Caremark Ulysses Holding 10K 2009 Annual report

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

FORM 10-K


(Mark One)
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file Number: 0-11321

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


New York (State or other jurisdiction of incorporation or organization)		11-2580136 (I.R.S. Employer Identification No.)

Six International Drive, Suite 190, Rye Brook, New York 10573
(Address of principal executive offices and zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange On Which Registered

Common Stock, par value $.01 per share		New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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


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

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

The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $232 million (based on the closing sales price of the registrant's common stock on that date). As of February 24, 2010, 74,404,582 shares of the registrant's common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement in connection with its 2010 Annual Meeting of Stockholders (the "Proxy Statement"), scheduled to be held on May 27, 2010, are incorporated by reference into Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.

TABLE OF CONTENTS

	Item	Description

PART 1	1	Business	4
	1A	Risk Factors	27
	1B	Unresolved Staff Comments	61
	2	Properties	61
	3	Legal Proceedings	61
	4	Submission of Matters to a Vote of Security Holders	61
PART II	5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	62
	6	Selected Financial Data	64
	7	Management's Discussion and Analysis of Financial Condition and Results of Operations	66
	7A	Quantitative and Qualitative Disclosures about Market Risk	103
	8	Financial Statements and Supplementary Data	105
	9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	105
	9A	Controls and Procedures	105
	9B	Other Information	106
PART III	10	Directors and Executive Officers of the Registrant	107
	11	Executive Compensation	107
	12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	107
	13	Certain Relationships and Related Transactions	107
	14	Principal Accountant Fees and Services	107
PART IV	15	Exhibits and Financial Statement Schedules	108
		Signatures	113

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As used in this Annual Report on Form 10-K, "Universal American," "we," "our," and "us" refer to Universal American 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 annual report on Form 10-K, such as those set forth under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", may constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. We intend these 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 PSLRA. These forward-looking statements are statements relating to:

•: projections of revenue, earnings and other financial items,
•: our future economic performance,
•: plans and objectives for future operations and
•: the identification of acquisition candidates and the completion of transactions with them.

You can identify forward-looking statements by words such as the following, or indicating or implying the following:

•: "prospects,"
•: "outlook,"
•: "believes,"
•: "estimates,"
•: "intends,"
•: "may,"
•: "will,"
•: "should,"
•: "anticipates,"
•: "expects,"
•: "plans,"
•: the negative or other variation of these or similar words, or
•: 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 our ability to control or predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations reflected in any forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that we will achieve our expectations. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements.

The risks and uncertainties set forth in this report in Item 1 "Business," Item 1A "Risk Factors" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other risks and uncertainties set forth in this report, constitute important factors that may cause actual results to differ materially from forward-looking statements. We assume no obligation to update or 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 I

ITEM 1—BUSINESS

Through its family of companies, Universal American Corp., which we refer to collectively with our subsidiaries as "we," "us," the "Company" or "Universal American," offers a broad array of health insurance and managed care products and services, primarily to the growing Medicare population. Our principal health insurance products for the senior market are Medicare Advantage, insured stand-alone prescription drug benefit plans pursuant to Medicare Part D, and Medicare supplement. We also provide administrative services for senior market insurance and non-insurance programs to both affiliated and unaffiliated insurance companies and prescription benefit management, or PBM, services to affiliated companies and fifteen state pharmacy assistance programs, or SPAPs, and offer PBM services through a number of group contracts.

Collectively, our insurance subsidiaries are licensed or otherwise authorized to sell health insurance, life insurance and annuities in all 50 states, the District of Columbia and Puerto Rico, as well as some U.S. territories. Our managed care subsidiary operates Medicare Advantage coordinated care plans in Texas, Wisconsin and Oklahoma.

We were incorporated under the laws of the State of New York on August 31, 1981. On December 3, 2007, our common shares began trading on the New York Stock Exchange or the NYSE under the ticker symbol UAM. Previously our common shares were traded on the NASDAQ Stock Market under the ticker symbol UHCO. Our corporate headquarters are located at Six International Drive, Rye Brook, New York 10573 and our telephone number is (914) 934-5200. We make available free of charge on our Internet website athttp://www.universalamerican.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file this material with, or furnish it to, the Securities and Exchange Commission. The reference to our website is not intended to incorporate the information on our website into this filing. You can read or copy materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of any materials we have filed electronically with the SEC may be accessed at the SEC's website:http://www.sec.gov.

Senior Market Opportunity

We believe that attractive growth opportunities exist in providing a range of products, particularly health insurance, to the growing senior market. At present, approximately 45 million Americans are eligible for Medicare, the Federal program that offers basic hospital and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the U.S. Census Bureau, more than 2 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65. In addition, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. Finally, the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, known as the MMA, increased the healthcare options available to Medicare beneficiaries through the expansion of Medicare managed care plans through the Medicare Advantage program, and the authorization of a subsidized prescription drug insurance benefit pursuant to Part D. While it is likely that there will be changes to these programs that may reduce their popularity or potential profitability, it does not change our basic view that there are significant business opportunities in the provision of health insurance and other services to the senior population.

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Our Strategy

The principal components of our business strategy are to:

•

Build our senior health insurance and managed care business by offering the following products:

•

Medicare Advantage plans, including:

•: Coordinated care plans ("HMO")
•: Preferred provider organization plans ("PPO")
•: Private fee-for-service plans ("PFFS")

•

Medicare Part D drug benefit plans marketed as Community CCRx^SM and Prescriba Rx^SM; and

•

Medicare supplement;

•

Build distribution with an emphasis on expanding our Healthy Collaberation® brand and our career distribution;

•

Sell complementary senior market and specialty health products through our distribution networks; and

•

Continue to complement our internal growth through opportunistic acquisitions.

Our Operating Segments

We manage and report our business as follows:

•: Senior Managed Care—Medicare Advantage segment reflects our Medicare Advantage HMO, PFFS and PPO businesses.
•: Medicare Part D segment includes both our Community CCRx^SM products and Prescriba Rx^SM (formerly Prescription Pathway^SM).
•: Traditional Insurance segment reflects our insurance products not offered through government programs, which includes Medicare supplement, other senior health insurance, specialty health insurance and life insurance.
•: Senior Administrative Services segment reflects the results of our administrative services company, CHCS.
•: Corporate segment reflects the activities of our holding company.

Please see "Note 27—Business Segment Information" in our consolidated financial statements included in this Annual Report on Form 10-K for information regarding each segment's revenue and income or loss before taxes for each of the last three fiscal years and total assets as of the end of each of the last two fiscal years.

Senior Managed Care—Medicare Advantage

During 2009, we operated Medicare Advantage HMO plans in 17 counties in Texas, primarily in Southeastern Texas and the surrounding Dallas area, 15 counties in Oklahoma and 4 counties in Wisconsin. In addition, we offer Medicare Advantage PFFS plans in 45 states. In January 2009, we began offering PPO products in 50 counties in 9 states. In January 2010, we expanded our PPO products to 126 counties in 17 states. As a result of the passage of the Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA, in 2008, the PFFS product will no longer be available as of January 1, 2011, except in areas that have met approval by Centers for Medicare &

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Medicaid Services, known as CMS, network access requirements or in certain designated rural areas. We have developed network based products in selected core markets to enable the migration of our PFFS membership to these products.

Membership and Annualized Premium in Force. The following table shows the total membership and annualized premium in force for our Medicare Advantage products:

		Membership						Annualized Premiums

		December 31,						December 31,
Senior Managed Care		2009		2008		2007		2009		2008		2007
		(in thousands)
PFFS plans			176.2		186.2		190.4	$	1,680,200	$	1,698,800	$	1,567,500
HMO plans			61.5		54.3		46.0		700,200		652,200		499,500
PPO plans			2.8		—		—		33,000		—		—

	Total		240.5		240.5		236.4	$	2,413,400	$	2,351,000	$	2,067,000

Medicare Advantage—HMO plans: Our HMO plans are offered under contracts with the CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. We built this coordinated care product around contracted networks of providers who, in connection with the health plan, coordinate an active medical management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members for specified products.

We operate plans offering the product TexanPlus® in 12 counties in Houston and southeastern Texas through SelectCare of Texas, which had approximately 44,600 members enrolled at December 31, 2009, representing approximately $540 million of annualized premium in force. We have expanded our Medicare Advantage HMO operations to locations outside of Southeastern Texas including five counties in North Texas offering TexanFirst Health Plans® through SelectCare Health Plans; nine counties in Oklahoma City and six counties in Tulsa offering Generations Healthcare through GlobalHealth; and, our counties in the Milwaukee, Wisconsin area offering Today's Health®.

Medicare Advantage—PPO plans: Our PPO plans are marketed as "Today's Options®PPO." They are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. This coordinated care product is built around contracted networks of providers who, in connection with the health plan, coordinate an active medical management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members for specified products. In 2009, we began offering PPO plans in 15 markets in 9 states. For 2010, we are expanding our PPO plans to 43 markets in 17 states.

Medicare Advantage—PFFS Plans: Our PFFS plans are marketed as "Today's Options®." They are offered under contracts with CMS and provide enhanced health care benefits compared to traditional Medicare, subject to cost sharing and other limitations. These plans have limited provider network restrictions, which allow the members to have more flexibility in the delivery of their health care services than other Medicare Advantage plans with limited provider network restrictions. Some of these products include a defined prescription drug benefit. In addition to a fixed monthly payment per member from CMS, individuals in these plans may be required to pay a monthly premium in selected counties or for selected enhanced products. As of December 31, 2009, we offered PFFS plans in a total of 45 states. We will offer PFFS plans in a total of 45 states in 2010 as well. As a result of the passage of MIPPA, as of January 1, 2011, we will continue to offer PFFS products only in areas that have either met approved CMS network access requirements or are in certain designated rural areas. We have developed network-based products in selected core markets to enable the migration of our PFFS membership to these products.

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Medicare Part D

Since the inception of the Medicare Part D program in January 2006, we have contracted with CMS to serve as a plan sponsor offering insurance for prescription drug coverage to Medicare eligible beneficiaries. We offer our Community CCRx^SM and Prescriba Rx^SM stand alone prescription drug benefit plans throughout the United States and the U.S. territories. We also operate as a PBM servicing the members in our stand alone prescription drug benefit plans and in our Medicare Advantage plans offering a Part D benefit.

Membership and Annualized Premium In Force. The following table shows the net retained membership and annualized premium in force for our Medicare Part D products:

		Membership						Annualized Premiums

		December 31,						December 31,
Medicare Part D		2009		2008		2007		2009		2008		2007
		(in thousands)
PRx plans(1)			444.9		264.0		240.0	$	491,500	$	273,350	$	269,600
CCRx plans(2)			1,252.1		1,308.0		1,164.0		1,515,200		1,434,700		1,439,300
Other plans(3)			—		—		25.0		—		—		9,000

	Total		1,697.0		1,572.0		1,429.0	$	2,006,700	$	1,708,050	$	1,717,900

(1): Represents 50% of membership and annualized premiums for our Prescription Pathway^SM plans in 2008 and 2007, which was succeeded in 2009 by Prescriba Rx^SM ("PRx"). Membership in PRx is 100% retained by us; however, Prescription Pathway^SM was reinsured on a 50% coinsurance basis with PharmaCare Re, a subsidiary of CVS/Caremark. Our strategic alliance with CVS/Caremark was terminated on December 31, 2008.
(2): MemberHealth was acquired on September 21, 2007.
(3): Part D business assumed on a 33¹/3% basis from Arkansas Blue Cross Blue Shield ("BCBS"). Our contract with BCBS was terminated effective January 1, 2008.

Effective January 1, 2010, we were auto-assigned an additional 148,604 dual eligible members and together with additional enrollments during the annual enrollment period ended December 31, 2009, brought our total membership to 1,891,242 to become the second largest plan sponsor in the country.

Medicare Part D. Effective January 1, 2006, private insurers under contract with CMS were permitted to sponsor insured stand-alone prescription drug benefit plans ("PDPs") pursuant to Part D, which was established in 2003 by the Medicare Modernization Act.. A portion of the premium for this insurance is paid by the Federal government, and the balance is due from the enrolled beneficiaries. The Federal government supports Part D through a combination of premium and claim subsidies as follows:

CMS Direct Premium Subsidy—Represents monthly premiums from CMS based on the Plan year bid submitted by plan sponsors to CMS. The monthly payment is a risk-adjusted amount per member and is based upon the member's health status as determined by CMS. Refer to the "Medicare Risk Adjustment" section of "Critical Accounting Policies", for a more detailed description of risk-adjusted subsidies.

Low-Income Premium Subsidy—For qualifying low-income status, or LIS, members, CMS pays for some or all of the LIS member's monthly premium. The CMS payment is dependent upon a member's income level which is determined by the Social Security Administration.

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Low-Income Cost Sharing Subsidy—For qualifying LIS members, CMS reimburses plans for all or a portion of the LIS member's deductible, coinsurance and co-payment amounts above the out of pocket threshold for low income beneficiaries. Low-income cost sharing subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid submitted by plan sponsors to CMS.

Our PDP contracts with CMS are renewable for successive one-year terms unless CMS notifies us of its decision not to renew by May 1 of the current contract year, or we notify CMS of our decision not to renew by the first Monday in June of the contract year.

Medicare beneficiaries who also qualify for Medicaid are known as dual eligible beneficiaries, or dual eligibles. Dual eligible beneficiaries, and certain beneficiaries who qualify for LIS but do not enroll themselves in a PDP, are automatically assigned to a plan by CMS. These assignments are made amongst those PDPs which submitted bids below the applicable regional benchmarks for standard plans.

For the 2009 plan year, we offered through our insurance subsidiaries, our Community CCRx^SM and PerscribaRx^SM prescription drug plans in all 34 regions designated by CMS in which we bid and one or both of our plans bid under the benchmark in 27 of the 34 regions. For the 2010 Plan year, one or both of our plans bid under the benchmark in 30 of the 34 regions, and were auto-assigned 148,604 additional dual-eligible members.

Community CCRx^SMPlans. These plans offer basic coverage with benefits mandated by the MMA, as well as plans providing enhanced coverage with varying degrees of out-of-pocket costs for premiums, deductibles and co-insurance. As of December 31, 2009, we had approximately 1.3 million members enrolled in our Community CCRx^SM PDPs. We have a multi-year strategic alliance with the National Community Pharmacists Association ("NCPA") which provides broad exclusive outreach and communications for our Community CCRx^SM PDPs to NCPA's independent pharmacy membership. Our alliance with NCPA, and its more than 25,000 independent pharmacy members, provides us with direct access to the largest community pharmacy network in the U.S. The NCPA member pharmacies make up over one-third of our pharmacy network, which totals over 62,000 pharmacy locations and accounted for approximately 60% of the prescriptions filled under our Community CCRx^SM PDPs in 2009.

Prescriba Rx^SMPlans. In March 2005, we entered into a strategic alliance with PharmaCare Re, a subsidiary of CVS/Caremark, known as CVS, to offer thePrescription Pathway^SM prescription drug benefit plan. PharmaCare Re reinsured half of the risk assumed by our PDPs and the parties created Part D Management Services, L.L.C., known as PDMS, to perform marketing risk management services on behalf of the Prescription Pathway^SM PDPs. PDMS was owned 50% by us and 50% by PharmaCare Re. The strategic alliance with CVS was mutually terminated effective December 31, 2008, and PDMS was dissolved in December 2009. Upon termination of the strategic alliance, CVS and Universal American each assumed responsibility for the drug benefit of specified Prescription Pathway^SM plan

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members to achieve an approximately equal distribution of the value of business that has been generated by the strategic alliance. For 2009, we created Prescriba Rx^SM plans as our successor to the Prescription Pathway^SM plans for the members distributed to us upon termination of the strategic alliance with CVS, as well as new members.

Traditional Insurance

Our Traditional Insurance segment reflects the results of our Medicare supplement, other senior health insurance, specialty health insurance, and life insurance. We designed the products in this segment primarily for the senior market and market them through our Senior Solutions® career agency force and our network of independent general agencies.

Medicare supplement has historically been our primary Traditional Insurance segment product. Fixed benefit accident and sickness disability and other health insurance products sold to the self-employed market, primarily by our career agents, are also part of this segment. We designed the life insurance products that we currently sell primarily for the senior market including "final expense" life insurance. This segment also includes some products that we no longer sell, such as long term care and major medical insurance as well as previously produced or acquired term, universal life, and whole life insurance products and single and flexible premium fixed annuities.

We reinsured substantially all of the net in force life and annuity business as of April 1, 2009 with Commonwealth Annuity and Life Insurance Company, a subsidiary of Goldman Sachs Group, Inc. (NYSE: GS). This transaction closed on April 24, 2009.

Annualized Premium In Force. Total traditional health insurance product annualized premium in force on a gross basis before reinsurance and the net amount we retained after reinsurance, is as follows:

		Gross						Net

		December 31,						December 31,
		2009		2008		2007		2009			2008			2007
		(in thousands)
Medicare supplement and Other Senior Health		$	322,500	$	368,000	$	419,300	$	242,800		$	271,000		$	304,500
Accident & Sickness and Other Health			41,700		45,300		50,600		40,500			44,000			49,300
Long Term Care			29,600		32,600		35,100		19,700			21,800			22,800

	Total	$	393,800	$	445,900	$	505,000	$	303,000		$	336,800		$	376,600

Percentage retained									77	%		76	%		75	%

Medicare Supplement. Medicare supplement insurance reimburses the policyholder for specified expenses, such as deductibles and co-pays, that are not covered by standard Medicare coverage. This coverage is designed for people who want the freedom to choose providers who participate in the standard Medicare program, as opposed to the more restrictive networks that exist in many Medicare Advantage products. We believe that the market for Medicare supplement products will continue to be attractive, especially because many seniors may lose similar coverage that had previously been offered to them as a retiree benefit by their former employers and as the federal government considers reforms to the Medicare Advantage program.

These products are guaranteed renewable for the lifetime of the policyholder, which means that we cannot cancel the policy but we can seek to increase premium rates on existing and future policies issued based upon our actual claims experience. We monitor the claims experience and, when

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necessary, apply for rate increases in the states in which we sell the products. These rate increases are subject to state regulatory approval and loss-ratio requirements.

Fixed Benefit. Fixed benefit products provide the following types of benefits:

•: Disability—fixed periodic payments to an insured who becomes disabled and unable to work due to an accident or sickness,
•: Specified Disease—fixed periodic payments to an insured who is diagnosed with a covered condition,
•: Hospital—fixed periodic payments to an insured who becomes hospitalized,
•: Surgical—fixed single payments that vary in amount for specified surgical or diagnostic procedures, and
•: Dental/Other—fixed single payments that vary in amount for specified procedures.

Because the benefits we provide are fixed in amount at the time of policy issuance and are not intended to provide full reimbursement for medical and hospital expenses, payment amounts are not generally affected by inflation or the rising cost of health care services.

Long Term Care. As of the end of 2004, we ceased selling new long term care products. Previously, we had offered several long term care plans consisting of fully integrated plans and nursing home and home health care plans, which remain in force. These products typically are guaranteed renewable for the lifetime of the policyholder, which means that we cannot cancel the policy but can seek to increase premium rates on existing policies based upon our actual claims experience, subject to state regulatory approval and loss-ratio requirements. There are circumstances when regulatory authorities do not grant approval for adequate rate relief.

Life Insurance. We offer a line of low-face amount, simplified issue whole life products that we sell through our senior market independent agency and our career agency systems. These products also offer acceleration of death benefit features that cover specified long term care expenses. As discussed above, we have reinsured substantially all of the net in force life and annuity business with Commonwealth Annuity and Life Insurance Company effective April 1, 2009. We continue to sell senior life products which are retained by us.

New Business Production. The following table shows the total new sales, consisting of issued annualized premiums of our Traditional Insurance products produced by our independent and career agency systems on a gross basis before reinsurance:

		Year ended December 31,

		2009		2008		2007
		(in thousands)
Medicare Supplement and Other Senior Health		$	17,692	$	13,619	$	16,707
Accident & Sickness and Other Health			4,564		3,773		5,040
Life Insurance			10,691		10,911		11,853

	Total	$	32,947	$	28,303	$	33,600

Senior Administrative Services

We have built extensive administrative services capabilities through internal development and acquisition. Through our wholly-owned subsidiary, CHCS Services, Inc., known as CHCS, we provide outsourcing services to our affiliated insurance companies as well as unaffiliated companies that support insurance and non-insurance products, primarily for the senior Traditional Insurance market.

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We perform a full range of administrative services for senior market insurance and managed care products, primarily Medicare supplement, Medicare Advantage, Part D, senior life and long term care, for both affiliated and unaffiliated companies. Our proprietary network of registered nurses and social workers provides personalized support and care for our senior programs nationwide. In addition, our proprietary network of discount providers is an integral part of our geriatric care management services. Our Senior Administrative Services segment generated revenues of $42.2 million for the year ended December 31, 2009, of which $14.1 million was from non-affiliates. Beginning January 1, 2009 specified services previously performed for affiliated Part D business representing $27.9 million of 2008 revenue, was performed directly by the affiliated entities.

Corporate

Our corporate segment reflects debt service, a portion of senior executive compensation and compliance with regulatory requirements resulting from our status as a public company.

Marketing and Distribution

We distribute our Medicare Advantage and Part D products through our career agency systems, independent agents, direct sales and telemarketing. Our Traditional Insurance products are distributed through our career agency systems and independent agents.

Career Agency Systems

Our career agency system currently consists of 3,000 agents in 200 offices. Our career agents are required to sell only the products that we offer or contract for them.

In addition to selling our Medicare Advantage and PDP products, our career agency sales force distributes traditional insurance products offered by our companies such as Medicare supplement, life insurance, disability, dental, cancer and hospital indemnity. They also sell life insurance, annuities and long term care insurance offered by unaffiliated carriers with whom we have contracted on their behalf.

Senior Market Independent Agents

These marketing organizations and general agencies typically recruit and train their own agents, bearing all of the costs incurred in connection with developing their organizations. We now sell our products through approximately 33,000 independent licensed agents in 47 states.

Telemarketing

This has been one of our fastest growing channels. Working with our telemarketing partners, this channel has grown from 13% of our MA enrollments in the 2008 selling season to more than 20% of our enrollments for the 2009 plan year and 19% in the 2010 plan year.

Part D

We distribute our PrescribaRx^SM products through our career and independent agents.

Additionally, we place career agents, independent licensed sales agents and CMS-approved marketing materials in many of the independent pharmacies.

Geographical Distribution of Premium

Through our insurance subsidiaries, we are licensed to market our products in all 50 states, the District of Columbia, and Puerto Rico and the U.S. Virgin Islands through a CMS waiver. Our managed care subsidiaries operated Medicare Advantage HMO plans in Texas, Oklahoma and

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Wisconsin and PFFS plans in 45 states and PPO plans in 9 states during 2009. The following table shows the geographical distribution of the direct cash premium collected in thousands, as reported on a statutory basis to the regulatory authorities for the years ended December 31, 2009 and 2008:

State/Region		2009				2008(1)

Texas		$	958,908	18.8	%	$	850,377	17.8	%
New York			492,244	9.7	%		422,418	8.8	%
Florida			233,575	4.6	%		203,083	4.3	%
Indiana			236,180	4.6	%		235,394	4.9	%
Pennsylvania			230,175	4.5	%		235,314	4.9	%
North Carolina			221,151	4.3	%		222,161	4.7	%
Georgia			217,119	4.3	%		197,827	4.1	%
Oklahoma			214,717	4.2	%		173,599	3.6	%
Ohio			182,688	3.6	%		147,776	3.1	%
Virginia			178,605	3.5	%		189,159	4.0	%

	Subtotal		3,165,362	62.1	%		2,877,108	60.2	%
All other			1,925,132	37.9	%		1,899,980	39.8	%

	Total	$	5,090,494	100.0	%	$	4,777,088	100.00	%

(1): Excludes premiums for the State of Connecticut Employee business, as this is 100% reinsured by PharmaCare Re. which was terminated effective as of July 1, 2008.

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Total Business in Force

The following table sets forth our direct, acquired and assumed annualized premium in force, including only the portion of premiums on interest-sensitive products that is applied to the cost of insurance and related membership counts:

		Gross Annualized Premium In Force

		December 31, 2009							December 31, 2008
		$		%			Members		$		%			Members
		(Dollars in millions, Members in thousands)
Senior Managed Care—Medicare Advantage
	Private Fee-for-Service(1)	$	1,680.2		37.8	%		176.2	$	1,698.8		35.1	%		186.2
	HMO Plans(1)		700.2		13.8	%		61.5		652.2		13.4	%		54.3
	PPO Plans(1)		33.0		0.6	%		2.8		—		—	%		—

Sub total			2,413.4		52.2	%		240.5		2,351.0		48.5	%		240.5

Medicare Part D
	Prescriba Rx^SM Plans(1)(2)		491.5		9.5	%		444.9		546.7		11.3	%		264.0
	CommunityCCRx^SM(1)		1,515.2		29.3	%		1,252.1		1,438.7		29.6	%		1,308.0

Sub total			2,006.7		38.8	%		1,697.0		1,985.4		40.9	%		1,572.0

Traditional Insurance
	Medicare Supplement and Other Senior Health		322.5		6.2	%		130.7		368.0		7.6	%		153.8
	Accident & Sickness and Other		41.7		0.8	%		128.2		45.3		0.9	%		138.0
	Long Term Care		29.6		0.6	%		16.9		32.6		0.7	%		18.1

Sub total			393.8		7.6	%		275.8		445.9		9.2	%		309.9

Life Insurance and Annuity			72.5		1.4	%		160.2		65.8		1.4	%		160.2

Total		$	4,886.4		100.0	%		2,373.5	$	4,848.1		100.0	%		2,282.6

(1): These plans are pursuant to contracts with CMS.
(2): 2008 amount represents 50% of membership for the Prescription Pathway^SM PDP, which was succeeded in 2009 by Prescriba Rx^SM (PRx). Membership in PRx is 100% retained by us however, Prescription Pathway^SM was reinsured on a 50% coinsurance basis with PharmaCare Re, a subsidiary of CVS/Caremark. Our strategic alliance with CVS/Caremark was terminated on December 31, 2008. Actual membership at December 31, 2008 was 527,000.

Investments

Our investment policy is to attempt to balance our portfolio duration to achieve investment returns consistent with the preservation of capital and maintenance of liquidity adequate to meet payment obligations of policy benefits and claims. We invest in assets permitted under the insurance laws of the various states in which we operate. These laws generally prescribe the nature, quality of and limitations on various types of investments that we may make. We do not currently have investments in partnerships, special purpose entities, real estate, commodity contracts or other derivative securities.

During 2009, we reevaluated our investment philosophy in light of the April 2009 life and annuity reinsurance transaction and our continued shift to the health and managed care sector. As a result, we elected to reduce the risk and exposure of our investment portfolio to be more conservative in nature and more appropriately aligned with our health insurance focused businesses.

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Reinsurance

In the normal course of business, we reinsure portions of policies that we underwrite. We enter into reinsurance arrangements with unaffiliated reinsurance companies to limit our exposure on individual claims and to limit or eliminate risk on our non-core or under-performing blocks of business. Accordingly, we are party to various reinsurance agreements on our life and accident and health insurance risks. Our senior market accident and health insurance products are generally reinsured under quota share coinsurance treaties, while our life insurance risks are generally reinsured under either quota share coinsurance or yearly-renewable term treaties. Under quota share coinsurance treaties, we pay the reinsurer an agreed upon percentage of all premiums and the reinsurer reimburses us that same percentage of any losses. In addition, the reinsurer pays us allowances to cover commissions, cost of administering the policies and premium taxes. Under yearly-renewable term treaties, the reinsurer receives premiums at an agreed upon rate for its share of the risk on a yearly-renewable term basis. We also use excess of loss reinsurance agreements for some policies whereby we limit our loss in excess of specified thresholds.

The table below details our gross annualized premium in force, the portion that we ceded to reinsurers and the net amount that we retained:

		December 31, 2009									December 31, 2008

		Gross		Ceded		Net		Retained			Gross		Ceded		Net		Retained
		(in millions)
Senior Managed Care—Medicare Advantage
	PFFS	$	1,680.2	$	2.4	$	1,677.8		99	%	$	1,698.8	$	2.3	$	1,696.5		99	%
	HMO		700.2		31.5		668.7		95	%		652.2		18.3		633.9		97	%
	PPO		33.0		—		33.0		100	%		—		—		—		—	%

Sub total			2,413.4		33.9		2,379.5		99	%		2,351.0		20.6		2,330.4		99	%

Medicare Part D
	Prescriba Rx^SM		491.5		—		491.5		100	%		546.7		273.4		273.3		50	%
	CommunityCCRx^SM		1,515.2		—		1,515.2		100	%		1,438.7		—		1,438.7		100	%

Sub total			2,006.7		—		2,006.7		100	%		1,985.4		273.4		1,712.0		86	%

Traditional Insurance(1)
	Medicare Supplement and Other Senior Health		322.5		79.7		242.8		75	%		368.0		97.0		271.0		74	%
	Accident & Sickness and Other		41.7		1.2		40.5		97	%		45.3		1.3		44.0		97	%
	Long Term Care		29.6		9.9		19.7		66	%		32.6		10.8		21.8		67	%

Sub total			393.8		90.8		303.0		77	%		445.9		109.1		336.8		76	%

Life Insurance and Annuity			72.5		67.0		5.5		8	%		65.8		23.6		42.2		64	%

Total		$	4,886.4	$	191.7	$	4,694.7		96	%	$	4,848.1	$	426.7	$	4,421.4		91	%

We have several quota share reinsurance agreements in place with General Re Life Corporation, Hannover Life Re of America, Swiss Re Life & Health America, Wilton Reassurance Co., Commonwealth Annuity & Life Insurance Company (and affiliates). A.M. Best Company, Inc. has rated these reinsurers "A –" or better. These agreements cover various insurance products, including Medicare supplement, long term care life and annuity policies, written or acquired by the Company and contain ceding percentages ranging between 15% and 100%.

Effective April 1, 2009, we reinsured substantially all of the net in force life and annuity business with Commonwealth under a 100% coinsurance treaty. We transferred approximately $454 million of cash, net of the ceding commission of $77 million, and $22 million of policy loans, related to the

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reinsured policies, to the reinsurer. We had approximately $74 million of deferred acquisition costs and present value of future profits as of the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding commission.

During 2009, we ceded premiums of $50.4 million to General Re, $39.5 million to Commonwealth, $38.6 million to Hannover, and $30.9 million to Fresenius Medical Care Re, representing 1.0%, 0.8%, 0.8%, and 0.6%, respectively of our total direct and assumed premiums. During 2008, we ceded premiums of $449.8 million to PharmaCare Re, $58.4 million to General Re, $49.2 million to Hannover and $10.6 million to Swiss Re, representing 8.6%, 1.1%, 1.0% and 0.2% respectively of our total direct and assumed premiums. During 2007, we ceded premiums of $580.3 million to PharmaCare Re, $67.8 million to General Re, $58.8 million to Hannover and $12.2 million to Swiss Re, representing 15.0%, 2.0%, 2.0% and 0.3% respectively of our total direct and assumed premiums.

Our quota share coinsurance agreements are generally subject to cancellation on 90 days notice as to future business, but policies reinsured prior to any cancellation remain reinsured as long as they remain in force. There is no assurance that if any of our reinsurance agreements were canceled we would be able to obtain other reinsurance arrangements on satisfactory terms.

We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our exposure to significant losses from reinsurer insolvencies. We must pay claims in the event that a reinsurer to which we have ceded an insured claim fails to meet its obligations under the reinsurance agreement. As of December 31, 2009, all of our primary reinsurers were rated "A" or better by A.M. Best. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured business.

Administration of Reinsured Blocks of Business

We retain the responsibility for administration of all accident and health reinsured blocks of business consisting principally of underwriting, issue, policy maintenance, rate management and claims adjudication and payment. In addition to reimbursement for commissions and premium taxes on the reinsured business, we also receive allowances from the reinsurers as compensation for our administration.

Commonwealth performs the administration for the policies included in that reinsurance transaction. We perform the administration for all other reinsured life insurance policies. The administration consists principally of policy maintenance and claims adjudication and payment. We receive reimbursement for commissions and premium taxes on the reinsured business.

Reinsurance of Senior Managed Care—Medicare Advantage

We reinsure our Medicare Advantage HMO, PPO and PFFS products on an excess of loss basis, which limits our per member risk. Our retention in 2009 is $250,000 of benefits and 10% in excess of the $250,000.

Reinsurance of Senior Market Health Insurance

We have retained all new Medicare supplement business written after January 1, 2004. Under the existing coinsurance agreements for business written prior to 2004, which remain in effect for the life of each policy reinsured, we reinsure a portion of the premiums, claims and commissions on a pro rata basis and receive additional expense allowances for policy issue and administration and premium taxes. The amounts reinsured under these agreements range from 25% to 100%. As older, reinsured business lapses and we write new business that we do not reinsure, the overall percentage of business we retain will increase. As of December 31, 2009, the percentage of Medicare supplement business in force retained by us increased to 75% as compared to 74% at the end of 2008.

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Reinsurance of Part D

In 2009 and currently, we retain 100% of the risk on our Part D business. In 2008 and prior, the Prescription Pathway^SM PDPs were reinsured, on a 50% coinsurance funds withheld share basis, to PharmaCare Re. The contract was terminated effective December 31, 2008. We ceded premiums from the Prescription Pathway^SM PDPs of $1.7 million during 2009, $277.9 million during 2008 and $255.3 million during 2007.

Reinsurance of Specialty Health Insurance

We retain 100% of the fixed benefit accident & sickness disability and hospital business issued in our insurance specialty health segment. We reinsure our long term care business on a 50% quota share basis, except for the acquired long term care business written in Pennsylvania Life Insurance Company, and Union Bankers Insurance Company which is 100% retained. We have excess of loss reinsurance agreements to reduce our liability on individual risks for home health care policies to $250,000. For other long term care policies issued in the U.S. we have reinsurance agreements which cover 90% of the benefits on claims after two years and 100% of the benefits on claims after the third or fourth years depending upon the plan. We also have excess of loss reinsurance agreements with unaffiliated reinsurance companies on most of our major medical insurance policies to reduce the liability on individual risks to $325,000 per year.

