securities during the six months ended June 30, 2005 or 2004.

7.     COMPREHENSIVE INCOME

        The components of other comprehensive income and the related tax effects for each component are as follows:

	2005									2004
Three months ended June 30,	Gross of Tax			Tax Effect			Net of Tax			Gross of Tax			Tax Effect			Net of Tax
	(In thousands)
Net unrealized gain (loss) arising during the year (net of deferred acquisition cost adjustment)	$	28,890		$	10,111		$	18,779		$	(44,238	)	$	(15,483	)	$	(28,755	)
Less: Reclassification adjustment for gains included in net income		(3,030	)		(1,060	)		(1,970	)		(209	)		(73	)		(136	)
Net unrealized gains (losses)		25,860			9,051			16,809			(44,447	)		(15,556	)		(28,891	)
Cash flow hedge		(438	)		(153	)		(285	)		1,214			425			789
Currency translation adjustments		(393	)		(138	)		(255	)		(1,053	)		(369	)		(684	)
Other comprehensive income (loss)	$	25,029		$	8,760		$	16,269		$	(44,286	)	$	(15,500	)	$	(28,786	)

	2005									2004
Six months ended June 30,	Gross of Tax			Tax Effect			Net of Tax			Gross of Tax			Tax Effect			Net of Tax
	(In thousands)
Net unrealized gain (loss) arising during the year (net of deferred acquisition cost adjustment)	$	16,744		$	5,860		$	10,884		$	(25,217	)	$	(8,826	)	$	(16,391	)
Less: Reclassification adjustment for gains included in net income		(4,103	)		(1,436	)		(2,667	)		(3,801	)		(1,330	)		(2,471	)
Net unrealized gains (losses)		12,641			4,424			8,217			(29,018	)		(10,156	)		(18,862	)
Cash flow hedge		219			77			142			945			331			614
Currency translation adjustments		(620	)		(217	)		(403	)		(1,613	)		(565	)		(1,048	)
Other comprehensive income (loss)	$	12,240		$	4,284		$	7,956		$	(29,686	)	$	(10,390	)	$	(19,296	)

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8.     STOCKHOLDERS' EQUITY

Preferred Stock

        The Company has 2.0 million authorized shares of preferred stock with no such shares issued or outstanding at June 30, 2005 or December 31, 2004.

Common Stock

        The par value of common stock is $.01 per share with 100 million shares authorized for issuance. Changes in the number of shares of common stock issued were as follows:

Six months ended June 30,	2005	2004
Common stock issued, beginning of year	55,326,092	54,111,923
Equity Offering	2,000,000	—
Stock options exercised	603,322	665,270
Agent stock award	60,002	—
Stock purchases pursuant to agents' stock plans	6,751	3,100
Common stock issued, end of period	57,996,167	54,780,293

        On June 22, 2005, the Company issued 2.0 million shares of its common stock at a price of $23.61 per share, in connection with a public offering pursuant to a shelf registration. The issuance of these shares generated proceeds to the Company of $44.2 million, net of underwriters discount and other issuance costs. Additionally, 5.0 million shares were sold by Capital Z Financial Services Fund II, L.P. and its affiliates ("Capital Z"), the Company's largest shareholder, under the same shelf registration. On July 20, 2005, the underwriters exercised their over-allotment option and the Company issued an additional 660,000 shares of its common stock at $23.61 per share, generating additional net proceeds of $14.8 million. Following the offering, Capital Z owned 20.2 million shares, or 34.5% of Universal American's outstanding common stock.

Treasury Stock

        The Board of Directors has approved a plan for the Company to repurchase up to 1.5 million shares of the Company's common stock in the open market. The primary purpose of the plan is to fund employee stock bonuses.

	2005
								2004
						Weighted Average Cost Per Share
Six months ended June 30,	Shares		Amount					Shares		Amount			Weighted Average Cost Per Share
	(In thousands)							(In thousands)
Treasury stock beginning of year	124,941		$	969		$	7.75	192,863		$	1,390		$	7.21
Shares repurchased	1,674			31			18.73	26,092			270			10.35
Shares distributed in the form of employee bonuses	(74,081	)		(577	)		15.87	(84,351	)		(636	)		10.09
Treasury stock, end of period	52,534		$	423		$	8.05	134,604		$	1,024		$	7.61

        Through June 30, 2005, the Company had repurchased 792,793 shares at an aggregate cost of $4.5 million. As of June 30, 2005, 707,207 shares remained available for repurchase under the program. Additional repurchases may be made from time to time at prevailing prices, subject to restrictions on volume and timing.

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Accumulated Other Comprehensive Income

        The components of accumulated other comprehensive income are as follows:

		June 30, 2005			December 31, 2004
		(In thousands)
Net unrealized appreciation on investments		$	73,350		$	61,150
Deferred acquisition cost adjustment			(7,335	)		(7,776	)
Foreign currency translation gains (losses)			8,225			8,845
Fair value of cash flow swap			1,051			832
Deferred tax on the above			(26,352	)		(22,068	)
	Accumulated other comprehensive income	$	48,939		$	40,983

9.     LOAN PAYABLE

Credit Facility, as Amended in May 2004

        In connection with the acquisition of Heritage on May 28, 2004 (see Note 3—Business Combinations), the Company amended the Credit Agreement by increasing the facility to $120 million from $80 million (the "Amended Credit Agreement"), including an increase in the term loan portion to $105 million from $36.4 million (the balance outstanding at May 28, 2004) and maintaining the $15 million revolving loan facility. None of the revolving loan facility has been drawn as of June 30, 2005. Under the Amended Credit Agreement, the spread over LIBOR was reduced to 225 basis points. Effective July 1, 2005, the interest rate on the term loan is 5.6%. Principal repayments are scheduled at $5.3 million per year over a five-year period with a final payment of $80.1 million due upon maturity on March 31, 2009.

        The Company made regularly scheduled principal payments of $2.6 million and paid $2.5 million in interest in connection with its credit facilities during the six months ended June 30, 2005. During the six months ended June 30, 2004, the Company made regularly scheduled principal payments of $3.1 million and paid $1.0 million in interest in connection with its credit facilities.

        The following table shows the schedule of principal payments (in thousands) remaining on the Amended Credit Agreement, with the final payment in March 2009:

2005 (remainder of year)	$	2,625
2006		5,250
2007		5,250
2008		5,250
2009		80,063
	$	98,438

10.   OTHER LONG TERM DEBT

        The Company has formed statutory business trusts, which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trust, investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures of the Company and engaging in only those activities necessary or incidental thereto. In accordance with the adoption of FIN 46R, the Company has deconsolidated the trusts. Separate subsidiary trusts of the Company (the "Trusts") have issued a combined $75.0 million in thirty year trust preferred securities that mature in 2032 and 2033.

        The Company paid $2.6 million in interest in connection with the Junior Subordinated Debt during the six months ended June 30, 2005 and paid $2.2 million during the six months ended June 30, 2004.

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11.   DERIVATIVE INSTRUMENTS—CASH FLOW HEDGE

        Effective September 4, 2003, the Company entered into a swap agreement whereby it pays a fixed rate of 6.7% on a $15.0 million notional amount relating to the December 2002 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 400 basis points, capped at 12.5%. The swap contract expires in December 2007. Effective April 29, 2004, the Company entered into a second swap agreement whereby it pays a fixed rate of 6.98% on a $20.0 million notional amount relating to the October 2003 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 395 basis points, capped at 12.45%. The swap contract expires in October 2008. The swaps are designated and qualify as cash flow hedges, and changes in their fair value are recorded in accumulated other comprehensive income. The combined fair value of the swaps was $1.1 million at June 30, 2005 and $0.8 million at December 31, 2004 and is included in other assets.

12.   STATUTORY FINANCIAL DATA

        The insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, substantially more than such minimum amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries' operations. Each of the life insurance subsidiaries' statutory capital and surplus exceeds its respective minimum statutory requirement at levels we believe are sufficient to support their current levels of operation. Additionally, the National Association of Insurance Commissioners ("NAIC") imposes regulatory risk-based capital ("RBC") requirements on life insurance enterprises. At June 30, 2005, all of our life insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the "authorized control level". The combined statutory capital and surplus, including asset valuation reserve, of the U.S. life insurance subsidiaries totaled $138.0 million at June 30, 2005 and $127.9 million at December 31, 2004.

        SelectCare is also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and is also subject to RBC requirements. At June 30, 2005, SelectCare's statutory capital and surplus exceeds its minimum requirement and its RBC is in excess of the "authorized control level". The statutory capital and surplus for SelectCare was $14.5 million at June 30, 2005 and $9.6 million at December 31, 2004.

        Penncorp Life (Canada) reports to Canadian regulatory authorities based upon Canadian statutory accounting principles that vary in some respects from U.S. statutory accounting principles. Penncorp Life (Canada)'s net assets based upon Canadian statutory accounting principles were C$63.0 million (US$51.4 million) as of June 30, 2005 and were C$57.4 million (US$47.8 million) as of December 31, 2004. Penncorp Life (Canada) maintained a Minimum Continuing Capital and Surplus Requirement Ratio ("MCCSR") in excess of the minimum requirement at June 30, 2005.

13.   BUSINESS SEGMENT INFORMATION

        The Company's principal business segments are based on product and include: Senior Market Health Insurance, Senior Managed Care—Medicare Advantage, Specialty Health Insurance, Life Insurance/Annuities and Senior Administrative Services. The Company also reports the activities of our holding company in a separate segment. Prior to our Annual Report of Form 10-K for the year ended December 31, 2004, the Company reported its segments based on distribution channel. The Company's former Senior Market Brokerage and Career Agency segments have been replaced with the three new segments: Senior Market Health Insurance, Life Insurance/Annuity and Specialty Health Insurance. The Senior Managed Care—Medicare Advantage and Administrative Services segments remain unchanged. Management believes that this new segmentation will provide even greater clarity to the

18

results of the Company. Reclassifications have been made to conform prior year amounts to the current year presentation. A description of these segments follows:

Senior Market Health Insurance—This segment consists primarily of our Medicare Supplement business and other senior market health products distributed through our career agency sales force and through our network of independent general agencies.

Senior Managed Care—Medicare Advantage—The Senior Managed Care—Medicare Advantage segment includes the operations of Heritage and our other initiatives in managed care for seniors. Heritage operates Medicare Advantage plans in Houston and Beaumont Texas, and our Medicare Advantage private fee-for-service plans in New York and Pennsylvania. Heritage's Medicare Advantage plans are sold by our career agency sales force and directly by employee representatives. Our Medicare Advantage private fee-for-service plans are sold by career and independent agents.

Specialty Health Insurance—The Specialty Health Insurance segment includes specialty health insurance products, primarily fixed benefit accident and sickness disability insurance sold to the middle income self-employed market in the United States and Canada. This segment also includes certain products that we no longer sell such as long term care and major medical insurance. This segment's products are distributed primarily by our career agents.

Life Insurance and Annuity—This segment includes all of the life insurance and annuity business sold in the United States. This segment's products include senior, traditional and universal life insurance and fixed annuities and are distributed through both independent general agents and our career agency distribution systems.

Senior Administrative Services—Our senior administrative services subsidiary acts as a third party administrator and service provider of senior market insurance products and geriatric care management for both affiliated and unaffiliated insurance companies. The services provided include policy underwriting and issuance, telephone and face-to-face verification, policyholder services, claims adjudication, case management, care assessment and referral to health care facilities.

Corporate—This segment reflects the activities of Universal American, including debt service, certain senior executive compensation, and compliance with requirements resulting from our status as a public company.

        Intersegment revenues and expenses are reported on a gross basis in each of the operating segments but eliminated in the consolidated results. These intersegment revenues and expenses affect the amounts reported on the individual financial statement line items, but are eliminated in consolidation and do not change income before taxes. The significant items eliminated include intersegment revenue and expense relating to services performed by the Senior Administrative Services segment for our other segments and interest on notes payable or receivable between the Corporate segment and the other operating segments.