Reinsurance of Life Insurance and Annuity

Effective April 1, 2009, we reinsured substantially all of the net in force life and annuity business with Commonwealth under a 100% coinsurance treaty. There were certain blocks of life business in force at April 1, 2009 that are subject to separate coinsurance arrangements with other companies ranging from 75% to 90% that were not included in the transaction with Commonwealth. We retain 100% of senior life insurance products issued after March 31, 2009.

Healthy Collaboration® Strategy

Our Healthy Collaboration® strategy sets out a model of improving the quality of care to our members on a cost-efficient basis through an active partnership with our providers. We believe we can improve medical outcomes through a series of collaborative initiatives with our physician groups including clinically sound benefit design, medical management, and integrated care management systems. Our goal is to create mutually beneficial and interdependent collaborative arrangements with our providers. We believe provider compensation arrangements should not only help providers to be paid for complex care coordination, but also help align their interests with our objective of improving clinical outcomes and controlling unnecessary cost.

Our health plans provide medical management services, information and analysis, and other support services to enable the network and individual physicians to serve their enrolled members. We rely heavily on the strong physician leadership of each network to help us achieve the clinical goals that support the mission of the organization.

Provider Arrangements

Our network providers deliver health care services to members enrolled in our Medicare Advantage coordinated care plans through a network of contracted providers, including physicians, and other clinical providers, hospitals, a variety of outpatient facilities and the full range of ancillary provider services. The major ancillary services and facilities include:

•: ambulance services,
•: medical equipment services,
•: home health agencies,

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•: home infusion providers,
•: mental health and substance abuse providers,
•: rehabilitation facilities,
•: skilled nursing facilities,
•: optical services, and
•: pharmacies.

We use a wide range of systems and processes to organize and deliver needed health care services to our members. The key steps in this process are:

•: the careful selection of primary care physicians to provide overall care management and care coordination of members,
•: development of a comprehensive panel of specialists usually selected by the primary care physicians,
•: contracting for the balance of needed services based on the preference and experience of the local physicians, and
•: arranging for the full range of medical management systems required to support the primary care and specialist physicians.

We employ health evaluation and assessment tools, quality improvement, care management and credentialing programs to ensure that we meet target goals relating to the provision of quality patient care. The major medical management systems are:

•: an inpatient hospitalist program at contracted hospitals, as described below,
•: selected authorization of target services,
•: referral management,
•: case management,
•: transition of care management,
•: in-home interventions,
•: focused chronic illness management,
•: transplant coordinator services, and
•: outpatient prescription drug management.

Our hospitalist programs use either the patient's primary care physician or a specially-trained physician to manage or arrange the member's medical care during hospital admissions and to coordinate the member's discharge and post-discharge care. In addition, we utilize on-site case managers at high volume hospitals. Upon initial enrollment, a majority of all members complete a health risk assessment, which along with other available clinical and risk information permits the stratification of membership into categories of health risk. Members in higher risk categories receive enhanced clinical attention. We have integrated these various medical management systems through a care coordination information system to provide clinical and administrative information to support the medical management process. Our chronic illness management programs target specific high risk medical conditions such as congestive heart failure, coronary artery disease, diabetes, and other conditions and focus on addressing major gaps in care. Our special needs plans for institutionalized beneficiaries focus on the unique needs of this population. In our southeast Texas market, we have implemented a quality compensation program that measures quality process indicators of care related to prevention and disease specific metrics. We plan to implement this program in new markets in the future.

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Our health plans usually contract with hospitals based on Medicare's Severity Diagnosis-Related Group or MS-DRG methodology, which is an all-inclusive rate per admission. We generally contract with outpatient facilities on Medicare's Ambulatory Payment Classification (APC) or Ambulatory Surgery Center (ASC) methodology as appropriate, or a percentage of billed charges which approximates APC or ASC reimbursement. We generally contract with physicians, and contract with some other providers, on a capitation or fee-for-service basis, utilizing Medicare's Resource Based Relative Value Scale or RBRVS methodology. Under a capitation arrangement, a physician receives a monthly fixed fee for each member, regardless of the medical services the physician provides to the member. Our provider contracts with network primary care physicians, specialists and ancillaries generally have terms of one year, with automatic renewal for successive one-year terms. We may terminate these contracts for cause, based on provider conduct or other appropriate reasons, subject to laws giving providers due process rights. Either party generally may cancel the contracts without cause upon 60 or 90 days prior written notice. Our contracts with hospitals generally have terms of one to two years, with automatic renewal for successive one-year terms. We may terminate these contracts for cause, based on provider misconduct or other appropriate reasons. Either party generally may cancel our hospital contracts without cause upon 90 days prior written notice.

Underwriting Procedures

For our Medicare advantage plans (HMO, PFFS, and PPO) and Medicare Part D plans, pursuant to applicable regulations, we are not permitted to underwrite new enrollees. However, premiums received for these members are risk adjusted based on CMS adjustment policies reflecting the health status for each member.

For our Traditional Insurance business, we base the premium we charge, in part, on assumptions about expected mortality and morbidity experience. We have adopted and follow detailed uniform underwriting procedures designed to assess and quantify various insurance risks before issuing individual life insurance policies and health insurance policies to individuals. We generally base these procedures on industry practices, reinsurer underwriting manuals and our prior underwriting experience. To implement these procedures, our insurance company subsidiaries employ an experienced professional underwriting staff.

We review applications for insurance on the basis of the answers that the customer provides to the application questions. Where appropriate to the type and amount of insurance applied for and the applicant's age and medical history, we require additional information such as medical examinations, statements from doctors who have treated the applicant in the past and, where indicated, special medical tests. If necessary, we use investigative services to supplement and substantiate information. For some coverages, we may verify information with the applicant by telephone. After reviewing the information collected, we either issue the policy as applied for on a standard basis, issue the policy with an extra premium charge due to unfavorable factors, issue the policy excluding benefits for specified conditions, either permanently or for a period of time, or reject the application. For some of our coverages, we have adopted simplified policy issue procedures in which the applicant submits an application for coverage typically containing only a few health-related questions instead of a complete medical history. Under regulations promulgated by the NAIC and adopted as a result of the Omnibus Budget Reconciliation Act of 1990, we are prohibited from using medical underwriting criteria for our Medicare supplement policies for specified first-time purchasers and for specified disenrollees from Medicare Advantage plans. If a person applies for insurance within six months after becoming eligible by reason of age, or disability in some circumstances, we may not reject the application due to medical conditions. For other prospective Medicare supplement policyholders, such as senior citizens who are purchasing our products, the underwriting procedures are limited based upon standard industry practices and state insurance regulations.

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In New York and some other states, some of our products, such as Medicare supplement, are subject to guaranteed issue "community rating" laws that severely limit or prevent underwriting of individual applications. See the "Regulation" section of this document.

Reserves

In accordance with applicable insurance regulations, we establish, and carry as liabilities in our GAAP and statutory financial statements, actuarially determined reserves.

We calculate reserves together with premiums to be received on outstanding policies and contracts and interest at assumed rates on these amounts, which we believe to be sufficient to satisfy policy and contract obligations. Reserves for life insurance policies are determined using actuarial factors based on mortality tables and interest rates prescribed by statute. Reserves for accident and health insurance policies (excluding Medicare Advantage and Part D) use prescribed morbidity tables based on our historical experience. For Medicare Advantage and Part D policies, claims reserves are estimated using standard actuarial development methodologies. Under such methods, we take into consideration the historical lag between incurred date of claim and payment date of claim, membership changes, expected medical cost trend, changes in pending claims, amount of claims receipts, claims seasonality, changes in average risk profile, and benefit plan changes. We also maintain reserves for unearned premiums, for premium deposits, for claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been incurred but have not yet been reported.

We calculate the reserves reflected in our consolidated financial statements in accordance with generally accepted accounting principles, known as GAAP. We determine these reserves based on our best estimates of mortality and morbidity, persistency, expenses and investment income. We use the net level premium method for all non-interest-sensitive products and the retrospective deposit method for interest-sensitive products. GAAP reserves differ from statutory reserves due to the use of different assumptions regarding mortality and morbidity, interest rates and the introduction of lapse assumptions into the GAAP reserve calculation.

When we acquire blocks of insurance policies or insurers owning blocks of policies, our assessment of the adequacy of the transferred policy liabilities is subject to risks and uncertainties. With acquired and existing businesses, we may from time to time need to increase our claims reserves significantly in excess of those previously estimated. An inadequate estimate of reserves could have a material adverse impact on our results of operations or financial condition.

Competition

The health insurance industry is highly competitive. We compete with numerous other health insurance companies on a national and regional basis. We consider our main competitors to include United Healthcare, Humana, Coventry, and Healthspring, as well as other health maintenance organizations, preferred provider organizations, prescription drug providers, and other health care-related institutions.

In addition, we compete with other managed care organizations for government healthcare program contracts, renewals of those government contracts, members and providers. In the Medicare managed care market, our primary competitors for contracts, members and providers are either national and regional managed care organizations that serve Medicare recipients or provider-sponsored organizations.

Our ability to sell our products and to retain customers may be influenced by such factors as those described in the section entitled "Risk Factors" in this report.

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We believe we can meet the competitive pressures by offering a high level of service and accessibility to our members and our field force and by developing specialized products and marketing approaches. We also believe that our policies and premium rates, as well as the commissions paid to our sales agents, are generally competitive with those offered by other companies selling similar types of products in the same jurisdictions. Also, we believe the following factors provide us additional strength to compete effectively:

•: our disciplined underwriting and pricing procedures,
•: our effective rate management,
•: our quality customer service,
•: our significant market position in the geographic areas where our business is concentrated,
•: the quality of our distribution network, and
•: our appropriate financial strength.

Regulation

General

Our insurance company subsidiaries and health plan affiliates are subject to the state and local laws, regulations and supervision of the jurisdictions in which they are domiciled and licensed, as well as to Federal laws and supervision. Those laws and regulations provide safeguards for policyholders and members, and do not exist to protect the interest of shareholders. Government agencies that oversee insurance and health care products and services generally have broad authority to issue regulations to interpret and enforce laws and rules. Changes in applicable laws and regulations are continually being considered, and the interpretation of existing laws and rules also change periodically, which could make it increasingly difficult to control medical costs, among other things. Therefore, future regulatory revisions could affect our operations and financial results.

Medicare

Medicare is a Federal program that provides eligible persons age 65 and over and certain eligible persons with disabilities a variety of hospital and medical insurance benefits. Medicare beneficiaries have the option to enroll in a Medicare Advantage private fee-for-service or health plan in counties where these plans are offered. Under Medicare Advantage, insurance companies and managed care organizations contract with CMS to provide benefits at least equivalent to the traditional fee-for-service Medicare program in exchange for a fixed monthly payment per member that varies based on the county in which a member resides as well as a member's demographics and health status.

Medicare supplemental insurance, sometimes called Medigap is jointly regulated by the Federal government and by State Departments of Insurance. In all but a few States, there are 14 standard Medicare supplement plans: Plans A through L and High Deductible Plans F and J. Plan A provides the least extensive coverage, while Plan J provides the most extensive coverage. Medicare supplement insurers must offer Plan A, but may offer any of the other plans at their option.

In June of 2010, as a result of the Medicare Modernization Act of 2003, the number of Medicare supplement plans available for sale will be reduced from 14 to 11. Plans E, H, I, J, and High Deductible Plan J will be eliminated while new Plans M and N will become available. In addition, minor benefit changes will be made to the remaining plans.

The Part D drug benefit offers Medicare beneficiaries the option to obtain covered outpatient prescription drug benefits offered through a private drug plan. Depending on the plan, the Part D drug benefit may be subject to cost sharing. Under the standard drug coverage, for 2010 the cost sharing is a $310 deductible, 25% coinsurance for annual drug costs reimbursed by Medicare up to a maximum of $2,830 and no reimbursement for drug costs above $2,830, until the beneficiary has paid $4,550 of his

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or her own money. After that, the MMA provides catastrophic stop loss coverage, subject to 9.5% cost-sharing. Plans are not required to mirror these limits; instead, Part D drug plans are required to provide coverage that is at least actuarially equivalent to the standard drug coverage delineated in the MMA. CMS adjusts these numbers on an annual basis. The MMA provides subsidies and the reduction or elimination of cost sharing for specified low-income beneficiaries, including "dual-eligible" individuals who receive benefits under both Medicare and Medicaid.

The MMA also revised payment methodologies for Medicare Advantage organizations beginning in 2004, and in 2006 the MMA expanded the Medicare Advantage program to include new regional plans that provide out-of-network benefits in addition to in-network benefits, as well as the traditional health and fee-for-service plans established by county. The MMA created a new competitive bidding process that began in 2006 for both the local health plans and the new regional plans for setting the payment to the Medicare Advantage plans and the beneficiary premium and benefits. The bidding process does not limit the number of plans that may participate in the Medicare Advantage program

The Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA, which amended the Medicare provisions of the Social Security Act, revises requirements for Medicare Advantage private fee-for-service plans, which we expect will have the effect of ending these plans as non-network products in plan year 2011 in all but sparsely-populated rural markets. We have been working to establish provider networks generally, and preferred provider organization, or PPO, and health maintenance organization, or HMO, in particular, in strategic locations. We expect that CMS will permit UAM and other PFFS plan sponsors to crosswalk its PFFS membership into network products on January 1, 2011, in service areas where CMS has approved UAM's proposed provider networks.

CMS conducts periodic audits of plans qualified under its Medicare program and may perform other reviews more frequently to determine compliance with Federal regulations and contractual obligations. These audits and reviews may include review of the plans' administration and management, including management information and data collection systems, fiscal stability, utilization management and physician incentive arrangements, health services delivery, quality assurance, marketing, enrollment and disenrollment activity, claims processing, and complaint systems. CMS regulations require submission of annual financial statements. In addition, CMS requires that disclosures be made to it and to Medicare beneficiaries concerning operations of a health plan contracted under the Medicare program. CMS's rules require disclosure, upon request, to members of information concerning financial arrangements and incentive plans between a plan and physicians in the plan's networks. These rules also require specified levels of stop loss coverage to protect contracted physicians against major losses relating to patient care, depending on the amount of financial risk they assume. CMS is also continuing to perform audits of selected Medicare Advantage plans of various companies to validate the provider coding practices and resulting economics under the actuarial risk-adjustment model used to calculate the individual member capitation paid to Medicare Advantage plans. We have been selected to participate and have recently completed our initial data submission to CMS.

Fraud and abuse laws

Enforcement of health care fraud and abuse laws has become a top priority for the nation's law enforcement entities. The funding of these law enforcement efforts has increased dramatically in the past few years and is expected to continue. The focus of these efforts has been directed at participants in Federal government health care programs such as Medicare. We participate in these programs and have continued our stringent regulatory compliance efforts.

Privacy regulations

The use of individually identifiable data by our business is regulated at Federal and state levels. These laws and rules are subject to administrative interpretation. Various state laws address the use and maintenance of individually identifiable health data. Many are derived from the privacy provisions in

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the Federal Gramm-Leach-Bliley Act and the Health Insurance Portability and Accountability Act of 1996, known as HIPAA.

Among other things, HIPAA mandates

•: guaranteed availability and renewability of health insurance for specified employees and individuals;
•: limits on termination options and on the use of preexisting condition exclusions;
•: prohibitions against discriminating on the basis of health status; and
•: requirements which make it easier to continue coverage in cases where an employee is terminated or changes employers.

HIPAA also calls for the adoption of standards for the exchange of electronic health information and privacy requirements that govern the handling, use and disclosure of protected customer health information. We believe that we met the HIPAA Security Rule changes that became effective on April 21, 2005; however, HIPAA is far-reaching and complex and proper interpretation and practice under the law continue to evolve. Consequently, our efforts to measure, monitor and adjust our business practices to comply with HIPAA are ongoing.

Insurance companies also are required to comply with Federal "Do Not Call" regulations. Insurance companies are required to develop their own "Do Not Call" lists and reference state and Federal Do Not Call Registries, before making calls to market insurance products. Estimates suggest that approximately two thirds of the country's residential telephone numbers are on the Federal registry, which could limit the marketing calls made and potentially could negatively impact sales.

USA PATRIOT Act

A portion of the USA PATRIOT Act applying to insurance companies became effective in mid 2004. Insurance companies have to impose processes and procedures to thoroughly verify their agents, applicants, insureds, claimants and premium payers in an effort to prevent money laundering. Our insurance companies have implemented measures to comply with the Office of Federal Asset Control requirements, whereby the names of customers and potential customers must be reviewed against a listing of known terrorists and money launderers. The identification verification requirement of the USA PATRIOT Act became final in late 2005. In May 2006, insurance companies were required to verify the identity of their applicants, insureds, and beneficiaries. We continually upgrade our internal procedures, securing software and training of home office staff and producers to maintain compliance.

State and local regulation

Each of our insurance company subsidiaries and our health plan affiliates is also subject to the regulations of and supervision by the insurance department of each of the jurisdictions in which they are admitted and authorized to transact business. These regulations cover, among other things,

•: the declaration and payment of dividends by our insurance company subsidiaries,
•: the setting of rates to be charged for some types of insurance,
•: the granting and revocation of licenses to transact business,
•: the licensing of agents,
•: the regulation and monitoring of market conduct and claims practices,
•: the approval of forms,
•: the establishment of reserve requirements,
•: investment restrictions,
•: the regulation of maximum allowable commission rates,

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•: the mandating of some insurance benefits,
•: minimum capital and surplus levels, and
•: the form and accounting practices used to prepare financial statements.

A failure to comply with legal or regulatory restrictions may subject the insurance company subsidiary to a loss of a right to engage in some or all business in a state or states or an obligation to pay fines or make restitution, which may affect our profitability.

American Pioneer is a Florida domiciled insurance company. American Progressive is a New York domiciled insurance company. Pyramid Life is a Kansas domiciled insurance company. Pennsylvania Life is a Pennsylvania domiciled insurance company. American Exchange, Constitution, Marquette and Union Bankers are Texas domiciled insurance companies. SelectCare of Texas and SelectCare Health Plans, Inc. are licensed as health plans in Texas. SelectCare of Oklahoma, Inc. and GlobalHealth, Inc. are licensed health plans in Oklahoma. Collectively, our insurance subsidiaries and managed care organizations are licensed to sell health insurance, life insurance and annuities in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. In addition, some of these subsidiaries have CMS-approved plans to enroll members in our PDPs in 50 states plus the U.S. Virgin Islands and Puerto Rico and in our Medicare Advantage PFFS and HMO plans in 47 states, for 2009.

Most jurisdictions mandate minimum benefit standards and loss ratios for accident and health insurance policies. We are generally required to maintain, with respect to our individual long term care policies, minimum anticipated loss ratios over the entire period of coverage. With respect to our Medicare supplement policies, we are generally required to attain and maintain an actual loss ratio, after three years, of not less than 65 percent of earned premium. We provide to the insurance departments of all states in which we conduct business annual calculations that demonstrate compliance with required loss ratio standards for Medicare supplement insurance. We prepare these calculations utilizing appropriate statutory assumptions. In the event we fail to maintain minimum mandated loss ratios, our insurance company subsidiaries could be required to provide retrospective premium refunds or prospective premium rate reductions. We believe that our insurance company subsidiaries currently comply with all applicable mandated minimum loss ratios. In addition, we actively review the loss ratio experience of our products and request approval for rate increases from the respective insurance departments when we determine they are needed. We cannot guarantee that we will receive the rate increases we request.

Every insurance company that is a member of an "insurance holding company system" generally is required to register with the insurance regulatory authority in its domicile state and file periodic reports concerning its relationships with its insurance holding company and with its affiliates. Material transactions between registered insurance companies and members of the holding company system are required to be "fair and reasonable" and in some cases are subject to administrative approval. The books, accounts and records of each party are required to be maintained so as to clearly and accurately disclose the precise nature and details of any intercompany transactions.

Each of our insurance company subsidiaries is required to file detailed reports with the insurance department of each jurisdiction in which it is licensed to conduct business and its books and records are subject to examination by each licensing insurance department. In accordance with the insurance codes of their domiciliary states and the rules and practices of the NAIC, our insurance company subsidiaries are examined periodically by examiners of each company's domiciliary state with elective participation by representatives of the other states in which they are licensed to do business.

During 2009, regularly scheduled examinations of SelectCare of Oklahoma and GlobalHealth, Inc. were completed as of and for the period ended December 31, 2008 with no significant findings noted. In addition, during 2009, regularly scheduled examinations of American Pioneer and Pyramid, for the periods ended December 31, 2008 and 2007, respectively, were also completed. Florida has not yet issued its report on American Pioneer. Kansas issued its report on Pyramid in February 2010, and while

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there were adjustments to Pyramid's December 31, 2007 statutory surplus resulting from the examination, none of the adjustments had an impact on the Company's 2009 Financial Statements.

Regularly scheduled examinations of American Progressive, American Exchange, Constitution, Union Bankers and Pennsylvania Life have been scheduled for the period ended December 31, 2009 by the insurance departments of their respective states of domicile. Fieldwork has commenced only on Pennsylvania Life, with no issues noted to date.

On October 7, 2009, American Progressive entered into a stipulation and consent order with the New York Department of Insurance concluding an investigation into the use of a hospital network with its Medicare Supplement product which required the payment of a fine in the amount of $500,000 and implementation of a compliance plan.

Many states require deposits of assets by insurance companies for the protection either of policyholders in those states or for all policyholders. These deposited assets remain part of the total assets of the company. As of December 31, 2009, we had securities totaling $43.4 million on deposit with various state treasurers or custodians. As of December 31, 2008, we had securities totaling $41.9 million on deposit. These deposits must consist of securities that comply with the standards established by the particular state.

CHCS Services Inc., our senior administrative services entity, is subject to regulation as a third party administrator in those states where it services policyholders. The primary intention of the regulation is to ensure propriety in the premium collection, claims adjudication and other servicing requirements of insurance policies being administered. MemberHealth is also subject to regulations as a PBM and/or third party administrator in states requiring PBMs to be licensed.

Dividend Restrictions

New York State insurance law provides that the declaration or payment of a dividend by American Progressive requires the approval of the New York Superintendent of Insurance. American Progressive would be able to pay ordinary dividends of up to $12.4 million to its direct parent, American Exchange in 2010, with such approval.

Pennsylvania, Kansas and Texas insurance laws provide that a life insurer may pay dividends or make distributions from accumulated earnings without the prior approval of the Insurance Department, provided the dividends and distributions do not exceed the greater of

•: 10% of the insurer's surplus as to policyholders as of the preceding December 31; or
•: the insurer's net gain from operations for the immediately preceding calendar year with 30 days advance notification to the insurance department.
•: In addition, Kansas requires that Pyramid Life maintain an RBC ratio in excess of 400%, after payment of a dividend, for a dividend to be declared and distributed.

Accordingly, Pennsylvania Life would be able to pay ordinary dividends of up to $119.8 million, to its direct parent American Exchange and American Exchange is able to pay ordinary dividends of up to $63.5 million to Universal American in 2010, without the prior approval from the insurance department for their respective states of domicile. As Pyramid Life's RBC would not meet the RBC threshold, it is not able to pay an ordinary dividend in 2010.

Texas insurance companies also are required to have positive "earned surplus" as defined by Texas regulations, which differs from statutory unassigned surplus, in order to pay dividends without prior regulatory approval. Marquette, Constitution and Union Bankers had negative earned surplus at December 31, 2009 and would not be able to pay dividends in 2010 without regulatory approval. SelectCare of Texas and SelectCare Health Plans, licensed health plans in Texas and GlobalHealth, Inc. and SelectCare of Oklahoma, licensed health plans in Oklahoma would also not be able to pay dividends in 2009 without regulatory approval.

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Florida insurance law provides that a life insurer may pay a dividend or make a distribution without the prior written approval of the insurance department when specified conditions are met. American Pioneer had negative unassigned surplus at December 31, 2009 and would not be able to pay dividends in 2010 without regulatory approval.

Risk-Based Capital and Minimum Capital Requirements

Risk-based capital requirements promulgated in each state take into account asset risks, interest rate risks, mortality and morbidity risks and other relevant risks with respect to the insurer's business and specify varying degrees of regulatory action to occur to the extent that an insurer does not meet the specified risk-based capital thresholds, with increasing degrees of regulatory scrutiny or intervention provided for companies in categories of lesser risk-based capital compliance. As of December 31, 2009, all of our U.S. insurance company subsidiaries and managed care affiliates maintained ratios of total adjusted capital to risk-based capital in excess of the authorized control level. However, should our insurance company subsidiaries' and managed care affiliates' risk-based capital positions decline in the future, their ability to pay dividends, the need for capital contributions or the degree of regulatory supervision or control to which they are subjected might be affected.

Effective December 31, 2009, the National Association of Insurance Commissioners, known as NAIC, has adopted SSAP 10RIncome Taxes. SSAP 10R is a temporary replacement of SSAP 10 that effectively expands the amount of Deferred Tax Assets, or DTA's, that qualify as admitted assets, with a sunset provision after December 31, 2010. The adoption of SSAP 10R on December 31, 2009 allowed the companies to admit additional DTA's (and increase Capital & Surplus) of $19.0 million.

Guaranty Association Assessments

Solvency or guaranty laws of most jurisdictions in which our insurance company subsidiaries do business may require them to pay assessments to fund policyholder losses or liabilitiesof unaffiliated insurance companies that become insolvent. These assessments may be deferred or forgiven under most solvency or guaranty laws if they would threaten an insurer's financial strength and, in most instances, may be offset against future premium taxes. Our insurance company subsidiaries provide for known and expected insolvency assessments based on information provided by the National Organization of Life & Health Guaranty Associations. Our insurance company subsidiaries have not incurred any significant costs of this nature. The likelihood and amount of any future assessments is unknown and is beyond our control.

Producer Compensation Disclosure

State regulators and attorneys general have initiated investigations into producer compensation and product pricing. While the initial investigations have focused on commercial lines insurers and brokers, it remains to be seen whether the investigations will broaden and potentially change how we sell our products. We have responded to inquiries regarding our sales practices, and we do not anticipate that our responses will require any change in our compensation practices or any other adverse result. Under the NAIC's Producer Licensing Model Act, known as the PLMA, when a producer receives compensation from both a customer and an insurance company, the producer must receive the customer's documented acknowledgement that it will receive compensation from the insurance company and must disclose the amount of this compensation to the customer. These disclosures, however, will not be necessary if the producer does not receive a fee from the customer for the placement of insurance and discloses to the customer that it is acting on behalf of the insurance company and may provide services to the customer on behalf of the insurance company.

Several states, such as Arizona, Colorado, Connecticut, Georgia, Nevada, New Jersey, Oregon, Rhode Island and Texas have enacted producer compensation disclosure legislation or regulations. Some other states, such as New York, are considering legislation or regulations dealing with producer

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commission disclosure. It is possible that some states will adopt laws that are broader than the NAIC model acts.

Outsourcing Arrangements

We outsource certain processing and administration functions to third parties, subject to outsourcing agreements. The outsourced functions include membership administration, call center operations, business process outsourcing, revenue management, marketing and pharmacy benefit management. A summary of our more significant arrangements is presented below.

Business Process Outsourcing. We have retained Patni Computer Systems, Inc. as a business outsource vendor to provide data entry, member application intake and processing, data validation, mailroom imaging and scanning, paper-based and electronic claims adjudication and processing, and overflow labor support services for our operations. Patni also provides some information technology support and programming. Patni bills us monthly on an as used basis. We signed a master services agreement with Patni in 2005 with an initial term of four years. A renewal agreement was executed in 2009 for a one-year period. We have executed additional statements of work to cover specific limited assignments. The master services agreement renews automatically for annual periods unless written notice of nonrenewal has been provided in advance. There are no explicit minimum payments required under the terms of this contract.

Risk Score Review. We have contracted with Outcomes Health Information Solutions, L.L.C. to review claims and other data to use its clinical algorithms to identify Medicare Advantage HMO, PPO and PFFS members who may have CMS assigned risk scores that are not indicative of the members' actual clinical acuity. Outcomes organizes the review of medical charts for these members and collects data to be submitted to CMS, after review and validation by the Company, which will result in a more accurate risk score assignment by CMS. We have executed additional statements of work to cover specific limited assignments. There are no explicit minimum payments required under this arrangement.

MarketingAlliance. Under our agreement with the National Community Pharmacists Association (NCPA), we license the "Community CCRx^SM and "CCRx^SM brand names in exchange for a fixed quarterly fee, and NCPA provides sales, marketing, public relations and other communication services that are targeted to the independent pharmacies in our network. Our agreement with NCPA is effective through December 31, 2015, but may be terminated early under certain circumstances, including (but not limited to) a material breach by either party, insolvency of either party, or in the event CMS terminates our Part D contract. The contract contains certain non-competition and exclusivity provisions for eighteen months after the contract is terminated. The loss of our relationship with NCPA could have an adverse effect on our business and results of operations.

Pharmacy Benefit Management. In 2009, we entered into an agreement with Medco Health Solutions, Inc. for the period January 1, 2009 through December 31, 2013, subject to earlier termination, to provide pharmacy network management, claims adjudication and administrative services and other prescription drug benefit services. The agreement may be terminated early under certain circumstances, including (but not limited to) a material breach by either party, insolvency of either party, or in the event CMS terminates our Part D contract. The agreement with Medco contains an exclusivity provision during the term of the agreement.

Employees

As of February 24, 2010, we employed approximately 2,200 employees, none of whom is represented by a labor union in such employment. We consider our relations with our employees to be good.

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ITEM 1A—Risk Factors

This report contains both historical and forward-looking statements. We are making the forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend the forward-looking statements in this report or made by us elsewhere to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with and relying upon these safe harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events, trends and uncertainties. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, the information discussed below. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect our business. In making these statements, we are not undertaking to address or update each factor in future filings or communications regarding our business or results. Our business is highly complicated, regulated and competitive with many different factors affecting results. If any of the following risks or uncertainties develops into actual events, this could significantly and adversely affect our business, prospects, financial condition and operating results. In that case, the trading price of our common stock could decline materially.

The MMA and MIPPA made changes to the Medicare program that will materially impact our operations and could reduce our profitability and increase competition for existing and prospective members. We may be unable to execute our plan to respond to the challenges resulting from the passage into law of the Medicare Improvements for Patients and Providers Act of 2008.

On July 15, 2008, the Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA, which amended the Medicare provisions of the Social Security Act, became law. Among many other things, MIPPA revises requirements for Medicare Advantage private fee-for-service plans, which we expect will have the effect of ending these plans in plan year 2011 in non-rural markets.

We anticipated many of MIPPA's provisions, and had undertaken initiatives to replace the private fee-for-service revenue that we thought might be lost to us, depending on the final text of the bill. In particular, we have been working to establish preferred provider organization, or PPO, and health maintenance organization, or HMO, networks in strategic locations, some of which we have established for the 2009 plan year and others of which we are continuing to establish for the 2010 plan year and beyond.

The MMA substantially changed the Medicare program and caused us to modify how we operate our business and MIPPA changed the Medicare program as it existed under the MMA. Although many of these changes are designed to benefit Medicare Advantage plans generally, some provisions of the MMA and MIPPA may increase competition, create challenges for us with respect to educating our existing and potential members about the changes, and create other risks and substantial and potentially adverse uncertainties.

We could experience difficulty in building these PPO and HMO networks, which must be approved by CMS. In addition, the cost of building PPO and HMO networks can be substantial. Accordingly, if

•: we are unable to build the PPO and HMO networks we plan to build in accordance with our plans,
•: the cost of building the networks exceeds our estimates, or
•: we do not receive approval from CMS for our PPO and/or HMO networks,

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then we could experience a material adverse effect on our revenues, results of operations and financial condition.

In addition, MIPPA places prohibitions and limitations on specified sales and marketing activities under Medicare Advantage plans and Medicare Prescription Drug Plans. For those prohibitions and limitations that have become effective, we have adapted our processes and procedures to comply with those prohibitions and limitations. Some prohibitions and limitations, which are not yet effective, are required to be interpreted through regulations established by CMS, and we are awaiting the promulgation of these regulations. The prohibitions and limitations, and the regulations promulgated by CMS, could have the effect of making it more difficult to sell our products to potential members and beneficiaries, which could materially adversely affect our revenues, results of operations and financial condition. In addition, if we are unable to comply fully with these prohibitions and limitations and their attendant regulations, we could be subject to investigation or audit by regulators or to complaints by members and beneficiaries, and potential members and beneficiaries, which could lead to sanctions, such as financial penalties, an enrollment freeze, and the requirement that we make changes in our operations, and these could materially adversely affect our results of operations and financial condition.

Measures of the Administration and U.S. Congress to expand covered health insurance and/or implement changes within the health care system, including the American Recovery and Reinvestment Act, could increase our cost of doing business and could adversely affect our profitability.

Although the Administration and U.S. Congress have expressed some support for measures intended to expand the number of citizens covered by health insurance and other changes within the health care system, the costs of implementing any of these proposals could be financed, in part, by reductions in the payments made under Medicare Advantage and other government programs. In addition, in February 2009, President Obama signed the American Recovery and Reinvestment Act that provides funding for, among other things: state Medicaid programs; the modernization of health information technology systems and aid to states to help defray budget cuts. Because of the unsettled nature of these initiatives and the numerous steps required to implement them, we remain uncertain as to the ultimate impact they will have on our business.

In addition, we are subject to potential changes in the political environment that can affect public policy and can adversely affect the markets for our products.

Reductions in funding for Medicare programs could materially reduce our profitability.

We generate a significant majority of our total revenue from the operation of our Medicare Advantage HMO, PFFS, and PPO plans and Medicare Part D PDPs. As a result, our revenue and profitability are dependent, in part, on government funding levels for these programs. The rates paid to Medicare Advantage health plans like ours are established by contract, although the rates differ depending on a combination of factors, such as upper payment limits established by CMS, a member's health profile and status, age, gender, county or region, benefit mix, member eligibility categories and the plan's risk scores. Future Medicare rate levels may be affected by continuing government efforts to contain prescription drug costs and other medical expenses, and other federal budgetary constraints. The government is currently examining Medicare Advantage health plans like ours in comparison to Medicare fee-for-service payments, and this examination could result in a reduction in payments to Medicare Advantage health plans like ours. Changes in the Medicare program or Medicare funding may affect our ability to operate under the Medicare program or lead to reductions in the amount of reimbursement, elimination of coverage for some benefits or reductions in the number of persons enrolled in or eligible for Medicare or increases in member premium.

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Competition in the insurance, healthcare, PBM and pharmacy industries is intense, and if we do not design and price our products properly and competitively, our membership and profitability could decline.