19

        Financial data by segment, including a reconciliation of segment revenues and segment income (loss) before income taxes to total revenue and net income in accordance with generally accepted accounting principles is as follows:

		2005						2004
Three months ended June 30,		Segment Revenue			Segment Income			Segment Revenue			Segment Income
		(In thousands)
Senior Market Health Insurance		$	97,806		$	8,449		$	89,705		$	8,021
Senior Managed Care—Medicare Advantage			57,852			7,089			11,958			838
Specialty Health Insurance			43,713			6,798			42,859			7,263
Life Insurance and Annuity			23,368			3,405			20,869			3,035
Senior Administrative Services			14,703			3,041			13,953			3,333
Corporate			58			(4,134	)		34			(2,774	)
Intersegment revenues			(10,902	)		—			(11,044	)		—
Adjustments to segment amounts:
	Net realized gains(1)		3,030			3,030			209			209
	Premium revenue adjustment(2)		(8	)		—			(2,036	)		—
Total		$	229,620		$	27,678		$	166,507		$	19,925

		2005						2004
Six months ended June 30,		Segment Revenue			Segment Income			Segment Revenue			Segment Income
		(In thousands)
Senior Market Health Insurance		$	197,037		$	15,279		$	178,030		$	15,961
Senior Managed Care—Medicare Advantage			111,129			14,130			11,958			838
Specialty Health Insurance			87,827			12,372			87,405			13,003
Life Insurance and Annuity			46,201			7,445			40,362			6,279
Senior Administrative Services			29,611			6,656			27,925			6,487
Corporate			109			(7,650	)		70			(5,259	)
Intersegment revenues			(22,212	)		—			(22,110	)		—
Adjustments to segment amounts:
	Net realized gains(1)		4,103			4,103			3,801			3,801
	Premium revenue adjustment(2)		17			—			(2,278	)		—
Total		$	453,822		$	52,335		$	325,163		$	41,110

(1)

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

(2)

We evaluate the results of our insurance segments based on incurred premium net of the change in unearned premium. The change in unearned premium is reported as part of the net increase in future policy benefits in the consolidated statements of operations. Management believes that including the change in unearned premium in revenue provides more indicative trends for the purpose of evaluating loss ratios.

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        Identifiable assets by segment are as follows:

	June 30, 2005			December 31, 2004
	(In thousands)
Senior Market Health Insurance	$	405,079		$	385,487
Senior Managed Care—Medicare Advantage		151,261			136,349
Specialty Health Insurance		749,466			732,680
Life Insurance and Annuity		746,694			723,343
Senior Administrative Services		18,168			19,401
Corporate		696,796			608,722
Intersegment assets(1)		(630,137	)		(588,894	)
Total Assets	$	2,137,327		$	2,017,088

(1)

Intersegment assets include the elimination of the parent holding company's investment in its subsidiaries as well as the elimination of other intercompany balances.

14.   FOREIGN OPERATIONS

        A portion of the Company's operations is conducted in Canada through Penncorp Life (Canada). These assets and liabilities are located in Canada where the insurance risks are written. Revenues, excluding capital gains and losses, of the Company by geographic distribution by country are as follows:

		Three months ended June 30,				Six months ended June 30,
		2005		2004		2005		2004
		(In thousands)
United States		$	208,668	$	150,155	$	413,342	$	287,917
Canada			17,922		16,143		36,377		33,445
	Total	$	226,590	$	166,298	$	449,719	$	321,362

        Total assets and liabilities of Penncorp Life (Canada), located entirely in Canada, are as follows:

	June 30, 2005		December 31, 2004
	(In thousands)
Assets	$	251,834	$	233,741
Liabilities	$	191,336	$	188,125

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Item 2.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Introduction

        The following discussion and analysis presents a review of the Company as of June 30, 2005, and its results of operations for the three months and six months ended June 30, 2005. This Management's Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with the consolidated financial statements as well as the Management's Discussion and Analysis of Financial Condition and Results of Operation included in the Company's 2004 Annual Report on Form 10-K.

Overview

        Our principal business segments are based on product and include: Senior Market Health Insurance, Senior Managed Care—Medicare Advantage, Specialty Health Insurance, Life Insurance/Annuities and Senior Administrative Services. We also report the activities of our holding company in a separate segment. Previously, we reported our segments based on distribution channel. Our former Senior Market Brokerage and Career Agency segments have been replaced with the three new segments: Senior Market Health Insurance, Life Insurance/Annuity and Specialty Health Insurance. Our Senior Managed Care—Medicare Advantage and Senior Administrative Services segments are unchanged. We believe that this new segmentation will provide even greater clarity to our results. Reclassifications have been made to conform prior year amounts to the current year presentation. See Note 13—Business Segment Information in our consolidated financial statements included in this Form 10-Q for a description of our segments.

Critical Accounting Policies

        Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of our financial statements in conformity with 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, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates. Accounts that, in our judgment, are most critical to the preparation of our financial statements include policy liabilities and accruals, deferred policy acquisition costs, intangible assets, valuation of certain investments and deferred income taxes. There have been no changes in our critical accounting policies during the current quarter.

Policy related liabilities

        We calculate and maintain reserves for the estimated future payment of claims to our policyholders using the same actuarial assumptions that 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, claims in the course of settlement and incurred but not reported claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability, premium rate increases and extra contractual damage awards. Therefore, the reserves and liabilities we establish are 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

22

on our results of operations and financial condition. Our net income depends significantly 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 be required to increase our liabilities resulting in reduced net income and shareholders' equity.

Deferred policy acquisition costs

        The cost of acquiring new business, principally non-level commissions and agency production, underwriting, policy issuance, and associated costs, all of which vary with, and are primarily related to the production of new and renewal business, are deferred. For interest-sensitive life and annuity products, these costs are amortized in relation to the present value of expected gross profits on the policies arising principally from investment, mortality and expense margins in accordance with SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". For other life and health products, these costs are amortized in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with SFAS No. 60, "Accounting and Reporting by Insurance Enterprises." Amortization of deferred acquisition costs for Medicare supplement policies is periodically adjusted for significant changes in benefit structures and differences in assumed premium rates on a prospective basis, consistent with assumptions used in the related reserves for future policy benefits. During 2005, the Company determined that the actual approved rate increases and persistency were higher than assumed levels. The prospective unlocking of these assumptions resulted in a slower amortization of Medicare supplement deferred acquisition costs.

        The determination of expected gross profits for interest-sensitive products is an inherently uncertain process that relies on assumptions including projected interest rates, the persistency of the policies issued as well as anticipated benefits, commissions and expenses. It is possible that the actual profits from the business may vary materially from the assumptions used in the determination and amortization of deferred acquisition costs. Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or expected gross profits would not be adequate to cover related losses and expenses.

Present value of future profits and other intangibles

        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 selected depends upon the general market conditions at the time of the acquisition and the inherent risk in the transaction. 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, is allocated to goodwill. Allocation of purchase price is performed in the period in which the purchase is consummated. Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies and refinements made to estimates of fair value in connection with the preliminary allocation.

        Amortization of present value of future profits is based upon the pattern of the projected cash flows of the in-force business acquired, over weighted average lives ranging from six to forty years. Other identified intangibles are amortized over their estimated lives.

        On a periodic basis, management reviews 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 such assets is not recoverable, in which case an impairment charge would be

23

recognized. Management believes that no impairments of present value of future profits, goodwill or other identified intangibles existed as of June 30, 2005.

Investment valuation

        Fair value of investments is based upon quoted market prices, where available, or on values obtained from independent pricing services. For certain mortgage and asset-backed securities, the determination of fair value is based primarily upon the amount and timing of expected future cash flows of the security. Estimates of these cash flows are based upon current economic conditions, past credit loss experience and other circumstances.

        We regularly evaluate the amortized cost of our investments compared to the fair value of those investments. Impairments of securities generally are recognized when a decline in fair value below the amortized cost basis is considered to be other-than-temporary. Generally, we consider a decline in fair value to be other-than-temporary when the fair value of an individual security is below amortized cost for an extended period and we do not believe that recovery in fair value is probable. Impairment losses for certain mortgage and asset-backed securities are recognized when an adverse change in the amount or timing of estimated cash flows occurs, unless the adverse change is solely a result of changes in estimated market interest rates and we intend to hold the security until maturity. The cost basis for securities determined to be impaired are reduced to their fair value, with the excess of the cost basis over the fair value recognized as a realized investment loss.

Income taxes

        We use the liability method to account for deferred income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of a change in tax rates.

        We establish valuation allowances on our deferred tax assets for amounts that we determine will not be recoverable based upon our analysis of projected taxable income and our ability to implement prudent and feasible tax planning strategies. Increases in these valuation allowances are recognized as deferred tax expense. Subsequent determinations that portions of the valuation allowances are no longer necessary are reflected as deferred tax benefits. To the extent that valuation allowances were established in conjunction with acquisitions, changes in those allowances are first applied to increasing or decreasing the goodwill (but not below zero) or other intangibles related to the acquisition and then applied as an increase or decrease in income tax expense.

Significant Transactions and Initiatives

Medicare Part D

        On March 23, 2005, we announced that we established a strategic alliance with PharmaCare Management Services, Inc. ("PharmaCare"), a wholly owned subsidiary of CVS Corporation, to offer Medicare Part D Prescription Drug Benefit Plans ("PDPs"). Certain of Universal American's insurance subsidiaries have filed applications with the Centers for Medicare and Medicaid Services ("CMS") to become PDP sponsors in 32 of the 34 CMS regions. PharmaCare, a leading pharmacy benefit manager, will provide comprehensive pharmacy benefit management services to the Universal American companies for this program. The PDP sponsors and an affiliate of PharmaCare have entered into a 50% quota share reinsurance agreement on the products to be sold. The products will be sold by the Universal American field force which consists of career agents who work through the Universal

24

American Senior Solutions® program, as well independent agents who specialize in the sale of Medicare supplement products. As part of the strategic alliance, CVS will assist in marketing the products through its 5,400 CVS/pharmacy stores, subject to the CMS guidelines. Although CVS has agreed to promote our PDPs on a preferred basis, CVS is not precluded from entering into marketing arrangements with other PDP sponsors. We believe that this program has the potential to have a meaningful impact on our business. We have incurred $1.0 million in costs to prepare for the implementation of the plans and we estimate that during the remainder of 2005, we will expense an additional $5.0 million to $6.0 million of incremental out of pocket costs relating to product development, systems development and upgrades and marketing costs, before we receive any revenues from the program starting in 2006. Additionally, we anticipate that we will be funding up to $15 million in costs that will be capitalized.

        There are significant risks associated with our participation in the Medicare Part D program. These include the following:

•

Although CMS has released regulations on Part D, some important requirements related to the implementation and marketing of the Part D prescription drug benefit plan have not yet been released by the federal government. This will create challenges for planning and implementation of our Part D program, and there is no assurance that Congress or CMS will not alter the program in a manner that will be detrimental to us.



•

We will incur significant expenditures of time and resources in developing this program, and we may need to divert human resources from other areas of the Company. Although we believe that we have the capability to meet our staffing needs, it is possible that the fulfillment of our administrative duties in other areas may suffer.



•

While we have submitted bids to CMS for approval in 32 of the 34 regions in which we intend to become a sponsor, we cannot assure you that all of our bids will be accepted by CMS. Further, we cannot be certain that, if approved, our products will be competitive, as compared to other PDPs.



•

In order for a PDP to be eligible to receive premium for Medicare beneficiaries who are also eligible for Medicaid ("dual-eligibles") (who will be automatically assigned to PDPs) and other low income Medicare beneficiaries, its bid must be below a benchmark that will not be known until all bids have been received and accepted by CMS. We cannot assure you that our bids will qualify in any or all regions.