We operate in a highly competitive industry. Some of our competitors are more established in the insurance, health care and PBM industries, with larger market share and greater financial resources than we have in some markets. In addition, other companies may enter our markets in the future. We believe that barriers to entry in many markets are not substantial, so the addition of new competitors can occur relatively easily, and customers enjoy significant flexibility in moving between competitors. Contracts for the sale of commercial products are generally bid upon or renewed annually. We compete for members in our health plans and PBM on the basis of the following and other factors:

•: price,
•: the size, location, quality and depth of provider networks,
•: benefits provided,
•: quality and extent of services, and
•: reputation.

In addition to the challenge of controlling PBM and health care costs, we face intense competitive pressure to contain premium prices. Factors such as business consolidations, strategic alliances, legislative reform and marketing practices create pressure to contain premium rate increases, despite being faced with increasing medical costs. Premium increases, introduction of new product designs, our relationship with our providers in various markets, and our possible exit from or entrance into additional markets, among other issues, could also affect our membership levels.

We compete based on innovation and service, as well as on price and benefit offering. We may not be able to develop innovative products and services, such as new Medicare Part D offerings, which are attractive to clients. Moreover, although we need to continue to expend significant resources to develop or acquire new products and services in the future, we may not be able to do so. We cannot be sure that we will continue to remain competitive, nor can we be sure that we will be able to market our products and services to clients successfully at current levels of profitability.

Consolidation within the PBM industry, as well as the acquisition of any of our competitors by larger companies, may lead to increased competition. Strategic combinations involving our competitors could have an adverse effect on our business or results of operations.

If we do not compete effectively in our markets, if we set rates too high in highly competitive markets to maintain or increase our market share, if we set rates too low to maintain or increase our profitability, if membership does not increase as we expect, if membership declines, or if we lose members with favorable medical cost experience while retaining or increasing members with unfavorable medical cost experience, our business and results of operations could be materially adversely affected.

Our results of operations will be adversely affected if our insurance premium rates are not adequate.

Our results of operations depend on our ability to charge and collect premiums sufficient to cover our health care costs, expenses of distribution and operations and provide a reasonable margin. Although we attempt to base the premiums we charge on our estimate of future health care costs, we may not be able to control the premiums we charge as a result of competition, government regulations and other factors. Our results of operations could be adversely affected if we are unable to set premium rates at appropriate levels or adjust premium rates in the event our health care costs increase.

We set the premium rates on our insurance policies based on facts and circumstances known at the time we issue the policies and on assumptions about numerous variables, such as

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•: the actuarial probability of a policyholder incurring a claim;
•: the severity and duration of the claim;
•: the utilization of benefits in our PDP's;
•: the mortality rate of our policyholder base;
•: the persistency or renewal rate of our policies in force;
•: our commission and policy administration expenses; and
•: the interest rate earned on our investment of premiums.

In setting premium rates, we consider historical claims information, industry statistics and other factors. We cannot be assured that the data and assumptions used at the time of establishing premium rates will prove to be correct and that premiums will be sufficient to cover benefits and expenses plus a reasonable margin.

For certain of our traditional products, we can periodically file for rate increases, if our actual claims experience proves to be less favorable than we assumed. If we are unable to raise our premium rates, our net income may decrease. We generally cannot raise our premiums in any state unless we first obtain the approval of the insurance regulator in that state. We review the adequacy of our accident and health premium rates regularly and file rate increases on our products when we believe permitted premium rates are too low. When determining whether to approve or disapprove our rate increase filings, the various state insurance departments take into consideration

•: our actual claims experience compared to expected claims experience;
•: policy persistency, which means the percentage of policies that are in-force at specified intervals from the issue date compared to the total amount originally issued;
•: investment income; and
•: medical cost inflation.

If the regulators do not believe these factors warrant a rate increase, it is possible that we will not be able to obtain approval for premium rate increases from currently pending requests or requests filed in the future. If we are unable to raise our premium rates because we fail to obtain approval for rate increases in one or more states, our net income may decrease. If we are successful in obtaining regulatory approval to raise premium rates, the increased premium rates may reduce the volume of our new sales and cause existing policyholders to let their policies lapse. This would reduce our premium income in future periods. Increased lapse rates also could require us to expense all or a portion of the deferred policy costs relating to lapsed policies in the period in which those policies lapse, reducing our net income in that period.

The competitive bidding process may adversely affect our profitability.

Payments for the local Medicare Advantage health plans and regional Medicare Advantage PPO programs are based on a competitive bidding process that may decrease the amount of premiums paid to us or cause us to increase the benefits we offer. As in the Part D program, we are required to submit PDP bids annually. We endeavor to use the best available member eligibility, claims and risk score data at the time of developing the bids. Furthermore, we make actuarial assumptions about the utilization of benefits in our plans. We cannot be assured that the data and assumptions used at the time of bid development will prove to be correct and that premiums will be sufficient to cover benefits plus a reasonable margin.

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Our Part D business is subject to an annual competitive bidding process and if we are unable to bid below the benchmark, we could lose auto-assigned dual eligible member which would adversely affect results of operations.

We are required to submit PDP bids annually, approximately six months in advance of the corresponding benefit year. The premiums we establish based on these bids are fixed for the entire plan year. We endeavor to use the best available member eligibility, claims and risk score data at the time of developing the bids. We cannot be certain that our products will be competitive with the products offered by other PDPs. We cannot be certain that our future bids will be competitive with the bids submitted by other PDPs. We cannot be certain that our future bids will be under the benchmark bids calculated by CMS.

Because our Medicare Advantage premiums, which generate most of our Medicare Advantage revenues, are fixed by contract, we are unable to increase our Medicare Advantage premiums during the contract term if our corresponding medical benefits expense exceeds our estimates which can adversely affect our results of operations.

Most of our Medicare Advantage revenues are generated by premiums consisting of fixed monthly payments per member. We use a significant portion of our revenues to pay the costs of health care services delivered to our members. The principal costs consist of claims payments, capitation payments and other costs incurred to provide health insurance coverage to our members. Generally, premiums in the health care business are fixed on an annual basis by contract, and we are obligated during the contract period to provide or arrange of the provision of healthcare services as established by the Federal government.

We are unable to increase the premiums we receive under these contracts during the then-current term. If our medical expenses exceed our estimates, except in very limited circumstances or as a result of risk score adjustments for member acuity, we generally cannot recover costs we incur in excess of our medical cost projections in the contract year through higher premiums. As a result, our profitability depends, to a significant degree, on our ability to adequately predict and effectively manage our medical expenses related to the provision of healthcare services. Accordingly, the failure to adequately predict and control medical expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims, known as IBNR, may have a material adverse effect on our financial condition, results of operations, or cash flows. If our estimates of reserves are inaccurate, our ability to take timely corrective actions or to otherwise establish appropriate premium pricing could be adversely affected. Failure to adequately price our products or to estimate sufficient medical claim reserves may result in a material adverse effect on our financial position, results of operations and cash flows. In addition, to the extent that CMS or Congress takes action to reduce the levels of payments to Medicare Advantage providers, our revenues would be adversely affected.

We estimate the costs of our future medical claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, cost trends, product mix, seasonality, medical inflation, historical developments, such as claim inventory levels and claim receipt patterns, and other relevant factors. We continually review estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves. However, historically, our medical expenses as a percentage of premium revenue have fluctuated. The principal factors that may cause medical expenses to exceed our estimates are:

•: increased utilization of medical facilities and services and prescription drugs;
•: increased cost of services;
•: our membership mix;

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•: variances in actual versus estimated levels of cost associated with new products, benefits or lines of business;
•: product changes or benefit level changes;
•: periodic renegotiation of hospital, physician and other provider contracts, or the consolidation of these entities;
•: membership in markets lacking adequate provider networks;
•: changes in the demographics of our members and medical trends affecting them;
•: termination of capitation arrangements resulting in the transfer of membership to fee-for-service arrangements or loss of membership;
•: possible changes in the pharmacy rebates available to us from drug manufacturers;
•: the occurrence of acts of terrorism, public health epidemics, severe weather events or other catastrophes;
•: the introduction of new or costly treatments and technologies;
•: medical cost inflation;
•: government mandated benefits or other regulatory changes; and
•: contractual disputes with hospitals, physicians and other providers.

Because of the relatively high average age of the Medicare population, medical expenses for our Medicare Advantage plans may be particularly difficult to control. We may not be able to continue to manage these expenses effectively in the future. If our medical expenses increase, our profits could be reduced or we may not remain profitable.

As a government contractor, we are exposed to risks that could adversely affect our business or our willingness to participate in government health care programs, including and as a result of the new 2010 Medicare Advantage payment rates released by CMS.

Reductions in payments under Medicare or the other programs under which we offer health Plans could reduce our profitability. The Medicare Modernization Act of 2003, or MMA, permits premium levels for certain Medicare Plans to be established through competitive bidding, with Congress retaining the ability to limit increases in premium levels established through bidding from year to year. On February 19, 2010, CMS released preliminary 2010 Medicare Advantage payment rates which represent a modest growth rate in the base payment of 1.38%. The growth rate is offset by other factors including a FFS normalization factor to account for the faster pace of risk score development among MA plans relative to fee for service Medicare and the phase out of IME payments. Overall, the increase in the base payment is insufficient to cover our projected trend in medical expense thereby requiring us to continue to seek reductions in administrative costs as well as consider changes to our current Plans including possible increases to member premiums, reduction of the benefits that we offer under our Medicare Advantage Plans, or some combination thereof, thereby making them potentially less attractive to members. Congress is considering other reductions to rates or other changes to the Medicare reimbursement system which could also have a material adverse effect on our results of operations, financial position, and cash flows.

We hold reserves for expected claims, which are estimated, and these estimates involve an extensive degree of judgment; if actual claims exceed reserve estimates, our results could be materially adversely affected.

Our benefits incurred expense reflects estimates of IBNR. We, together with our internal and external consulting actuaries, estimate our claim liabilities using actuarial methods based on historical

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data adjusted for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors. Actual conditions, however, could differ from those assumed in the estimation process, and those differences could be material. Due to the uncertainties associated with the factors used in these assumptions, the actual amount of benefit expense that we incur may be materially more or less than the amount of IBNR originally estimated, and materially different amounts could be reported in our financial statements for a particular period under different conditions or using different assumptions. We make adjustments, if necessary, to benefits incurred expense when the criteria used to determine IBNR change and when we ultimately determine actual claim costs. If our estimates of IBNR are inadequate in the future, our reported results of operations will be adversely affected. Further, our inability to estimate IBNR accurately may also affect our ability to take timely corrective actions or otherwise establish appropriate premium pricing, further exacerbating the extent of any adverse effect on our results.

Our reserves for future insurance policy benefits and claims on our traditional business may prove to be inadequate, requiring us to increase liabilities and resulting in reduced net income and shareholders' equity.

We calculate and maintain reserves for the estimated future payment of claims to our insurance policyholders using the same actuarial assumptions that we use to set our premiums. For our traditional accident and health insurance business, we establish active life reserves 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 medical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, we necessarily base our reserves and liabilities on extensive estimates, assumptions and prior years' statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of acquired policy liabilities is subject to similar estimates and assumptions. Establishing reserves involves inherent uncertainties, and it is possible that actual claims could materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. 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, statutory surplus and shareholders' equity.

We may experience higher than expected loss ratios which could materially adversely affect our results of operations.

We may experience higher than expected loss ratios if health care costs exceed our estimates. Factors that may cause health care costs to exceed our estimates include:

•: an increase in the cost of health care services and supplies, including pharmaceuticals;
•: higher than expected utilization of health care services;
•: periodic renegotiations of hospital, physician and other provider contracts;
•: the occurrence of catastrophic events, including epidemics and natural disasters;
•: general inflation or economic downturns;
•: new mandated benefits or other regulatory changes that increase our costs; and
•: other unforeseen occurrences.

We seek to take appropriate actions in an effort to reverse any upward trend in our loss ratios; however, we can make no assurances that these actions will be sufficient. We also cannot give assurance

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that our loss ratios will not continue to increase beyond what we currently anticipate, and any increases could materially adversely affect our results of operations.

In addition, medical liabilities in our financial statements include our estimated reserves for incurred but not reported and reported but not paid claims. The estimates for medical liabilities are made on an accrual basis. We believe that our reserves for medical liabilities are adequate, but we cannot assure you of this. Any adjustments to our medical liabilities could adversely affect our results of operations.

We are subject to extensive government regulation; compliance with laws and regulations is complex and expensive, and any violation of the laws and regulations applicable to us could reduce our revenues and profitability and otherwise adversely affect our operating results.

There is substantial Federal and state governmental regulation of our business. Several laws and regulations adopted by the Federal government, such as the Sarbanes-Oxley Act of 2002, the Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act, known as HIPAA, the MMA, the USA PATRIOT Act, the False Claims Act, anti-kickback laws, MIPPA and "Do Not Call" regulations, have created administrative and compliance requirements for us. The requirements of these laws and regulations are continually evolving, and the cost of compliance may have an adverse effect on our profitability. As laws and regulations evolve, the costs of compliance, which are already significant, will tend to increase. If we fail to comply with existing or future applicable laws and regulations, we could suffer civil, criminal or administrative penalties. Different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure you that we will be able to obtain or maintain the regulatory approvals required to operate our business.

Laws in each of the states in which we operate our health plans, insurance companies and other businesses also regulate our sales practices, operations, the scope of benefits, rate formulas, delivery systems, utilization review procedures, quality assurance, complaint systems, enrollment requirements, claim payments, marketing, and advertising. These state regulations generally require, among other things, prior approval or notice of new products, premium rates, benefit changes and specified material transactions, such as dividend payments, purchases or sales of assets, inter-company agreements, and the filing of various financial and operational reports.

We are also subject to various governmental reviews, audits and investigations to verify our compliance with our contracts and applicable laws and regulations. State departments of insurance audit our health plans and insurance companies for financial and contractual compliance. State departments of health audit our health plans for compliance with health services. State attorneys general, CMS, the Office of the Inspector General of Health and Human Services, the Office of Personnel Management, the Department of Justice, the Department of Labor, the Government Accountability Office, state departments of insurance and departments of health and Congressional committees also conduct audits and investigations of us. We have historically incurred, and expect to continue to incur, significant costs to respond to governmental reviews, audits and investigations, and we expect these costs to increase over time as regulation increases and becomes more complex and as regulatory agencies and Congressional committees become more sophisticated and thorough.

Any adverse review, audit or investigation, or changes in regulations resulting from the conclusion of reviews, audits or investigations, could result in:

•: repayment of amounts we have been paid pursuant to our government contracts;
•: imposition of civil or criminal penalties, fines or other sanctions on us;

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•: loss of licensure or the right to participate in Medicare and other government-sponsored programs;
•: damage to our reputation in various markets;
•: legislative or regulatory changes that affect our business and operations; and
•: increased difficulty in marketing our products and services.

Any of these events could make it more difficult for us to sell our products and services, reduce our revenues and profitability and otherwise adversely affect our operating results. For more information on governmental regulation of our business, see the section captioned "Regulation" in Part I, Item 1 of this annual report on Form 10-K.

CMS from time to time releases proposed or amended regulations that, if adopted, would, among other things, place tighter restrictions on marketing processes relative to the Medicare Advantage program and Medicare prescription drug benefit program. Depending upon the final content of these regulations, if CMS proposes and adopts them, compliance with and enforcement of the regulations could have a material adverse effect on our results of operations.

Changes in governmental regulation or legislative reform could increase our costs of doing business and adversely affect our profitability.

The Federal government and the states in which we operate extensively regulate our health plans, insurance companies and other business. The laws and regulations governing our operations are generally intended to benefit and protect policyholders, health plan members and providers rather than shareholders. From time to time, Congress has considered various forms of "Patients' Bill of Rights" legislation, which, if adopted, could alter the treatment of coverage decisions under applicable federal employee benefits laws. There have also been legislative attempts at the state level to limit the preemptive effect of Federal employee benefits laws on state laws. If adopted, these types of limitations could increase our liability exposure and could permit greater state regulation of our operations. The government agencies administering these laws and regulations have broad latitude to enforce them. These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer, and how we interact with our policyholders, members, providers and the public. Healthcare laws and regulations are subject to frequent change and differing interpretations. Changes in the political climate or in existing laws or regulations, or their interpretations, or the enactment of new laws or the issuance of new regulations could adversely affect our business by, among other things:

•: imposing additional license, registration, or capital reserve requirements;
•: increasing our administrative and other costs;
•: forcing us to undergo a corporate restructuring;
•: increasing mandated benefits without corresponding premium increases;
•: limiting our ability to engage in inter-company transactions with our affiliates and subsidiaries;
•: adversely affecting our ability to operate under the Medicare program and to continue to serve our members and attract new members;
•: changing the manners or the basis upon which CMS reinsures us or pays premium to us, or upon which our members pay premiums;
•: forcing us to alter or restructure our relationships with providers and agents;
•: restricting our ability to market our products;

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•: increasing governmental regulation or provision of healthcare and PBM services, such as potential regulation of the PBM industry by the U.S. Food and Drug Administration, or direct regulation of pharmacies by regulatory and quasi- regulatory bodies;
•: requiring that health plan members have greater access to non-formulary drugs;
•: expanding the ability of health plan members to sue their plans;
•: requiring us to implement additional or different programs and systems;
•: prohibiting us from participating in existing or future programs and systems;
•: increasing antitrust lawsuits challenging PBM pricing practices;
•: instituting state legislation regulating PBMs or imposing fiduciary status on PBMs; and
•: instituting drug pricing "most favored nation" pricing and "unitary pricing" legislation or other drug pricing legislation.

While it is not possible to predict when and whether fundamental policy changes would occur, policy changes on the local, state and federal level could fundamentally change the dynamics of our industry, such as policy changes mandating a much larger role of the government in the health care arena. Changes in public policy could materially affect our profitability, our ability to retain or grow business, or our financial condition. State and federal governmental authorities are continually considering changes to laws and regulations applicable to us and are currently considering regulations relating to:

•: health insurance access and affordability;
•: disclosure of provider quality information;
•: electronic access to pharmacy and medical records;
•: formation of regional or national association health plans for small employers;
•: universal health coverage; and
•: disclosure of provider fee schedules and other data about payments to providers, sometimes called transparency.

All of these proposals could apply to us and could result in new regulations that increase the cost of our operations. Healthcare organizations also may reduce or delay the purchase of PBM services, and manufacturers may reduce administrative fees and rebates or reduce supplies of some products. Any of the foregoing legislative or regulatory changes could adversely affect our or our service providers' ability to negotiate rebate and administrative fee arrangements with manufacturers and have a material adverse effect on our business and results of operations.

Both Congress and state legislatures are expected to consider legislation to increase governmental regulation of managed care plans. Some of these initiatives would, among other things, require that health plan members have greater access to drugs not included on a plan's formulary and give health plan members the right to sue their health plans for malpractice when they have been denied care. The scope of the managed care reform proposals under consideration by Congress and state legislatures and enacted by states to date vary greatly, and we cannot predict the extent of future legislation. However, these initiatives could limit our business practices and impair our ability to serve our clients and could have a material adverse effect on our business and results of operations.

In addition, CMS has adopted regulations that, and may in the future propose regulations that, if adopted, would, among other things, place tighter restrictions on marketing processes relative to the Medicare Advantage program and prescription drug benefit program. Compliance with and

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enforcement of the existing and any proposed regulations could have a material adverse effect on our results of operations.

We are required to comply with laws governing the transmission, security and privacy of health information that require significant compliance costs, and any failure to comply with these laws could result in material criminal and civil penalties.

Regulations under HIPAA require us to comply with standards regarding the exchange of health information within our company and with third parties, such as healthcare providers, business associates and our members. These regulations impose standards for common healthcare transactions, such as

•: claims information, plan eligibility, and payment information;
•: unique identifiers for providers and employers;
•: security;
•: privacy; and
•: enforcement.

HIPAA also provides that to the extent that state laws impose stricter privacy standards than HIPAA privacy regulations, HIPAA does not preempt the state standards and laws.

Given the complexity of the HIPAA regulations, the possibility that the regulations may change, and the fact that the regulations are subject to changing and potentially conflicting interpretation, our ability to comply with the HIPAA requirements is uncertain and the costs of compliance are significant. Furthermore, a state's ability to promulgate stricter laws, and uncertainty regarding many aspects of state requirements, make compliance more difficult. To the extent that we submit electronic healthcare claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA, payments to us may be delayed or denied. Additionally, the costs of complying with any changes to the HIPAA regulations may have a negative impact on our operations. We could be subject to criminal penalties and civil sanctions for failing to comply with the HIPAA health information provisions, which could result in the incurrence of significant monetary penalties. In addition, our failure to comply with state health information laws that may be more restrictive than the regulations issued under HIPAA could result in additional penalties.

Compliance with HIPAA regulations requires significant systems enhancements, training and administrative effort. HIPAA could also expose us to additional liability for violations by our business associates. A business associate is a person or entity, other than a member of the work force, who on behalf of an entity subject to HIPAA performs or assists in the performance of a function or activity involving the use or disclosure of individually identifiable health information, or provides legal, accounting, consulting, data aggregation, management, administrative, accreditation or financial services.

Legal and regulatory investigations and actions are increasingly common in the insurance and managed care business and may result in financial losses and harm our reputation.

We face a significant risk of class action lawsuits and other litigation and regulatory investigations and actions in the ordinary course of operating our businesses. Due to the nature of our businesses, we are subject to a variety of legal and regulatory actions relating to our business operations, such as the design, management and offering of products and services. The following are examples of the types of potential litigation and regulatory investigations we face:

•: claims relating to sales or underwriting practices;
•: claims relating to the methodologies for calculating premiums;

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•: claims relating to the denial or delay of health care benefit payments;
•: claims relating to claims payments and procedures;
•: additional premium charges for premiums paid on a periodic basis;
•: claims relating to the denial, delay or rescission of insurance coverage;
•: challenges to the use of software products used in administering claims;
•: claims relating to our administration of our Medicare Part D and other healthcare and insurance offerings and PBM;
•: claims by government agencies relating to compliance with laws and regulations;
•: medical malpractice or negligence actions based on our medical necessity decisions or brought against us on the theory that we are liable for our providers' alleged malpractice or negligence;
•: claims relating to product design;
•: allegations of anti-competitive and unfair business activities;
•: provider disputes over compensation and termination of provider contracts;
•: allegations of discrimination;
•: claims related to the failure to disclose business practices;
•: allegations of breaches of duties to customers;
•: claims relating to inadequate or incorrect disclosure or accounting in our public filings;
•: allegations of agent misconduct;
•: claims related to deceptive trade practices;
•: claims relating to suitability of annuity products; and
•: claims relating to customer audits and contract performance.

Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, and punitive and treble damages, which may remain unknown for substantial periods of time. We are also subject to various regulatory inquiries, such as information requests, formal and informal inquiries, subpoenas and books and record examinations, from state and Federal regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations.

We cannot predict the outcome of actions we face with certainty, and we have incurred and are incurring expenses in the defense of our past and current matters. We also may be subject to additional litigation in the future. Litigation could materially adversely affect our business or results of operations because of the costs of defending these cases, the costs of settlement or judgments against us, or the changes in our operations that could result from litigation. The defense of any these actions may be time-consuming and costly, and may distract our management's attention. In addition, we could suffer significant harm to our reputation, which could have an adverse effect on our business, financial condition and results of operations. As a result, we may incur significant expenses and may be unable to effectively operate our business.

Potential liabilities may not be covered by insurance or indemnity, insurers or indemnifying parties may dispute coverage or may be unable to meet their obligations or the amount of our insurance or indemnification coverage may be inadequate. In addition, some types of damages, such as punitive damages or damage for willful acts, may not be covered by insurance. The cost of business insurance coverage has increased, and may in the future increase, significantly. Insurance coverage for all or some

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forms of liability may become unavailable or prohibitively expensive in the future. We cannot assure you that we will be able to obtain insurance coverage in the future, or that insurance will continue to be available on a cost-effective basis, if at all.

The health care industry continues to receive significant negative publicity regarding the public's perception of it. This publicity and public perception have been accompanied by increased litigation, in some cases resulting in

•: large jury awards,
•: legislative activity,
•: regulation, and
•: governmental review of industry practices.

These factors, as well as any negative publicity about us in particular, could adversely affect our ability to market our products or services and to attract and retain members, may require us to change our products or services, may increase the regulatory burdens under which we operate and may require us to pay large judgments or fines. Any combination of these factors could further increase our cost of doing business and adversely affect our financial position, results of operations and cash flows.

If we fail to effectively execute our Medicare initiatives and our other operational and strategic initiatives, our business could be materially adversely affected.

Our future performance depends in large part upon our management team's ability to execute our strategy to position us for the future. This strategy relies to a significant extent on opportunities created by the MMA. The MMA offers new opportunities in our HMO, PPO and private fee-for-service Medicare Advantage products and other Medicare programs, as well as Medicare Part D plans. We have made substantial investments in our Medicare programs to enhance our ability to participate in these programs. The growth in our Medicare membership and revenues, as well as the timing of membership enrollment and the speed with which the individual members meet their deductibles and cost-sharing obligations, impacts the pattern of our quarterly earnings. Moreover, we are continuing to expand our Medicare offerings with the establishment of our Medicare Advantage PPOs in selected markets.

Our contracts with CMS, as well as applicable Medicare Part D regulations and federal and state laws, requires us to, among other obligations:

•: comply with disclosure, filing, record-keeping and marketing rules;
•: operate quality assurance, drug utilization management and medication therapy management programs;
•: support e-prescribing initiatives;
•: implement grievance, appeals and formulary exception processes;
•: comply with payment protocols, such as the return of overpayments to CMS and, in specified circumstances, coordination with state pharmacy assistance programs;
•: use approved networks and formularies, and provide access to these networks to any willing pharmacy;
•: provide emergency out-of-network coverage; and
•: adopt a comprehensive Medicare and Fraud, Waste and Abuse compliance program.

Any contractual or regulatory non-compliance on our part could entail significant sanctions and monetary penalties.

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We cannot predict the length of the selling season for any year. If the selling season for any plan year is shorter than in prior years, there could be a material adverse effect on our business and results of operations.

CMS's risk adjustment payment system and budget neutrality factors make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.

All of the Medicare Advantage programs we offer are subject to Congressional appropriation. As a result, our profitability is dependent, in large part, on continued funding for government healthcare programs at or above current levels. The reimbursement rates paid to health plans like ours by the Federal government are established by contract, although the rates differ depending on a combination of factors such as a member's health status, age, gender, county or region, benefit mix, member eligibility categories, and the plans' risk scores.

CMS has implemented a risk adjustment model that apportions premiums paid to Medicare health plans according to health severity. A risk adjustment model pays more for enrollees with predictably higher costs. CMS has completely phased in this payment methodology with a risk adjustment model that bases a portion of the total CMS reimbursement payments on various clinical and demographic factors such as

•: hospital inpatient diagnoses,
•: diagnosis data from ambulatory treatment settings, such as hospital outpatient facilities and physician visits,
•: gender,
•: age, and
•: Medicaid eligibility.

Under the risk adjustment methodology, all Medicare health plans must capture, collect and submit the necessary diagnosis code information from inpatient and ambulatory treatment settings to CMS within prescribed deadlines. The CMS risk adjustment model uses this diagnosis data to calculate the risk adjusted premium payment to Medicare health plans. As a result of this process, it is difficult to predict with certainty our future revenue or profitability. CMS may also change the manner in which it calculates risk adjusted premium payments in ways that are adverse to us. In addition, our own risk scores for any period may result in favorable or unfavorable adjustments to the payments we receive from CMS and our Medicare premium revenue. Because diagnosis coding is a manual process, there is the potential for human error in the recording of codings, and there can be no assurance that our contracting physicians and hospitals will be successful in improving the accuracy of recording diagnosis code information and therefore our risk scores.

During 2008, CMS announced its intention to engage in a pilot program to more extensively audit a select group of Medicare Advantage health plans in the area of hierarchical condition category, or HCC, coding for the determination of risk score revenue. These audits were labeled "Risk Adjustment Data Validation" audits, or RADV. The stated intent of the audit was to determine whether the source of differences in diagnosis coding between MA plans and that of the Medicare Fee For Service population was the result of coding patterns of Plan contracted physicians or due the underlying beneficiary health status. Following the completion of the RADV pilot, CMS has extended its audit program to randomly selected Plans for the stated purpose of generating statistically valid payment error estimates. While CMS has not yet fully disclosed its final intent with respect to RADV findings it should be noted that this audit, like any other audit pursued by CMS, may result in an adverse impact to revenue on a prospective or retrospective basis. We have been selected to participate in the extended audit program and have recently completed our initial data submission to CMS.

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Coincident with phase-in of the risk-adjustment methodology, CMS also adjusted payments to Medicare Advantage plans by a "budget neutrality" factor. CMS implemented the budget neutrality factor to prevent overall health plan payments from being reduced during the transition to the risk-adjustment payment model. CMS first developed the payment adjustments for budget neutrality in 2002 and began to use them with the 2003 payments. CMS began phasing out the budget neutrality adjustment in 2007 and will fully eliminate it by 2011. The risk adjustment methodology and phase-out of the budget neutrality factor will reduce our plans' premiums unless our risk scores increase. We do not know if our risk scores will increase in the future or, if they do, that the increases will be large enough to offset the elimination of this adjustment. As a result of the CMS payment methodology described previously, the amount and timing of our CMS monthly premium payments per member may change materially, either favorably or unfavorably. In addition, the possibility exists that CMS may reduce revenues in the future for plans whose risk scores have increased significantly greater than the general Medicare average increase in risk scores. If our risk scores increase significantly greater than the general Medicare average increase, and CMS introduces this approach, it could adversely affect our results of operations.

We rely on the accuracy of information provided by CMS regarding the eligibility of an individual to participate in our Medicare Advantage and Medicare Part D plans, and any inaccuracies in those lists could cause CMS to recoup premium payments from us with respect to members who turn out not to be ours, or could cause us to pay benefits in respect of members who turn out not to be ours, which could reduce our revenue and profitability.

Premium payments that we receive from CMS are based upon eligibility lists produced by Federal and local governments. From time to time, CMS requires us to reimburse it for premiums that we received from CMS based on eligibility and dual-eligibility lists that CMS later discovers contained individuals who were not in fact residing in our service areas or eligible for any government-sponsored program or were eligible for a different premium category or a different program. We may have already provided services to these individuals and reimbursement of amounts paid on behalf of services provided to them may be unrecoverable. In addition to recoupment of premiums previously paid, we also face the risk that CMS could fail to pay us for members for whom we are entitled to payment. Our profitability would be reduced as a result of this failure to receive payment from CMS if we had made related payments to providers and were unable to recoup these payments from them.

The limited annual enrollment process may adversely affect our growth and ability to market our products.

Medicare beneficiaries generally have a limited annual enrollment period during which they can choose to participate in a Medicare Advantage plan or receive benefits under the traditional fee-for-service Medicare program. After the annual enrollment period, most Medicare beneficiaries will not be permitted to change their Medicare benefits until the next enrollment period. This annual enrollment process and subsequent "lock-in" provisions of the MMA may adversely affect our growth as it will limit our ability to enter new service areas and market to or enroll new members in our established service areas outside of the annual enrollment period.

If we are unable to develop and maintain satisfactory relationships with the providers of care to our members, our profitability could be adversely affected and we may be precluded from operating in some markets.

We contract with physicians, hospitals and other providers to deliver health care to our members. Our Medicare Advantage products encourage or require our customers to use these contracted providers. In some circumstances, these providers may share medical cost risk with us or have financial incentives to deliver quality medical services in a cost-effective manner. Our operations and profitability are significantly dependent upon our ability to enter into appropriate cost-effective contracts with hospitals, physicians and other healthcare providers that have convenient locations for our members in our geographic markets.

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In the long term, our ability to contract successfully with a sufficiently large number of providers in a particular geographic market will affect the relative attractiveness of our Medicare Advantage and managed care products in that market. Any difficulty in contracting with providers in a market could preclude us from renewing or from entering our Medicare contracts in that market. We will be required to establish acceptable provider networks prior to entering new markets. We may be unable to maintain our relationships with our network providers or enter into agreements with providers in new markets on a timely basis or under favorable terms. In any particular market, providers could refuse to contract with us, demand to contract with us, demand higher payments, or take other actions that could result in higher health care costs for us, less desirable products for members, disruption of benefits to our members, or difficulty meeting regulatory or accreditation requirements. In some markets, some providers, particularly hospitals, physician specialty groups, physician/hospital organizations or multi-specialty physician groups, may have significant market positions and negotiating power. In addition, physician or practice management companies, which aggregate physician practices for administrative efficiency and marketing leverage, may compete directly with us. In our southeastern Texas HMO market, one of our significant provider groups recently has formed a health plan. If this provider group refuses to contract with us, uses its market position to negotiate favorable contracts or otherwise places us at a competitive disadvantage, our ability to market products or to be profitable in that market could be adversely affected.

In some situations, we have contracts with individual or groups of primary care physicians for a fixed, per-member-per-month fee under which physicians are paid an amount to provide all required medical services to our members. This type of contract is referred to as a "capitation" contract. The inability of providers to properly manage costs under these capitation arrangements can result in the financial instability of these providers and the termination of their relationship with us. In addition, payment or other disputes between a primary care provider and specialists with whom the primary care provider contracts can result in a disruption in the provision of services to our members or a reduction in the services available to our members. The financial instability or failure of a primary care provider to pay other providers for services rendered could lead those other providers to demand payment from us even though we have made our regular fixed payments to the primary provider. There can be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with other providers. Any of these events could have an adverse effect on the provision of services to our members and our operations, resulting in loss of membership or higher healthcare costs or other adverse effects.

If our government contracts are not renewed or are terminated, our business could be substantially impaired.

We provide our Medicare benefits and other services through a limited number of contracts with Federal government agencies. These contracts generally have terms of one or two years and are subject to non-renewal by the applicable agency. All of our government contracts are terminable for cause if we breach a material provision of the contract or violate relevant laws or regulations. In addition, a government agency may suspend our right to add new members if it finds deficiencies in our provider network or operations. If we are unable to renew, or to successfully re-bid or compete for any of our government contracts, or if any of our contracts are terminated, our business could be substantially impaired. If any of those circumstances were to occur, we would likely pursue one or more alternatives, such as

•: seeking to enter into contracts in other geographic markets,
•: seeking to enter into contracts for other services in our existing markets, or
•: seeking to acquire other businesses with existing government contracts.

If we were unable to do so, we could be forced to cease conducting business. In this event, our revenues and profits would decrease materially.

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A reduction in the number of members in our health plans could adversely affect our results of operations.

A reduction in the number of members in our health plans could adversely affect our results of operations. The principal factors that could contribute to the loss of membership are:

•: competition in premium or plan benefits from other health care benefit companies;
•: reductions in the number of employers offering health care coverage;
•: competition from physicians or other provider groups who may elect to form their own health plans;
•: inability to develop and maintain satisfactory relationships with the providers of care to our members;
•: reductions in work force by existing customers;
•: our increases in premiums or benefit changes;
•: our exit from a market or the termination of a health plan;
•: negative publicity and news coverage relating to our company or the managed health care industry generally;
•: general economic conditions that induce beneficiaries to cancel their coverage; and
•: catastrophic events, such as epidemics, natural disasters and man-made catastrophes, and other unforeseen occurrences.

Financial accounting for the Medicare Part D and Medicare Advantage benefits is complex.

The accounting and regulatory guidance regarding the proper method of accounting for Medicare Part D and Medicare Advantage, particularly as it relates to the timing of revenue and expense recognition and, with respect to Part D, calculation of the risk corridor, taken together with the complexity of the Medicare Part D and Medicare Advantage products and challenges in reconciling CMS Medicare Part D and Medicare Advantage membership data with our records, may lead to variability in our reporting of quarter-to-quarter and year-to-year earnings and to uncertainty among investors and research analysts following us as to the impacts of our Medicare PDPs on our full year results.

We derive a substantial portion of our Medicare Advantage HMO revenues and profits from Medicare Advantage HMO operations in Texas, and legislative actions, economic conditions or other factors that adversely affect those operations could materially reduce our revenues and profits.

We derive a substantial portion of our Medicare Advantage HMO revenues and profits from Medicare Advantage HMO operations in Texas. If we are unable to continue to operate in Texas, or if we must significantly curtail our current operations in any portion of Texas, our revenues will decrease materially. Our reliance on our operations in Texas could cause our revenues and profitability to change suddenly and unexpectedly, depending on legislative actions, economic conditions and similar factors. In addition, our market share in some areas of Texas may make it more difficult for us to expand our membership in those areas. Our inability to continue to operate in Texas, or a decrease in the revenues or profitability of our Texas operations, would harm our overall operating results.

If the PBM and service providers that support our business do not continue to earn and retain purchase discounts and rebates from manufacturers at current levels, our gross margins may decline.

We have direct and indirect contractual relationships with pharmaceutical manufacturers that provide us with purchase discounts on drugs dispensed to our members. Manufacturer rebates often

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depend on our ability to meet contractual market share or other requirements. Pharmaceutical manufacturers have also increasingly made rebate payments dependent upon our agreement to include a broad array of their products in our formularies.

Changes in existing Federal or state laws or regulations or in their interpretation by courts and agencies or the adoption of new laws or regulations relating to patent term extensions, purchase discount, administrative fee and rebate arrangements with pharmaceutical manufacturers, as well as some of the formulary and other services we provide to pharmaceutical manufacturers, could also reduce the discounts or rebates we receive and adversely impact our business, financial condition, liquidity and operating results.

Changes in industry pricing benchmarks could adversely affect our financial performance.

Contracts in the prescription drug industry generally use published benchmarks to establish pricing for prescription drugs. The principal benchmarks are average wholesale price, known as AWP, average selling price, known as ASP, wholesale acquisition cost, known as WAC, and average manufacturer price, known as AMP.

Recent events have raised uncertainties as to whether payors, pharmacy providers, PBMs and others in the prescription drug industry will continue to utilize AWP as it has previously been calculated, or whether they will adopt other pricing benchmarks for establishing prices within the industry. Specifically, in the proposed settlement in the case ofNew England Carpenters Health Benefits Fund, et al. v. First DataBank, et al., a civil class action case brought against McKesson Corporation and First DataBank, known as FDB, which is one of several companies that report data on prescription drug prices, FDB has agreed to reduce the reported AWP of specified drugs by 4% at a future time as contemplated by the settlement. At this time, the proposed settlement has not received final court approval. We cannot precisely predict the long-term effect of the proposed settlement or the timing of any impact it may have on our PBM business.

Demands by our clients for enhanced service levels or possible loss or unfavorable modification of contracts with our clients could negatively affect our profitability.

As our clients face the continued rapid growth in prescription drug costs, they may demand additional services and enhanced service levels to help mitigate the increase in spending. We operate in a very competitive PBM environment, and as a result, we may not be able to increase our fees to compensate for these increased services, which could negatively affect our profitability.

Our results of operations could suffer if we lose our pharmacy network affiliations.

Our PBM operations are dependent to a significant extent on our ability to obtain discounts on prescription purchases from retail pharmacies that can be utilized by our clients and participants. Our contracts with retail pharmacies, as well as our network vendor's contracts with retail pharmacies, which are non-exclusive, are generally terminable by either party on short notice. If one or more of our top large volume network pharmacies elects to terminate its relationship with us or our network vendor or if we are only able to continue our relationship on terms less favorable to us, access to retail pharmacies by our clients and health plan participants, and our business, results of operations and financial condition could suffer. In addition, some large retail pharmacy chains either own or have strategic alliances with PBMs or could attempt to acquire or enter into these kinds of relationships in the future. Ownership of, or alliances with, PBMs by retail pharmacy chains, particularly large pharmacy chains which control a significant amount of retail pharmacy business, could have material adverse effects on our relationships with those retail pharmacy chains, particularly the discounts they are willing to make available, and on our business, results of operations and financial condition.

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Our PBM could be subject to claims under ERISA if it is found to be a fiduciary of health benefit plans governed by ERISA.

PBMs typically provide services to corporations and other sponsors of health benefit plans. These plans are subject to the Employee Retirement Income Security Act of 1974, as amended, known as ERISA, which regulates health and medical plans and other employee pension benefit plans and employee welfare benefit plans. The U.S. Department of Labor, which is the agency that enforces ERISA, could assert that the fiduciary obligations imposed by the statute apply to some or all of the services provided by a PBM. If a court were to determine, in litigation brought by a private party or in a proceeding arising out of a position taken by the Department of Labor, that MemberHealth was a fiduciary in connection with services it provides, MemberHealth could potentially be subject to claims for breaching fiduciary duties and/or entering into specified "prohibited transactions" under ERISA. In addition, claims also might be made against our PBM under common law and state fiduciary obligation theories.

Our relationship with NCPA is important and the loss of such relationship could have an adverse effect on our Part D business and results of operations.

Our ability to market some of our Part D plans is substantially dependent on our strategic alliance with the National Community Pharmacists Association, known as the NCPA, which provides outreach and communications for our CCRx Part D plans to NCPA's independent pharmacy membership. NCPA member pharmacies make up over one-third of MemberHealth's pharmacy network and, in 2009, accounted for a significant percentage of the prescriptions filled under our CCRx Part D plans. The loss of our NCPA relationship could have an adverse effect on our ability to market CCRx Part D plans, our Part D business and results of operations. Further, to the extent that CMS or other regulatory authorities determine that any provisions of our agreements with NCPA conflicts with any applicable law, regulation or policy, we may not be able to realize fully the benefits we anticipate from the arrangement with NCPA, and we could potentially incur regulatory liability.

There are significant risks associated with our participation in the Medicare Part D program, the occurrence of which could have a material adverse effect on our results of operations.

Our actual results may differ from our assumptions regarding the Medicare Part D program. Our participation in the Medicare Part D program involves the following risks, the occurrence of any or all of which could have a material adverse effect on our financial condition, results of operations and cash flows:

•

CMS continues to release regulations on Medicare Part D, including important requirements related to the implementation and marketing of the Medicare Part D prescription drug benefit plan. This may create challenges for planning, implementing and operating the Medicare Part D program, and we can provide no assurance that Congress or CMS will not alter the program in a manner that will be detrimental to us.

•

CMS has in the past released, and could in the future release, call letters on Medicare Part D that impact the revenue that can be earned by our Part D.

•

Our contracts with CMS, as well as applicable Medicare Part D regulations and Federal and state laws, require us, among other obligations, to:

•: comply with specified disclosure, filing, record-keeping and marketing rules;
•: operate quality assurance, drug utilization management and medication therapy management programs;
•: support e-prescribing initiatives;

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•: implement grievance, appeals and formulary exception processes;
•: comply with payment protocols, which require the return of overpayments to CMS and, in specified circumstances, coordination with state pharmacy assistance programs;
•: use approved networks and formularies, and provide access to these networks to any willing pharmacy;
•: provide emergency out-of-network coverage; and
•: adopt a comprehensive Medicare compliance program, including specific fraud, waste and abuse policies and procedures.

Any contractual or regulatory non-compliance on our part could entail significant sanctions and monetary penalties, which in turn could negatively affect our results of operations and the market price of our common stock.

•: We cannot be certain that other regulatory changes, such as a restructuring of the Medicare Part D program, will not affect our ability to operate under the Part D program or increase our costs or reduce our reimbursements.
•: We cannot be certain that our products will be competitive with the products offered by other PDPs. We cannot be certain that our future bids will be competitive with the bids submitted by other PDPs. We cannot be certain that our future bids will be under the benchmark bids calculated by CMS.
•: We are required to submit PDP bids annually, approximately six months in advance of the corresponding benefit year. We endeavor to use the best available member eligibility, claims and risk score data at the time of developing the bids. Furthermore, we make actuarial assumptions about the utilization of benefits in our PDPs. We cannot be assured that the data and assumptions used at the time of bid development will prove to be correct and that premiums will be sufficient to cover benefits plus a reasonable margin.
•: We may experience higher benefit expenses as a result of an increase in the cost of pharmaceuticals, possible changes in our pharmacy rebate program with drug manufacturers, higher than expected utilization and new mandated benefits or other regulatory changes that increase our costs.
•: CMS automatically assigns members who are eligible for both Medicare and Medicaid, known as "dual eligibles," to our PDPs in regions where our premiums for our standard plans were under the CMS established regional benchmarks. We cannot guarantee that all of these dual eligibles assigned to us will continue to participate in our PDPs in the future because dual eligible beneficiaries can change their PDP each month. Moreover, we also cannot guarantee whether dual eligibles will be auto-assigned to us in the future for a region since we are required to bid anew each year and there exists the possibility that our bid for the region could be above the applicable benchmark; if our bid is below the benchmark, we cannot predict the number of dual eligibles that will be assigned to us.
•: Medicare Part D is still a relatively new program and the competitive landscape remains uncertain. We expect to encounter competition from other PDP sponsors, some of which may have significantly greater resources and brand recognition than we do.
•: If our current pharmacies and other providers terminate their contracts, we will have to contract with other providers to take their place.
•: CMS and other service providers may not be able to deliver or process information completely, timely and accurately relating to our PDPs, which could negatively impact our operations.

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•: There is uncertainty as to whether marketing practices will be restricted, which could negatively impact our ability to market and sell our product.
•: There may be other unforeseen occurrences that could negatively impact our PDP operations.

The pharmacy benefit management component of our business is subject to significant additional regulation.

Our PBM operations are subject to a variety of Federal and state laws. Medicare Part D regulations, such as anti-kickback rules and compliance requirements under Federal employee benefits laws, also govern the treatment of related entities. CMS has indicated that it will apply greater scrutiny to arrangements between PDPs and related parties, especially to rebate retention arrangements. Federal and state legislative proposals regarding PBMs are frequently introduced, and these proposals, if adopted, could affect a variety of industry practices, such as the receipt of rebates and administrative fees from pharmaceutical manufacturers.

In addition, changes in existing Federal or state laws or regulations or in their interpretation by courts and agencies, or the adoption of new laws or regulations relating to patent term extensions, purchase discount, administrative fee and rebate arrangements with pharmaceutical manufacturers, as well as proposed legislation requiring direct rebate negotiation and contracting between CMS and pharmaceutical manufacturers, could reduce the discounts, rebates or other fees received by PBMs and could adversely impact our business, financial condition, liquidity and operating results.

Corporate practice of medicine and fee-splitting laws may govern our business operations, and violation of these laws could result in penalties and adversely affect our arrangements with contractors and our profitability.

Several states have laws commonly known as "corporate practice of medicine" laws that prohibit a business corporation from practicing medicine, employing physicians to practice medicine, or exercising control over medical treatment decisions by physicians. In these states, typically only medical professionals or a professional corporation in which the shares are held by licensed physicians or other medical professionals may provide medical care to patients. Many states also have some form of fee-splitting law prohibiting business arrangements that involve the splitting or sharing of medical professional fees earned by a physician or another medical professional for the delivery of healthcare services.

We perform only non-medical administrative and business services for physicians and physician groups. We do not represent that we offer medical services, and we do not exercise control over the practice of medical care by providers with whom we contract. We do, however, monitor medical services to ensure they are provided and reimbursed within the appropriate scope of licensure. In addition, we have developed close relationships with our network providers under which we review and monitor the coding of medical services provided by those providers, among other services we provide.

Regulatory authorities may assert that we are engaged in the corporate practice of medicine or that our contractual arrangements with providers constitute unlawful fee-splitting. Moreover, we cannot predict whether changes will be made to existing laws or if new ones will be enacted, which could cause us to be out of compliance with these requirements. If our arrangements are found to violate corporate practice of medicine or fee-splitting laws, our provider or independent physician association management contracts could be found to be legally invalid and unenforceable, which could adversely affect our operations and profitability, and we could be subject to civil or, in some cases, criminal, penalties.

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We may experience future lapsation in our Medicare supplement business, requiring faster amortization of the deferred acquisition costs.

We have in the past experienced higher than expected lapsation in our Medicare supplement business. We believe competitive pressure from other Medicare supplement companies and Medicare Advantage products, as well as the departure of some of our sales managers, and other factors, contributed to the level of lapsation. This excess lapsation required us to accelerate the amortization of the deferred acquisition cost and present value of future profits assets associated with the business that lapsed. We cannot give assurances that lapsation of our Medicare supplement business will not again increase, requiring faster amortization of the deferred costs.

We no longer sell long term care insurance and the premiums that we charge for the long term care policies that remain in force may not be adequate to cover the claims expenses that we incur.

We began to curtail the sale of new long-term care business in 2003, and stopped all new sales at the end of 2004. As of December 31, 2009, approximately, $30 million of annualized premium remains in force, of which we retain approximately $20 million. The overall block of business continues to generate losses; a portion of the losses we have incurred relates to a specific block of Florida home health care business that we stopped selling in 1999. There can be no assurance that current premiums we charge will be adequate to cover the claims expenses that we will incur in the future. There is also no assurance that rate increases that we may seek will be approved by the applicable state regulators or, if approved, will be adequate to fully mitigate adverse loss experience.

Our business and its growth are subject to risks related to difficulties in the financial markets and general economic conditions.

As has been widely reported, financial markets around the world have been experiencing extreme disruption, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades and declining or indeterminate valuations of many investments and declines in real estate values. Governments have taken unprecedented actions intended to address these market conditions. While currently these conditions have not impaired our ability to access credit markets and finance our operations, largely because our financing has generally come from internal cash generation since September 2007, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies or that any deterioration in markets or confidence will not impair our ability to access credit markets and finance our operations.

These economic developments affect businesses such as ours in a number of ways, many of which we cannot predict. Among the potential effects could be further writedowns in the value of investments we hold, an inability or refusal by lenders under our credit agreement to fund a draw by us, and an inability to access credit markets should we require external financing in excess of or in addition to the current revolving commitment under our credit agreement. In addition, it is possible that economic conditions, and resulting budgetary concerns, could prompt the federal government to make changes in the Medicare program, which could adversely affect our results of operations. We are unable to predict the likely duration and severity of the current disruptions in financial markets and adverse economic conditions, or the effects these disruptions and conditions could have on us.

We may suffer losses due to fraudulent activity, which could adversely affect our financial condition and results of operation.

Both traditional Medicare and the newer Medicare Advantage and Medicare Part D plans have in the past been subject to fraudulent activity perpetrated by actual and purported beneficiaries and providers, as well as others. We have recently incurred losses as a result of a fraudulent scheme or a group of similar fraudulent schemes. While we have undertaken efforts to prevent these schemes, there

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can be no assurance that we will not again become the target of fraud, or that we will detect fraud prior to incurring losses. The need to expend effort and construct infrastructure to combat fraud requires significant expenditures. These expenditures, and losses arising from any fraud that we suffer, could have a material adverse effect on our financial condition and results of operations.

The occurrence of natural or man-made disasters could adversely affect our financial condition and results of operation.

We are exposed to various risks arising out of natural disasters, such as

•: earthquakes;
•: hurricanes;
•: floods, tornadoes;
•: pandemic health events such as avian influenza; and
•: man-made disasters, such as acts of terrorism, political instability and military actions.

For example, a natural or man-made disaster could lead to unexpected changes in persistency rates as policyholders and members who are affected by the disaster may be unable to meet their contractual obligations, such as payment of premiums on our insurance policies. The continued threat of terrorism and ongoing military actions may cause significant volatility in global financial markets, and a natural or man-made disaster could trigger an economic downturn in the areas directly or indirectly affected by the disaster. These consequences could, among other things, result in a decline in business and increased claims from those areas. Disasters also could disrupt communications and financial services and other aspects of public and private infrastructure, which could disrupt our normal business operations.

A natural or man-made disaster also could disrupt the operations of our counterparties or result in increased prices for the products and services they provide to us. In addition, a disaster could adversely affect the value of the assets in our investment portfolio if it affects companies' ability to pay principal or interest on their securities.

Acquisition risk

The rapid growth in the size and complexity of our operations has placed, and will continue to place, significant demands on our management, operations systems, accounting systems, internal control systems and financial resources. As part of our strategy, we have experienced, and expect to continue to experience, growth through acquisitions.

Acquisitions involve numerous risks, some of which we have experienced in the past, such as:

•: difficulties in the integration of operations, technologies, products, systems and personnel of the acquired company;
•: diversion of financial and management resources from existing operations;
•: potential increases in policy lapses;
•: potential losses from unanticipated litigation, undiscovered or undisclosed liabilities or unanticipated levels of claims;
•: inability to generate sufficient revenue to offset acquisition costs;
•: loss of key customer accounts;
•: loss of key provider contracts or renegotiation of existing contracts on less favorable terms; and

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•: other systems and operational integration risks.

In addition, we generally are required to obtain regulatory approval from one or more governmental agencies when making acquisitions, which may require a public hearing, regardless of whether we already operate a plan in the state in which the business to be acquired is located. We may be unable to comply with these regulatory requirements for an acquisition in a timely manner, or at all. Moreover, some sellers may insist on selling assets that we may not want, such as commercial lines of business, or transferring their liabilities to us as part of the sale of their companies or assets. Even if we identify suitable acquisition targets, we may be unable to complete acquisitions or obtain the necessary financing for acquisitions on terms favorable to us, or at all.

To the extent we complete an acquisition, we may be unable to realize the anticipated benefits from it because of operational factors or difficulties in integrating the following or other aspects of acquisitions with our existing businesses:

•: additional employees who are not familiar with our operations;
•: new provider networks, which may operate on terms different from our existing networks;
•: additional members, who may decide to transfer to other healthcare providers or health plans;
•: disparate information technology, claims processing and record keeping systems; and
•: accounting policies, some of which require a high degree of judgment or complex estimation processes, such as estimates of reserves, IBNR claims, valuation and accounting for goodwill and intangible assets, stock-based compensation and income tax matters.

For all of the above reasons, we may not be able to implement our acquisition strategy successfully, which could materially adversely affect our growth plans and on our business, financial condition and results of operations.

Furthermore, in the event of an acquisition or investment, you should be aware that we may issue stock that would dilute stock ownership, incur debt that would restrict our cash flow, assume liabilities, incur large and immediate write-offs, incur unanticipated costs, divert management's attention from our existing business, experience risks associated with entering markets in which we have no or limited prior experience, or lose key employees from the acquired entities or our historical business.

Any acquisition or disposition that we undertake may not be accretive and may cause dilution to our earnings per share, which may harm the market price of our common stock.

The combined businesses resulting from any acquisition, or remaining businesses resulting from any disposition, could encounter unanticipated transaction and integration-related costs or other factors such as the failure to realize all of the benefits expected in the acquisition or disposition. These or other factors could cause dilution to our earnings per share or decrease the expected accretive effect of the acquisition or disposition and cause a decrease in the price of our common stock.

Any failure by us to manage our growing operations or to successfully complete or integrate acquisitions, dispositions and other significant transactions could harm our financial results, business and prospects.

As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions, dispositions, strategic alliances, joint ventures and outsourcing transactions and often enter into agreements relating to these transactions that are designed to enhance our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates for, and successfully complete, transactions as well as effectively integrate any acquired companies into our operations and efficiently separate any businesses we sell. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to expend

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resources to develop products and technology internally, we may be unable to sustain our historical growth rates, we may be put at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our results of operations, financial position or cash flows.

Internal growth and expansion risk

Additionally, we are likely to incur additional costs if we develop new product offerings or enter new service areas or states where we do not currently operate, which may limit our ability to expand to, or further expand in, those areas. Our rate of expansion into new geographic areas may also be limited by:

•: our inability to raise sufficient capital;
•: the time and costs associated with designing and filing new product forms and recruiting related sales forces to offer products in the new area;
•: the time and costs associated with obtaining regulatory approval to operate in the new area or expanding our licensed service area, as the case may be;
•: our inability to develop a network of physicians, hospitals, and other healthcare providers that meets our requirements and those of the applicable regulators;
•: competition, which could increase the costs of recruiting members, reduce the pool of available members, or increase the cost of attracting and maintaining our providers;
•: the cost of providing healthcare services in those areas;
•: the cost of implementation and on-going administration of newly developed programs and services;
•: our inability to achieve sufficient scale of operations to cover the administration and marketing costs associated with entering new markets; and
•: demographics and population density.

Our ability to manage our growth and compete effectively will depend, in part, on our success in addressing these demands and risks. Any failure by us to effectively manage our growth could have a material adverse effect on our business, financial condition or results of operations.

We have incurred and may in the future incur significant expenses in connection with the implementation and expansion of our new Medicare Advantage plans, which could adversely affect our operating results.

We have expanded our Medicare Advantage HMO operations to locations outside of Southeastern Texas including five counties in North Texas offering TexanFirst Health Plans® through SelectCare Health Plans; nine counties in Oklahoma City and six counties in Tulsa offering Generations Healthcare through GlobalHealth; and, our counties in the Milwaukee, Wisconsin area offering Today's Health®. As of December 31, 2009, we offered PFFS plans in a total of 45 states. We will offer PFFS plans in a total of 45 states in 2010 as well. As a result of the passage of MIPPA, as of January 1, 2011, we will continue to offer PFFS products only in areas that have either met approved CMS network access requirements or are in certain designated rural areas. We have begun to implement a strategy to develop network-based products in selected core markets to enable the migration of our PFFS membership to these products. In 2009, we began offering PPO plans in 15 markets in 9 states. For 2010, we are expanding our PPO plans to 43 markets in 17 states.

In connection with this expansion, we have incurred expenses to upgrade and improve our infrastructure, technology, and systems to manage these products, and will in the future incur additional

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expenses. In particular, we incurred the following expenses in connection with the implementation and expansion of our Medicare Advantage program:

•: hiring and training of personnel to establish and manage systems, operations, regulatory relationships, and materials;
•: systems development and upgrade costs, such as hardware, software and development resources;
•: marketing and sales;
•: enrolling new members;
•: developing and distributing member materials such as ID cards and member handbooks; and
•: handling sales inquiry and customer service calls.

There can be no assurance that we will recoup these expenditures or that they will result in profitable operations, currently, or in the future.

If we fail to properly maintain the integrity of our data and information systems, our business could be materially adversely affected.

Our business depends significantly on efficient, effective and secure information systems and the integrity and timeliness of the data we use to run our business. We have various information systems which support our operating segments. The information gathered and processed by our management information systems assists us in, among other things, marketing and sales tracking, underwriting, billing, claims processing, medical management, medical care cost and utilization trending, financial and management accounting, reporting, planning and analysis and e-commerce. These systems also support on-line customer service functions, provider and member administrative functions and support tracking and extensive analyses of medical expenses and outcome data.

Our information systems and applications require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences. If the information we rely upon to run our businesses were to be found to be inaccurate or unreliable, if we fail to properly maintain our information systems and data integrity, or if we fail to successfully update or expand processing capability or develop new capabilities to meet our business needs in a timely manner, we could have operational disruptions, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician and other health care provider disputes, lose our ability to produce timely and accurate reports, have regulatory or other legal problems, have increases in operating and administrative expenses, lose existing customers, have difficulty in attracting new customers or in implementing our growth strategies, sustain losses due to fraud or suffer other adverse consequences.

To the extent we fail to maintain effective information systems, we may need to contract for these services with third-party management companies, which may be on less favorable terms to us and significantly disrupt our operations and information flow. In addition, we have outsourced the operation of our data centers to independent third parties and may from time to time obtain additional services or facilities from other independent third parties. Dependence on third parties for these services and facilities may make our operations vulnerable to their failure to perform as agreed.

Furthermore, our business requires the secure transmission of confidential information over public networks. Because of the confidential health information we store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability and loss. Our security measures may be inadequate to prevent security breaches, and our business operations and profitability would be

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adversely affected by cancellation of contracts, loss of members and potential criminal and civil sanctions if they are not prevented.

There can be no assurance that our process of improving existing systems, developing new systems to support our expanding operations, integrating new systems, protecting our proprietary information, and improving service levels will not be delayed or that additional systems issues will not arise in the future. Failure to adequately protect and maintain the integrity of our information systems and data may result in a material adverse effect on our financial positions, results of operations and cash flows.

Our reliance upon third party administrators and other outsourcing arrangements may disrupt or adversely affect our operations.

We depend, and may in the future increase our dependence, on independent third parties for significant portions of our data center operations, data network, voice communication services and pharmacy data processing and payment and other systems-related support, equipment, facilities and data. This dependence makes our operations vulnerable to the third parties' failure to perform adequately under the contract, due to internal or external factors.

We have outsourced portions of the operation of our data center, call centers and new business processing services to independent third parties and may from time to time obtain additional services or facilities from other independent third parties. Dependence on third parties for these services and facilities may make our operations vulnerable to their failure to perform as agreed. We also rely upon third parties for information relating to Medicare Part D membership and claims administration. Incorrect information from these entities could generate inaccurate or incomplete membership and payment reports concerning our Medicare eligibility and enrollment, and claims information used by CMS to determine plan benefit subsidies and risk corridor payments. This could cause us to incur additional expense to utilize additional resources to validate, reconcile and correct the information. We have not been able to independently test and verify some of these third party systems and data. There can be no assurance that future third party data will not disrupt or adversely affect our plans' relationships with our members or our results of operations. A change in service providers or a move of services from a third party to internal operations could result in a decline in service quality and effectiveness, increased cost or less favorable contract terms which could adversely affect our operating results. Some of our outsourced services are being performed offshore. CMS requires attestations from plans that utilize the services of offshore vendors as to the vendors' ability to perform delegated functions. Prevailing economic conditions and other circumstances could prevent our offshore vendors' ability to adequately perform as agreed, which would impair our ability to provide the requisite attestations to CMS and could have a material adverse effect on our results of operations and financial condition.

Our business may suffer if we are not able to hire and retain sufficient qualified personnel or if we lose our key personnel.

Our future success depends partly on the continued contribution of our senior management and other key employees. While we currently have employment agreements with key executives, these do not guarantee that the services of these executives will continue to be available to us. The loss of the services of any of our senior management, or other key employees, could harm our business. In addition, recruiting and retaining the personnel we require to effectively compete in our markets may be difficult. If we fail to hire and retain qualified employees, we may not be able to maintain and expand our business.

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Any failure to manage sales and administrative costs could impair profitability.

The level of our sales and administrative expenses affects our profitability. While we proactively attempt to manage these expenses effectively, increases in the cost of sales and marketing, staff-related expenses, investment in new products, greater emphasis on small group and individual health insurance products, acquisitions and implementation of regulatory requirements, among others, may occur from time to time.

There can be no assurance that we will be able to contain our sales expenses in line with our actual levels of production and our administrative expenses in line with our membership base. This may result in a material adverse effect on our financial position, results of operations and cash flows.

The limited annual enrollment period may make it difficult to retain an adequate sales force.

As a result of the limited annual enrollment period and the subsequent "lock-in" provisions of the MMA, our internal and external sales force may be limited in its ability to market some of our products year-round. Our agents rely substantially on sales commissions for their income. Given the limited annual sales window, it may become more difficult to find agents to market and promote our products.

We may be responsible for the actions of our independent and career agents, and restrictions on our ability to market would adversely affect our revenue.

In litigation against our subsidiaries, our members sometimes claim that agents failed to comply with applicable laws, regulations and rules, or acted improperly in other ways, and that we are responsible for the alleged failure. We could be liable for contractual and extra-contractual damages on these claims. We cannot assure you that any future claim will not result in material liability in the future. Federal and state regulators increasingly scrutinize the marketing practices of insurers, such as Medicare Advantage and private fee-for-service plans, MA-PDs and PDPs and their marketing agents, and there is no guarantee that regulators will not scrutinize the practices of our Medicare Advantage plans, PDPs and our marketing agents, and will not expose us to liability.

We rely on our marketing and sales efforts for a significant portion of our premium revenue growth. The Federal government and state governments in the states in which we currently operate permit marketing but impose strict requirements and limitations as to the types of marketing activities that we may conduct. If our marketing efforts were to be prohibited or curtailed, our ability to increase or sustain membership would be significantly harmed, which would adversely affect our revenue and results of operations.

Similarly, Federal and state governments and regulatory agencies have recently placed an increased focus on the sales and marketing of private fee-for-service plans. Concerns over the growing number of market conduct complaints regarding improprieties in agents' sales activities of private fee-for-service plans have spawned stricter marketing standards by CMS relating to these plans and their agents. This heightened focus on market conduct and stricter standards in the marketing and sales of private fee-for-service plans could require us to modify our systems, increase our costs and change our agent training requirements, which could result in a material adverse effect on our results of operations and financial condition.

We may not be able to compete successfully if we cannot recruit and retain insurance agents, which could materially adversely affect our business and ability to compete.

We distribute our products principally through career agents and independent agents who we recruit and train to market and sell our products. We also engage managing general agents from time to time to recruit agents and develop networks of agents in various states. We compete with other insurance companies for productive agents, primarily on the basis of our financial position, support

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services, compensation and product features. It can be difficult to successfully compete for productive agents with larger insurance companies that have higher financial strength ratings than we do. Our business and ability to compete will suffer if we are unable to recruit and retain insurance agents or if we lose the services provided by our managing general agents.

We make cash advances to our agents to assist in the development of agency offices and recruitment of agents.

We historically invested in our career distribution agencies to provide monetary assistance in the development of offices and recruitment of agents to build a controlled distribution force for our various products. In late 2006, we began recruiting career managers to develop offices for distribution of our new Medicare Advantage products. We have opened a significant number of new "expansion" offices since then. The Company has advanced much of the cost of the development of these new offices; however, these costs are the responsibility of the manager of the individual office, to be repaid from future profits of the office. Collectability of these advances generally comes from the commissions earned from the production of these offices or personal guarantees of the office managers. No assurance can be given that production levels or personal assets of the managers will be sufficient to repay the obligation.

As a result of recent regulatory changes, the PFFS product will no longer be available as of January 1, 2011, except in areas that have approved CMS network access requirements or in certain designated rural areas. We have begun to develop provider network-based products in selected core markets to enable the migration of their PFFS membership to the new PPO products. Our PFFS membership is dispersed and our distribution was developed to have a presence in these areas.

We have considered the impact of these and other changes (the reinsurance of the Life and Annuity business and the overall cost savings initiatives associated with the 2010 bids) on our distribution. During the second quarter of 2009, we began a review of our career offices. This review consisted of determining whether the office was in a "core" market, the level of expenses being incurred by the office, the level of in-force commission and the anticipated production. As a result of this review, we had identified a significant number of offices to be closed or restructured and we incurred charges totaling $13.6 million related to the underperforming offices.

A significant portion of our assets are invested in fixed income securities and other securities that are subject to market fluctuations, which have recently been intensified by general economic conditions.

A significant portion of our investment portfolio consists of fixed income securities and other investment securities. Our portfolio can be viewed on our web site,www.universalamerican.com, in the "Investors" section. Our reference to the web site in this annual report on Form 10-K is not intended to, and does not, incorporate the information contained in the web site into this report.

The fair market value of these assets and the investment income from these assets generally fluctuate depending on general economic and market conditions, and these variations have been exacerbated by the ongoing adverse economic conditions. The fair market value of our investments in fixed income securities generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease in a direct relationship with fluctuations in interest rates; in addition, these values and prospective income have been adversely affected by general economic conditions. Moreover, actual net investment income or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset- backed securities, may differ from those anticipated at the time of investment or at various financial statement dates as a result of interest rate fluctuations, general economic conditions and other factors.

Because our investment securities are classified as available for sale, we reflect changes in the market value of these securities in our consolidated balance sheet. Therefore, interest rate fluctuations

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and changes in the values of securities we hold could adversely affect our results of operations and financial condition.

Further deterioration in the mortgage-backed securities market or significant deterioration in the mortgage-backed securities we hold could adversely affect our results of operations or financial condition.

As of December 31, 2009, we held subprime securities with par values of $136.2 million, an amortized cost of $52.6 million and a market value of $25.9 million representing approximately 1.4% of our cash and invested assets, with collateral comprised substantially of first lien mortgages. The majority of these securities are in senior or senior-mezzanine level tranches, which have preferential liquidation characteristics, and have an average rating of A+ by Standard & Poors, a division of the McGraw Hill Companies, Inc., known as S&P, or equivalent.

We have recognized other-than-temporary impairment in the value of some of our securities with exposure to subprime mortgages, securities issued by financial institutions and some of our other securities. As the economy in general, as well as the market for mortgage-backed securities with exposure to subprime mortgages and securities issued by financial institutions, have deteriorated, these securities have become increasingly illiquid. In addition, as some financial institutions have become insolvent, their securities have become worthless or have significantly lost value. If the mortgage-backed securities with exposure to subprime mortgages in our portfolio experience significant rates of default, if the market for these securities, securities issued by financial institutions and other securities continues to experience lack of liquidity or otherwise deteriorates or this lack of liquidity worsens, we might need to continue to impair the value of our securities, which could adversely effect our results of operations or financial condition.