•

We are making actuarial assumptions about utilization of benefits in our PDPs. Since Part D is a newly created program, there is no historical basis for these assumptions, and we cannot assure you that these assumptions will prove to be correct and that premiums will be sufficient to cover benefits.



•

We cannot assure you that the market will accept and acquire insurance from our PDPs, and therefore our anticipated sales under, and revenues derived from, the program may be significantly less than our current expectations.



•

Part D is a new program and the competitive landscape is uncertain. We expect to encounter competition from other PDP sponsors, some of whom may have significantly greater resources and brand recognition than we do. Our marketing arrangement with CVS is non-exclusive and CVS may enter into marketing arrangements with our competitors. We cannot predict whether we will be able to effectively compete in this new market.



•

The costs of developing and marketing our PDPs could vary based upon the size of membership in our PDPs. Given the uncertainties and risks described above, the cost of developing PDPs

25

that will allow us to effectively compete in this new market could exceed our current expectations.

        Additional discussion of the risks and speculative factors inherent in and affecting our business in general as well as our participation in the Medicare Part D program, are detailed in our filings with the Securities and Exchange Commission, including our prospectus supplement, dated June 16, 2005 and our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The Company assumes no obligation to update and supplement any forward-looking statements that may become untrue because of subsequent events, whether as a result of new information, future events or otherwise.

Acquisition of Heritage Health Systems, Inc.

        On May 28, 2004, we acquired Heritage, a privately owned managed care company that operates Medicare Advantage plans in Houston and Beaumont Texas, for $98 million in cash plus transaction costs of $2.0 million. The acquisition was financed with $66.5 million of net proceeds derived from the amendment of our credit facility and $33.5 million of cash on hand. As of the date of acquisition, Heritage had approximately 16,000 Medicare members and annualized revenues of approximately $140 million. Operating results generated by Heritage prior to the date of acquisition are not included in our consolidated financial statements.

Equity Offering

        On June 22, 2005, we issued 2.0 million shares of our common stock at a price of $23.61 per share, in connection with a public offering pursuant to a shelf registration. The issuance of these shares generated proceeds to us of $44.2 million, net of underwriters discount and other issuance costs. Additionally, 5.0 million shares were sold under the same shelf registration by Capital Z Financial Services Fund II, L.P. and its affiliates ("Capital Z"), our largest shareholder. On July 20, 2005, the underwriters exercised their over-allotment option and we issued an additional 660,000 shares of our common stock at $23.61 per share, generating additional net proceeds of $14.8 million. Following the offering, Capital Z owned 20.2 million shares, or 34.5% of our outstanding common stock. (See Shelf Registration and Equity Offering in the Liquidity section of this Management's Discussion and Analysis).

26

Results of Operations—Consolidated Overview

        The following table reflects income from each of our segments (1) and contains a reconciliation to reported net income:

			Three months ended June 30,						Six months ended June 30,
			2005			2004			2005			2004
			(In thousands)
Senior Market Health Insurance(1)			$	8,449		$	8,021		$	15,279		$	15,961
Senior Managed Care—Medicare Advantage(1)				7,089			838			14,130			838
Specialty Health Insurance(1)				6,798			7,263			12,372			13,003
Life Insurance and Annuities(1)				3,405			3,035			7,445			6,279
Senior Administrative Services(1)				3,041			3,333			6,656			6,487
Corporate(1)				(4,134	)		(2,774	)		(7,650	)		(5,259	)
Realized gains				3,030			209			4,103			3,801
Income before income taxes(1)				27,678			19,925			52,335			41,110
Income taxes, excluding capital gains				8,970			6,801			17,179			12,853
Income taxes on capital gains				60			73			436			1,330
	Total income taxes			9,030			6,874			17,615			14,183
		Net income	$	18,648		$	13,051		$	34,720		$	26,927
Per Share Data (Diluted):
	Net income		$	0.32		$	0.23		$	0.60		$	0.48

(1)

We evaluate the results of operations of our segments based on income before realized gains and income taxes. Management believes that realized gains and losses are not indicative of overall operating trends. This differs from generally accepted accounting principles, which includes the effect of realized gains in the determination of net income. The schedule above reconciles our segment income to net income in accordance with generally accepted accounting principles.

Three months ended June 30, 2005 and 2004

        Net income for the second quarter of 2005 increased 43% to $18.6 million, or $0.32 per diluted share, compared to $13.1 million, or $0.23 per diluted share in 2004. Net income for the second quarter of 2005 includes after-tax realized investment gains of $3.0 million, or $0.05 per diluted share, which reflects the benefit from a $1.0 million release of a tax valuation allowance relating to net capital loss carryforwards. Net income for the second quarter of 2004 includes after-tax realized investment gains of $0.1 million. The realized investment gains during the second quarter of 2005 were generated as we took advantage of the tightening of the yield curve and sold longer duration investments. Additionally, net income for the second quarter of 2005 was reduced by after-tax expenses of $0.7 million, or $0.01 per diluted share, relating to the implementation of our Part D program. Our overall effective tax rate was 32.6% for the second quarter of 2005, reflecting the release of the valuation allowance noted above, and 34.5% for the second quarter of 2004.

        Our Senior Market Health Insurance segment generated segment income of $8.4 million during the second quarter of 2005, an increase of 5% compared to $8.0 million in 2004, primarily as a result of the increase in net retained business, offset by higher claim costs in our Medicare supplement lines. Additionally, segment income for the second quarter of 2005 was reduced by expenses of $0.4 million relating to the implementation of our Part D program. Excluding these expenses, segment income would have been $8.8 million, an increase of 10% from the 2004 amount.

27

        Our Senior Managed Care—Medicare Advantage segment generated segment income of $7.1 million during the second quarter of 2005, compared to $0.8 million in 2004. This segment includes the results of Heritage and our other initiatives in Medicare managed care, including our Medicare Advantage private fee-for-service plans, since our acquisition or inception during the second quarter of 2004.

        Our Specialty Health Insurance segment generated segment income of $6.8 million for the second quarter of 2005, down 6% compared to $7.3 million for the second quarter of 2004, primarily as a result of higher claim costs.

        Results for our Life Insurance and Annuities segment improved by $0.4 million, or 12%, to $3.4 million compared to the second quarter of 2004, primarily as a result of an increase in business.

        Segment income for our Senior Administrative Services segment decreased by $0.3 million, or 9%, to $3.0 million, compared to the second quarter of 2004, primarily as a result of the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these expenses, segment income would have been $3.6 million, an increase of 9% from the 2004 amount.

        The loss from our Corporate segment increased by $1.4 million, or 50%, compared to the second quarter of 2004. The increase was primarily due to higher interest cost as a result of an increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase in the weighted average interest rates, as compared to the second quarter of 2004.

Six months ended June 30, 2005 and 2004

        Net income for the first six months of 2005 increased 29% to $34.7 million, or $0.60 per diluted share, compared to $26.9 million, or $0.48 per diluted share in 2004. Net income for the first six months of 2005 includes realized investment gains, net of tax, of $3.7 million, or $0.06 per diluted share. The realized investment gains during 2005 were generated as we took advantage of the tightening of the yield curve and sold longer duration investments. Additionally, net income for the first six months of 2005 was reduced by after-tax expenses of $0.7 million, or $0.01 per diluted share, relating to the implementation of our Part D program. Net income for the first six months of 2004 includes realized investment gains, net of tax, of $2.5 million, or $0.04 per diluted share. The realized investment gains during 2004 were generated at Penncorp Life (Canada) as a result of the sale of investments to fund the dividend of approximately $19.6 million paid to the parent company during the first quarter of 2004 and the tax payments made during the first quarter of 2004 relating to 2003 taxable income. See "Liquidity and Capital Resources—Obligations of the Parent Company to Affiliates" for additional information regarding the dividend. Our overall effective tax rate was 34.8% for the first six months of 2005 and 34.5% for the first six months of 2004.

        Our Senior Market Health Insurance segment generated segment income of $15.3 million during the first six months of 2005, a 4% decline compared to $16.0 million in 2004, primarily as a result of higher claim costs in our Medicare supplement lines, although net retained business increased by 11%. Additionally, segment income for the six months ended June 30, 2005 was reduced by expenses of $0.4 million relating to the implementation of our Part D program. Excluding these expenses, segment income would have been $15.7 million, a decrease of 2% from the 2004 amount.

        Our Senior Managed Care—Medicare Advantage segment generated segment income of $14.1 million during the first six months of 2005. This segment includes the results of Heritage and our other initiatives in Medicare managed care, including our Medicare Advantage private fee-for-service plans, since our acquisition or inception during the second quarter of 2004.

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        Our Specialty Health Insurance segment income of $12.4 million for the first six months of 2005 declined by 5% compared to $13.0 million for the first six months of 2004, primarily as a result of higher claim costs.

        Results for our Life Insurance and Annuities segment improved by $1.2 million, or 19%, to $7.4 million compared to the first six months of 2004, primarily as a result of an increase in business and lower claim costs.

        Segment income for our Senior Administrative Services segment increased by $0.2 million, or 3%, to $6.7 million compared to the first six months of 2004, primarily as a result of growth in premiums managed, offset by the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these expenses, segment income would have been $7.3 million, an increase of 12% from the 2004 amount.

        The loss from our Corporate segment increased by $2.4 million, or 46%, compared to the first six months of 2004. The increase was due to higher interest cost as a result of an increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase in the weighted average interest rates, as compared to the first six months of 2004.

Segment Results—Senior Market Health Insurance

			Three months ended June 30,						Six months ended June 30,
			2005			2004			2005			2004
			(In thousands)
Premiums:
	Direct and assumed		$	141,134		$	141,517		$	289,589		$	286,546
	Ceded			(44,474	)		(53,462	)		(95,066	)		(111,240	)
		Net premiums		96,660			88,055			194,523			175,306
Net investment income				1,147			1,053			2,363			2,077
Other income				(1	)		597			151			647
		Total revenue		97,806			89,705			197,037			178,030
Policyholder benefits				69,892			61,892			141,161			124,192
Change in deferred acquisition costs				(10,365	)		(7,913	)		(18,983	)		(16,598	)
Amortization of intangible assets				554			395			1,094			953
Commissions and general expenses, net of allowances				29,276			27,310			58,486			53,522
	Total benefits, claims and other deductions			89,357			81,684			181,758			162,069
Segment income			$	8,449		$	8,021		$	15,279		$	15,961

Three months ended June 301, 2005 and 2004

        Our Senior Market Health Insurance segment generated segment income of $8.4 million during the second quarter of 2005, an increase of 5% compared to $8.0 million in 2004, primarily as a result of the increase in net retained business, offset by higher claim costs in our Medicare supplement lines. Additionally, income was reduced by expenses of $0.4 million relating to the implementation of our Part D program. Excluding these expenses, segment income would have been $8.8 million, an increase of 10% from the 2004 amount.

29

        Revenues.    Net premiums for the Senior Market Health Insurance segment increased by $8.6 million, or 10%, compared to the second quarter of 2004, due to rate increases, new sales and increased retention of the Medicare supplement business.

        Net investment income increased by approximately $0.1 million, or 9%, compared to the second quarter of 2004.

        Benefits, Claims and Expenses.    Policyholder benefits incurred increased by $8.0 million, or 13%, compared to the second quarter of 2004, as a result of the increase in net premiums and an increase in loss ratios. Overall loss ratios for the segment increased 200 basis points to 72.3% for the second quarter of 2005 compared to 70.3% for the second quarter of 2004. The increase in deferred acquisition costs was $2.5 million more for the second quarter of 2005, compared to the increase in the second quarter of 2004, as a result of higher retained premium and the effect of prospective unlocking resulting from higher than anticipated rate increases and better than anticipated persistency. The amortization of intangibles relates to intangibles recorded from the acquisition of Pyramid Life, and increased by $0.2 million compared to the second quarter of 2004.