Additionally, mortgage-backed securities are subject to prepayment risks that vary with interest rates, among other things. During periods of declining interest rates, mortgage-backed securities generally prepay faster as the underlying mortgages are prepaid or refinanced by borrowers in order to take advantage of lower rates. Mortgage-backed securities that have an amortized cost greater than par because we purchased them at a premium may incur a reduction in yield or a loss as a result of these prepayments.

In addition, in connection with the other-than-temporary impairments that we have recognized for financial statement purposes, we believe we have available opportunities to recover the tax assets generated by the other-than-temporary impairments. Circumstances may arise in the future that cause us to re-determine the recoverability of those tax benefits, which could result in the loss of the tax benefits we expect to take.

We may not have adequate intellectual property rights in our brand names for our health plans, and we may be unable to adequately enforce these rights.

Our success depends, in part, upon our ability to market our health plans under the brand names that we own or license. We may not have taken enforcement action to prevent infringement of our marks and may not have secured registrations of the other brand names that we use in our business. Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual property rights. Other businesses may have prior rights in our brand names or in similar names, which could cause market confusion or limit or prevent our ability to use these marks or prevent others from using similar marks. If we are unable to prevent others from using our brand names, or if others prohibit us from using them, our revenues could be adversely affected. Even if we are able to protect our intellectual property rights in our brands, we could incur significant costs in doing so.

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Our results of operations and shareholders' equity could be materially adversely affected if we have an impairment of our intangible assets.

Due to our past acquisitions, goodwill and other intangible assets represent a significant portion of our total assets. Goodwill and other intangible assets were approximately $697.6 million, or 18% of our total assets as of December 31, 2009. In accordance with applicable accounting standards, we perform periodic assessments of our goodwill and other intangible assets to determine whether all or a portion of their carrying values may no longer be recoverable, in which case a charge to earnings may be necessary. This impairment testing requires us to make assumptions and judgments regarding the estimated fair value of our reporting units. Fair value is calculated using a blend of a projected income and market value approach. Estimated fair values developed based on our assumptions and judgments might be significantly different if other assumptions and estimates were to be used. Any future evaluations requiring an asset impairment of our goodwill and other intangible assets could materially affect our results of operations and shareholders' equity in the period in which the impairment occurs.

We have debt outstanding that contains restrictive covenants, and we may be unable to access other sources of financing should we require additional external financing or obtain waivers of relevant covenants or, if they arise, defaults under the debt agreements.

We have available $150 million of borrowing capacity under the revolving portion of our credit facility. Our credit agreement significantly restricts our ability to borrow from other sources. Therefore, if we are required to fund the growth of our business, or to fund capital requirements at our insurance company and health plan subsidiaries, in excess of the aggregate of our cash, revolver borrowing capacity and other borrowing capacity permitted under the credit facility, we could be restricted in our ability to generate new premium or other revenue, to construct the health maintenance organizations and preferred provider organizations that we are in the process of contracting, or to otherwise fund or expand our business. Moreover, if we determine to enter into a transaction or affect another corporate event that requires a waiver or consent under a debt agreement, or if we experience an event of default under a debt agreement, lenders could refuse to grant a required waiver or consent, could charge a material amount for it or could otherwise demand costly concessions. As a consequence, we could be unable to complete the desired transaction or other corporate event, or the required waiver or consent could cost more than it otherwise would, or we could experience a default under the relevant debt instrument, or our results of operations and financial condition could be adversely affected.

We have debt outstanding that contains restrictive covenants, and we may be unable to service and repay our debt obligations if our subsidiaries cannot pay sufficient dividends or make other cash payments to us.

As of December 31, 2009, we had $314 million of debt outstanding under the term portion of our credit agreement. We have available borrowing capacity under the revolving portion of our credit facility of $150 million. As of December 31, 2009, we had $110 million of trust preferred securities outstanding. Our credit agreement provides that upon the occurrence of specified events all of the capital stock of the guarantor subsidiaries under the credit agreement will be pledged to our bank lenders; those events have occurred and we have pledged this stock. Because our principal outstanding indebtedness has been incurred by our parent company, our ability to make interest and principal payments on our outstanding debt is dependent upon the ability of our subsidiaries to pay cash dividends or make other cash payments to our parent company. Our subsidiaries will be able to pay dividends to our parent company only if they earn sufficient profits and, in the case of our insurance company and health plan subsidiaries, they satisfy the requirements of the state insurance laws relating to dividend payments and the maintenance of required surplus.

Our debt service obligations will require us to use a portion of our operating cash flow to pay interest and principal on indebtedness before use for other corporate purposes, such as funding future expansion of our business and ongoing capital expenditures. If our operating cash flow and capital

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resources are insufficient to service our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt. However, these measures might be unsuccessful or inadequate in permitting us to meet scheduled debt service obligations. We may also incur additional indebtedness in the future. Our indebtedness could have additional adverse consequences, such as:

•: increasing our vulnerability to adverse economic, regulatory and industry conditions, and placing us at a disadvantage compared to our competitors that have less leverage;
•: limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•: limiting our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate or other purposes; and
•: exposing us to greater interest rate risk since the interest rate on borrowings under our senior credit facilities is variable.

If we are required to maintain higher statutory capital levels for our existing operations or if we are subject to additional capital reserve requirements as we pursue new business opportunities, our ability to obtain funds from our subsidiaries may be restricted and our cash flows and liquidity may be adversely affected.

Because Universal American operates as a holding company, it is dependent upon dividends and administrative expense reimbursements from its subsidiaries to fund its obligations, such as payment of principal and interest on its debt obligations. These subsidiaries generally are regulated by state departments of insurance. Our health plan and insurance company subsidiaries are subject to laws and regulations that limit the amount of dividends and distributions they can pay for purposes other than to pay income taxes related to their earnings. These laws and regulations also limit the amount of management fees our subsidiaries may pay to our management subsidiaries and their other affiliates without prior notification to, or in some cases approval of, state regulators.

We are also required by law to maintain specific prescribed minimum amounts of capital in these subsidiaries. The levels of capitalization required depend primarily upon the volume of premium generated. A significant increase in premium volume will require additional capitalization from our parent company. In most states, we are required to seek prior approval by these state regulatory authorities before we transfer money or pay dividends that exceed specified amounts from these subsidiaries, or, in some states, any amount. The pre-approval and notice requirements vary from state to state, and the discretion of the state regulators, if any, in approving or disapproving a dividend is not always clearly defined. Subsidiaries that declare non-extraordinary dividends must usually provide notice to the regulators in advance of the intended distribution date. If the regulators were to deny or significantly restrict our subsidiaries' requests to pay dividends to us or to pay management and other fees to affiliates, the funds available to us would be limited, which could impair our ability to implement our business and growth strategy and satisfy our debt obligations, or we could be required to incur additional indebtedness to fund these strategies.

In addition, one or more of these states could increase the statutory capital level from time to time. States have also adopted risk-based capital requirements based on guidelines adopted by the National Association of Insurance Commissioners, which tend to be, although are not necessarily, higher than existing statutory capital requirements. Regardless of whether the states in which we operate maintain or adopt risk-based capital requirements, the state departments of insurance can require our subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under the applicable state laws if they determine that maintaining additional statutory capital is in the best interests of our members. Any increases in these requirements could materially increase our reserve requirements. In addition, as we continue to expand our plan offerings in new states or pursue new business opportunities, such as our recent offerings of PDPs and expansion of private

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fee-for-service products and health plans in new markets, we may be required to maintain additional statutory capital reserves. In either case, our available funds could be materially reduced, which could harm our ability to implement our business strategy.

In the event that we are unable to provide sufficient capital to fund the debt obligations of Universal American, our operations or financial position may be adversely affected.

Downgrades in our debt ratings, should they occur, may adversely affect our business, financial condition and results of operations.

Increased public and regulatory concerns regarding the financial stability of insurance companies and health plans have resulted in consumers placing greater emphasis upon financial strength ratings. Claims paying ability, financial strength, and debt ratings by recognized rating organizations are increasingly important factors in establishing the competitive position of insurance companies and health plans. Ratings information is broadly disseminated and generally used throughout the industry. Our ability to expand and to attract new business is affected by the financial strength ratings assigned to our subsidiaries by independent industry rating agencies, such as A.M. Best Company, Inc. Some distributors such as financial institutions, unions, associations and affinity groups may not sell our products to these groups unless the rating of our subsidiary writing the business improves to at least an "A-." The lack of higher A.M. Best ratings for our subsidiaries could adversely affect sales of our products.

Our debt ratings affect both the cost and availability of future borrowings. Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future. Our ratings reflect each rating agency's opinion of our financial strength, operating performance, and ability to meet our debt obligations or obligations to policyholders, but are not evaluations directed toward the protection of investors in our common stock and should not be relied upon as such. There is no assurance that the rating agencies will maintain our current ratings in the future. Any future downgrade in our ratings may cause our policyholders and members to lapse, and may cause some of our agents to sell less of our products or to cease selling our products altogether. Increased lapse rates would reduce our premium revenue and net income. Thus, downgrades in our ratings, should they occur, may adversely affect our business, financial condition and results of operations.

The securities and credit markets recently have been experiencing extreme volatility and disruption, which could adversely affect our business.

Given the current economic climate, our stock and the stocks of other companies in the insurance industry may be increasingly subject to stock price and trading volume volatility. Also, downgrades in our debt ratings, should they occur, may adversely affect our business, results of operations, and financial condition.

State insurance laws and anti-takeover provisions in our organizational documents could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our current management.

Provisions of state insurance laws, the business corporation law of the State of New York, where we are incorporated, and our certificate of incorporation and bylaws, as well as the percentage of our common stock owned by our management, directors and equity investors may delay or prevent an acquisition of us or a change in our management or similar change in control transaction, such as transactions in which shareholders might otherwise receive a premium for their shares over then current prices or that shareholders may otherwise deem to be in their best interests. In addition, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors.

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Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our shareholders to replace current members of our management team.

Our stock price and trading volume may be volatile, which could result in a decrease in the price of our common stock.

From time to time, the price and trading volume of our common stock may experience periods of significant volatility. Company-specific issues and developments generally in the health care and insurance industries, the regulatory environment, the capital markets and the general economy may cause this volatility. The principal events and factors that we have identified that may cause our stock price and trading volume to fluctuate are:

•: variations in our operating results;
•: changes in the market's expectations about our future operating results;
•: changes in financial estimates and recommendations by securities analysts concerning our company or the health care or insurance industries generally;
•: operating and stock price performance of other companies that investors may deem comparable;
•: news reports relating to trends in our markets;
•: changes in the laws and regulations affecting our business;
•: acquisitions and financings by us or others in our industry; and
•: sales of substantial amounts of our common stock by our directors and executive officers or principal shareholders, or the perception that these sales could occur.

Some of our directors and executive officers may have interests that are different from, or in addition to, the interests of our shareholders generally.

Some of our directors and executive officers may have significant equity ownership in us, employment, indemnification and severance benefit arrangements, potential rights to other benefits on a change in control and rights to ongoing indemnification and insurance that result in their having interests that may differ from the interests of our shareholders generally. The receipt of compensation or other benefits by our directors or executive officers in connection with the any acquisition may make it more difficult for the combined company to retain their services after the acquisition, or require the combined company to expend additional sums to continue to retain their services. In addition, consistent with our compensation philosophy of senior executives holding approximately 5% of our aggregate equity ownership, some of our executives are likely to receive additional equity grants as a result of the increase in our outstanding shares due to the acquisition and the investment by the equity investors.

If we are unable to maintain effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the price of our common stock.

Because of our status as a public company, we are required to test our financial, internal, and management control systems to meet obligations imposed by the Sarbanes-Oxley Act of 2002. These control systems relate to our corporate governance, corporate control, internal audit, disclosure controls and procedures, and financial reporting and accounting systems. Our disclosure controls and procedures and our internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must reflect

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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 the Company have been detected. Among these inherent limitations are the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The individual acts of some persons or the collusion of two or more people can circumvent controls. The design of any system of controls is based in part on 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.

If we conclude that we do not have effective internal controls over financial reporting or if our independent auditors are unable to conclude that our internal controls over financial reporting are effective, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Our assessment of our internal controls over financial reporting may also uncover material weaknesses, significant deficiencies or other issues with these controls that could also result in adverse investor reaction. These results may also subject us to adverse regulatory consequences.

ITEM 1B—UNRESOLVED STAFF COMMENTS

There are no unresolved comments from the Staff of the Securities and Exchange Commission regarding the registrant's periodic or current reports under the Act.

ITEM 2—PROPERTIES

Our executive offices are located in Rye Brook, New York. Marketing and professional staff for our U.S. insurance subsidiaries occupy space in Lake Mary, Florida and Solon, Ohio. Our Administrative Services operations occupy office space in Pensacola and Weston, Florida. Our Medicare Advantage operations occupy office space in Houston, Beaumont and Dallas, Texas, as well as Oklahoma City, Oklahoma and Milwaukee, Wisconsin. Our Part D operations occupy space in Solon, Ohio and Pensacola, Florida. We lease over 655,000 square feet of office space. Management considers its office facilities suitable and adequate for the current level of operations. In addition to the above, Pennsylvania Life is the named lessee on over 30 properties occupied by career agents for use as field offices. Rent for these field offices is reimbursed by the agents. Additional information regarding our lease obligations is included in Note 26—Commitments and Contingencies in our consolidated financial statements included in this Annual Report on Form 10-K.

ITEM 3—LEGAL PROCEEDINGS

For information relating to litigation affecting us, please see Note 26—Commitments and Contingencies of the notes to the consolidated financial statements of this report, which is incorporated into this Part I—Item 3—Legal Proceedings by reference.

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted by us to a vote of stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of 2009.

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PART II

ITEM 5—MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

On December 3, 2007, our common shares began trading on the New York Stock Exchange, or the NYSE, under the ticker symbol "UAM." Prior to December 3, 2007, our common stock traded in the over-the-counter market and was quoted on the NASDAQ Global Select tier of The NASDAQ Stock Market, or the NASDAQ, under the symbol "UHCO". The following table sets forth the high and low sales prices for our common stock on the NYSE and NASDAQ National Market, as reported by the NYSE or NASDAQ for the periods indicated.

		Common Stock

Period		High		Low
Year Ended December 31, 2008
	First Quarter	$	25.59	$	10.35
	Second Quarter		12.61		9.11
	Third Quarter		13.69		8.71
	Fourth Quarter		12.19		6.79
Year Ending December 31, 2009
	First Quarter		10.66		5.41
	Second Quarter		10.62		7.98
	Third Quarter		10.26		7.83
	Fourth Quarter		12.00		8.69
Year Ending December 31, 2010
	First Quarter (through February 24, 2010)		14.75		12.00

The closing sale price of our common stock on February 24, 2010, as reported by NYSE, was $14.65 per share.

Stockholders

As of the close of business on February 24, 2010, there were approximately 900 holders of record of our common stock. There are no outstanding shares of our nonvoting common stock. We estimate that there are approximately 3,500 beneficial owners of our common stock. In addition, there were 5 record and beneficial holders of our Series A preferred stock. Each outstanding share of our preferred stock is convertible, directly or indirectly, into 100 shares of our common stock.

Dividends

We have never declared cash dividends on our common stock, and have no present intention to declare any cash dividends in the foreseeable future. As discussed under "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources", our credit facility limits our ability to pay dividends, and the debentures that we have issued simultaneously with our trust preferred securities also limit our ability to pay dividends if we fail to make the required interest payments under the debentures.

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Issuer Purchases of Equity Securities

Period		Average Price Paid Per Share			Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in Thousands)

October 1, 2009—October 31, 2009	404,500	$	9.27	404,500	$	64,826
November 1, 2009—November 30, 2009	1,732,740	$	9.75	1,732,740		47,929
December 1, 2009—December 31, 2009	489,020	$	11.49	489,020		42,312

Total	2,626,260			2,626,260

We have approved share repurchase plans that have authorized us to repurchase up to $175 million of shares of our common stock. Through December 31, 2009, we had repurchased 13.4 million shares of our common stock for an aggregate amount of $132.7 million, under these programs. As of December 31, 2009, we have $42.3 million that remains available to repurchase additional shares under these plans. There have been no buybacks since December 31, 2009. We are not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

Recent Sales of Unregistered Securities

None.

Securities Authorized for Issuance Under Equity Compensation Plans

The information regarding securities authorized for issuance under our equity compensation plans is disclosed in Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

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ITEM 6—SELECTED FINANCIAL DATA

The table below provides selected financial data and other operating information as of and for the five fiscal years ended December 31, 2009. We derived the selected financial data presented below for the five fiscal years ended December 31, 2009 from our audited financial statements. We have prepared the following data, other than statutory data, in conformity with generally accepted accounting principles. You should read this selected financial data together with our consolidated financial statements and the notes to those consolidated financial statements as well as the discussion under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."

		As of or for the Year Ended December 31,

		2009			2008			2007(1)			2006		2005(2)
		(in thousands, except per share data)
Income Statement Data:
Net premium and policyholder fees earned		$	4,918,898		$	4,600,454		$	2,941,419		$	1,197,142	$	771,962
Net investment income			49,814			81,270			106,970			75,459		61,448
Fee and other income			19,776			37,130			26,412			27,645		18,294
Net realized (losses) gains on investments			(24,988	)		(59,681	)		(40,178	)		4,818		5,044

Total revenues			4,963,500			4,659,173			3,034,623			1,305,064		856,748
Total benefits, claims and expenses			4,749,148			4,580,682			2,958,661			1,257,495		786,385

Income from continuing operations before equity in earnings of unconsolidated subsidiary			214,352			78,491			75,962			47,569		70,363
Equity in earnings (loss) of unconsolidated subsidiary			280			72,813			56,664			46,187		(3,980	)

Income from continuing operations before taxes			214,632			151,304			132,626			93,756		66,383
Provision for income taxes			74,328			56,212			48,554			32,610		22,626

Income from continuing operations			140,304			95,092			84,072			61,146		43,757

Discontinued Operations:
	Income from discontinued operations, net of taxes		—			—			—			9,788		10,119
	Gain on Sale of discontinued operations, net of taxes		—			—			—			48,372		—

	Income from discontinued operations		—			—			—			58,160		10,119

Net income		$	140,304		$	95,092		$	84,072		$	119,306	$	53,876

Earnings per common share:
Basic:
	Continuing operations	$	1.73		$	1.09		$	1.20		$	1.04	$	0.76
	Discontinued operations		—			—			—			0.99		0.18

	Net income	$	1.73		$	1.09		$	1.20		$	2.03	$	0.94

Diluted:
	Continuing operations	$	1.73		$	1.08		$	1.18		$	1.02	$	0.74
	Discontinued operations		—			—			—			0.97		0.17

	Net income	$	1.73		$	1.08		$	1.18		$	1.99	$	0.91

(1): Reflects the results of MemberHealth since its acquisition on September 21, 2007.
(2): Amounts originally reported in our Annual Report on Form 10K for 2005 have been adjusted to reflect the operations of our Canadian subsidiary as discontinued operations.

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	As of December 31,

	2009		2008		2007(1)		2006		2005(2)
	(in thousands, except per share data)
Balance Sheet Data:
Total cash and investments	$	1,822,787	$	1,567,348	$	1,815,620	$	1,677,973	$	1,272,343
Total assets		3,814,856		3,862,163		4,089,256		2,585,042		2,224,344
Policyholder related liabilities		1,388,586		1,532,422		1,585,750		1,253,113		1,202,922
Outstanding bank debt		313,758		320,625		349,125		90,563		95,813
Trust preferred securities		110,000		110,000		110,000		75,000		75,000
Shareholders' equity		1,449,464		1,316,084		1,351,066		623,909		531,884
Book value per share:
Basic	$	18.44	$	15.58	$	14.66	$	10.54	$	9.13
Data Reported to Regulators:
Statutory capital and surplus	$	800,580	$	611,497	$	545,201	$	282,453	$	180,448
Asset valuation reserve		247		590		5,220		4,445		3,182

Adjusted capital and surplus	$	800,827	$	612,087	$	550,421	$	286,898	$	183,630

(1): Reflects the results of MemberHealth since its acquisition on September 21, 2007.

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ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the consolidated financial statements and related consolidated footnotes included in this Annual Report on Form 10-K.

The following discussion and analysis presents a review of the Company as of December 31, 2009 and its results of operations for the fiscal years ended December 31, 2009, 2008 and 2007.

2009 Highlights:

•: Revenue increased 7% to $5.0 billion, compared 2008.
•: Pre-tax earnings increased $63.3 million to $214.6 million from 2008.
•: Membership in our network-based Plans increased 18% year-over-year, including 35% growth in our HMO expansion markets in Oklahoma, Wisconsin and Dallas, TX. This offset a 5% decline in PFFS membership due to lapsation.
•: Net retained Part D membership increased 125,000 from December 31, 2008.
•: For the 2010 Plan year, one or both of our Part D Plans bid under the benchmark in 30 of the 34 regions. We maintained all of our current auto-assigned regions and added three new regions and we were auto-assigned 148,604 additional dual-eligible members in 2010.
•: 2009 diluted earnings per share of $1.73.
•: Recorded realized losses of $25.0 million, which included a charge of $17.4 million for the other-than-temporary impairment of investment securities, compared to realized losses of $59.7 million, including $59.8 million of OTTI recorded in 2008.
•: Closed the transaction to reinsure substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty with two insurance company subsidiaries of Goldman Sachs Group, Inc. (NYSE:GS). Recorded loss on transaction and related activities of $4.8 million, after-tax, or $0.06 per share.
•: Recorded restructuring charges of $3.0 million, after-tax, or $0.04 per share.
•: Recorded charge of $8.6 million, after tax, or $0.10 per share related to the proposed closing and restructuring of certain career sales offices.
•: Recorded $5.5 million tax benefit related to non-recurring items.
•: Implemented ASC 320, which increased retained earnings $10.7 million, with a corresponding increase to accumulated other comprehensive loss.
•: Repurchased 6.7 million of our shares at a cost of $60.9 million in 2009, in connection with our share repurchase plan.

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Membership

The following table presents our membership in Medicare Advantage and Part D products as of December 31, 2009 and 2008.

Membership by Segment			2009

			(in thousands)
Medicare Advantage
	PFFS			177	186
	Network-based (HMO and PPO)			64	55

		Total Medicare Advantage		241	241

Part D
	CCRx			1,252	1,308
	PRx(1)			445	264

		Total Part D		1,697	1,572

Total Membership				1,938	1,813

(1): 2008 amount represents 50% of membership for the Prescription Pathway^SM PDP, which was succeeded in 2009 by Prescriba Rx^SM (PRx). While membership in PRx is 100% retained by us, Prescription Pathway^SM was operated in connection with a 50% joint venture partner. Actual membership at December 31, 2008 was 527,000.

Significant Transactions and Initiatives

Medicare Advantage

Our Senior Managed Care—Medicare Advantage segment includes the operations of our private fee-for-service business, known as PFFS, which offers coverage to Medicare beneficiaries in 45 states and our Medicare coordinated care Plans including PPOs and HMOs. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas and the greater Dallas area, 15 counties in Oklahoma and 4 counties in Wisconsin. In January 2010, we expanded our PPO products to 126 counties in 17 states. As a result of the passage of the Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA, in 2008, the PFFS product will no longer be available as of January 1, 2011, except in areas that have met approved CMS network access requirements or in certain designated rural areas. We have begun to implement a strategy to develop network-based products in selected core markets to enable the migration of our PFFS membership to these products. These businesses provide managed care for seniors under contracts with CMS.

As of December 30, 2009, our enrollment in network-based plans (HMO and PPO) has increased to approximately 64,300 members from 54,300 members at December 31, 2008. As of December 31, 2009, our enrollment in PFFS plans has decreased to approximately 176,200 members, compared with 186,200 members at December 31, 2008.

Medicare Part D

Effective January 1, 2006, private insurers were permitted to sponsor insured stand-alone PDPs pursuant to Part D, which was established by the Medicare Modernization Act in 2003. The federal government pays a portion of the premium for this insurance, and the balance (if any) is due from the enrolled beneficiary. The federal government also provides additional subsidies in the form of premium support, coverage of the cost-sharing elements of the plan to specified low income Medicare beneficiaries and the federal reinsurance subsidy for claims in the catastrophic benefit phase. For the 2009 plan year, we offered through our insurance subsidiaries, our Community CCRx^SM and

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PerscribaRx^SM prescription drug plans in all 34 regions designated by CMS in which we bid and one or both of our plans bid under the benchmark in 27 of the 34 regions. For the 2010 Plan year, one or both of our plans bid under the benchmark in 30 of the 34 regions, and were auto-assigned 148,604 additional dual-eligible members.

Life Insurance and Annuity Reinsurance Transaction

On April 24, 2009 we completed the closing of the previously announced Life Insurance and Annuity Reinsurance transaction with the Commonwealth Annuity and Life Insurance Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS). Under this transaction, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty. We transferred approximately $454 million of cash, net of the ceding commission of $77 million, and $22 million of policy loans, related to the reinsured policies, to the reinsurer. We had approximately $74 million of deferred acquisition costs and present value of future profits as of the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding commission. On a GAAP basis, the transaction resulted in a loss and other related costs of approximately $7.6 million, including approximately $2.8 million related to the transition of the administration of the business to the reinsurer.

Segment Overview

Our business segments are based on product and consist of

•: Senior Managed Care—Medicare Advantage,
•: Medicare Part D,
•: Traditional Insurance, and
•: Senior Administrative Services.

We also report the activities of our holding company in a separate segment. See Note 27—Business Segment Information in our consolidated financial statements included in this annual report on Form 10-K for a description of our segments.

We report inter-segment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These inter-segment revenues and expenses affect the amounts reported on the individual financial statement line items, but we eliminate them in consolidation and they do not change income before taxes. The significant items eliminated are

•: inter-segment revenue and expense relating to services performed by the Senior Administrative Services segment for our other segments,
•: inter-segment revenue and expense relating to PBM services performed by the Part D segment for other segments, and
•: interest on notes payable or receivable between the Corporate segment and the other operating segments.

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Results of Operations—Consolidated Overview

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

		For the year ended December 31,

		2009			2008			2007
		(in thousands)
Senior Managed Care—Medicare Advantage(1)		$	134,810		$	94,625		$	52,726
Medicare Part D(1)			178,344			127,444			116,888
Traditional Insurance(1)(2)			(20,518	)		4,845			14,106
Senior Administrative Services(1)			8,486			22,020			24,124
Corporate(1)			(61,502	)		(37,949	)		(35,040	)
Net realized losses on investments(1)			(24,988	)		(59,681	)		(40,178	)

Income before provision for income taxes(1)			214,632			151,304			132,626
	Provision for income taxes		74,328			56,212			48,554

Net income		$	140,304		$	95,092		$	84,072

Earnings per common share (diluted)		$	1.73		$	1.08		$	1.18

(1): We evaluate the results of operations of our segments based on income before realized gains and losses and income taxes. We believe that realized gains and losses are not indicative of overall operating trends. This differs from generally accepted accounting principles, which reflects the effect of realized gains and losses in the determination of net income. The schedule above reconciles our segment income to net income in accordance with generally accepted accounting principles.
(2): Includes $3.9 million goodwill impairment in 2008.

Years ended December 31, 2009 and 2008

Net income for the year ended December 31, 2009 was $140.3 million, or $1.73 per diluted share, compared to net income of $95.1 million, or $1.08 per diluted share for the year ended December 31, 2008. The net income for the year ended December 31, 2009 includes realized investment losses, net of taxes, of $16.2 million, or $0.20 per diluted share, relating primarily to the recognition of other-than-temporary impairments on investments. Net income for the year ended December 31, 2008 includes realized investment losses, net of taxes, of $38.8 million, or $0.44 per diluted share, also related primarily to the recognition of other-than-temporary impairments on investments. For the year ended December 31, 2009, our effective tax rate was 34.7%, compared with 37.2% for the same period of 2008. The decline in the effective rate for the year ended December 31, 2009 is due to the recording of $5.5 million of non-recurring tax benefits during the third quarter of 2009. This benefit resulted from the settlement of the Internal Revenue Service examination of 2005 primarily related to the treatment of a controlled foreign corporation sold in 2006. Absent this non-recurring benefit, the effective rate would have been 37.2% for the year ended December 31, 2009.

Our Senior Managed Care—Medicare Advantage segment generated income before taxes of $134.8 million for the year ended December 31, 2009, an increase of $40.2 million compared to the year ended December 31, 2008. These results reflect $21.1 million of favorable CMS reconciliations and reserve development in 2009 as compared to $42.1 million in 2008. The increase in earnings was driven by higher medical operating income generated by higher premium, an improvement in the medical benefit ratio of 80 basis points and higher net investment income, partially offset by the $3.5 million restructuring costs incurred during the second quarter and continued investment in the development of provider networks for our expansion PPO markets. The improvement in the medical benefit ratio is

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due primarily to higher premium per member related to changes in members' risk scoring process in 2009 and the $18.9 million in false claims submitted by fictitious providers, in our PFFS business during the fourth quarter of 2008.

Our Medicare Part D segment income for the year ended December 31, 2009 increased by $50.9 million versus the comparable period in 2008. These results reflect favorable CMS reconciliations and reserve development of $0.5 million in 2009 as compared to net negative prior period development of $0.6 million in 2008. In addition, premium growth and improved benefit and expense ratios exceeded the elimination of income generated from our interest in PDMS and the amortization of the below market contract liability by approximately $50 million.

Results for our Traditional Insurance segment decreased by $25.4 million compared to the year ended December 31, 2008. The reinsurance transaction with Commonwealth to reinsure substantially all of the net retained life and annuity business resulted in a loss and other related costs of approximately $7.6 million. Additionally, a $1.4 million restructuring charge was recorded as a result of re-alignment of operations with the lower level of net retained business. Excluding these impacts, the decrease to net income was primarily caused by a $37.1 million decrease in net investment income caused by a lower invested asset base due to the transfer of assets in conjunction with the reinsurance transaction noted above and by lower average yields on retained business, which was offset by a reduction in commissions and general expenses of $19.5 million.

Segment income before taxes for our Senior Administrative Services segment declined by $13.5 million, or 62%, to $8.5 million for the year ended December 31, 2009, as compared to 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a corresponding decrease in general expenses.

The loss from our Corporate segment increased by $23.6 million, or 62%, for the year ended December 31, 2009 compared to 2008. This was due primarily to a $13.6 million charge related to the proposed closing and restructuring of certain career sales offices in 2009, a significant non-recurring release of a bonus accrual in the first quarter of 2008, higher stock-based compensation costs for equity awards to employees and directors, higher levels of expense and lower net investment income, partially offset by lower borrowing costs.

Years ended December 31, 2008 and 2007

Net income for 2008 was $95.1 million, or $1.08 per diluted share, compared to $84.1million, or $1.18 per diluted share for 2007. Net income for 2008 reflects realized investment losses, net of tax, of $38.8 million, or $0.44 per diluted shares, relating primarily to the recognition of other-than-temporary impairment of some of our securities with exposure to subprime mortgages, other structured securities and corporate securities. Income from continuing operations for 2007 reflects realized investment losses, net of tax, of $26.1 million, or $0.37 per diluted shares, relating primarily to the recognition of other-than-temporary impairment of some of our securities with exposure to subprime mortgages.

Our Senior Managed Care—Medicare Advantage segment generated segment income before taxes of $94.6 million in the year ended December 31, 2008, an increase of $41.9 million compared to 2007, primarily due to growth in HMO and PFFS member months, $35.2 million of net positive 2007 development in our PFFS business, $6.9 million of net positive 2007 development in our HMO business and improved PFFS and HMO medical loss ratios, partially offset by false claims of $18.9 million submitted by fictitious providers in our PFFS business, lower investment income due to declining short term interest rates and $12.3 million of start-up costs mainly associated with the establishment of our PPO networks.

Our Medicare Part D income increased by $10.6 million, compared to the year ended December 31, 2007. We acquired MemberHealth on September 21, 2007 and our results for the year

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ended December 31, 2008 reflect income of $89.4 million on MemberHealth's business, which is an increase of $26.1 million over the prior year period. This was partially offset by a decrease in year to date earnings on Prescription Pathway^SM business of $15.5 million compared with the prior year period, primarily as a result of increases in prescription drug costs and the impact of the government risk corridor.

Our Traditional Insurance segment income before taxes decreased by $9.3 million compared to 2007, due to $3.9 million impairment of goodwill and lower earnings on specialty health and life insurance and annuity businesses, partially offset by increased earnings on Medicare supplement business. The declines were primarily due to lower investment income. The overall loss ratio for the segment was 76.8% for 2008, compared with 75.3% for 2007. Individual loss ratios for 2008 were 75.2% for Medicare supplement, compared with 73.4% for 2007, due to higher skilled nursing facility claims and aging of the business; 91.7% for specialty health, compared with 90.1% for last year and 65.8% for life and annuity, compared with 67.1% for 2007.

Segment income before taxes for our Senior Administrative Services segment decreased by $2.1 million, or 9%, to $22.0 million for the year ended December 31, 2008, as compared to 2007. This decrease is primarily the result of reduced levels of unaffiliated service fee revenues.

The loss from our Corporate segment increased by $2.9 million, or 8%, for the year ended December 31, 2008 compared to the 2007. The increase was due primarily to an increase in interest costs and the cost of stock based compensation, partially offset by lower other parent company expenses, net of revenues and the non-recurring early extinguishment of debt costs incurred in 2007.

Segment Results—Senior Managed Care—Medicare Advantage

		For the year ended December 31,

		2009		2008		2007
		(in thousands)
Net premiums		$	2,616,596	$	2,404,067	$	1,920,309
Net investment and other income			26,394		16,626		23,142

	Total revenue		2,642,990		2,420,693		1,943,451

Medical expenses			2,156,603		2,001,163		1,611,824
Amortization of intangible assets			4,584		4,056		3,844
Restructuring costs			3,500		—		—
Commissions and general expenses			343,493		320,849		275,057

	Total benefits, claims and expenses		2,508,180		2,326,068		1,890,725

Segment income before taxes		$	134,810	$	94,625	$	52,726

Our Senior Managed Care—Medicare Advantage segment includes the operations of our private fee-for-service business, known as PFFS, which offers coverage to Medicare beneficiaries in 45 states as well as our Medicare coordinated care Plans including PPOs and HMOs. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas and the surrounding Dallas area, 15 counties in Oklahoma and 4 counties in Wisconsin. In January 2010, we expanded our PPO products to 126 counties in 17 states. As a result of the passage of the Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA, the PFFS product will no longer be available as of January 1, 2011, except in areas that have met approved CMS network access requirements or in certain designated rural areas. We have developed network-based products in selected core markets to enable the migration of our PFFS membership to these products. These businesses provide managed care for persons with Medicare under contracts with CMS.