        Commissions and general expenses increased by $2.0 million, or 7%, compared to the second quarter of 2004, consistent with the increase in premiums. The following table details the components of commission and other operating expenses:

	Three months ended June 30,
	2005			2004
	(In thousands)
Commissions	$	20,622		$	21,298
Other operating costs		18,229			18,053
Reinsurance allowances		(9,575	)		(12,041	)
Commissions and general expenses, net of allowances	$	29,276		$	27,310

        The ratio of commissions to gross premiums decreased to 14.6% for the second quarter of 2005, from 15.1% for the second quarter of 2004, as a result of a leveling off of new production as well as lower overall commission rates associated with the continued growth of our in force renewal premium, including the effects of better persistency and rate increases. Other operating costs as a percentage of gross premiums were 12.9% for the second quarter of 2005, consistent with the second quarter of 2004. Commission and expense allowances received from reinsurers as a percentage of the premiums ceded decreased to 21.5% for the second quarter of 2005 from 22.5% for the second quarter of 2004, primarily due to the reduction in new business ceded and the effects of normal lower commission allowances on our aging base of ceded renewal business.

Six months ended June 30, 2005 and 2004

        Our Senior Market Health Insurance segment generated segment income of $15.3 million during the first six months of 2005, a 4% decline compared to $16.0 million in 2004, primarily as a result of higher claim costs in our Medicare supplement lines, although net retained business increased by 11%. Additionally, income was reduced by expenses of $0.4 million relating to the implementation of our Part D program. Excluding these expenses, income would have been $15.7 million, a decrease of 2% from the 2004 amount.

        Revenues.    Net premiums for the Senior Market Health Insurance segment increased by $19.2 million, or 11%, compared to the first six months of 2004, due to rate increases, new sales and increased retention of the Medicare supplement business.

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        Net investment income increased by approximately $0.3 million, or 14%, compared to the first six months of 2004.

        Benefits, Claims and Expenses.    Policyholder benefits incurred increased by $17.0 million, or 14%, compared to the first six months of 2004, as a result of the increase in net premiums and an increase in loss ratios. Overall loss ratios for the segment increased 180 basis points to 72.6% for the first six months of 2005 compared to 70.8% for the first six months of 2004. The increase in deferred acquisition costs was $2.4 million more for the first six months of 2005, compared to the increase in the first six months of 2004, as a result of higher retained premium and the effect of prospective unlocking resulting from higher than anticipated rate increases and better than anticipated persistency. As a percentage of premium, the increase in deferred acquisition costs was 9.8% for the first six months of 2005 compared to 9.5% for the first six months of 2004. The amortization of intangibles relates to intangibles recorded from the acquisition of Pyramid Life, and increased by $0.2 million compared to the first six months of 2004.

        Commissions and general expenses increased by $5.0 million, or 9%, compared to the first six months of 2004, consistent with the increase in premiums. The following table details the components of commission and other operating expenses:

	Six months ended June 30,
	2005			2004
	(In thousands)
Commissions	$	41,435		$	42,586
Other operating costs		36,705			36,007
Reinsurance allowances		(19,654	)		(25,071	)
Commissions and general expenses, net of allowances	$	58,486		$	53,522

        The ratio of commissions to gross premiums decreased to 14.3% for the first six months of 2005, from 14.9% for the first six months of 2004, as a result of lower overall commission rates associated with the continued growth of our in force renewal premium, including the effects of better persistency and rate increases. Other operating costs as a percentage of gross premiums were 12.7% for the first six months of 2005, consistent with the first six months of 2004. Commission and expense allowances received from reinsurers as a percentage of the premiums ceded decreased to 20.7% for the first six months of 2005 from 22.5% for the first six months of 2004, primarily due to the reduction in new business ceded and the effects of normal lower commission allowances on our aging base of ceded renewal business.

Segment Results—Senior Managed Care—Medicare Advantage

		Three months ended June 30,				Six months ended June 30,
		2005		2004(2)		2005		2004(2)
		(In thousands)
Net premiums		$	57,093	$	11,937	$	109,930	$	11,937
Net investment and other income			759		21		1,199		21
	Total revenue		57,852		11,958		111,129		11,958
Medical expenses			41,512		8,642		79,016		8,642
Amortization of intangible assets			247		266		1,003		266
Commissions and general expenses			9,004		2,212		16,980		2,212
	Total benefits, claims and other deductions		50,763		11,120		96,999		11,120
Segment income		$	7,089	$	838	$	14,130	$	838
Depreciation, amortization and interest			403		266		1,293		266
Earnings before interest, taxes, depreciation and amortization ("EBITDA")(1)		$	7,492	$	1,104	$	15,423	$	1,104

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(1)

In addition to segment income, we also evaluate the results of our Medicare Advantage segment based on earnings before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA is a common alternative measure of performance used by investors, financial analysts and rating agencies. It is also a measure that is included in the fixed charge ratio required by the covenants for our outstanding bank debt. Accordingly, these groups use EBITDA, along with other measures, to estimate the value of a company and evaluate the Company's ability to meet its debt service requirements. While we consider EBITDA to be an important measure of comparative operating performance, it should not be construed as an alternative to segment income or cash flows from operating activities (as determined in accordance with generally accepted accounting principles).

(2)

Includes results for the one month since acquisition or inception

        Our Senior Managed Care—Medicare Advantage segment includes the operations of Heritage and our other initiatives in Medicare managed care, including our Medicare Advantage private fee-for-service plans. Heritage generates its revenues and profits from three sources. First, Heritage owns an interest in SelectCare, a health plan that offers coverage to Medicare beneficiaries under a contract with CMS. Next, Heritage operates three separate Management Service Organizations ("MSO's") that manage the business of SelectCare and two affiliated Independent Physician Associations ("IPA's"). Lastly, Heritage participates in the profits derived from these IPA's.

        Starting in June 2004, American Progressive, an insurance subsidiary of Universal American, began enrolling members in its private fee-for-service ("PFFS") product, a Medicare Advantage program that allows its members to have more flexibility in the delivery of their health care services than other Medicare Advantage plans. In addition to premium received from CMS, American Progressive receives modest premium payments from the members. Beginning August 1, 2005, we have expanded our PFFS product offering to Medicare eligibles in 258 counties in seven new states. We plan on expanding the PFFS product to an additional 151 counties in six states on January 1, 2006, subject to CMS approval.

        The components of the revenues and results within the segment are as follows:

		Three months ended June 30, 2005					Six months ended June 30, 2005
		Revenue			Segment Income		Revenue			Segment Income
		(In thousands)
Health Plan		$	52,905		$	2,330	$	102,572		$	4,962
Affiliated IPA's			28,890			2,838		57,655			5,556
MSO's and Corporate			8,145			1,633		15,834			3,316
Private Fee-for Service			4,606			288		7,963			296
Eliminations			(36,694	)		—		(72,895	)		—
	Total	$	57,852		$	7,089	$	111,129		$	14,130

        Intrasegment revenues are reported on a gross basis in each of the above components of the Medicare Advantage segment. These intrasegment revenues are eliminated in the consolidation for the segment totals. The eliminations include premiums received by the IPA's from the Health Plan amounting to $28.8 million for the three months ended June 30, 2005 and $57.4 million for the six months ended June 30, 2005 and management fees received by the MSO's from the Health Plan and the IPA's amounting to $7.9 million for the three months ended June 30, 2005 and $15.5 million for the six months ended June 30, 2005.

        Heritage operates a health plan through SelectCare, a provider sponsored organization ("PSO"). SelectCare offers a Medicare Advantage coordinated care plan operating in southeastern Texas, including Beaumont and Houston and receives its premiums primarily from CMS. SelectCare makes capitated risk payments to IPA's or medical groups in the Houston and Beaumont regions, two of which are affiliated IPA's. In addition, SelectCare retains the risk for certain other types of care, primarily out

32

of area emergency and transplants. As of June 30, 2005, SelectCare had approximately 22,180 members enrolled. During the second quarter of 2005, SelectCare had revenues of $52.9 million and reported a medical loss ratio of 82.6%. For the six months ended June 30, 2005, SelectCare had revenues of $102.6 million and reported a medical loss ratio of 82.0%.

        Heritage participates in the profits from the two affiliated IPA's that receive capitated payments from SelectCare. As of June 30, 2005, the affiliated IPA's managed the care for approximately 14,770 SelectCare members. During the second quarter of 2005, the IPA's earned $2.8 million on $28.9 million in revenues received from SelectCare. For the six months ended June 30, 2005, the IPA's earned $5.6 million on $57.7 million in revenues received from SelectCare.

        Heritage owns three MSO's that provide comprehensive management services to SelectCare and its affiliated IPA's as part of long-term management agreements. Services provided include strategic planning, provider network services, marketing, finance and accounting, enrollment, claims processing, information systems, utilization review, credentialing and quality management. For the three months ended June 30, 2005, these MSO's earned $1.6 million of income on $8.1 million of fees collected. For the six months ended June 30, 2005, these MSO's earned $3.3 million of income on $15.8 million of fees collected.

        As of June 30, 2005, American Progressive had 2,792 members enrolled in its private fee-for-service plans. During the second quarter of 2005, American Progressive collected $4.6 million of premium from CMS and the members, and reported a medical loss ratio of 68.9%. For the six months ended June 30, 2005, American Progressive collected $8.0 million of premium from CMS and the members, and reported a medical loss ratio of 71.5%.

Segment Results—Specialty Health Insurance

			Three months ended June 30,						Six months ended June 30,
			2005			2004			2005			2004
			(In thousands)
Premiums:
	Direct and assumed		$	42,398		$	42,759		$	85,508		$	86,545
	Ceded			(5,632	)		(6,505	)		(11,315	)		(12,657	)
		Net premiums		36,766			36,254			74,193			73,888
Net investment income				6,608			6,530			12,997			13,309
Other income				339			75			637			208
		Total revenue		43,713			42,859			87,827			87,405
Policyholder benefits				25,150			22,516			50,532			47,411
Change in deferred acquisition costs				(2,158	)		(2,269	)		(4,127	)		(3,771	)
Commissions and general expenses, net of allowances				13,923			15,349			29,050			30,762
		Total benefits, claims and other deductions		36,915			35,596			75,455			74,402
Segment income			$	6,798		$	7,263		$	12,372		$	13,003

Three months ended June 30, 2005 and 2004

        Our Specialty Health Insurance segment generated segment income of $6.8 million for the second quarter of 2005, down 6% compared to $7.3 million for the second quarter of 2004, primarily as a result of higher claim costs. The operations of Penncorp Life (Canada), which are included in our Specialty Health segment results, are transacted using the Canadian dollar as the functional currency.

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The Canadian dollar strengthened relative to the U.S. dollar in 2005. The average conversion rate increased 9%, to C$0.8028 per U.S.$1.00 for the second quarter of 2005, from C$0.7346 per U.S.$1.00 for the second quarter of 2004. This strengthening added approximately $0.3 million of pre-tax income to the Specialty Health segment results compared to the second quarter of 2004. See discussion below under the heading "Quantitative and Qualitative Disclosures about Market Risk" for additional information.

        Revenues.    Net premiums for the Specialty Health Insurance segment increased by $0.5 million, or 2%, compared to the second quarter of 2004. Canadian business accounted for approximately 42% of the net premiums of this segment for the second quarter of 2005 and 39% of the net premiums for the second quarter of 2004. The stronger Canadian dollar generated an increase in premiums of approximately $1.3 million, which was offset by a reduction in long term care premium as a result of our decision to discontinue marketing that product, beginning in late 2003.

        Net investment income increased by approximately $0.1 million, or 1%, compared to the second quarter of 2004.

        Benefits, Claims and Expenses.    Policyholder benefits incurred increased by $2.6 million, or 12%, compared to the second quarter of 2004, primarily as a result of higher loss ratios for our long term care and U.S. fixed benefit accident and sickness lines. Overall loss ratios for the segment increased to 68.4% during the second quarter of 2005 compared to 62.1% in the second quarter of 2004.

        The increase in deferred acquisition costs was $0.1 million less in the second quarter of 2005 than the increase in the second quarter of 2004.

        Commissions and general expenses decreased by $1.4 million, or 9%, in the second quarter of 2005 compared to 2004.

Six months ended June 30, 2005 and 2004

        Our Specialty Health Insurance segment segment income of $12.4 million for the first six months of 2005 declined by 5% compared to $13.0 million for the first six months of 2004, primarily as a result of higher claim costs. The operations of Penncorp Life (Canada), which are included in our Specialty Health segment results, are transacted using the Canadian dollar as the functional currency. The Canadian dollar strengthened relative to the U.S. dollar in 2005. The average conversion rate increased 8%, to C$0.8097 per U.S.$1.00 for the first six months of 2005, from C$0.7474 per U.S.$1.00 for the first six months of 2004. This strengthening added approximately $0.5 million of pre-tax income to the Specialty Health segment results compared to the first six months of 2004. See discussion below under the heading "Quantitative and Qualitative Disclosures about Market Risk" for additional information.

        Revenues.    Net premiums for the Specialty Health Insurance segment increased by $0.3 million, or less than 1%, compared to the first six months of 2004. Canadian business accounted for approximately 43% of the net premiums of this segment for the first six months of 2005 and 39% of the net premiums for the first six months of 2004. The stronger Canadian dollar generated an increase in premiums of approximately $2.4 million, which was offset by a reduction in long term care premium as a result of our decision to discontinue marketing that product, beginning in late 2003.

        Net investment income decreased by approximately $0.3 million, or 2%, compared to the first six months of 2004. The decrease is due primarily to lower yields during the first six months of 2005.

        Benefits, Claims and Expenses.    Policyholder benefits incurred increased by $3.1 million, or 7%, compared to the first six months of 2004, primarily as a result of higher loss ratios for our long term care and U.S. fixed benefit accident and sickness lines. Overall loss ratios for the segment increased to 68.1% during the first six months of 2005 compared to 64.2% in the first six months of 2004.

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        The increase in deferred acquisition costs was $0.4 million more in the first six months of 2005 than the increase in the first six months of 2004.

        Commissions and general expenses decreased by $1.7 million, or 6%, in the first six months of 2005 compared to 2004.

Segment Results—Life Insurance and Annuities

			Three months ended June 30,						Six months ended June 30,
			2005			2004			2005			2004
			(In thousands)
Premiums:
	Direct and assumed		$	19,074		$	14,834		$	37,052		$	28,370
	Ceded			(4,684	)		(2,441	)		(8,522	)		(4,768	)
		Net premiums		14,390			12,393			28,530			23,602
Net investment income				8,908			8,422			17,598			16,645
Other income				70			54			73			115
		Total revenue		23,368			20,869			46,201			40,362
Policyholder benefits				10,093			8,686			19,081			16,253
Interest credited to policyholders				4,630			4,258			9,175			8,478
Change in deferred acquisition costs				(5,047	)		(4,719	)		(10,146	)		(10,854	)
Amortization of intangible assets				269			178			529			439
Commissions and general expenses, net of allowances				10,018			9,431			20,117			19,767
		Total benefits, claims and other deductions		19,963			17,834			38,756			34,083
Segment income			$	3,405		$	3,035		$	7,445		$	6,279

Three months ended June 30, 2005 and 2004

        Results for our Life Insurance and Annuities segment improved by $0.4 million, or 12%, to $3.4 million compared to the second quarter of 2004, primarily as a result of an increase in business.

        Revenues.    Net premiums for the segment increased by $2.0 million, or 16%, compared to the second quarter of 2004. Approximately $1.4 million of the increase relates to increased sales of our senior life product and $0.8 million relates to the net business produced by the former Guarantee Reserve field force. The balance relates to increased sales of our senior life product and an increase in policy fees on our interest sensitive life and annuity business as a result of the growth in the level of deposits for those products. Ceded premiums increased by approximately $1.4 million as a result of the Guarantee Reserve business. Prior to receiving approval to write the business through the insurance subsidiaries of Universal American during the first quarter of 2004, 50% of the Guarantee Reserve business was assumed from Swiss Re. As we received the regulatory approvals, we wrote the business through our insurance subsidiaries and ceded 50% to Swiss Re.

        Our agents sold $9.6 million of fixed annuities during the second quarter of 2005 and $12.1 million during the second quarter of 2004. Annuity deposits are not considered premiums for reporting in accordance with generally accepted accounting principles. The reduction in annuity sales was the result of lower interest crediting rates on policy account balances and a decrease in minimum guaranteed crediting rates on our policies as compared to the crediting rates in 2004.

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        Net investment income increased by approximately $0.5 million, or 6%, compared to the second quarter of 2004, as a result of the increase in policyholder account balances as a result of the additional deposits received as noted above, offset by a decline in yields on the portfolio.

        Benefits, Claims and Expenses.    Policyholder benefits incurred increased by $1.4 million, or 16%, compared to the second quarter of 2004, primarily as a result of the increase in business. Interest credited increased by $0.4 million, due to the increase in policyholder account balances as a result of continued annuity sales, offset by a reduction in credited rates. The increase in deferred acquisition costs was approximately $0.3 million more during the second quarter of 2005, as compared to the increase in 2004. This is directly related to the increase in senior life business produced during the quarter. The amortization of intangible assets relates to the present value of the future profits of the life business acquired with Pyramid Life. Commissions and general expenses increased by $0.6 million, or 6%, compared to the second quarter of 2004, primarily as a result of the increase in business.

Six months ended June 30, 2005 and 2004

        Results for our Life Insurance and Annuities segment improved by $1.2 million, or 19%, to $7.4 million compared to the first six months of 2004, primarily as a result of an increase in business and lower claim costs.

        Revenues.    Net premiums for the segment increased by $4.9 million, or 21%, compared to the first six months of 2004. Approximately $2.8 million of the increase relates increased sales of our senior life product and $1.8 relates to the net business produced by the former Guarantee Reserve field force. Ceded premiums increased by approximately $2.8 million as a result of the Guarantee Reserve business. Prior to receiving approval to write the business through the insurance subsidiaries of Universal American during the first quarter of 2004, 50% of the Guarantee Reserve business was assumed from Swiss Re. As we received the regulatory approvals, we wrote the business through our insurance subsidiaries and ceded 50% to Swiss Re.

        Our agents sold $25.6 million of fixed annuities during the first six months of 2005 and $38.7 million during the first six months of 2004. Annuity deposits are not considered premiums for reporting in accordance with generally accepted accounting principles. The reduction in annuity sales was the result of lower interest crediting rates on policy account balances and a decrease in minimum guaranteed crediting rates on our policies as compared to the crediting rates in 2004.

        Net investment income increased by approximately $1.0 million, or 6%, compared to the first six months of 2004, as a result of the increase in policyholder account balances as a result of the additional deposits received as noted above, offset by a decline in yields on the portfolio.

        Benefits, Claims and Expenses.    Policyholder benefits incurred increased by $2.8 million, or 17%, compared to the first six months of 2004. Policyholder benefits increased by approximately $3.3 million as a result of the increase in business, offset by favorable mortality. Interest credited increased by $0.7 million, due to the increase in policyholder account balances as a result of continued annuity sales, offset by a reduction in credited rates. The increase in deferred acquisition costs was approximately $0.7 million less during the first six months of 2005, as compared to the increase in 2004. This is directly related to the decline in annuity business produced during the first six months of 2005 compared to 2004. The amortization of intangible assets relates to the present value of the future profits of the life business acquired with Pyramid Life. Commissions and general expenses increased by $0.4 million, or 2%, compared to the first six months of 2004.

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Segment Results—Senior Administrative Services

			Three months ended June 30,				Six months ended June 30,
			2005		2004		2005		2004
					(In thousands)
Affiliated Fee Revenue
	Medicare supplement		$	7,585	$	7,079	$	15,551	$	14,282
	Long term care			673		712		1,269		1,405
	Life insurance			886		1,048		1,730		2,102
	Other			694		790		1,491		1,381
		Total Affiliated Revenue		9,838		9,629		20,041		19,170
Unaffiliated Fee Revenue
	Medicare supplement			2,124		2,164		4,158		4,506
	Long term care			2,077		1,518		4,100		2,921
	Non-insurance products			374		379		758		778
	Other			290		263		554		550
		Total Unaffiliated Revenue		4,865		4,324		9,570		8,755
		Total revenue		14,703		13,953		29,611		27,925
Amortization of present value of future profits				120		105		239		209
General expenses				11,542		10,515		22,716		21,229
		Total expenses		11,662		10,620		22,955		21,438
		Segment income	$	3,041	$	3,333	$	6,656	$	6,487
Depreciation, amortization and interest				542		535		1,074		1,070
Earnings before interest, taxes, depreciation and amortization ("EBITDA")(1)			$	3,583	$	3,868	$	7,730	$	7,557

(1)

In addition to segment income, we also evaluate the results of our Senior Administrative Services segment based on earnings before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA is a common alternative measure of performance used by investors, financial analysts and rating agencies. It is also a measure that is included in the fixed charge ratio required by the covenants for our outstanding bank debt. Accordingly, these groups use EBITDA, along with other measures, to estimate the value of a company and evaluate the Company's ability to meet its debt service requirements. While we consider EBITDA to be an important measure of comparative operating performance, it should not be construed as an alternative to segment income or cash flows from operating activities (as determined in accordance with generally accepted accounting principles).

        Included in unaffiliated revenue are fees received to administer certain business of our insurance subsidiaries that is 100% reinsured to an unaffiliated reinsurer, which amounted to $1.0 million for the three months ended June 30, 2005, and $1.4 million for the three months ended June 30, 2004 and $2.1 million for the six months ended June 30, 2005, and $2.9 million for the six months ended June 30, 2004. These fees, together with the affiliated revenue, were eliminated in consolidation.

Three months ended June 30, 2005 and 2004

        Segment income for our Senior Administrative Services segment decreased by $0.3 million, or 9%, to $3.0 million compared to the second quarter of 2004, primarily as a result of the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these expenses, income would have been $3.6 million, an increase of 9% from the 2004 amount. EBITDA for this segment also decreased $0.3 million compared to the second quarter of 2004.

37

        Service fee revenue increased by $0.8 million, or 7%, compared to the second quarter of 2004. Affiliated service fee revenue increased by $0.2 million compared to the second quarter of 2004 as a result of the increase in Medicare supplement/select business in force at our insurance subsidiaries over this period. Unaffiliated service fee revenue increased by approximately $0.6 million compared to the second quarter of 2004, primarily due to an increase in fees for services for long term care products. General expenses for the segment increased by $1.0 million, or 10%, due primarily as a result of the $0.6 million of expenses incurred in this segment relating to our implementation of Part D as well as the increase in business.

Six months ended June 30, 2005 and 2004

        Segment income for our Senior Administrative Services segment increased by $0.2 million, or 3%, to $6.7 million compared to the first six months of 2004, primarily as a result of growth in premiums managed, offset by the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these expenses, income would have been $7.3 million, an increase of 12% from the 2004 amount. EBITDA for this segment also increased $0.2 million compared to the first six months of 2004.

        Service fee revenue increased by $1.7 million, or 6%, compared to the first six months of 2004. Affiliated service fee revenue increased by $0.9 million compared to the first six months of 2004 as a result of the increase in Medicare supplement/select business in force at our insurance subsidiaries over this period. Unaffiliated service fee revenue increased by approximately $0.8 million compared to the first six months of 2004. An increase of $1.2 million, or 40%, for services for long term care products was offset, in part, by a decline in fees for Medicare supplement of $0.3 million. General expenses for the segment increased by $1.5 million, or 7%, due primarily to the increase in business, as well as the Part D implementation costs.