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Years ended December 31, 2009 and 2008

Revenues. Net premiums for the Senior Managed Care—Medicare Advantage segment increased by $212.5 million compared to the year ended December 31, 2008, primarily due to premium growth resulting from an increase in overall premium rates per member, growth in HMO membership and net premium generated by our new PPO markets. Total member months in our Medicare Advantage Plans for the year ended December 31, 2009 were down slightly from prior year with gains in membership in our HMO Plans being offset by lapses in our PFFS Plans. In addition, net investment income increased due to higher investment levels, partially offset by lower yields.

Benefits, Claims and Expenses. Medical expenses increased by $155.4 million compared to the year ended December 31, 2008, consistent with the higher level of earned premium. The Medicare Advantage medical benefit ratio decreased to 82.4% for the year ended December 31, 2009 from 83.2% for the same period in 2008, primarily as a result of the items discussed above. In the second quarter of 2009 we recorded a $3.5 million restructuring charge related to the in-sourcing of billing and enrollment for our health plan business. Commissions and general expenses increased by $22.6 million compared to the year ended December 31, 2008 primarily as the result of an increase in expenses to support the continued investment in the development of provider networks for our expansion PPO markets. However, the ratio of commissions and general expenses to premiums decreased to 13.1% for the year ended December 31, 2009 from 13.3% in 2008 primarily due to increased efficiencies.

Years ended December 31, 2008 and 2007

Revenues. Net premiums for the Senior Managed Care—Medicare Advantage segment increased by $483.8 million compared to the year ended December 31, 2007, primarily due to premium growth in both our PFFS and HMO markets. Total member months in our Medicare Advantage Plans for the year ended December 31, 2008 was up from prior year with gains in membership in our HMO Plans and our PFFS Plans. This was partially offset by a decline in net investment income due to lower short term interest rates.

Benefits, Claims and Expenses. Medical expenses increased by $389.3 million compared to the year ended December 31, 2007, consistent with the higher level of earned premium. The Medicare

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Advantage medical benefit ratio decreased to 83.2% for the year ended December 31, 2008 from 83.9% for the same period in 2007, primarily as a result of the items discussed above. Commissions and general expenses increased by $45.7 million compared to the year ended December 31, 2007 primarily as the result of an increase in expenses to support the development of provider networks for our PPO markets and growth in membership in our PFFS and HMO Plans. However, the ratio of commissions and general expenses to premiums decreased to 13.3% for the year ended December 31, 2008 from 14.3% in 2007 primarily due to increased efficiencies.

Segment Results—Medicare Part D

		For the year ended December 31,

		2009			2008			2007
		(in thousands)
Direct and assumed premiums		$	2,016,387		$	2,089,226		$	950,986
Risk corridor adjustment/government reinsurance			(33,580	)		9,273			(113,545	)

Direct and assumed premiums after risk corridor adjustment			1,982,807			2,098,499			837,441
Ceded premiums			(1,900	)		(296,372	)		(258,650	)

	Net premiums		1,980,907			1,802,127			578,791
Other Part D income—PDMS			280			72,813			56,664

Total Part D revenue			1,981,187			1,874,940			635,455
Net investment and other income			3,204			21,130			7,083

	Total revenue		1,984,391			1,896,070			642,538

Pharmacy benefits			1,587,075			1,533,090			427,195
Amortization of intangibles			16,046			16,022			4,437
Commissions and general expenses			202,926			219,514			94,018

	Total benefits, claims and expenses		1,806,047			1,768,626			525,650

Segment income before taxes		$	178,344		$	127,444		$	116,888

Reported results for our Medicare Part D business are subject to seasonality during a given calendar year. This is due to the uneven nature of the standard benefit design under Medicare Part D. Consequently, this business generally incurs higher claims experience in the first two quarters of the year while beneficiaries are in the deductible and initial coverage phases of the benefit design. As the beneficiary reaches the coverage gap and catastrophic phases of the benefit design, the Plan experiences lower claims liability which is generally in the last two quarters of the year, resulting in a pattern of increasing reported net income attributable to the Part D business.

Other Part D income—PDMS represents our equity in the earnings of PDMS—see Note 10 of the notes to the Consolidated Financial Statements. We report this as revenue for segment reporting purposes because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, we reflect this amount as a separate line following income from continuing operations. See the reconciliation of segment revenues in Note 27 of the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K. Our strategic alliance with CVS/Caremark was terminated effective December 31, 2008. Upon termination of this strategic alliance, CVS/Caremark and Universal American were each assigned responsibility for the drug benefit of specific Prescription Pathway's Plan members in a manner to achieve an approximately equal distribution of the value of business that had been generated by the strategic alliance. Universal American has continued to operate PDPs derived from this business under the name PrescribaRx.

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Effective January 1, 2009, PDMS no longer managed the strategic alliance and did not earn revenue or incur expenses related to the 2009 Medicare PDP year. PDMS was dissolved in December 2009.

In 2008, the Prescription Pathway^SM business was reinsured on a 50% coinsurance basis with PharmaCare Re, a subsidiary of CVS/Caremark, and we retained a 50% share in that business. There was no reinsurance for the PrescribaRx business in 2009, and therefore we retained 100%.

Years ended December 31, 2009 and 2008

Membership. At December 31, 2009, total membership for Medicare Part D, based on enrollment information provided by CMS, was approximately 1,697,000 members, an increase of 125,000 members, or 8.0% compared to net retained membership of 1,572,000 members at December 31, 2008. Net retained membership at December 31, 2008 excludes members that were reinsured to CVS/Caremark. The increase in membership was principally attributable to growth from open enrollment and dual eligible members automatically assigned to our Plans in 2009.

Revenues. Net premiums for the year ended December 31, 2009 increased by $178.8 million, or 10%, versus the comparable period in 2008. The increase in net premiums was primarily attributable to an increase in net retained membership of 125,000 members, offset by a decrease in the government risk corridor receivable. Net premiums for the year ended December 31, 2009 included items related to prior Plan years, which increased total revenue by approximately $14.7 million (net of the impact of government risk corridor). These items were comprised of $9.2 million in risk adjustment revenue related to our 2008 membership and $5.5 million related to the final CMS prescription drug event, known as PDE, reconciliations for prior Plan years. Net premiums for the year ended December 31, 2008 included items which reduced total revenue by approximately $3.9 million (net of the impact of the government risk corridor) related to final CMS PDE reconciliation for the 2007 Plan year. In addition, net premiums for the year ended December 31, 2008 included $39.2 million in amortization of a below market contract liability.

Other Part D income—PDMS for the year ended December 31, 2009, decreased by $72.5 million versus the comparable period in 2008, as a result of the termination of our strategic alliance with CVS/Caremark. Net investment and other income decreased by $17.9 million principally as a result of a decrease in revenue earned by MemberHealth for third party services performed in 2008 that were discontinued in 2009.

Benefits, Claims and Expenses. Pharmacy benefits for the year ended December 31, 2009, increased by $54.0 million, or 3.5%, compared to the year ended December 31, 2008. The ratio of incurred prescription drug benefits to net premium was 80.1% and 85.1% for the years ended December 31, 2009 and 2008, respectively. The improvement in the ratio of incurred prescription drug benefits to net premium is attributable to more competitive network rates available through our claims processor, combined with higher rebates that resulted from the consolidation of our Medicare Part D contracts with pharmaceutical manufacturers. In addition, pharmacy benefits for the year ended December 31, 2009 include $14.2 million in items related to prior plan years. These items increased benefits and are primarily attributable to co-pay refunds that will be issued to members for the 2008 plan year, partially offset by rebates earned in prior periods. Pharmacy benefits for the year ended December 31, 2008 included a $2.0 million reduction related to the final 2007 CMS PDE and plan to

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plan membership reconciliations. Commissions and general expenses for the year ended December 31, 2009 decreased by $16.6 million versus the comparable period in 2008 with the decrease largely attributable to our restructuring of the Medicare Part D call center, other member services and PBM services which began during 2008 and was completed in 2009.

Years ended December 31, 2008 and 2007

Our Medicare Part D income increased by $10.6 million, compared to the year ended December 31, 2007. We acquired MemberHealth on September 21, 2007 and our results for the year ended December 31, 2008 reflect income of $89.4 million on MemberHealth's business, which is an increase of $26.1 million over the prior year period. This was partially offset by a decrease in year to date earnings on Prescription Pathway^SM business of $15.5 million compared with the prior year period, primarily as a result of increases in prescription drug costs and changes in the calculation of the government risk corridor.

Membership. At December 31, 2008, our net retained membership for Medicare Part D was 1,572,000 members compared to net retained membership of 1,429,000 members at December 31, 2007, an increase of 143,000 members or 10% over December 31, 2007. Net retained membership excludes members that were reinsured to CVS/Caremark. The increase is principally attributable to growth from open enrollment, and dual eligible members auto assigned to our plans in 2008. At December 31, 2008, our Part D membership reflects approximately 1,308,000 members enrolled in our Community CCRx^SM PDP and retained membership of 264,000 members enrolled in our Prescription Pathway^SM business, which we participate in on a 50% basis. Prior to January 1, 2008, we participated, on a 33.3% basis, in Arkansas BCBS which had approximately 25,000 members at December 31, 2007.

Revenues. Net premiums increased by $1,223.3 million, or 211%, compared to the prior year period. This growth resulted primarily from the inclusion of a full year of business for MemberHealth which generated $1,542.8 million of net premiums for the year ended December 31, 2008 compared to $398.2 million in the three months after acquisition in 2007. The MemberHealth premium for the year ended December 31, 2008 reflects $39.2 million of amortization of the below market contract liability recorded in connection with the MemberHealth acquisition. The change in the government risk corridor adjustment increased revenue by an additional $122.8 million compared to the year ended December 31, 2007. The government risk corridor adjustment from MemberHealth for the year ended December 31, 2008 was an increase in revenues of $13.3 million, which was an increase of $93.4 million over the prior year as we acquired MemberHealth on September 21, 2007. The government risk corridor adjustment from our Prescription Pathway^SM business decreased revenue $1.4 million for the year ended December 31, 2008 compared to a decrease of $33.4 million for the same period in 2007. Net premiums for 2008 also reflect retroactive adjustments which reduced total revenue by approximately $4.6 million. These adjustments were comprised of $0.8 million related to risk adjustment revenue for our 2007 membership and $3.8 million related to the final CMS PDE reconciliation for the 2007 Plan year.

Other Part D income—PDMS increased by $16.1 million compared to the year ended December 31, 2007 as a result of growth in business at Prescription Pathway^SM and increased revenue rates. Net investment and other income increased by $14.0 million principally as a result of the inclusion of revenue earned by MemberHealth for third party services, partially offset by lower rates of return on investments.

Benefits, Claims and Expenses. Pharmacy benefits increased by $1,105.9 million compared to the year ended December 31, 2007. The MemberHealth business generated $1,262.2 million of benefits for the year ended December 31, 2008, which was an increase of $1,067.7 million over the prior year period due to the acquisition of MemberHealth on September 21, 2007. The 2008 pharmacy benefits reflect a $4.0 million reduction related to the final 2007 CMS PDE and Plan to Plan Membership reconciliations for MemberHealth. Pharmacy benefits for our Prescription Pathway^SM business increased

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by $38.2 million or 16% over the prior year period. The ratio of incurred prescription drug benefits to net premium for our Medicare Part D business was 85.1% compared to 73.8% for 2007 primarily as a result of the impact in 2008 of the negative 2007 revenue adjustments discussed above as well as increased benefits. Amortization of intangibles increased $11.6 million as the result of a full year of amortization of intangible assets recorded in connection with the acquisition of MemberHealth compared with three months in 2007. Commissions and general expenses increased by $125.5 million, compared to the year ended December 31, 2007. Commissions and general expenses for our PBM and CCRx business increased $121.8 million over the prior year as a result of a full year in 2008 compared to three months in 2007. The balance of the increase of $3.7 million relates to the growth in our Prescription Pathway^SM business.

Segment Results—Traditional Insurance

		For the year ended December 31,

		2009			2008		2007
		(in thousands)
Net premiums		$	321,423		$	394,275	$	442,163
Net investment income			23,062			60,189		71,189
Other income			1,959			1,120		1,311

	Total revenue		346,444			455,584		514,663
Policyholder Benefits			250,707			302,608		332,971
Interest credited to policyholders			4,284			14,736		17,819
Change in deferred acquisition costs			7,786			14,273		15,389
Amortization of intangible assets			2,721			3,319		3,530
Goodwill Impairment			—			3,893		—
Loss on reinsurance and other related costs			7,624			—		—
Restructuring costs			1,404			—		—
Commissions and general expenses, net of allowances			92,436			111,910		130,848

	Total benefits, claims and expenses		366,962			450,739		500,557

Segment income (loss) before taxes		$	(20,518	)	$	4,845	$	14,106

Years ended December 31, 2009 and 2008

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The following tables detail premium for the segment by major lines of business:

Premium

		Year ended December 31,

		2009							2008
		Gross		Ceded			Net		Gross		Ceded			Net
		(in thousands)
Senior market		$	324,347	$	(82,861	)	$	241,486	$	373,990	$	(99,539	)	$	274,451
Specialty health			72,447		(11,169	)		61,278		251,217		(184,209	)		67,008
Life insurance and annuity			74,182		(55,523	)		18,659		76,556		(23,740	)		52,816

	Total premium	$	470,976	$	(149,553	)	$	321,423	$	701,763	$	(307,488	)	$	394,275

Revenues. Net premiums declined by $72.9 million, or 18.5% compared to the year ended December 31, 2008. As a result of the reinsurance transaction with Commonwealth, life and annuity premium ceded increased by $31.8 million. The remaining decrease is primarily a result of the continued effect of lapsation of our senior market and specialty health in-force business. Gross and ceded premium for specialty health both declined by $171.8 million as the result of the June 30, 2008 termination of the reinsurance arrangement with PharmaCare Re for the state of Connecticut employees. The decrease in net investment income is primarily due to the decrease in invested assets as a result of the Commonwealth reinsurance transaction as well as lower yield on retained assets.

Benefits, Claims and Expenses. Policyholder benefits incurred declined by $51.9 million, or 17.2%, compared to the year ended December 31, 2008. This decline was due to the reinsurance transaction with Commonwealth, which resulted in a decrease in net life and annuity benefits retained of $21.4 million, and a net reduction in senior market product benefits of $30.7 million. The reduction in senior market benefits is mainly a result of a decline in the business in-force. Individual loss ratios for the twelve months ended December 31, 2009 were 72.8% for senior market, compared with 75.2% for the same period last year, and 100.5% for specialty health, compared with 91.7% for the same period last year. The increase in the Specialty loss ratio was primarily caused by an increase in frequency of long term care claims. The change in deferred acquisition cost decreased $6.5 million, or 45.4%. This was primarily caused by the elimination of the deferred acquisition costs and the related amortization on the life and annuity business reinsured to Commonwealth.

The following table details the components of commission and general expenses, net of allowances:

	Year ended December 31,

	2009			2008
	(in thousands)
Commissions	$	53,321		$	63,752
Other operating costs		69,787			80,200
Reinsurance allowances		(30,672	)		(32,042	)

Commissions and general expenses, net of allowances	$	92,436		$	111,910

Commissions and general expenses, net of allowances, decreased by $19.5 million compared to the year ended December 31, 2008. The lower level of commissions is associated with the continued aging of our in-force renewal premium and less new business production that has higher commission rates. Other operating costs decreased $10.4 million for the year ended December 31, 2009, compared to the twelve months ended December 31, 2008. This is primarily due to the lower levels of business in-force. Allowances received from reinsurers decreased $1.4 million for the year ended December 31, 2009 from the year ended December 31, 2008, primarily due to the termination of the State of Connecticut

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employees reinsurance arrangement with PharmaCare Re effective June 30, 2008 partially offset by an increase in allowances received on life and annuity business reinsured to Commonwealth.

Years ended December 31, 2008 and 2007

Our Traditional Insurance segment income before taxes decreased by $9.3 million compared to 2007, due to $3.9 million impairment of goodwill and lower earnings on specialty health and life insurance and annuity businesses, partially offset by increased earnings on Medicare supplement business. The declines were primarily due to lower investment income. The overall loss ratio for the segment was 76.8% for 2008, compared with 75.3% for 2007. Individual loss ratios for 2008 were 75.2% for Medicare supplement, compared with 73.4% for 2007, due to higher skilled nursing facility claims and aging of the business; 91.7% for specialty health, compared with 90.1% for 2007 and 65.8% for life and annuity, compared with 67.1% for 2007.

Revenues. Net premiums declined by $47.9 million or 11% and was primarily caused by the continued effect of lapsation of our Medicare supplement in force products. Below is a summary of premium for the segment by major lines of business.

		Year ended December 31,

		2008							2007
		Gross		Ceded			Net		Gross		Ceded			Net
		(in thousands)
Senior market		$	373,990	$	(99,539	)	$	274,451	$	429,041	$	(117,924	)	$	311,117
Specialty health			251,217		(184,209	)		67,008		414,256		(340,848	)		73,408
Life insurance and annuity			76,556		(23,740	)		52,816		77,978		(20,340	)		57,638

	Total premium	$	701,763	$	(307,488	)	$	394,275	$	921,275	$	(479,112	)	$	442,163

Both direct and ceded premiums for specialty health declined by $153 million as a result of the termination of the State of Connecticut reinsurance agreement effective June 30, 2008.

Net investment income decreased by $11.0 million as a result of less invested assets caused by less business in force as well as lower interest rates.

Benefits, Claims and Expenses. Policyholder benefits incurred and interest credited to policyholders declined by $33.4 million, or 10%, compared to 2007. This decline was principally caused by a net reduction in Medicare supplement benefits of $21.8 million as well as declines in the levels of Specialty Health and Life and Annuity benefits as a result of a decline in the business partially offset by an increase in the Medicare Supplement loss ratio to 75.2% for 2008 from 73.4% for 2007.

During our annual valuation of the recovery of goodwill, we concluded that the fair value of the Traditional reporting unit had declined, and as a result, we recorded an impairment charge of $3.9 million to eliminate its goodwill. For further discussion of this adjustment, refer to Note 7 of notes to consolidated financial statements elsewhere in this Annual Report on Form 10-K.

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Commissions and general expenses, net of reinsurance allowances, decreased by $18.9 million, or 15%, compared to 2007. The following table details the components of commission and other operating expenses, net of allowances:

	Year ended December 31,

	2008			2007
	(in thousands)
Commissions	$	63,752		$	86,483
Other operating costs		80,200			84,561
Reinsurance allowances		(32,042	)		(40,196	)

Commissions and general expenses, net of allowances	$	111,910		$	130,848

The lower level of commissions is associated with the continued aging of our in force renewal premium and less new business production, which has higher commission rates. Other operating costs were $4.4 million lower for 2008 compared to 2007 as a result of lower acquisition expenses due to less new business production and lower fixed costs. Reinsurance allowances received from reinsurers decreased $8.2 million for 2008 from 2007, primarily due to the non-renewal of the State of Connecticut agreement with PharmaCare Re on July 1, 2008 as well as a reduction in new business ceded and the effects of normal lower commission allowances on our aging base of ceded renewal business.

Segment Results—Senior Administrative Services

			For the year ended December 31,

			2009		2008		2007
			(in thousands)
Affiliated fee revenue
	Medicare supplement		$	12,516	$	19,560	$	23,342
	Part D			—		27,873		25,057
	PFFS			—		—		18,382
	Long term care			4,160		2,460		2,234
	Life insurance			4,880		4,307		2,169
	Other			6,593		6,479		8,440

		Total affiliated revenue		28,149		60,679		79,624

Unaffiliated fee revenue
	Medicare Advantage			3,725		11,795		11,528
	Medicare supplement			4,971		5,462		5,848
	Long term care			4,712		5,777		7,020
	Non-insurance products			588		830		1,426
	Part D			—		200		1,345
	Other			76		145		163

		Total unaffiliated revenue		14,072		24,209		27,330

		Total revenue		42,221		84,888		106,954

Amortization of present value of future profits				208		367		441
General expenses				33,527		62,501		82,389

		Total expenses		33,735		62,868		82,830

Segment income before taxes			$	8,486	$	22,020	$	24,124

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In 2007 and 2008, we performed administrative functions for the affiliated Part D line that the affiliated entities perform directly in 2009. In 2007, we performed administrative functions for the affiliated PFFS business that the affiliated entities performed directly in 2008 and 2009. We eliminated these fees, together with affiliated revenue, in consolidation.

Years ended December 31, 2009 and 2008

Revenue declined by $42.7 million, or 50%, during the year ended December 31, 2009 compared to 2008. Affiliated service fee revenue decreased by $32.5 million primarily as a result of the loss of fee income associated with the administration of our Part D business that is performed directly by the affiliated entities in 2009 as well as a reduction in fee levels and lower policies in-force for our affiliated Medicare supplement business, partially offset by growth in revenues on services performed for affiliated long term care and life insurance business. Unaffiliated service fee revenue decreased by $10.2 million, due primarily to a decrease in services performed for unaffiliated Medicare Advantage, long term care and Medicare supplement business. General expenses for the segment decreased by $29.0 million, or 46%, primarily due to the decline in the business discussed above.

Years ended December 31, 2008 and 2007

Revenue declined by $22.1 million, or 21%, during the year ended December 31, 2008, compared to 2007. Affiliated service fee revenue decreased by $18.9 million primarily as a result of the loss of fee income associated with the administration of our PFFS business that our affiliated entities performed directly in 2008 and a decline in Medicare supplement revenues on a smaller book of business partially offset by an increase in Part D revenues on a growing block of business. Unaffiliated service fee revenue decreased by $3.1 million, due primarily to a decrease in services performed for unaffiliated Part D and long term care business. General expenses for the segment decreased by $19.9 million, or 24%, primarily due to the decline of the affiliated PFFS business.

Segment Results—Corporate

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

		For the year ended December 31,

		2009		2008		2007
		(in thousands)
Interest expense		$	19,937	$	23,694	$	20,480
Early extinguishment of debt			—		—		1,343
Amortization of capitalized loan origination fees			1,325		1,048		1,128
Stock-based compensation expense			7,127		6,367		4,573
Other parent company expenses, net revenues			33,113		6,840		7,516

	Segment loss before taxes	$	61,502	$	37,949	$	35,040

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Years ended December 31, 2009 and 2008

The decrease in interest expense of $3.8 million is due primarily to a reduction in the interest rates charged on the debt, as compared to 2008. The weighted average interest rate on our loan payable was 4.0% for 2009 compared to 4.6% for 2008. The weighted average interest rate on our other long term debt was 6.2% for 2009 compared to 7.4% for 2008. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

The increase in stock-based compensation expense of $0.8 million resulted primarily from option awards, in the last quarter of 2008 and the first nine months of 2009, to directors, officers and other employees approved by the compensation committee.

Other parent company expenses, net of revenues, increased $26.3 million. In the second quarter of 2009, primarily in relation to a management decision to close or restructure under-performing field offices in connection with a company-wise cost reduction effort, we recorded a $6.3 million charge to earnings. An additional $7.3 million charge to earnings was recorded in the fourth quarter of 2009 as additional under-performing field offices were closed. The remaining variance was primarily due to the release in the first quarter of 2008 of a 2007 bonus accrual that was $5.6 million in excess of the final amounts approved by the compensation committee and paid in 2008, compared with a $0.5 million release for similar reasons in the first quarter of 2009 as well as increased staffing and outside service costs. In addition, net investment income decreased $2.7 million as a result of lower invested assets at a lower rate.

Years ended December 31, 2008 and 2007

The increase in interest cost of $3.2 million is due primarily to the increase in the average balance of our debt outstanding, offset in part by a reduction in the interest rates charged on the debt, as compared to 2007. While our combined outstanding debt decreased by $28.5 million to $430.6 million at December 31, 2008 from $459.1 million at December 31, 2007, the balance at December 31, 2007 had increased significantly from $165.6 million at December 31, 2006, due primarily to the refinancing of our credit facility in connection with the acquisition of MemberHealth in September 2007. The weighted average interest rate on our loan payable was 4.6% for 2008 compared to 6.4% for 2007. The weighted average interest rate on our other long term debt was 7.4% for 2008 compared to 7.9% for 2007. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

The increase in stock-based compensation resulted primarily from option awards, in the second half of 2007 and the first half of 2008, to officers and other employees approved by the compensation committee.

The decrease in other parent company expenses, net of revenues was primarily due to the reversal of a 2007 bonus accrual that was $5.6 million in excess of the final amounts approved in 2008 by the compensation committee, partially offset by a decrease of $2.1 million in net investment income, an increase in the costs of restricted stock awards, legal fees associated with the defense and settlement of a shareholder's lawsuit and other, individually insignificant, unfavorable expense variances.

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Contractual Obligations and Commercial Commitments

Our contractual obligations as of December 31, 2009, are shown below.

			Payments Due by Period

Contractual Obligations			Total		Less than 1 Year		1–3 Years		3–5 Years		More than 5 Years
			(in thousands)
Long Term Debt Obligations(1):
	Trust preferred securities(2)		$	217,986	$	6,436	$	11,128	$	8,221	$	192,201
	Loan payable(3)			350,724		16,824		333,900		—		—
Operating Lease Obligations				32,284		6,461		15,598		3,945		6,280
Purchase Obligations(4)				25,400		4,600		10,200		7,600		3,000
Policy Related Liabilities(5):
	Reserves and other policy liabilities—life			5,866		796		601		500		3,969
	Reserve for future policy benefits—health			428,476		23,372		43,936		40,441		320,727
	Policy and contract claims—health			363,105		326,336		36,769		—		—

		Total	$	1,423,841	$	384,825	$	452,132	$	60,707	$	526,177

(1): These obligations include contractual interest and the table reflects scheduled maturities for contractual obligations existing as of December 31, 2009.
(2): Trust preferred securities all have scheduled maturities of 30 years from the dates of issue; however they are all callable by us five years from the date of issuance. For the purpose of this schedule, we have assumed that the securities will be redeemed at their scheduled maturities, not the call date. Accordingly, the obligation for repayment of principal relating to these is included in the More than 5 Years column. The trust preferred securities generally have floating rate interest rates. However, the interest rate on $50 million of the trust preferred securities is fixed through its no call period and then converts to a floating rate. We did not project future changes in the base interest rates. For the purpose of this schedule, we applied the base rate in effect at December 31, 2009 to all future periods. Additionally, we assumed that, upon the expiration of the fixed rate, the rate for the respective trust preferred security adjusted to a variable rate using the current base rate.
(3): Reflects scheduled amortization through final maturity in 2012. The loan payable is floating rate debt, although we pay a fixed rate on $250 million through the use of swap agreements. We did not project future changes in the base interest rates. For the purpose of this schedule, we applied the rate in effect at December 31, 2009 to all future periods.
(4): Reflects minimum obligations on our outsourcing contracts, See "Outsourcing Arrangements" in Part 1, Item 1 of this annual report on Form 10-K. The amount of service provided under the contracts and the levels of business processed affect our actual monthly payments. Currently, our actual payments exceed the minimums stated in the contracts. Therefore our actual payments will exceed the amounts presented in the above schedule based upon anticipated future service levels.
(5): Our obligations for policy related liabilities represent those payments we expect to make on death, disability and health insurance claims and policy surrenders, net of amounts recovered from reinsurers. These projected values contain assumptions for future policy persistency, mortality and morbidity comparable with our historical experience. The distribution of payments for policy and contract claims reflects assumptions as to the timing of policyholders reporting claims for prior periods and the amounts of those claims. Actual amounts and timing of both future policy benefits and policy and contract claims may differ significantly from the estimates above. We anticipate that our reserves for policy liabilities and policy and contract claims, along with future net premiums, investment income and recoveries from our reinsurers, will be sufficient to fund our policy related

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obligations. On our consolidated balance sheet in Part II, Item 8 of this annual report on Form 10-K, we report our policy related liabilities gross of amounts recoverable from reinsurers, which are reflected as assets. We are obligated to pay claims in the event that a reinsurer fails to meet its obligations under the reinsurance agreements. However, as of December 31, 2009, all of our primary reinsurers were rated "A –" (Excellent) or better by A.M. Best. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on reinsured business. Therefore, we have presented our obligations in the table above net of amounts recoverable from reinsurers. Our obligations for policy related liabilities before amounts recovered from reinsurers amount to $1.7 billion.

Liquidity and Capital Resources

Sources and Uses of Liquidity to the Parent Company, Universal American Corp.

We require cash at our parent company to support the growth of our insurance subsidiaries and HMO affiliates, meet our obligations under our credit facility, fund potential growth through acquisitions of other companies or blocks of business, and pay the operating expenses necessary to function as a holding company, as applicable insurance department regulations require us to bear our own expenses and fund other corporate finance activities.

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

•: the cash flows of our unregulated subsidiaries including our PBM subsidiary, our management service organizations ("MSO") under our senior managed care company and the senior administrative services company;
•: surplus note payments and dividends from and capital contributions to our insurance subsidiaries and HMO affiliates;
•: debt principal and interest payments and access to $150 million under the revolving portion of our Credit Facility.

Unregulated subsidiary cash flows. The primary sources of liquidity for our unregulated subsidiaries are fees collected from clients for performing administrative, marketing and management services. The uses are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for the unregulated subsidiaries will exceed scheduled uses of cash and result in amounts available to dividend to our parent holding company.

Insurance subsidiaries and HMO affiliates—surplus note principal repayments, Dividends and Capital Contributions. We require cash at our insurance subsidiaries and HMO affiliates to meet our policy related obligations and to pay operating expenses, including the cost of administration of the policies, and to maintain adequate capital levels. Excess capital can be used to make dividend and surplus note principal payments to our parent company, subject to certain restrictions.

Our insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities and each currently exceeds its respective minimum requirement at levels we believe are sufficient to support their current levels of operation. Our HMO affiliates are also required by regulatory authorities to maintain minimum amounts of capital and surplus and each currently exceeds this minimum requirement.

At December 31, 2009, we held cash and cash equivalents totaling $755 million and fixed maturity securities that could readily be converted to cash with carrying values of $965 million at our insurance companies and HMO affiliates. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.

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American Exchange made $5.6 million in principal payments on the surplus note during June 2009 resulting in the note being paid in full. Prior to repayment, this note bore interest at LIBOR plus 250 basis points.

In 2007, Pyramid issued $60.0 million of surplus notes payable to our holding company, which bears interest at an average fixed rate of 7.5%. The notes are repayable beginning March 29, 2009 provided that capital and surplus are sufficient to maintain risk-based capital levels of 450% or greater in the immediate prior year end. However, at December 31, 2008, Pyramid's risk-based capital ratio was below 450%, thus no payments of principal or interest were made during the year ended December 31, 2009. As of December 31, 2009, Pyramid's risk-based capital ratio was below 450%, thus principal repayments are not likely to be made in 2010.

Our parent holding company did not make capital contributions to American Exchange during 2009 and 2008. American Exchange did not make capital contributions to its subsidiaries during 2009 and made a $7.0 million capital contribution to its Pyramid subsidiary and a $6.5 million capital contribution to its Marquette subsidiary during 2008. Further, no dividends were declared nor paid to American Exchange from its subsidiaries during 2009 and 2008.

Capital contributions to and dividends from for our HMO affiliates are made through our managed care holding company, Heritage Health Systems, Inc., known as HHSI. HHSI made capital contributions totaling $9.7 million to its HMO subsidiaries for the year ended December 31, 2009. HHSI made capital contributions totaling $1.6 million during the year ended December 31, 2008. No dividends were declared nor paid to HHSI from its subsidiaries during 2008 and 2009.

Debt principal and interest—Credit Facility, Swaps and Other Long Term Debt. We currently have a credit facility consisting of a $350 million term loan and a $150 million revolver. This Credit Facility has customary covenants and requirements including a leverage ratio test, minimum risk based capital requirements for our insurance companies and, under certain conditions, the ability to pose limitations on certain investments, dispositions and our ability to make restricted payments. Other than the limitations on restricted payments (see the ensuing paragraph and Note 14 - Loan Payable), as of December 31, 2009, we were well in excess of minimum requirements, such that there would be no material effect on our ability to operate our business or incur additional indebtedness and there were no covenant violations.

In November 2009, the 2007 Credit Facility was amended (the "November 2009 Amendment") which provided us with the ability to make an additional $75 million of restricted payments in exchange for prepayments of Term Loan principal and increases in borrowing spreads and fees (see Note 14 -Loan Payable). As of December 31, 2009, $313.8 million was outstanding under the term loan agreement and the weighted average interest rate on the term loan portion of the credit facility was 1.28%. $250 million of this $313.8 million term loan outstanding has been swapped from a LIBOR-based floating rate to an average fixed rate of 4.14% (see Note 16Derivative Instruments—Cash Flow Hedges and the ensuing paragraph), resulting in a total blended interest rate of 4.34% on the $313.8 million as of December 31, 2009. We pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 25 basis points. We had not drawn on the revolving loan facility as of the date of this report. We made regularly scheduled principal payments totaling $3.1 million and repayments of $3.8 million, as a result of the November 2009 Amendment, and interest payments totaling $7.2 million during the year ended December 31, 2009.

On December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in fixed rate of 4.14% and receive a floating rate based on LIBOR. During 2009, we paid a net amount of $6.3 million in association with these swap agreements.

In 2003 and 2007, we formed statutory business trusts, in order to issue a combined $125.0 million in thirty year trust preferred securities, with $110 million currently outstanding. $60 million of these

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securities have floating interest rates based on LIBOR and are currently at an average rate of 4.33%. The remaining $50 million is fixed at 7.68% until March 2012. We made interest payments on the trust preferred securities totaling $7.2 million during the year ended December 31, 2009.

Investments

We invest primarily in fixed maturity securities of the U.S. Government and its agencies, mortgage backed securities and in corporate fixed maturity securities with investment grade ratings of BBB – or higher by S&P or Baa3 or higher by Moody's Investor Service. As of December 31, 2009, approximately 99% of our fixed maturity investments had investment grade ratings from S&P or Moody's.

We have recently adopted a more conservative approach to our investment portfolio, which focuses more on capital preservation than on generation of investment yield. As a result, as of December 31, 2009, approximately 47% of our portfolio is in cash equivalents, largely in government money market funds, and, in the aggregate, approximately 82% of our portfolio is securities backed by the US government or its agencies.

The net yields on our cash and invested assets decreased to 2.9% for the year ended December 31, 2009, from 4.8% for the year ended December 31, 2008.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles, known as GAAP. The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts of reported by us in our consolidated financial statements and the accompanying notes. Critical accounting policies are ones that require significant subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results. We believe that the following accounting policies are critical, as they involve the most significant judgments and estimates used in the preparation of our consolidated financial statements:

•: policy related liabilities and benefit expense recognition,
•: deferred policy acquisition costs,
•: goodwill and other intangible assets,
•: investment valuation,
•: recognition of premium revenues and policy benefits—Medicare products and
•: income taxes.

Policy related liabilities and benefit expense recognition

We calculate and maintain reserves for the estimated future payment of claims to our policyholders using actuarial assumptions that are consistent with actuarial assumptions we use in the pricing of our products. For our accident and health insurance business, we establish an active life reserve for expected future policy benefits, plus a liability for due and unpaid claims and incurred but not reported claims, known as IBNR. Benefit expenses are recognized in the period in which services are provided or claims are incurred and include an estimate of the cost of services and IBNR claims. Our net income depends upon the extent to which our actual claims experience is consistent with the assumptions we used in setting our reserves and pricing our policies. If our assumptions with respect to

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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.

The following table presents a summary of our policy-related liabilities by category (dollars in thousands):

	Direct & Assumed										Net of Reserve Ceded to Reinsurers

Liability Type	2009		% of Total Policy Liabilities			2008		% of Total Policy Liabilities			2009		2008
Reserves and other policy liabilities—life	$	599,442		43	%	$	616,819		40	%	$	4,295	$	556,074
Reserves for future policy benefits—health		408,625		30	%		415,026		27	%		301,579		304,447
Policy and contract claims—health		380,519		27	%		500,577		33	%		362,596		469,656

Total policy liabilities	$	1,388,586		100	%	$	1,532,422		100	%	$	668,470	$	1,330,177

Reserves and other policy liabilities—life

Reserves and other policy liabilities—life represents the gross amount of liabilities on our life insurance business, including policyholder account balances on our investment and universal life type policies, future policy benefit reserves on our traditional life insurance policies and policy and contract claims on our life policies. In April, 2009, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty. A portion of our traditional business was not included in that reinsurance transaction, however much of that business is reinsured under separate treaties. We continue to sell traditional life products, primarily senior life.

Policyholder account balances represent the balance that accrues to the benefit of the policyholder, otherwise known as the account value, as of the financial statement date. Account values increase to reflect additional deposits received and interest credited based on the account value. Account values decline to reflect surrenders and other withdrawals, including withdrawals relating to the cost of insurance and expense charges. We review the interest crediting rates periodically and adjust them with minimum levels below which the crediting rate cannot fall as we deem necessary. The liability for future policy benefits represents the present value of estimated future benefits to be paid to or on behalf of policyholders, less the future value of net premiums. We calculate this amount based on actuarially recognized methods using morbidity and mortality tables, which we modify to reflect our actual experience when appropriate. The liability for unpaid claims, which also reflects IBNR, reflects estimates of amounts to fully settle known reported claims as well as claims related to insured events that we estimate have been incurred, but have not yet been reported to us.

The amount of reserves for life insurance products we currently retain amounted to $4.3 million as of December 31, 2009.

Reserves for future policy benefits—health

Reserves for future policy benefits—health represents the present value of estimated future benefits to be paid to or on behalf of policyholders, less the future value of net premiums. We calculate this amount based on actuarially recognized methods using morbidity and mortality tables, which we modify to reflect our actual experience when appropriate.

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For our fixed benefit accident and sickness and our long term care products, we establish a reserve for future policy benefits at the time we issue each policy based on the present value of future benefit payments less the present value of future premiums. We have ceased issuing new long term care policies, although our current policies are renewable annually at the discretion of the policyholder, as evidenced by the policyholder continuing to make premium payments. In establishing these reserves, we must evaluate assumptions about mortality, morbidity, lapse rates and the rate at which new claims are submitted to us. We estimate the future policy benefits reserve for these products using the above assumptions and actuarial principles. For long-duration insurance contracts, we use these original assumptions throughout the life of the policy and generally do not subsequently modify them.

A portion of our reserves for long-term care products also reflect our estimates relating to members currently receiving benefits. We estimate these reserves primarily using recovery and mortality rates, as described above.

Policy and contract claims—health

The policy and contract claims liability for our health policies include a liability for unpaid claims, including claims in the course of settlement, as well as a liability for IBNR claims. Our policy and contract claims—health liability by major product grouping is as follows:

	Carrying Value at December 31,

	Direct and Assumed										Net of Reserves Ceded to Reinsurers
Policy and contract claims—health	2009		% of Total Policy Liabilities			2008		% of Total Policy Liabilities			2009		2008
	($ in thousands)
Medicare Part D	$	91,027		6	%	$	180,309		12	%	$	86,086	$	167,712
Medicare Advantage—PFFS & PPO		174,227		13	%		197,942		13	%		174,197		197,075
Medicare Advantage—HMO		64,693		5	%		59,366		4	%		61,663		56,367
Medicare supplement		30,763		2	%		43,590		3	%		23,517		31,715
Other—specialty		19,809		1	%		19,370		1	%		17,133		16,787

Total policy and contract claims—health	$	380,519		27	%	$	500,577		33	%	$	362,596	$	469,656

The following factors can affect these reserves and liabilities:

•: economic and social conditions,
•: inflation,
•: hospital and pharmaceutical costs,
•: changes in doctrines of legal liability,
•: premium rate increases,
•: extra-contractual damage awards, and
•: other factors affecting health care and insurance generally.

Therefore, we establish the reserves and liabilities based on extensive estimates, assumptions and prior years' statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of acquired policy liabilities is subject to similar estimates and assumptions. Establishing reserves involves inherent uncertainties, and it is possible that actual claims could materially exceed our reserves and have a material adverse effect on our results of operations and financial condition.

We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim payment and claim receipt patterns, as well as historical medical cost trends.

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Depending on the period for which we are estimating incurred claims, we apply a different method in determining our estimate. For periods prior to the most recent three months, the key assumption we use in estimating our IBNR is that the completion factor pattern, adjusted for known changes in claim inventory levels and claim payment processes, remains consistent over a specified rolling period. This period, ranging from 3 to 12 months, is dependent on the type of business with respect to which we are estimating reserves or liabilities. Completion factors result from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For the most recent three months, we estimate the incurred claims primarily from a trend analysis based upon per member per month, known as PMPM, claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, product mix, and seasonality.

We use the completion factor method for the months of incurred claims prior to the most recent three months because the historical percentage of claims processed for those months is at a level sufficient to produce a consistently reliable result. Conversely, for the most recent three months of incurred claims, the volume of claims processed historically is not at a level sufficient to produce a reliable result, which therefore requires that we examine historical trend patterns as the primary method of evaluation. Because cumulative claims payment development often fluctuates widely close to the incurral date of claims, estimates for the most recent three months of incurred claims are based largely on our pricing assumptions for the product. The amounts above reflect the estimated potential medical and other expenses payable based upon assumptions used in determining the loss ratio for the pricing of our PFFS products.

Medical cost trends potentially are more volatile than other segments of the economy. The principal intrinsic drivers of medical cost trends are:

•: changes in the utilization of hospital facilities, physician services, prescription drugs, and new medical technologies, and
•: the inflationary effect on the cost per unit of each of these expense components.

Other external factors may impact medical cost trends, such as:

•: government-mandated benefits,
•: other regulatory changes,
•: an aging population,
•: natural disasters and other catastrophes, and
•: epidemics.

Factors internal to our company may also affect our ability to accurately predict estimates of historical completion factors or medical cost trends, such as:

•: claims processing cycle times,
•: changes in medical management practices, and
•: changes in provider contracts.

We consider all of these factors in estimating IBNR and in estimating the PMPM claims trend for purposes of determining the reserve for the most recent three months. Additionally, we continually prepare and review follow-up studies to assess the reasonableness of the estimates generated by our process and methods over time. We also consider the results of these studies in determining the reserve for the most recent three months. Each of these factors requires significant judgment by management.

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The following table presents the components of the change in our policy and contract claims—health liabilities for the years ended December 31, 2009 and 2008:

		2009			2008

		(in thousands)
Balance at beginning of year		$	500,577		$	522,228
	Less reinsurance recoverable		(33,086	)		(56,580	)

Net balance at beginning of year			467,491			465,648

Incurred related to:
	Current year		3,979,830			3,846,808
	Prior year development		3,603			(44,803	)

Total incurred			3,983,433			3,802,005

Paid related to:
	Current year		3,640,970			3,210,310
	Prior year		447,358			589,852

Total paid			4,088,328			3,800,162

Net balance at end of period			362,596			467,491
	Plus reinsurance recoverable		17,923			33,086

Balance at end of period		$	380,519		$	500,577

Policy and contract claims—health decreased by $120.1 million at December 31, 2009 from December 31, 2008. This decrease was due primarily to a change in our Part D claims processing that resulted in reducing days' claims payable for Part D claims at December 31, 2009 compared to December 31, 2008.

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

The claim reserve balances at December 31, 2008 settled during 2009 for $3.6 million more than originally estimated, representing 0.1% of the incurred claims recorded in 2008.

The claim reserve balances at December 31, 2007 ultimately settled during 2008 for $44.8 million less than originally estimated, representing 2.4% of the incurred claims recorded in 2007. The majority of the favorable development of 2007 claim reserves resulted from our Senior Managed Care—Medicare Advantage segment, including $35.2 million relating to our PFFS business and $6.9 million relating to our HMO business. The actual claims trends were lower than the original estimate of trend factors as a result of:

•: lower than estimated utilization of hospital and physician services, and
•: limited historical information from which to base trend rate estimates at December 31, 2007, due to the rapid growth in our PFFS product in new geographic areas.

Additionally, our original estimate of the completion factors used to establish reserves at December 31, 2007, which were based upon historical patterns, were lower than the actual pattern that emerged during 2008. The actual patterns reflect a shortening of the cycle time associated with provider claim submissions and changes in claim payment and recovery patterns associated with continued enhancements made in our claims processing functions for our PFFS product.

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We had adjusted for the favorable historical trend and completion factor experience together with our knowledge of recent events that may impact current trends and completion factors when establishing our reserves at December 31, 2008.

During 2007, the claim reserve balances at December 31, 2006 ultimately settled for $1.5 million less than originally estimated, representing 0.2% of the incurred claims recorded in 2006.

In 2007, we acquired MemberHealth. The "balances acquired" line item in the table above represents the accident and health claim liabilities acquired in this transaction.

Sensitivity Analysis

The following table illustrates the sensitivity of our health IBNR payable at December 31, 2009 to identified reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health care cost trend rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):						Claims Trend Factor(2):

(Decrease) Increase in Factor			Increase (Decrease) in Net Health IBNR			(Decrease) Increase in Factor			(Decrease) Increase in Net Health IBNR
($ in thousands)
	(3	)%	$	1,282			(3	)%	$	(12,976	)
	(2	)%	$	854			(2	)%	$	(8,651	)
	(1	)%	$	427			(1	)%	$	(4,325	)
	1	%	$	(427	)		1	%	$	4,325
	2	%	$	(854	)		2	%	$	8,651
	3	%	$	(1,281	)		3	%	$	12,976

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

Deferred Policy Acquisition Costs

We defer the following costs of acquiring new business:

•: non-level commissions,
•: agency production costs,
•: policy underwriting costs,
•: policy issue costs,
•: associated issuance costs, and
•: other costs that vary with, and are primarily related to, the production of new and renewal business.

We refer to these costs as deferred acquisition costs or DAC. For our net retained traditional life and health products, we amortize DAC in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with ASC 944. Under ASC 944, any unamortized DAC relating to lapsed policies must be amortized as of the date of the lapse.

We test for the recoverability of DAC at least annually. To the extent that we determine that the present value of future policy premiums and investment income or the net present value of expected

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gross profits would not be adequate to recover the unamortized costs, we would write off the excess deferred policy acquisition costs. Based on our review of DAC recoverability as October 1, 2009, we determined the DAC was recoverable.

Goodwill and other intangible assets

Valuation of acquired intangible assets

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 these fair values as the new accounting basis. We base the present value of future profits on an estimate of the cash flows of the in-force business acquired, discounted to reflect the present value of those cash flows. The discount rate we select depends upon the general market conditions at the time of the acquisition and the inherent risk in the transaction. We allocate purchase consideration in excess of the fair value of net assets acquired, including the present value of future profits and other identified intangibles, for a specific acquisition, to goodwill. We perform the allocation of purchase price in the period in which we consummate the purchase. Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies, tax matters and refinements made to estimates of fair value in connection with the preliminary allocation.

Amortizing intangible assets

We must estimate and make assumptions regarding the useful life we assign to our amortizing intangible assets. Set forth below are our annual amortization policies for each of the main categories of amortizing intangible assets:

Description		Amortization Basis

Insurance policies acquired	7–9	The pattern of projected future cash flows for the policies acquired over the estimated weighted average life of the policies acquired
Distribution channel acquired	3–30	Straight line over the estimated life of the asset
Membership base acquired	7–10	Straight line over the estimated weighed average life of the membership base
Trademarks/tradenames	9	Straight line over the estimated weighted average life of the trademarks/tradenames
Licenses	15	Straight line over the estimated weighed average life of the licenses
Provider contracts	10	Straight line over the estimated weighted average life of the contracts
Non-compete	7	Straight line over the length of the agreement
Administrative service contracts	6	The pattern of projected future cash flows for the customer contracts acquired over the estimated weighted average life of the contracts
Hospital network contracts	10	The pattern of projected future cash flows for the hospital network contracts acquired over the estimated weighted average life of the contracts

In accordance with ASC 350,Intangibles and Other, we periodically review amortizing intangible assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. If these estimates or their related assumptions change in the future, we may be required to record impairment losses for these assets. There were no impairment losses relating to our amortizing intangible assets during 2009.

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Goodwill

ASC 350,Goodwill and Other Intangible Assets, requires that goodwill balances be reviewed for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event, as defined in ASC 350, has occurred. A reporting unit is defined as an operating segment or one level below an operating segment. Our reporting units are equivalent to our operating segments. We had goodwill allocated to the following reporting units as follows (in thousands):

		December 31,

		2009		2008
Senior Managed Care—Medicare Advantage		$	77,459	$	77,459
Medicare Part D			448,215		448,215
Traditional Insurance(1)			—		—
Senior Administrative Services			4,357		4,357

	Total Goodwill	$	530,031	$	530,031

(1): Goodwill eliminated as a result of impairment at December 31, 2008. See discussion below.

Our annual goodwill impairment test follows a two step process as defined in ASC 350. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss shall be recognized in an amount equal to that excess.

Our strategy, long-range business plan, and annual planning process are used to support our valuation of our reporting units. Our valuations are based primarily on an analysis of discounted cash flows for each reporting unit. Outcomes from the discounted cash flow analysis are compared to other market approach valuation methodologies for reasonableness. Key assumptions, including changes in membership, premium yields, medical cost trends and selected government contract extensions, are consistent with those utilized in our long-range business plan and annual planning process. Other assumptions include levels of economic capital, future business growth, earnings projections and the weighted average cost of capital used for purposes of discounting. We use a range of discount rates that correspond to a market-based weighted-average cost of capital. Decreases in business growth, decreases in earnings projections, increases in the weighted average cost of capital and increases in the amount of required capital for a reporting unit will all cause the reporting unit's fair value to decrease. If these assumptions differ from actual, the estimates underlying our goodwill impairment tests could be adversely affected. These assumptions can be impacted by general factors, including: the U.S healthcare economy, health care reform and federal monetary policy.

Our businesses participate in the U.S. health care economy, which comprises a significant portion of the gross domestic product and which has grown consistently for many years. Management expects overall spending on health care in the U.S. to continue to rise in the future, based on inflation, demographic trends in the U.S. population and national interest in health and well-being. The rate of market growth may be impacted by a variety of factors, including macro-economic conditions and proposed health care reforms, which could also impact our results of operations.

There has been significant discussion recently about health care reforms at both state and national levels, due to the size of and national interest in the health economy. Examples of health care reform proposals include policy changes that would change the dynamics of the health care industry, including

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having the federal or one or more state governments assume a larger role in the health care system such as competing with private health insurers, imposing new taxes on health insurers, or restructuring of the Medicare or Medicaid programs. Any health care reforms enacted may be phased in over a number of years, but, if enacted, could increase our costs, expose us to expanded liability and require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition, our operating results, financial position and cash flows could be materially adversely affected by such changes even if we correctly predict their occurrence. The current administration and various congressional leaders have expressed their interest in reducing payments to private plans offering Medicare Advantage over the intermediate term. On February 19, 2010, CMS released preliminary 2010 Medicare Advantage payment rates which represent a modest growth rate in the base payment of 1.38%. The growth rate is offset by other factors including a FFS normalization factor to account for the faster pace of risk score development among MA plans relative to fee for service Medicare and the phase out of IME payments. Overall, the increase in the base payment is insufficient to cover our projected trend in medical expense. Management believes that there are a number of annual adjustments we can make to our operations which may serve to partially offset any impact from these rate reductions. For example, we can adjust members' benefits and/or premiums, decide on a county-by-county basis which geographies to participate in and seek to intensify our medical and operating cost management. There can be no assurance that we will be able to successfully execute on these or other strategies to address changes in the Medicare Advantage program. The reduction of payments to private plans may also cause declines in the number of seniors participating in Medicare Advantage and the industry-wide revenues and earnings derived from these plans. Our operating results, financial position and cash flows could be materially adversely affected by such declines. If industry-wide Medicare Advantage membership declines, there is likely to be increased demand for Medicare Supplemental insurance and Part D prescription drug coverage, and in both categories Universal American is a market leader.

CMS has preliminarily proposed a modest increase in Medicare Advantage reimbursements for 2011 to be finalized by April 1, 2010.

Our revenues are also impacted by U.S. monetary and fiscal policy as it effects interest rates, which impacts the interest income earned on our investments. Beginning in late 2008, the U.S. Federal Reserve decreased and has maintained the target federal funds rate to a range of zero to 25 basis points. As of December 31, 2009 our $1.8 billion portfolio of cash and investments is substantially composed of high quality securities and cash, and has a relatively short aggregate duration, which has been directly impacted by this interest rate reduction. Changes in federal monetary policy have reduced the level of investment income received from this portfolio on a year-over-year basis. In total, management believes that economic recessions will slow our revenue growth rate and could impact our operating profitability. Management also believes that government funding pressure, coupled with recessionary economic conditions, will impact the financial positions of hospitals, physicians and other care providers and could therefore increase medical cost trends experienced by our businesses.

We operate a diversified set of health care businesses focused on the senior market. This business model has been designed to address a multitude of market sectors. We could see simultaneous increases and decreases in demand for our various products and services, depending on the scope, shape and timing of health care reforms. It is difficult to predict the outcome of reform discussions with precision over the mid- to long-term time horizon. For additional discussions regarding our risks related to health care reforms and Medicare Advantage reimbursement changes, see "Item 1A. Risk Factors" in Part I of this Annual Report on Form 10-K.

During the fourth quarter of 2009, we performed our annual goodwill assessment for the individual reporting units based on information as of October 1, 2009. We determined, based on our "Step 1" impairment test, that our estimated fair value of our Part D Reporting unit was in excess of its carrying value by 12% and that our estimated fair value of our Senior Managed Care reporting unit was in excess of its carrying value by 19%. Our estimated fair value of our Senior Administrative Services reporting unit was also in excess of its carrying value. We concluded that there was no impairment of goodwill for these reporting units.

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The fair value for our Traditional reporting unit was below its carrying value, however, we had reduced the goodwill for that segment to zero at December 31, 2008 as a result of our 2008 annual test of recoverability. During our 2008 test, we concluded that the decline in value of the traditional reporting unit was due to decreasing sales outlooks and the lapsation of our Medicare supplement policies. We performed a "Step 2" analysis of our Traditional reporting unit to determine the amount of impairment. The allocation of our estimated fair value of our Traditional reporting unit to its respective assets and liabilities as of October 1, 2008 indicated an implied level of goodwill of $0. Therefore, at December 31, 2008, we recorded an impairment charge of $3.9 million to eliminate the goodwill for our Traditional reporting unit.

During each quarter, we perform a review of certain key components of our valuation of our reporting units, including the operating performance of the reporting units compared to plan (which was the primary basis for the prospective financial information included in our last goodwill impairment test as of October 1, 2009), the company's weighted average cost of capital and the company's stock price and market capitalization. Based on our review of these items through the reporting date, we believe that our estimate of fair value for each of our reporting units remains reasonable.

Investment Valuation

The fair value for fixed maturity securities is largely determined by third party pricing service market prices. The typical inputs that third party pricing services use are

•: reported trades,
•: benchmark yields,
•: issuer spreads,
•: bids,
•: offers,
•: and estimated cash flows and prepayment speeds.

Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services may use matrix or model processes to develop a security price where they develop future cash flow expectations based upon collateral performance and discount this at an estimated market rate. Included in the pricing for mortgage-backed and asset-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates. See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk, for a discussion regarding the interest rate sensitivity of our investment portfolio.

ASC 820,Fair Value Measurements and Disclosures, requires companies in the U.S. to classify their assets based on the certainty with which fair values can be calculated into three asset categories: Level 1, Level 2 and Level 3. Level 1 assets are the easiest to value accurately based on standard market-based prices and Level 3 are the most difficult. We have analyzed the third party pricing services valuation methodologies and related inputs, and have also evaluated the various types of securities in our investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, we classified most securities that had prices provided by third party pricing services into Level 2 because the inputs used in pricing the securities are market observable.

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The following table presents the fair value of fixed maturity and equity securities that are carried at fair value by ASC 820 hierarchy levels, as of December 31, 2009 (in thousands):

	Fair Value

Level 1	$	—	—
Level 2		962,990	99.8	%
Level 3		1,572	0.2	%

	$	964,562	100.0	%

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between knowledgeable, unrelated willing parties using inputs, including assumptions and estimates, a market participant would utilize. As such, the estimated fair value of a financial instrument may differ significantly from the amount that could be realized if the security was sold immediately.

Due to a general lack of transparency in the process that brokers use to develop prices, we classify most securities that have prices that are based on broker's prices as Level 3. We also classify internal model priced securities, primarily consisting of private placement asset-backed securities, as Level 3 because this model pricing reflects significant non-observable inputs. We classify private placement equity securities as Level 3 due to the lack of observable inputs.

The following table presents the fair value of the asset sectors within the ASC 820 Level 3 securities as of December 31, 2009 (in thousands):

	December 31, 2009					December 31, 2008

	Fair Value		% of Total Fair Value			Fair Value		% of Total Fair Value
	(in thousands)
Mortgage and asset-backed securities	$	50		3.2	%	$	1,862		42.0	%
Corporate debt securities		1,513		96.2	%		2,082		47.0	%
Equity securities		9		0.6	%		490		11.0	%

Total Level 3 securities	$	1,572		100.0	%	$	4,434		100.0	%

Mortgage and asset-backed securities represents private-placement collateralized debt obligations that are thinly traded and priced using an internal model or by independent brokers.

We regularly evaluate the amortized cost of our investments compared to the fair value of those investments. We generally recognize impairments of securities when we consider a decline in fair value below the amortized cost basis to be other-than-temporary. The evaluation includes the intent and ability to hold the security to recovery, and we consider it on an individual security basis, not on a portfolio basis. We generally recognize impairment losses for mortgage-backed and asset-backed securities 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. We also recognized impairment losses when we determine declines in fair values based on quoted prices to be other than temporary.

The evaluation of impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether we should recognize declines in the fair value of investments in current period earnings. The principal risks and uncertainties are

•: changes in general economic conditions,
•: the issuer's financial condition or near term recovery prospects,
•: the effects of changes in interest rates or credit spreads, and

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•: the recovery period.

Our accounting policy requires that we assess a decline in the value of a security below its cost or amortized cost basis to determine if the decline is other-than-temporary. During 2009, ASC 320-65-1 modified the criteria for recognition of other-than-temporary impairment (OTTI) of a debt security and we have adopted this new criterion into our accounting policy for investments.

•: If we intend to sell a debt security, or it is more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis, we recognize an OTTI in earnings equal to the entire difference between the debt security's amortized cost basis and its fair value at the balance sheet date.
•: If we do not intend to sell the debt security and it is not more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the debt security (referred to as the credit loss), an OTTI is considered to have occurred. In this instance, we bifurcate the total OTTI into the amount related to the credit loss, which we recognize in earnings, with the remaining amount of the total OTTI attributed to other factors (referred to as the noncredit portion) recognized as a separate component in other comprehensive loss.

After the recognition of an OTTI, we account for the debt security as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.

We have a security monitoring process overseen by our Investment Committee, consisting of investment and accounting professionals who identify securities that, due to specified characteristics, as described below, we subject to an enhanced analysis on a quarterly basis. We review our fixed maturity securities at least quarterly to determine if an other-than-temporary impairment is present based on specified quantitative and qualitative factors. The primary factors that we consider in evaluating whether a decline in value is other-than-temporary are

•: the length of time and the extent to which the fair value has been or is expected to be less than cost or amortized cost,
•: the financial condition, credit rating and near-term prospects of the issuer,
•: whether the debtor is current on contractually obligated interest and principal payments, and
•: our intent and ability to retain the investment for a period of time sufficient to allow for recovery.

Each quarter, during this analysis, we assert our intent and ability to retain until recovery those securities we judge to be temporarily impaired. Once identified, we restrict trading on these securities unless approved by members of the Investment Committee. The Investment Committee will only authorize the sale of these securities based on criteria that relate to events that could not have been foreseen. The principal criteria are the deterioration in the issuer's creditworthiness, a change in regulatory requirements or a major business combination or major disposition.

Subprime Residential Mortgage Loans

We hold securities with exposure to subprime residential mortgages. Subprime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles. The slowing U.S. housing market, greater use of mortgage products with low introductory interest rates, generally referred to as "teaser rates," and relaxed underwriting standards for some originators of subprime loans have led to higher delinquency and loss rates. These factors combined with heightened capital constraints on financial institutions have caused a significant reduction in market liquidity and repricing of risk, which has led to a decrease in the market valuation of these securities sector wide.

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The following table presents our exposure to subprime residential mortgages by vintage year.

Vintage Year	Amortized Cost		Fair Value		Unrealized Loss

	(in thousands)
2003	$	4,229	$	3,389	$	(840	)
2004		2,102		1,614		(488	)
2005		23,384		14,914		(8,470	)
2006		17,478		4,298		(13,180	)
2007		5,427		1,730		(3,697	)

Totals	$	52,620	$	25,945	$	(26,675	)

We continuously review our subprime holdings stressing multiple variables, such as cash flows, prepayment speeds, default rates and loss severity, and comparing current base case loss expectations to the loss required to incur a principal loss, or breakpoint. This breakpoint currently exceeds the base case loss expectation for 14 out of a total of 32 holdings to varying degrees. We expect delinquency and loss rates in the subprime mortgage sector to continue to increase in the near term but at a decreasing rate. Those securities with a greater variance between the breakpoint and base case can withstand this further deterioration. However, holdings where the base case is closer to the breakpoint are more likely to incur a principal loss. We utilize third party pricing services to provide or estimate market prices. The major inputs used by third party pricing services include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and estimated cash flows and prepayment speeds. If there are no recent reported trades, the third party pricing services may use matrix or model processes to develop a security price, as has recently been the case with many of our subprime holdings.

The following table summarizes, on a pre-tax basis, our other-than-temporary impairments recorded since the subprime deterioration began in 2007:

					2009 Quarter Ended

	Cumulative		2009		December 31		September 30		June 30		March 31		2008		2007
	(in thousands)
Subprime	$	99,458	$	10,497	$	3,841	$	146	$	2,135	$	4,375	$	47,964	$	40,997
Other structured		11,043		6,398		201		108		2,388		3,701		4,645		—
Corporate		7,177		—		—		—		—		—		7,177		—

	$	117,678	$	16,895	$	4,042	$	254	$	4,523	$	8,076	$	59,786	$	40,997

At December 31, 2007, we recognized an other-than-temporary impairment on fourteen 2006 and 2007 vintage year subprime holdings. As of December 31, 2008, we recognized an additional other-than-temporary impairment on the same fourteen securities impaired at December 31, 2007 plus four additional subprime holdings that were initially impaired during the first quarter of 2008. In addition, during 2008, we have recognized an other-than-temporary impairment on five other structured securities and three corporate securities. The corporate other-than-temporary impairment includes $6.1 million on two Lehman Brothers securities. During the year ended December 31, 2009, we recognized an additional other-than-temporary impairment on twelve subprime securities impaired in 2007 and 2008, plus one additional subprime holding in 2009.

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We continue to review the estimated fair values indicated by pricing provided by the third party pricing services. However, we cannot give assurance that there will be no further impairments on these securities.

Recognition of Premium Revenues and Policy Benefits—Medicare Products

Medicare is a federal health insurance program that provides Americans age 65 and over, and some disabled persons under the age of 65, certain hospital, medical and prescription drug benefits. The Medicare program consists of four parts, labeled Parts A–D.

Part A—Hospitalization benefits are provided under Part A. These benefits are financed largely through Social Security taxes. Beneficiaries are not required to pay any premium for Part A benefits; however, they are still required to pay out-of- pocket deductibles and coinsurance.

Part B—Benefits for medically necessary services and supplies including outpatient care, doctor's services, physical or occupational therapists and additional home health care are provided under Part B. These benefits are financed through premiums paid to the federal government by those eligible beneficiaries who choose to enroll in the program. The beneficiaries are also required to pay out-of- pocket deductibles and coinsurance.

Part C—Under the Medicare Advantage program, private plans provide Medicare-covered health care benefits to enrollees and can include prescription drug coverage. Part C benefits are provided through private HMO, PPO and PFFS plans. An individual must have Medicare Part A and Part B in order to join a Medicare Advantage Plan.

Part D—Under Part D, prescription drug benefits may be provided by private Plans to individuals eligible for benefits under Part A and/or enrolled in Part B. These benefits are provided on both a stand-alone basis and also in connection with certain of our HMO, PPO and PFFS plans.

These programs are administered by Centers for Medicare and Medicaid Services, known as CMS, an agency of the United States Department of Health and Human Services. We contract with CMS under the Medicare program to provide a comprehensive array of health insurance and prescription drug benefits to Medicare eligible persons. These benefits are provided through HMO, PPO, PFFS and stand-alone Part D Plans in exchange for contractual risk-adjusted payments received from CMS.

Premiums received pursuant to Medicare contracts with CMS are recorded as revenue in the month in which members are entitled to receive benefits. Premiums collected in advance are deferred. Receivables from CMS and Plan members are recorded net of estimated uncollectible amounts and are reported as due and unpaid premiums in the consolidated balance sheets. We routinely monitor the collectability of specific accounts, the aging of member premium receivables, historical retroactivity trends and prevailing and anticipated economic conditions. Certain commissions are deferred and amortized in relation to the corresponding revenues which is no longer than a one-year period.

Policy and contract claims include actual claims reported but not paid and estimates of health care services and prescription drug claims incurred but not reported. The estimated claims incurred but not reported are based upon current enrollment, historical claim receipt and payment patterns, historical medical cost trends and health service utilization statistics. These estimates and assumptions are derived from and are continually evaluated using per member per month trend analysis, claims trends developed from our historical experience in the preceding month (adjusted for known changes in estimates of recent hospital and drug utilization data), provider contracting changes, changes in benefit levels, product mix and seasonality. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results.

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Membership

We analyze the membership for our Medicare HMO, PPO, PFFS and stand-alone Part D Plans in our administrative system and reconcile to the enrollment provided by CMS. There are timing differences between the addition of a member to our administrative system and the approval, or accretion, of the member by CMS. Additionally, the monthly payments from CMS include adjustments to reflect changes in membership as a result of retroactive terminations, additions or other changes. Current period membership, net premium, CMS subsidies and claims expense are adjusted to reflect retroactive changes in membership.

Medicare Risk Adjustment Provisions

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

Medicare Advantage Health Benefit Plans

We receive monthly payments from CMS related to members in our HMO, PPO and PFFS Plans. The recognition of the premium and cost reimbursement components under these Plans is described below:

CMS Premium—We receive a monthly premium from CMS based on the Plan year bid we submitted to CMS. The monthly payment is a risk-adjusted amount per member and is based upon the member's health status, as determined by CMS. The CMS premium is recognized over the contract period and reported as premium revenue.

Revenue Adjustments—The monthly CMS Direct Premium Subsidy is based upon the members' risk score status, which is determined by CMS, as more fully described above under "Medicare Risk Adjustment Provisions." All health benefit organizations must capture, collect, and submit the necessary diagnosis code information to CMS within prescribed deadlines. Accordingly, we collect, capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines for our HMO, PPO and PFFS plans. We estimate changes in CMS premium related to risk score adjustments based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. Risk scores are updated annually by CMS and reconciled to our estimated amounts by us with any adjustments recorded in premium revenue. Although such adjustments have not been considered to be material in the past, future adjustments could be material.

Member Premium—We receive a monthly premium from members based on the Plan year bid we submitted to CMS. The member premium, which is fixed for the entire Plan year, is recognized over the contract period and reported as premium revenue.

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determined by the Social Security Administration. Low-income premium is recognized over the contract period and reported as premium revenue.

Low-Income Cost Sharing Subsidy—For qualifying LIS members of our Medicare Advantage Health Benefit Plans with Part D benefits, CMS will reimburse the Plans for all or a portion of the LIS member's deductible, coinsurance and co-payment amounts above the out of pocket threshold for low income beneficiaries. Low-income cost sharing subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid we submitted to CMS. After the close of the annual Plan year, CMS reconciles actual experience to low-income cost sharing subsidies paid to the Plan and any differences are settled between CMS and the Plan. The low-income subsidy is accounted for as deposit accounting and therefore not recognized in operations.

Catastrophic Reinsurance—We receive payments from CMS for catastrophic reinsurance for members of our Medicare Advantage Health Benefit Plans with Part D benefits.