Segment Results—Corporate

        The following table presents the primary components comprising the loss from the segment:

		Three months ended June 30,				Six months ended June 30,
		2005		2004		2005		2004
				(In thousands)
Interest		$	2,670	$	1,762	$	5,181	$	3,285
Amortization of capitalized loan origination fees			227		164		444		287
Stock-based compensation expense			—		23		2		46
Other parent company expenses, net			1,237		825		2,023		1,641
	Segment loss	$	4,134	$	2,774	$	7,650	$	5,259

Three months ended June 30, 2005 and 2004

        The loss from our Corporate segment increased by $1.4 million, or 50%, compared to the second quarter of 2004. The increase was due to higher interest cost as a result of an increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase in the weighted average interest rates, as compared to the same period of 2004. Our combined outstanding debt was $173.4 million at June 30,, 2005 compared to $178.7 million at June 30, 2004. The weighted average interest rate on our loan payable increased to 5.3% for the second quarter of 2005 from 4.0% for the second quarter of 2004. The weighted average interest rate on our other long term debt also increased to 7.1% for the second quarter of 2005 from 6.3% for the second quarter of 2004. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

38

Six months ended June 30, 2005 and 2004

        The loss from our Corporate segment increased by $2.4 million, or 46%, compared to the first six months of 2004. The increase was due to higher interest cost as a result of an increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase in the weighted average interest rates, as compared to the same period of 2004. The weighted average interest rate on our loan payable increased to 5.0% for the first six months of 2005 from 4.1% for the first six months of 2004. The weighted average interest rate on our other long term debt also increased to 7.0% for the first six months of 2005 from 6.2% for the first six months of 2004. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

Liquidity and Capital Resources

        Our capital is used primarily to support the retained risks and growth of our insurance company subsidiaries and health plan and to support our parent company as an insurance holding company. In addition, we use capital to fund our growth through acquisitions of other companies, blocks of insurance or administrative service business.

        We require cash at our parent company to meet our obligations under our credit facility and our outstanding debenture held by our subsidiary, Pennsylvania Life. In January 2002, our parent company issued a debenture to Pennsylvania Life in conjunction with the transfer of the business of Pennsylvania Life's Canadian Branch to Penncorp Life (Canada). The outstanding balance on the debenture was $3.4 million at June 30, 2005. We anticipate funding the repayment of the debenture from dividends of Penncorp Life (Canada). We also require cash to pay the operating expenses necessary to function as a holding company (applicable insurance department regulations require us to bear our own expenses), and to meet the costs of being a public company.

        We believe that our current cash position, the availability of our $15.0 million revolving credit facility, the expected cash flows of our administrative service company and management service organizations (acquired in the acquisition of Heritage) and the surplus note interest payments from American Exchange (as explained below) can support our parent company obligations for the foreseeable future. However, there can be no assurance as to our actual future cash flows or to the continued availability of dividends from our insurance company subsidiaries.

Contractual Obligations and Commercial Commitments

Credit Facility, as Amended in May 2004

        In connection with the acquisition of Pyramid Life, the Company obtained an $80 million credit facility (the "Credit Agreement") on March 31, 2003 to repay the then existing loan and provide funds for the acquisition of Pyramid Life. The Credit Agreement consisted of a $65 million term loan which was drawn to fund the acquisition and a $15 million revolving loan facility. The Credit Agreement initially called for interest at the London Interbank Offering Rate ("LIBOR") for one, two or three months, at the option of the Company, plus 300 basis points. Effective March 31, 2004, the spread over LIBOR was reduced to 275 basis points in accordance with the terms of the Credit Agreement. Principal repayments were scheduled over a five-year period with a final maturity date of March 31, 2008. The Company incurred loan origination fees of approximately $2.1 million, which were capitalized and are being amortized on a straight-line basis over the life of the Credit Agreement.

        In connection with the acquisition of Heritage on May 28, 2004 (see Note 3—Business Combinations), the Company amended the Credit Agreement by increasing the facility to $120 million from $80 million (the "Amended Credit Agreement"), including an increase in the term loan portion to $105 million from $36.4 million (the balance outstanding at May 28, 2004) and maintaining the $15 million revolving loan facility. None of the revolving loan facility has been drawn as of June 30, 2005. Under the Amended Credit Agreement, the spread over LIBOR was reduced to 225 basis points.

39

Effective July 1, 2005, the interest rate on the term loan is 5.6%. Principal repayments are scheduled at $5.3 million per year over a five-year period with a final payment of $80.1 million due upon maturity on March 31, 2009. The Company incurred additional loan origination fees of approximately $2.1 million, which were capitalized and are being amortized on a straight-line basis over the life of the Amended Credit Agreement along with the continued amortization of the origination fees incurred in connection with the Credit Agreement. The Company pays an annual commitment fee of 50 basis points on the unutilized revolving loan facility. The obligations of the Company under the Amended Credit Facility are guaranteed by WorldNet Services Corp., CHCS Services Inc., CHCS Inc., Quincy Coverage Corporation, Universal American Financial Services, Inc., Heritage, HHS-HPN Network, Inc., Heritage Health Systems of Texas, Inc., PSO Management of Texas, LLC, HHS Texas Management, Inc. and HHS Texas Management LP (collectively the "Guarantors") and secured by substantially all of the assets of each of the Guarantors. In addition, as security for the performance by the Company of its obligations under the Amended Credit Facility, the Company, WorldNet Services Corp., CHCS Services Inc., Heritage and HHS Texas Management, Inc. have each pledged and assigned substantially all of their respective securities (but not more than 65% of the issued and outstanding shares of voting stock of any foreign subsidiary), all of their respective limited liability company and partnership interests, all of their respective rights, title and interest under any service or management contract entered into between or among any of their respective subsidiaries and all proceeds of any and all of the foregoing.

        The Amended Credit Facility requires the Company and its subsidiaries to meet certain financial tests, including a minimum fixed charge coverage ratio, a minimum risk based capital test and a minimum consolidated net worth test. The Amended Credit Facility also contains covenants, which among other things, limit the incurrence of additional indebtedness, dividends, capital expenditures, transactions with affiliates, asset sales, acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements.

        The Amended Credit Facility contains customary events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-acceleration, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency and judgment defaults.

        The Company made regularly scheduled principal payments of $2.6 million and paid $2.5 million in interest in connection with its credit facilities during the six months ended June 30, 2005. During the six months ended June 30, 2004, the Company made regularly scheduled principal payments of $3.1 million and paid $1.0 million in interest in connection with its credit facilities.

        The following table shows the schedule of principal payments (in thousands) remaining on the Amended Credit Agreement, with the final payment in March 2009:

2005 (remainder of year)	$	2,625
2006		5,250
2007		5,250
2008		5,250
2009		80,063
	$	98,438

Other Long Term Debt

        The Company has formed statutory business trusts, which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trust, investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures of the Company (the "Junior Subordinated Debt") and engaging in only those activities necessary or incidental thereto. In accordance with the adoption of FIN 46R, the Company has deconsolidated the trusts.

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        Separate subsidiary trusts of the Company (the "Trusts") have issued a combined $75.0 million in thirty year trust preferred securities (the "Capital Securities") as detailed in the following table:

Maturity Date	Amount Issued		Term	Spread Over LIBOR		Rate as of June 30, 2005
	(In thousands)			(Basis points)
December 2032	$	15,000	Fixed/Floating	400	(1)	6.7	%
March 2033		10,000	Floating	400		7.1	%
May 2033		15,000	Floating	420		7.5	%
May 2033		15,000	Fixed/Floating	410	(2)	7.4	%
October 2033		20,000	Fixed/Floating	395	(3)	7.0	%
	$	75,000

(1)

Effective September 2003, the Company entered into a swap agreement whereby it will pay a fixed rate of 6.7% in exchange for a floating rate of LIBOR plus 400 basis points. The swap contract expires in December 2007.

(2)

The rate on this issue is fixed at 7.4% for the first five years, after which it is converted to a floating rate equal to LIBOR plus 410 basis points.

(3)

Effective April 29, 2004, the Company entered into a swap agreement whereby it will pay a fixed rate of 6.98% in exchange for a floating rate of LIBOR plus 395 basis points. The swap contract expires in October 2008.

        The Trusts have the right to call the Capital Securities at par after five years from the date of issuance (which ranged from December 2002 to October 2003). The proceeds from the sale of the Capital Securities, together with proceeds from the sale by the Trusts of their common securities to the Company, were invested in thirty-year floating rate Junior Subordinated Debt of the Company. From the proceeds of the trust preferred securities, $26.0 million was used to pay down debt during 2003. The balance of the proceeds has been used, in part to fund acquisitions, to provide capital to the Company's insurance subsidiaries to support growth and to be held for general corporate purposes.

        The Capital Securities represent an undivided beneficial interest in the Trusts' assets, which consist solely of the Junior Subordinated Debt. Holders of the Capital Securities have no voting rights. The Company owns all of the common securities of the Trusts. Holders of both the Capital Securities and the Junior Subordinated Debt are entitled to receive cumulative cash distributions accruing from the date of issuance, and payable quarterly in arrears at a floating rate equal to the three-month LIBOR plus a spread. The floating rate resets quarterly and is limited to a maximum of 12.5% during the first sixty months. Due to the variable interest rate for these securities, the Company would be subject to higher interest costs if short-term interest rates rise. The Capital Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debt at maturity or upon earlier redemption. The Junior Subordinated Debt is unsecured and ranks junior and subordinate in right of payment to all present and future senior debt of the Company and is effectively subordinated to all existing and future obligations of the Company's subsidiaries. The Company has the right to redeem the Junior Subordinated Debt after five years from the date of issuance.

        The Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debt for a period not exceeding 20 consecutive quarters up to each debenture's maturity date. During any such period, interest will continue to accrue and the Company may not declare or pay any cash dividends or distributions on, or purchase, the Company's common stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Junior Subordinated Debt. The Company has the right at any time to dissolve the Trusts and cause the Junior Subordinated Debt to be distributed to the holders of the Capital Securities. The Company has guaranteed, on a subordinated basis, all of the Trusts' obligations under the Capital Securities including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation but only to the extent the Trusts have funds available to make such payments.

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        The Company paid $2.6 million in interest in connection with the Junior Subordinated Debt during the six months ended June 30, 2005 and paid $2.2 million during the six months ended June 30, 2004.

Lease Obligations

        We are obligated under certain lease arrangements for our executive and administrative offices in New York, Florida, Indiana, Tennessee, Texas, and Ontario, Canada. Annual minimum rental commitments, subject to escalation, under non-cancelable operating leases (in thousands) are as follows:

2005 (remainder of year)		$	1,263
2006			2,605
2007			2,588
2008			2,328
2009 and thereafter			9,236
	Totals	$	18,020

        In addition to the above, Pennsylvania Life and Penncorp Life (Canada) are the named lessees on 71 properties occupied by Career Agents for use as field offices. The Career Agents reimburse Pennsylvania Life and Penncorp Life (Canada) the actual rent for these field offices. The total annual rent paid by the Company and reimbursed by the Career Agents for these field offices during 2004 was approximately $1.1 million.

Shelf Registration and Equity Offering

        On November 3, 2004, we filed a universal shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission ("SEC"), pursuant to which we may issue common stock, warrants and debt securities from time to time, up to an aggregate offering of $140 million. The registration statement also covers five million shares of common stock that may be offered for sale by Capital Z Financial Services Fund II, L.P ("Capital Z"), our largest shareholder. The shelf registration statement was declared effective in December, 2004.

        The shelf registration statement enables us to raise funds from the offering of any individual security covered by the shelf registration statement, as well as any combination thereof, through one or more methods of distribution, subject to market conditions and our capital needs. The terms of any offering pursuant to this shelf will be established at the time of the offering. We plan to use the proceeds from any future offering under the registration statement for general corporate purposes, including, but not limited to, working capital, capital expenditures, investments in subsidiaries, acquisitions and refinancing of debt. A more detailed description of the use of proceeds will be included in any specific offering of securities in the prospectus supplement relating to the offering.

        On June 22, 2005, we issued 2.0 million shares of our common stock at a price of $23.61 per share, in connection with a public offering pursuant to the shelf registration. The issuance of these shares generated proceeds to us of $44.2 million, net of underwriters discount and other issuance costs. Additionally, 5.0 million shares were sold by Capital Z Financial Services Fund II, L.P. and its affiliates ("Capital Z"), our largest shareholder, under the same shelf registration. On July 20, 2005, the underwriters exercised their over-allotment option and we issued an additional 660,000 shares of our common stock at $23.61 per share, generating additional net proceeds of $14.8 million. Following the offering, Capital Z owned 20.2 million shares, or 34.5% of our outstanding common stock.

        Subsequent to the offering noted above, the aggregate offering that remains available on the shelf registration is $77.2 million.

Obligations of the Parent Company to Affiliates

        In January 2002, our parent company issued an $18.5 million, 8.5% debenture to Pennsylvania Life in connection with the transfer of the business of Pennsylvania Life's Canadian Branch to Penncorp

42

Life (Canada). The debenture is scheduled to be repaid in full during 2005. As of June 30, 2005, the outstanding balance was $3.4 million. Our parent holding company paid $0.1 million in interest on these debentures during the six months ended June 30, 2005 and $0.3 million during the three months ended June 30, 2004. The interest on these debentures is eliminated in consolidation. Dividends from Penncorp Life (Canada) funded the interest and principal paid on the debenture to date and it is anticipated that they will fund all future payments made on this debenture.

Sources of Liquidity to the Parent Company

        We have several sources of liquidity to fund the obligations of the parent company and provide the capital required to grow our business. On an operating basis, we have four distinct and uncorrelated sources of cash flow as follows:

•

the expected cash flows of our senior administrative services company,



•

the expected cash flows of our senior managed care company (acquired in the acquisition of Heritage),



•

dividend payments received from Penncorp Life (Canada), and



•

surplus note principal and interest payments from American Exchange.

        In addition, we have access to our unutilized $15.0 million revolving credit facility. Finally, we have the ability, from time to time, to access the capital markets for additional capital. There can be no assurance as to our actual future cash flows, to the continued availability of dividends from our insurance company subsidiaries or from access to the capital markets.

Senior Administrative Services Company.    Liquidity for our senior administrative services subsidiary is measured by its ability to pay operating expenses and pay dividends to our parent company. The primary source of liquidity is fees collected from clients. We believe that the sources of cash for our senior administrative services company exceed scheduled uses of cash and results in amounts available to dividend to our parent holding company. We measure the ability of the senior administrative services company to pay dividends based on its earnings before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA for our Senior Administrative Services segment was $7.7 million for the six months ended June 30, 2005, and was $7.6 million for the six months ended June 30, 2004.

Senior Managed Care Company.    Liquidity for our managed care company is measured by its ability to pay operating expenses and pay dividends to our parent company. The primary source of liquidity is management fees for administration of SelectCare and services provided to the IPA's. Dividend payments by SelectCare to Heritage are subject to the approval of the insurance regulatory authorities of the state of Texas, SelectCare's state of domicile. SelectCare is not able to pay dividends during 2005 without prior approval. We believe that the sources of cash to our managed care holding company exceed scheduled uses of cash which will result in funds available to dividend to our parent holding company. We measure the ability of the senior managed care holding company to pay dividends based on its EBITDA. EBITDA for our senior managed care holding company was $15.4 million for the six months ended June 30, 2005.

Penncorp Life (Canada) Dividends.    Penncorp Life (Canada) is a Canadian insurance company. Canadian law provides that a life insurer may pay a dividend after such dividend declaration has been approved by its board of directors and upon at least 10 days prior notification to the Superintendent of Financial Institutions. Such a dividend is limited to retained net income (based on Canadian GAAP) for the preceding two years, plus net income earned for the current year. In considering approval of a dividend, the board of directors must consider whether the payment of such dividend would be in contravention of the Insurance Companies Act of Canada. No dividends were paid during the six months ended June 30, 2005. During the first quarter of 2004, Penncorp Life (Canada) paid dividends of C$26.7 million (approximately US$20.0 million) to Universal American, relating to 2003 net income. The amount of the dividend was larger than normal due to a benefit received by Penncorp Life (Canada) from an actuarial experience study that allowed Penncorp Life (Canada) to reduce its policy

43

benefit reserves at December 31, 2003 on a Canadian GAAP basis. The actuarial experience study did not have an impact on Penncorp Life (Canada)'s policy benefit reserves on a U.S. GAAP basis. During the remainder of 2004, Penncorp Life (Canada) paid dividends totaling C$7.2 million (US$5.6 million) relating to net income for 2004. We anticipate that Penncorp Life (Canada) will be able to pay dividends equal to its net income earned during 2005, less $2.5 million.

Insurance Subsidiaries—Surplus Note, Dividends and Capital Contributions.    Cash generated by our insurance company subsidiaries may be made available to our holding company, principally through periodic payments of principal and interest on the surplus note owed to our holding company by our subsidiary, American Exchange. As of June 30, 2005, the principal amount of the surplus note was $44.2 million. The note bears interest to our parent holding company at LIBOR plus 325 basis points. We anticipate that the surplus note will be primarily serviced by dividends from Pennsylvania Life, a wholly owned subsidiary of American Exchange, and by tax-sharing payments among the insurance companies that are wholly owned by American Exchange and file a consolidated Federal income tax return. American Exchange made principal payments totaling $4.3 million during the six months ended June 30, 2005 and $3.5 million during the six months ended June 30, 2004. American Exchange paid interest on the surplus note of $1.0 million during the six months ended June 30, 2005 and $1.3 million during the six months ended June 30, 2004.

        Our parent holding company made capital contributions to American Exchange amounting to $6.6 million during 2005. American Exchange made capital contributions of $2.8 million to Union Bankers, $1.7 million to Constitution and $2.0 million to American Pioneer during the six months ended June 30, 2005.

        Our parent holding company made capital contributions to American Exchange amounting to $3.5 million during the six months ended June 30, 2004. In March 2004, Pennsylvania Life declared and paid a dividend in the amount of $10.6 million to American Exchange. American Exchange made capital contributions of $7.0 million to Union Bankers and $4.0 million to American Progressive and $1.5 million to American Pioneer during the six months ended June 30, 2004.

        Dividend payments by our U.S. insurance companies to our holding company or to intermediate subsidiaries are limited by, or subject to the approval of the insurance regulatory authorities of each insurance company's state of domicile. Such dividend requirements and approval processes vary significantly from state to state. Pennsylvania Life is able to pay ordinary dividends of up to $6.3 million to American Exchange during 2005, without prior approval. Pyramid Life is able to pay ordinary dividends of up to $2.5 million to Pennsylvania Life (its direct parent) with prior notice to the Kansas Insurance Department and Marquette would be able to pay ordinary dividends of up to $0.3 million to Constitution (its direct parent) without the prior approval from the Texas Insurance Department during 2005. American Exchange, American Pioneer, American Progressive, Constitution and Union Bankers had negative earned surplus at December 31, 2004 and are not able to pay dividends in 2005 without special approval.

Insurance Subsidiaries—Liquidity

        Liquidity for our insurance company subsidiaries is measured by their ability to pay scheduled contractual benefits, pay operating expenses, fund investment commitments, and pay dividends to their parent company. The principal sources of cash for our insurance operations include scheduled and unscheduled principal and interest payments on investments, premium payments, annuity deposits, and the sale or maturity of investments. Both the sources and uses of cash are reasonably predictable and we believe that these sources of cash for our insurance company subsidiaries exceed scheduled uses of cash.

        Liquidity is also affected by unscheduled benefit payments including benefits under accident and health insurance policies, death benefits and interest-sensitive policy surrenders and withdrawals.

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        Our accident and health insurance policies generally provide for fixed-benefit amounts and, in the case of Medicare supplement policies, for supplemental payments to Medicare provider rates. Some of these benefits are subject to medical-cost inflation and we have the capability to file for premium rate increases to mitigate rising medical costs. Our health insurance business is widely dispersed in the United States and Canada, which mitigates the risk of unexpected increases in claim payments due to epidemics and events of a catastrophic nature. These accident and health polices are not interest-sensitive and therefore are not subject to unexpected policyholder redemptions due to investment yield changes.

        Some of our life insurance and annuity policies are interest-sensitive in nature. The amount of surrenders and withdrawals is affected by a variety of factors such as credited interest rates for similar products, general economic conditions and events in the industry that affect policyholders' confidence. Although the contractual terms of substantially all of our in force life insurance policies and annuities give the holders the right to surrender the policies and annuities, we impose penalties for early surrenders. As of June 30, 2005 we held reserves that exceeded the underlying cash surrender values of our net retained in force life insurance and annuities by $34.6 million. Our insurance subsidiaries, in our view, have not experienced any material changes in surrender and withdrawal activity in recent years.

        Changes in interest rates may affect the incidence of policy surrenders and withdrawals. In addition to the potential impact on liquidity, unanticipated surrenders and withdrawals in a changed interest rate environment could adversely affect earnings if we were required to sell investments at reduced values in order to meet liquidity demands. We manage our asset and liability portfolios in order to minimize the adverse earnings impact of changing market rates. We have segregated a portion of our investment portfolio in order to match liabilities that are sensitive to interest rate movements with fixed income securities containing similar characteristics to the related liabilities, most notably the expected duration and required interest spread. We believe that this asset/liability management process adequately covers the expected payment of benefits related to these liabilities.

        As of June 30, 2005, our insurance company subsidiaries held cash and cash equivalents totaling $143.4 million, as well as fixed maturity securities that could readily be converted to cash with carrying values (and fair values) of $1.2 billion.

        The net yields on our cash and invested assets decreased to 4.8% for the six months ended June 30, 2005, from 5.0% for the six months ended June 30, 2004. A portion of these securities are held to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. The credited interest rates of the interest-sensitive policyholder account balances are determined by us based upon factors such as portfolio rates of return and prevailing market rates and typically follow the pattern of yields on the assets supporting these liabilities.

        Our insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, substantially more than such minimum amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries' operations. Each of the life insurance subsidiaries' statutory capital and surplus exceeds its respective minimum statutory requirement at levels we believe are sufficient to support their current levels of operation. Additionally, the National Association of Insurance Commissioners ("NAIC") imposes regulatory risk-based capital ("RBC") requirements on life insurance enterprises. At June 30, 2005, all of our life insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the "authorized control level". The combined statutory capital and surplus, including asset valuation reserve, of the U.S. life insurance subsidiaries totaled $138.0 million at June 30, 2005 and $127.9 million at December 31, 2004. Statutory net income for the six months ended June 30, 2005 was $0.3 million, and for the six months ended June 30, 2004 was $3.8 million, which included after-tax net realized gains of $0.1 million.

45

        SelectCare is also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and is also subject to RBC requirements. At June 30, 2005, SelectCare's statutory capital and surplus exceeds its minimum requirement and its RBC is in excess of the "authorized control level". The statutory capital and surplus for SelectCare was $14.5 million at June 30, 2005 and $9.6 million at December 31, 2004. Statutory net income for the six months ended June 30, 2005 was $5.0 million and for the six months ended June 30, 2004 was $1.7 million.

        Penncorp Life (Canada) reports to Canadian regulatory authorities based upon Canadian statutory accounting principles that vary in some respects from U.S. statutory accounting principles. Penncorp Life (Canada)'s net assets based upon Canadian statutory accounting principles were C$63.0 million (US$51.4 million) as of June 30, 2005 and were C$57.4 million (US$47.8 million) as of December 31, 2004. Net income based on Canadian generally accepted accounting principles was C$5.6 million (US$4.5 million) for the six months ended June 30, 2005, and C$4.4 million (US$3.3 million) for the six months ended June 30, 2004. Penncorp Life (Canada) maintained a Minimum Continuing Capital and Surplus Requirement Ratio ("MCCSR") in excess of the minimum requirement at June 30, 2005.

Investments

        Our investment policy is to balance the portfolio duration to achieve investment returns consistent with the preservation of capital and maintenance of liquidity adequate to meet payment of policy benefits and claims. We invest in assets permitted under the insurance laws of the various states in which we operate. Such laws generally prescribe the nature, quality of and limitations on various types of investments that may be made. We do not currently have investments in partnerships, special purpose entities, real estate, commodity contracts, or other derivative securities. We currently engage the services of three investment advisors under the direction of the management of our insurance company subsidiaries and in accordance with guidelines adopted by the Investment Committees of their respective boards of directors. Conning Asset Management Company manages the portfolio of all of our United States subsidiaries, except for the portfolio of Pyramid Life, and certain floating rate portfolios, which are managed by Hyperion Capital. MFC Global Investment Management manages our Canadian portfolio. We invest primarily in fixed maturity securities of the U.S. Government and its agencies and in corporate fixed maturity securities with investment grade ratings of "BBB-" (Standard & Poor's Corporation), "Baa3" (Moody's Investor Service) or higher. Our current policy is not to invest in derivative programs or other hybrid securities, except for GNMA's, FNMA's and investment grade corporate collateralized mortgage obligations.

        As of June 30, 2005, 98.6% of our fixed maturity investments had investment grade ratings from Standard & Poor's Corporation or Moody's Investor Service. There were no non-income producing fixed maturities as of June 30, 2005. We did not write down the value of any fixed maturity securities during the six months ended June 30, 2005 or 2004.

Effects of Recently Issued and Pending Accounting Pronouncements

        There was no material impact on our consolidated financial condition or results of operations as a result of our adoption of recently issued accounting pronouncements. We do not anticipate any material impact from the future adoption of the pending accounting pronouncements, other than the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires all companies to recognize compensation costs for share-based payments to employees based on the grant-date fair value of the award for financial statements for annual periods beginning after June 15, 2005. Refer to Consolidated Financial Statements (Unaudited) Note 2—Recent and Pending Accounting Pronouncements.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

        In general, market risk relates to changes in the value of financial instruments that arise from adverse movements in interest rates, equity prices and foreign exchange rates. We are exposed principally to changes in interest rates that affect the market prices of our fixed income securities as well as the cost of our variable rate debt. Additionally, we are exposed to changes in the Canadian dollar that affects the translation of the financial position and the results of operations of our Canadian subsidiary from Canadian dollars to U.S. dollars.

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. However, we attempt to mitigate our exposure to adverse interest rate movements through a combination of active portfolio management 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 insurance liabilities generally arise over relatively long periods of time, which typically permits ample time to prepare for their settlement.

        Certain classes of mortgage-backed securities are subject to significant prepayment risk due to the fact that 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 points from their levels as of June 30, 2005, and with all other variables held constant. A 100 basis point increase in market interest rates would result in a pre-tax decrease in the market value of our fixed income investments of $67.1 million and a 200 basis point increase in market interest rates would result in $132.4 million decrease. Similarly, a 100 basis point decrease in market interest rates would result in a pre-tax increase in the market value of our fixed income investments of $72.2 million and a 200 basis point decrease in market interest rates would result in a $149.7 million increase.

Debt

        We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate ("LIBOR") for one, two or three months. Due to the variable interest rate, the Company would be subject to higher interest costs if short-term interest rates rise. We have attempted to mitigate our exposure to adverse interest rate movements by fixing the rate on $15.0 million of the trust preferred securities for a five year period through the contractual terms of the security at inception and an additional $35.0 million through the use of interest rate swaps.

        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 scenarios of increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the six months ended June 30, 2005, and

47

with all other variables held constant. The following table summarizes the impact of changes in LIBOR:

						Effect of Change in LIBOR on Pre-tax Income for the six months ended June 30, 2005
				Weighted Average Balance Outstanding
Description of Floating Rate Debt		Weighted Average Interest Rate				200 Basis Point Decrease		100 Basis Point Decrease		100 Basis Point Increase			200 Basis Point Increase
				(in millions)
Loan Payable		5.05	%	$	100.4	$	1.0	$	0.5	$	(0.5	)	$	(1.0	)
Other long term debt		7.01	%	$	25.0		0.3		0.1		(0.1	)		(0.3	)
	Total					$	1.3	$	0.6	$	(0.6	)	$	(1.3	)

        As noted above, we have fixed the interest rate on $50 million of our $175 million of total debt outstanding, leaving $125 million of the debt exposed to rising interest rates. As of June 30, 2005 we had approximately $217 million of cash and cash equivalents and $60 million in short duration floating rate investment securities. We anticipate that the net investment income on this $277 million will be positively impacted by rising interest rates and will mitigate the negative impact of rising interest rates on our debt.

Currency Exchange Rate Sensitivity

        Portions of our operations are transacted using the Canadian dollar as the functional currency. As of and for the six months ended June 30, 2005, approximately 12% of our assets, 8% of our revenues, excluding realized gains, and 14% of our income before realized gains and taxes were derived from our Canadian operations. As of and for the six months ended June 30, 2004, approximately 11% of our assets, 10% of our revenues, excluding realized gains, and 14% of our income before realized gains and taxes were derived from our Canadian operations. Accordingly, our earnings and shareholder's equity are affected by fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. Although this risk is somewhat mitigated by the fact that both the assets and liabilities for our foreign operations are denominated in Canadian dollars, we are still subject to translation gains and losses.

        We periodically conduct various analyses to gauge the financial impact of changes in the foreign currency exchange rate on our financial condition. The ranges selected in these analyses reflect our assessment of what is reasonably possible over the succeeding twelve-month period.

        A 10% strengthening of the U.S. dollar relative to the Canadian dollar, as compared to the actual average exchange rate for the six months ended June 30, 2005, would have resulted in a decrease in our income before realized gains and taxes of approximately $0.6 million for the six months ended June 30, 2005 and a decrease in our shareholders' equity of approximately $5.2 million at June 30, 2005. A 10% weakening of the U.S. dollar relative to the Canadian dollar would have resulted in an increase in our income before realized gains and taxes of approximately $0.7 million for the six months ended June 30, 2005 and an increase in shareholders' equity of approximately $6.3 million at June 30, 2005. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in any potential change in sales levels, local prices or any other variables.

        The magnitude of changes reflected in the above analysis regarding interest rates and foreign currency exchange rates should, in no manner, be construed as a prediction of future economic events, but rather as a simple illustration of the potential impact of such events on our financial results.

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Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

        Our management evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this report. Based on their evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Change in Internal Control over Financial Reporting

        There has been no material change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

        Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all error 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 the benefits of controls must be considered 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 all control issues and instances of fraud, if any, within Universal American have been detected. 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. Controls can also be circumvented by the individual acts of some persons or by collusion of two or more people. 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 controls effectiveness 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.

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings.

        The Company has litigation in the ordinary course of business, including claims for medical, disability and life insurance benefits, and in some cases, seeking punitive damages. Management and counsel believe that after reserves and liability insurance recoveries, none of these will have a material adverse effect on the Company.

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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer purchases of Equity securities

Period		Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or ProgramsUnder the Plans or Programs
April 1, 2005 – April 30, 2005		60	$	17.58	60	708,071
May 1, 2005 – May 31, 2005		225	$	17.58	225	707,846
June 1, 2005 – June 30, 2005		639	$	23.49	639	707,207
	Total	924			924

(1)

All shares were purchased in private transactions.

        During 2000, our Board of Directors approved a plan for us to repurchase up to 0.5 million shares of our common stock in the open market. The primary purpose of the plan is to fund employee stock bonuses. Our Board approved an amendment to the plan to increase the total shares authorized for repurchase to 1.0 million in March 2002 and during December 2003 approved a second amendment to increase the shares authorized for repurchase to 1.5 million. Additional repurchases may be made from time to time at prevailing prices, subject to restrictions on volume and timing.

Item 3.    Defaults Upon Senior Securities.

Item 4.    Submission of Matters to a Vote of Security Holders.

        On May 26, 2005, the Company held its Annual Meeting of Stockholders (the "Annual Meeting") to elect nine directors to the Board of Directors of the Company, among other things. The directors elected at the Annual Meeting were Richard A. Barasch, Bradley E. Cooper, Mark M. Harmeling, Bertram Harnett, Linda H. Lamel, Eric W. Leathers, Patrick J. McLaughlin, Robert A. Spass, and Robert F. Wright.

        At the Annual Meeting, the vote on the election of nine directors to hold office until the Company's 2006 annual meeting of stockholders, or until their successors are duly elected and qualified, was as follows:

	Number of Votes
	For	Against
Richard A. Barasch	51,624,324	1,011,397
Bradley E. Cooper	51,793,564	842,157
Mark M. Harmeling	51,198,711	1,437,010
Bertram Harnett	51,572,007	1,063,714
Linda H. Lamel	52,297,865	337,856
Eric W. Leathers	51,863,330	772,391
Patrick J. McLaughlin	52,293,346	342,375
Robert A. Spass	51,642,430	993,291
Robert F. Wright	52,068,544	567,177

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        At the Annual Meeting, the vote on a proposal to ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 2005, was as follows:

Number of Votes For	Number of Votes Against	Number of Abstentions	Number of Broker Non-Votes
52,559,191	68,156	10,527	—

Item 5.    Other Information.

        None

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Item 6.    Exhibits.

2.1	Agreement and Plan of Merger, dated as of March 9, 2004, among Universal American Financial Corp., HHS Acquisition Corp., Heritage Health Systems, Inc. and Carlyle Venture Partners, L.P., as the stockholder representative, incorporated by reference to Form 8-K dated March 9, 2004.
3.1	Restated Certificate of Incorporation of Universal American Financial Corp. incorporated by reference to Exhibit 3.1 to the registrant's Amendment No. 2 to the Registration Statement (No. 333-62036) on Form S-3 filed on July 11, 2001.
3.2	Amendment No. 1 to the Restated Certificate of Incorporation of Universal American Financial Corp., incorporated by reference to Exhibit 3 to Form 10-Q (File No. 0-11321) for the quarter ended June 30, 2004, filed with the SEC on August 9, 2004.
3.3	Amended and Restated By-Laws of Universal American Financial Corp., incorporated by reference to Exhibit A to Form 8-K (File No. 0-11321) dated August 13, 1999.
4.1	Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.01 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004.
4.2	Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.02 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004.
4.3	Shareholders Agreement dated July 30, 1999, among the Company, Capital Z Financial Services Fund II, L.P., UAFC, L.P., AAM Capital Partners, L.P., Chase Equity Associates, L.P., Richard A. Barasch and others, incorporated by reference to Exhibit A of Form 8-K dated August 13, 1999.
4.4	Registration Rights Agreement, dated July 30, 1999, among the Company, Capital Z Financial Services Fund II, L.P., Wand/Universal American Investments L.P.I., Wand/Universal American Investments L.P. II, Chase Equity Associates, L.P., Richard A. Barasch and others, incorporated by reference to Exhibit A to Form 8-K dated August 13, 1999.
*11.1	Computation of Per Share Earnings Data required by Statement of Financial Accounting Standards No. 128, Earnings Per Share, is provided in Note 4 to the Consolidated Financial Statements in this report.
*31.1	Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2	Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1	Certification of the Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, s adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

Filed or furnished herewith.

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SIGNATURES

        Pursuant to the requirements 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 FINANCIAL CORP.
Date: August 9, 2005	By:	/s/  ROBERT A. WAEGELEIN      Robert A. Waegelein Executive Vice President and Chief Financial Officer

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UNIVERSAL AMERICAN FINANCIAL CORP. FORM 10-Q
CONTENTS
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
PART 1. FINANCIAL INFORMATION
UNIVERSAL AMERICAN FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
UNIVERSAL AMERICAN FINANCIAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited)
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PART II—OTHER INFORMATION
SIGNATURES