For the members of our HMO and PPO Plans with Part D benefits, CMS reimburses Plans for 80% of the drug costs after a member reaches his or her out of pocket catastrophic threshold through a catastrophic reinsurance subsidy. Catastrophic reinsurance subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid we submitted to CMS. After the close of the annual Plan year, CMS reconciles actual experience compared to catastrophic reinsurance subsidies paid to the Plan and any differences are settled between CMS and the Plan. The catastrophic reinsurance subsidy is accounted for as deposit accounting.

For members of our PFFS Plans with Part D benefits, CMS makes prospective monthly catastrophic reinsurance payments to the Plans based on estimated average reinsurance payments to other Medicare Advantage—Prescription Drug (MA-PD) Plans that provide Part D benefits. Based upon the current guidelines from CMS, PFFS Plans are at risk for the variance between their actual expense and the CMS payments. As a result, we do not follow deposit accounting.

CMS Risk Corridor Provisions for the Part D benefits of our HMO and PPO Plans —Premiums from CMS for members of our HMO and PPO Plans with Part D benefits, are subject to risk sharing through the risk corridor provisions. The CMS risk corridor calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual Plan bid (target amount) to actual experience. Variances of more than 5% above the target amount will result in CMS making additional payments to us, and variances of more than 5% below the target amount will require us to refund to CMS a portion of the premiums we received. Risk corridor payments due to or from CMS are estimated throughout the year and are recognized as adjustments to premium revenues and due and unpaid premiums. This estimate requires us to consider factors that may not be certain, including: membership, risk scores, prescription drug events, or PDEs, and rebates. After the close of the annual Plan year, CMS reconciles actual experience to the target amount and any differences are settled between CMS and the Plan.

Medicare Part D Plans

We receive monthly payments from CMS related to members in our stand-alone Part D Plans. The recognition of the premium and subsidy components under Part D is described below:

CMS Direct Premium Subsidy—We receive a monthly premium from CMS based on the Plan year bid we submitted to CMS. The monthly payment is a risk-adjusted amount per member and is based upon the member's health status, as determined by CMS. The CMS premium is recognized over the contract period and reported as premium revenue.

Revenue Adjustments—The monthly CMS Direct Premium Subsidy is based upon the members' health status, which is determined by CMS, as more fully described above under "Medicare Risk

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Adjustment Provisions." We do not have access to diagnosis data with respect to our stand-alone PDP members and therefore, we cannot anticipate changes in our members' risk scores. Changes in CMS premiums related to risk-score adjustments for our stand alone PDP membership are recognized when the amounts become determinable and collectability is reasonably assured, which occurs when we are notified by CMS of such adjustments. Although such adjustments have not been considered to be material in the past, future adjustments could be material.

Low-Income Premium Subsidy—For qualifying low-income status, or LIS, members, CMS pays us for some or all of the LIS member's monthly premium. The CMS payment is dependent upon a member's income level which is determined by the Social Security Administration. Low-income premium is recognized over the contract period and reported as premium revenue.

Low-Income Cost Sharing Subsidy—For qualifying LIS members, CMS will reimburse Plans for all or a portion of the LIS member's deductible, coinsurance and co-payment amounts above the out of pocket threshold for low income beneficiaries. Low-income cost sharing subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid we submitted to CMS. After the close of the annual Plan year, CMS reconciles actual experience to low-income cost sharing subsidies paid to the Plan and any differences are settled between CMS and the Plan. See "Deposit Accounting" below for a description of the accounting for low-income cost sharing subsidies.

Catastrophic Reinsurance Subsidy—CMS reimburses Plans for 80% of the drug costs after a member reaches his or her out of pocket catastrophic threshold through a catastrophic reinsurance subsidy. Catastrophic reinsurance subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid we submitted to CMS. After the close of the annual Plan year, CMS reconciles actual experience compared to catastrophic reinsurance subsidies paid to the Plan and any differences are settled between CMS and the Plan. See "Deposit Accounting" below for a description of the accounting for catastrophic reinsurance subsidies.

CMS Risk Corridor—Premiums from CMS are subject to risk sharing through the Medicare Part D risk corridor provisions. The CMS risk corridor calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual Plan bid to actual experience. Variances of more than 5% above the target amount will result in CMS making additional payments to us, and variances of more than 5% below the target amount will require us to refund to CMS a portion of the premiums we received. Risk corridor payments due to or from CMS are estimated throughout the year and are recognized as adjustments to premium revenues and due and unpaid premiums. This estimate requires us to consider factors that may not be certain, including: membership, risk scores, prescription drug events, or PDEs, and rebates. After the close of the annual Plan year, CMS reconciles actual experience to the target amount and any differences are settled between CMS and the Plan.

Deposit Accounting—Low-income cost sharing and catastrophic reinsurance subsidies represent funding from CMS for which we assume no risk and are reported as increases to CMS contract deposits in the consolidated balance sheets. Payments of the actual prescription drug costs related to the low-income cost sharing and catastrophic reinsurance are reported as decreases to CMS contract deposits in the consolidated balance sheets. We do not recognize premium revenues or claims expense for this activity. These receipts and payments are reported as financing activity in our consolidated statements of cash flows.

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Income Taxes

We use the liability method to account for deferred income taxes. Under the liability method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates that we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize in income the effect on deferred tax assets and liabilities of a change in tax rates in the period that reflects 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. We recognize increases in these valuation allowances as deferred tax expense. We reflect portions of the valuation allowances subsequently determined to be no longer necessary as deferred tax benefits. To the extent that valuation allowances were established in conjunction with acquisitions, we first apply changes in those allowances to increasing or decreasing the goodwill, but not below zero, or other intangibles related to the acquisition, for acquisitions occurring before January 1, 2009, and then apply those changes as an increase or decrease in income tax expense.

We carried valuation allowances on deferred tax assets of $5.8 million at December 31, 2009 and $4.4 million at December 31, 2008 primarily related to the tax benefits associated with a New York state net operating loss carryforward. At December 31, 2009, we recorded our deferred tax assets based on the amount that was more likely than not to be realized under ASC 740,Income Taxes.

Federal Income Taxation of the Company

We file a consolidated life-nonlife return for Federal income tax purposes that reflects all US subsidiaries, as well as Heritage and its subsidiaries and American Exchange and its subsidiaries. At December 31, 2009, the Company had a net operating loss carryforward of approximately $1.0 million that expires in 2025.

We establish valuation allowances based upon an analysis of projected taxable income and its ability to implement prudent and feasible tax planning strategies. We carried valuation allowances on deferred tax assets of $5.8 million at December 31, 2009 and $4.4 million at December 31, 2008, primarily related to the tax benefits associated with a New York state net operating loss carryforward. At December 31, 2009, the Company recorded a deferred tax asset at an amount that was more likely than not to be realized under ASC 740. During 2005, the Company incurred creditable foreign taxes related to dividends from PennCorp Life Canada, its defined previously Canadian subsidiary, generating a foreign tax credit carryforward, for which a deferred tax asset of approximately $0.8 million was established. A valuation allowance for the entire amount was established because the Company lacked sufficient foreign source income to realize the benefit for the foreign tax credit. As foreign source income was generated in 2006, the valuation allowance related to the foreign tax credit carryforward was released. An additional $4.6 million foreign tax credit related to Penn Corp Life was identified during the IRS examination of 2006.

Management believes it is more likely than not that the Company will realize the recorded value of its net deferred tax assets.

Some of our U.S. insurance company subsidiaries are taxed as life insurance companies as provided in the Internal Revenue Code. The Omnibus Budget Reconciliation Act of 1990 amended the Internal Revenue Code to require a portion of the expenses incurred in selling insurance products be capitalized and amortized over a period of years, as opposed to an immediate deduction in the year incurred. Instead of measuring actual selling expenses, the amount capitalized for tax purposes is based on a percentage of premiums. In general, the capitalized amounts are subject to amortization over a

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ten-year period. Since this change only affects the timing of the deductions, it does not, assuming stability of income tax rates, affect the provisions for taxes reflected in our financial statements prepared in accordance with GAAP. However, by deferring deductions, the change has the effect of increasing our current tax expense and reducing statutory surplus. There was no material increase in our current income tax provision for any of the three years in the period ended December 31, 2009.

The Jobs Creation Tax Act of 2004, known as the Jobs Act, contains a provision that placed a two year moratorium on the imposition of tax on distributions from Policyholder Surplus Accounts ("PSAs"), the Phase III tax. Additionally, the ordering rules were changed to allow for the first dollar of any distribution to reduce the PSA. At December 31, 2009 and 2008, we had $7.1 million in deferred tax liabilities for potential Phase III tax. In accordance with the Jobs Act, distributions during 2005 and 2006 from an insurance company that has a PSA will be treated as a distribution from its PSA account; however, the distribution will not be subject to Federal income tax. We received the approval of the Insurance Departments of the respective companies for the transactions that could trigger the elimination of the potential tax and made such distributions during 2006. Upon the confirmation of the elimination of the potential Phase III tax on the PSAs, the deferred tax liability will be released and will reduce deferred tax expense.

The Company adopted provisions of ASC 740-10-25 related to the recognition, measurement, presentation and disclosure of uncertain tax positions on January 1, 2007. The Company has no material uncertain tax positions and no cumulative adjustment was required or recorded as a result of the adoption of ASC 740-10-25. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense when incurred. No material interest and penalties related to uncertain tax positions were accrued at December 31, 2009.

Effects of Recently Issued and Pending Accounting Pronouncements

A summary of recent and pending accounting pronouncements is provided in Note 2 of the Consolidated Financial Statements in the Annual Report on Form 10-K under the captions "Recently Adopted Accounting Standards" and "Future Adoption of Accounting Standards." We do not anticipate any material impact from the future adoption of the pending accounting pronouncements discussed in that note.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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 investment policy is to attempt to balance our portfolio duration to achieve investment returns consistent with the preservation of capital and to meet payment obligations of policy benefits and claims.

Some classes of mortgage-backed securities are subject to significant prepayment risk 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.

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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 December 31, 2009, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest rates.

December 31, 2009	Effect of Change in Market Interest Rates on Market Value of Fixed Income Portfolio as of December 31, 2009

Market Value of Fixed Income Portfolio	200 Basis Point Decrease		100 Basis Point Decrease		100 Basis Point Increase			200 Basis Point Increase
	(in millions)
$964.6	$	37.3	$	21.1	$	(31.8	)	$	(65.0	)

Debt

We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate, known as LIBOR, over one, two, three or six month interest periods. Due to the variable interest rate, we 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 a portion of our loan payable through the use of cash flow swaps and our trust preferred securities through the contractual terms of the security at inception. At December 31, 2009, we have fixed the rate on a total of $300 million of our debt, including $250 million of our loan payable and $50 million of our trust preferred securities.

The sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the year ended December 31, 2009, and 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 year ended December 31, 2009

	Weighted Average Interest Rate			Weighted Average Balance Outstanding
Description of Floating Rate Debt	Weighted Average Interest Rate			Weighted Average Balance Outstanding		200 Basis Point Decrease(1)		100 Basis Point Decrease(1)		100 Basis Point Increase			200 Basis Point Increase
				(in millions)
Loan payable		1.24	%	$	69.1	$	0.3	$	0.3	$	(0.7	)	$	(1.4	)
Other long tern debt		5.20	%	$	60.0		0.6		0.4		(0.6	)		(1.2	)

Total						$	0.9	$	0.7	$	(1.3	)	$	(2.6	)

(1): During 2009, the LIBOR rate on our loan payable and our other long term debt has steadily decreased to approximately 27 basis points as of December 31, 2009. As a result, for the purposes of this illustration, decreases in monthly rates over this period have been limited to the year to

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date average of 48 basis points on our loan payable and 90 basis points on our other long term debt.

As noted above, we have fixed the interest rate on $300 million of our $424 million of total debt outstanding, leaving $124 million of the debt exposed to rising interest rates, as of December 31, 2009. We had approximately $857 million of cash and cash equivalents as of December 31, 2009. We anticipate that any increase or decrease in the interest cost of our debt as a result of an increase in interest rates will be mitigated by an increase or decrease in the net investment income from our cash and cash equivalents.

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

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary schedules are listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules in this Annual Report on Form 10-K on Page F-1.

ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A—CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Inherent Limitations on Effectiveness of Controls

Our disclosure controls and procedures and our internal controls over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and 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 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.

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Evaluation of Effectiveness of Controls

An evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2009, at a reasonable assurance level, to timely alert management to material information required to be included in our periodic filings with the Securities and Exchange Commission.

Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed our internal control over financial reporting as of December 31, 2009, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we determined that, as of December 31, 2009, the Company's internal control over financial reporting was effective based on those criteria.

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included on page F-3 of our consolidated financial statements included in this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B—OTHER INFORMATION

None

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PART III

ITEM 10—DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

ITEM 11—EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated into Part III of this Annual Report on Form 10-K by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

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PART IV

ITEM 15(a)—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1: 1 Financial Statements

Consolidated Balance Sheets as of December 31, 2009 and 2008

Consolidated Statements of Operations for the Three Years Ended December 31, 2009

Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income for the Three Years Ended December 31, 2009

Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2009

Notes to Consolidated Financial Statements

2: 2 Financial Statement Schedules

Schedule I—Summary of Investments Other Than Investments in Related Parties

Schedule II—Condensed Financial Information of Registrant

Schedule III—Supplemental Insurance Information

Schedule IV—Reinsurance (incorporated in Note 11 to the Consolidated Financial Statements)

Schedule V—Valuation and Qualifying Accounts

3: 3 Exhibits

All references below to our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K share the Securities and Exchange Commission File No. 0-11321. These reports and our other Securities and Exchange Commission filings are available on the Commission's EDGAR web site athttp://www.sec.gov/edgar/searchedgar/companysearch.html.


	2.1		Agreement and Plan of Merger and Reorganization dated as of May 7, 2007 among Universal American Financial Corp., MH Acquisition I Corp., MH Acquisition II LLC, MHRx LLC, MemberHealth, Inc. and the shareholder representative named therein (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed May 11, 2007, and incorporated by reference herein).
	2.2		Settlement Agreement and Amendment to Merger Agreement, dated as of March 5, 2008 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 10, 2008, and incorporated by reference herein).
	3.1		Restated Certificate of Incorporation of Universal American Financial Corp. (filed as Exhibit 3.1 to the Registrant's Amendment No. 2 to the Registration Statement on Form S-3 (File No. 333-62036) filed on July 11, 2001, and incorporated by herein reference herein).
	3.2		Certificate of Amendment of the Certificate of Incorporation of Universal American Financial Corp. (filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-11321) for the quarter ended June 30, 2004, and incorporated by reference herein).
	3.3		Certificate of Amendment to Universal American's Certificate of Incorporation for the Series A Preferred Stock (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated May 7, 2007, and incorporated by reference herein).
	3.4		Certificate of Amendment to Universal American's Certificate of Incorporation for the Series B Preferred Stock (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated May 7, 2007, and incorporated by reference herein).

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	3.5		Certificate of Amendment to Universal American's Certificate of Incorporation dated August 24, 2007 (filed as Exhibit 3(i).1 to the Registrant's Current Report on Form 8-K dated August 24, 2007, and incorporated by reference herein).
	3.6		Certificate of Amendment to Universal American's Certificate of Incorporation changing the name of the Company from Universal American Financial Corp. to Universal American Corp. dated November 30, 2007 (filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated December 3, 2007, and incorporated by reference herein).
	3.7		Amended and Restated By-Laws of Universal American Corp. (filed as Exhibit 3.7 to the Registrant's Annual Report on Form 10-K filed on March 10, 2009, and incorporated by reference herein).
	4.1		Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee (filed as Exhibit 4.01 to Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004, and incorporated by reference herein).
	4.2		Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee (filed as Exhibit 4.02 to Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004, and incorporated by reference herein).
	4.3		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 (filed as Exhibit A to the Registrant's Current Report on Form 8-K dated August 13, 1999, and incorporated by reference herein).
	4.4		Guarantee Agreement, dated as of March 22, 2007, by Universal American Financial Corp., as Guarantor, and Wilmington Trust Company, as Trustee (filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated March 22, 2007, and incorporated by reference herein).
	4.5		Indenture, dated as of March 22, 2007, between Universal American Financial Corp. and Wilmington Trust Company, as Trustee, relating to Fixed/Floating Rate Junior Subordinated Debentures Due 2037 (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 22, 2007, and incorporated by reference herein).
	4.6		Stockholders' Agreement, dated as of September 21, 2007, among Universal American Financial Corp. and the security holders listed on the signature pages thereto (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated September 24, 2007, and incorporated by reference herein).
	10.1		Employment Agreement dated July 30, 1999, between Registrant and Richard A. Barasch (filed as Exhibit D to the Registrant's Current Report on Form 8-K/A dated March 14, 2001 and incorporated by reference herein).
	10.2		Employment Agreement dated July 30, 1999, between Registrant and Gary Bryant (filed as Exhibit E to the Registrant's Current Report on Form 8-K/A dated March 14, 2001 and incorporated by reference herein).
	10.3		Employment Agreement dated July 30, 1999, between Registrant and Robert Waegelein (filed as Exhibit E to the Registrant's Current Report on Form 8-K/A dated March 14, 2001 and incorporated by reference herein).

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	10.4		Employment Agreement dated March 9, 2004, by and among the Company, Heritage Health Systems, Inc. and Theodore M. Carpenter, Jr. (filed as Exhibit 10.18 to the Registrant's Current Report on Form 8-K dated January 18, 2007, and incorporated by reference herein).
	10.5		Employment Letter dated March 7, 2008, between Registrant and John Wardle (filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed on March 10, 2009, and incorporated by reference herein).
	10.6		1998 Incentive Compensation Plan (filed as Annex A to the Registrant's Definitive Proxy Statement filed on Form 14A dated April 29, 1998, and incorporated by reference herein).
	10.7		Amendment No. 1 to Universal American Financial Corp. 1998 Incentive Compensation Plan (filed as Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-120190) filed on December 10, 2004, and incorporated by reference herein).
	10.8		Agent Equity Plan for Agents of Penn Union Companies (filed as Amendment 1 to the Registrant's Registration Statement on Form S-2, dated July 13, 2000, and incorporated by reference herein).
	10.9		Agent Equity Plan for Regional Managers and Sub Managers of Penn Union Companies (filed as Amendment 1 to the Registrant's Registration Statement on Form S-2, dated July 13, 2000, and incorporated by reference herein).
	10.10		Agreement dated as of July 6, 2000, between ALICOMP, a division of ALICARE, Inc. and Universal American Financial Corp., as amended (filed as Exhibit 10.1 to the Registrant's Form 10-Q/A (Amendment No. 1) for the period ended September 30, 2003, dated December 23, 2003, and incorporated by reference herein).
	10.11		Quota Share Reinsurance Agreement, dated June 30, 2005, among the Company and PharmaCare Captive Re, Ltd. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, and incorporated by reference herein).
	10.12		Stage 1 securities purchase agreement dated May 7, 2007 among Lee-Universal Holdings, LLC, Welsh, Carson, Anderson & Stowe X, L.P., Union Square Universal Partners, L.P., Perry Partners, L.P., Perry Partners International, Inc., Perry Commitment Fund, L.P. and Perry Commitment Master Fund, L.P. (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 7, 2007, and incorporated by reference herein).
	10.13		Stage 2 securities purchase agreement dated May 7, 2007 among Lee-Universal Holdings, LLC, Welsh, Carson, Anderson & Stowe X, L.P., Union Square Universal Partners, L.P., Perry Partners, L.P., Perry Partners International, Inc., Perry Commitment Fund, L.P. and Perry Commitment Master Fund, L.P. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated May 7, 2007, and incorporated by reference herein).
	10.14		Credit Agreement dated as of September 18, 2007, among Universal American Financial Corp., each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (filed as Exhibit 10.26 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, and incorporated by reference herein).
	10.15		Settlement Agreement and Amendment to Merger Agreement, dated as of March 5, 2008 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 10, 2008, and incorporated by reference herein).

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	10.16		Amendment to Agreement and Plan of Merger and Reorganization, dated as of December 31, 2008 (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K filed on March 10, 2009, and incorporated by reference herein).
	10.17		Indemnity Reinsurance Agreement between Constitution Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein)..
	10.18		Indemnity Reinsurance Agreement between American Exchange Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).
	10.19		Indemnity Reinsurance Agreement between Marquette National Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein)..
	10.20		Indemnity Reinsurance Agreement between Pennsylvania Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).
	10.21		Indemnity Reinsurance Agreement between American Pioneer Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).
	10.22		Indemnity Reinsurance Agreement between American Progressive Life and Health Insurance Company of New York (Ceding Company) and First Allmerica Financial Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).
	10.23		Indemnity Reinsurance Agreement between The Pyramid Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).
	10.24		Indemnity Reinsurance Agreement between Union Bankers Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).
	10.25		Subcontract Agreement dated as of October 21, 2005 by and between MemberHealth, Inc. and Community Care Rx, L.L.C. (filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q/A filed on November 12, 2009 in redacted form pursuant to a request for confidential treatment for certain provisions thereof pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended).

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	10.26		Letter Agreement dated as of May 3, 2007 by and among Universal American Corp., the National Community Pharmacists Association, Community Pharmacy Ventures, Inc. and Community MTM Services, Inc. (filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q/A filed on November 12, 2009 in redacted form pursuant to a request for confidential treatment for certain provisions thereof pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended).
	10.27		First Amendment to Credit Agreement, dated as of November 9, 2009, by and among Universal American Corp., the Lenders party thereto and Bank of America, N.A. as administrative agent for the Lenders (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on November 12, 2009, and incorporated by reference herein).
	12.1*		Statement re Computation of Ratio of Earnings to Fixed Charges.
	21.1*		List of Subsidiaries.
	23.1*		Consent of Ernst & Young LLP
	31.1*		Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
	31.2*		Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
	32.1*		Certification of the Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*: Filed or furnished herewith.

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SIGNATURES

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


		UNIVERSAL AMERICAN CORP.
March 1, 2010		/s/ RICHARD A. BARASCH Richard A. Barasch Chairman of the Board, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the following capacities and on the dates indicated.

Signature and Title		Date


/s/ RICHARD A. BARASCH Richard A. Barasch Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)		March 1, 2010
/s/ ROBERT A. WAEGELEIN Robert A. Waegelein Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)		March 1, 2010
/s/ BARRY W. AVERILL Barry W. Averill Director		March 1, 2010
/s/ SALLY CRAWFORD Sally Crawford Director		March 1, 2010
/s/ MATTHEW ETHERIDGE Matthew Etheridge Director		March 1, 2010
/s/ MARK GORMLEY Mark Gormley Director		March 1, 2010

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Signature and Title		Date


/s/ MARK M. HARMELING Mark M. Harmeling Director		March 1, 2010
/s/ LINDA LAMEL Linda Lamel Director		March 1, 2010
/s/ PATRICK J. MCLAUGHLIN Patrick J. McLaughlin Director		March 1, 2010
/s/ RICHARD PERRY Richard Perry Director		March 1, 2010
/s/ THOMAS A. SCULLY Thomas A. Scully Director		March 1, 2010
/s/ ROBERT A. SPASS Robert A. Spass Director		March 1, 2010
/s/ SEAN M. TRAYNOR Sean M. Traynor Director		March 1, 2010
/s/ CHRIS WOLFE Chris Wolfe Director		March 1, 2010
/s/ ROBERT F. WRIGHT Robert F. Wright Director		March 1, 2010

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES OF THE REGISTRANT:
Report of Independent Registered Public Accounting Firm		F-2
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting		F-3
Consolidated Balance Sheets as of December 31, 2009 and 2008		F-4
Consolidated Statements of Operations for the Three Years Ended December 31, 2009		F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Three Years Ended December 31, 2009		F-6
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2009		F-7
Notes to Consolidated Financial Statements		F-8
Schedule I—Summary of Investments Other Than Investments in Related Parties		F-75
Schedule II—Condensed Financial Information of Registrant		F-76
Schedule III—Supplementary Insurance Information		F-81
Schedule IV—Reinsurance (incorporated in Note 11 to the Consolidated Financial Statements)
Schedule V—Valuation and Qualifying Accounts		F-82

Other schedules were omitted because they were not applicable

Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Universal American Corp.

We have audited the accompanying consolidated balance sheets of Universal American Corp. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal American Corp. and subsidiaries at December 31, 2009 and 2008 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, Universal American Corp. changed its method of accounting for impairment of debt securities with the adoption of the guidance originally issued in FASB Staff Position 115-2 and 124-2Recognition and Presentation of Other-Than-Temporary Impairments (codified in FASB ASC Topic 320Investments — Debt and Equity Securities) effective April 1, 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal American Corp.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion thereon.


		/s/ ERNST & YOUNG LLP

New York, New York
March 1, 2010

F-2

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Universal American Corp.

We have audited Universal American Corp.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Universal American Corp.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

In our opinion, Universal American Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Universal American Corp. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2009, and our report dated March 1, 2010 expressed an unqualified opinion thereon.


		/s/ ERNST & YOUNG LLP

New York, New York
March 1, 2010

F-3

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

(in thousands)

			December 31, 2009			December 31, 2008

ASSETS
Investments:
	Fixed maturities available for sale, at fair value (amortized cost: 2009, $961,265; 2008, $1,075,078)		$	964,553		$	1,032,393
	Other invested assets			1,276			23,923

		Total investments		965,829			1,056,316
Cash and cash equivalents				856,958			511,032
Accrued investment income				9,005			13,214
Deferred policy acquisition costs				150,398			237,630
Reinsurance recoverables—life				622,547			75,290
Reinsurance recoverables—health				126,524			145,696
Due and unpaid premiums				35,466			97,320
Present value of future profits and other amortizing intangible assets				167,545			192,742
Goodwill and other indefinite lived intangible assets				530,031			530,031
Income taxes receivable				3,441			38,032
CMS contract deposit receivables				—			609,293
Other Part D receivables				168,159			154,049
Advances to agents				66,418			60,017
Other assets				112,535			141,501

		Total assets	$	3,814,856		$	3,862,163

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Reserves and other policy liabilities—life			$	599,442		$	616,819
Reserves for future policy benefits—health				408,625			415,026
Policy and contract claims—health				380,519			500,577
Premiums received in advance				12,535			7,183
Loan payable				313,758			320,625
Other long term debt				110,000			110,000
Amounts due to reinsurers				7,078			22,091
Deferred income tax liability				31,564			6,877
CMS contract deposit liabilities				169,169			—
Other Part D liabilities				163,332			378,016
Other liabilities				169,370			168,865

		Total liabilities		2,365,392			2,546,079

STOCKHOLDERS' EQUITY
Preferred Stock (Authorized: 3 million shares):
		Series A Preferred Stock (Authorized: 300,000 shares, issued and outstanding: 42,105 shares, liquidation value: $49,263; 2008, 37,137)		42			42
		Series B Preferred Stock (Authorized: 300,000 shares)		—			—
Common stock—voting (Authorized: 200 million shares, issued and outstanding: 2009, 87.9 million shares; 2008, 87.4 million shares)				879			874
Common stock—non-voting (Authorized 30 million shares)				—			—
Additional paid-in capital				880,709			870,520
Accumulated other comprehensive loss				(7,915	)		(36,422	)
Retained earnings				709,695			558,675
Less: Treasury Stock (2009, 13.5 million shares; 2008, 7.2 million shares)				(133,946	)		(77,605	)

		Total stockholders' equity		1,449,464			1,316,084

		Total liabilities and stockholders' equity	$	3,814,856		$	3,862,163

See notes to consolidated financial statements.

F-4

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Years Ended December 31, 2009

(in thousands, per share amounts in dollars)

				2009			2008			2007

Net premium and policyholder fees earned				$	4,918,898		$	4,600,454		$	2,941,419
Net investment income					49,814			81,270			106,970
Fee and other income					19,776			37,130			26,412
Realized loss:
	Total other-than-temorary impairment losses on securities				(24,206	)		(59,786	)		(40,997	)
	Portion of loss recognized in other comprehensive income				6,830			—			—

		Net other-than-temporary impairment losses on securities recognized in earnings			(17,376	)		(59,786	)		(40,997	)
		Realized (loss)/gain, excluding other-than-temporary impairment losses on securities			(7,612	)		105			819

Net realized losses on investments					(24,988	)		(59,681	)		(40,178	)

			Total revenues		4,963,500			4,659,173			3,034,623

Benefits, claims and expenses:
	Claims and other benefits				3,998,634			3,851,582			2,389,938
	Change in deferred acquisition costs				7,786			14,273			15,963
	Amortization of present value of future profits				23,560			23,763			12,251
	Commissions				118,278			147,125			167,145
	Reinsurance commissions and expense allowances				(26,577	)		(65,707	)		(71,221	)
	Interest expense				19,937			23,694			20,480
	Early extinguishment of debt				—			—			1,343
	Loss on reinsurance and other related costs				7,624			—			—
	Restructuring costs				4,904			—			—
	Goodwill impairment				—			3,893			—
	Other operating costs and expenses				595,002			582,059			422,762

		Total benefits, claims and expenses			4,749,148			4,580,682			2,958,661

Income before equity in earnings of unconsolidated subsidiary					214,352			78,491			75,962
	Equity in earnings of unconsolidated subsidiary				280			72,813			56,664

Income before taxes					214,632			151,304			132,626
	Provision for income taxes				74,328			56,212			48,554

Net income				$	140,304		$	95,092		$	84,072

Earnings per common share:
	Basic			$	1.73		$	1.09		$	1.20

	Diluted			$	1.73		$	1.08		$	1.18

Weighted average shares outstanding:
Weighted average common shares outstanding					87,227			74,997			64,175
		Less weighted average treasury shares			(10,305	)		(3,635	)		(556	)

Basic weighted shares outstanding					76,922			71,362			63,619
Weighted average common equivalent of preferred shares outstanding					4,211			16,157			6,609
		Effect of dilutive securities			71			342			1,261

Diluted weighted shares outstanding					81,204			87,861			71,489

See notes to consolidated financial statements.

F-5

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

For the Three Years Ended December 31, 2009

(in thousands)

	Preferred Stock Series A			Preferred Stock Series B			Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings		Treasury Stock			Total

Balance at January 1, 2007	$	—		$	—		$	599		$	252,542		$	1,883		$	379,511	$	(10,626	)		623,909
Net income		—			—			—			—			—			84,072		—			84,072
Other comprehensive loss		—			—			—			—			(1,949	)		—		—			(1,949	)

Comprehensive income		—			—			—			—			—			—		—			82,123

Preferred stock issuance		47			128						331,932											332,107
Issuance of common stock		—			—			9			9,109			—			—		—			9,118
Equity transactions related to the acquisition of MemberHealth		—			—			142			283,358			—			—		—			283,500
Stock based compensation		—			—			—			10,683			—			—		—			10,683
Repayments of loans to officers		—			—			—			38			—			—		—			38
Treasury shares reissued		—			—			—			3,220			—			—		6,368			9,588

Balance at December 31, 2007		47			128			750			890,882			(66	)		463,583		(4,258	)		1,351,066
Net income		—			—			—			—			—			95,092		—			95,092
Other comprehensive loss		—			—			—			—			(36,356	)		—		—			(36,356	)

Comprehensive income		—			—			—			—			—			—		—			58,736

Preferred stock conversion		(5	)		(128	)		133			—			—			—		—			—
Issuance of common stock		—			—			11			4,843			—			—		—			4,854
Purchase price adjustment for acquisition of MemberHealth		—			—			(20	)		(34,521	)		—			—		—			(34,541	)
Stock based compensation		—			—			—			9,469			—			—		—			9,469
Treasury shares purchased, at cost		—			—			—			—			—			—		(74,821	)		(74,821	)
Treasury shares reissued		—			—			—			(153	)		—			—		1,474			1,321

Balance at December 31, 2008		42			—			874			870,520			(36,422	)		558,675		(77,605	)		1,316,084
Net income		—			—			—			—			—			140,304		—			140,304
Other comprehensive income		—			—			—			—			39,223			—		—			39,223

Comprehensive income		—			—			—			—			—			—		—			179,527

ASC 320-10-65-1 implementation adjustment		—			—			—			—			(10,716	)		10,716		—			—
Issuance of common stock		—			—			5			542			—			—		—			547
Stock based compensation		—			—			—			9,775			—			—		—			9,775
Treasury shares purchased, at cost		—			—			—			—			—			—		(63,693	)		(63,693	)
Treasury shares reissued		—			—			—			(128	)		—			—		7,352			7,224

Balance at December 31, 2009	$	42		$	—		$	879		$	880,709		$	(7,915	)	$	709,695	$	(133,946	)	$	1,449,464

See notes to consolidated financial statements.

F-6

Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Years Ended December 31, 2009

(in thousands)

			2009			2008			2007

Cash flows from operating activities:
Net income			$	140,304		$	95,092		$	84,072
Adjustments to reconcile net income to net cash provided by operating activities, net of balances acquired:
Equity in earnings of unconsolidated subsidiary				(280	)		(72,813	)		(56,664	)
Distribution from unconsolidated subsidiary				5,593			67,500			58,371
Deferred income taxes				9,337			7,050			(24,931	)
Realized losses on investments				24,988			59,681			40,178
Amortization of intangible assets				23,560			23,763			12,251
Impairment of goodwill				—			3,893			—
Loss on reinsurance, net of tax				2,221			—			—
Net amortization of bond premium				2,346			2,171			1,356
Changes in operating assets and liabilities:
	Deferred policy acquisition costs			7,786			14,273			15,963
	Reserves for future policy benefits			9,724			8,562			15,953
	Policy and contract claims payable			(114,860	)		(23,732	)		66,660
	Reinsurance balances			(16,610	)		25,839			(86,932	)
	Due and unpaid/advance premium, net			67,206			3,246			44,958
	Income taxes payable/receivable			34,591			(7,076	)		(6,791	)
	Other Part D (payables)/receivables			(228,794	)		35,480			254,779
	Other, net			47,576			(60,180	)		(65,089	)

		Cash provided by operating activities		14,688			182,749			354,134

Cash flows from investing activities:
Proceeds from sale or redemption of fixed maturity investments				670,157			221,142			246,636
Cost of fixed maturity investments purchased				(566,969	)		(233,276	)		(307,822	)
Assets transferred on life reinsurance				(454,487	)		—			—
Purchase of business and return of purchase price, net of cash acquired				—			40,990			(307,931	)
Purchase of fixed assets				(18,156	)		(20,935	)		(7,417	)
Other investing activities				2,742			735			8,938

Cash (used in) provided by investing activities—continuing operations				(366,713	)		8,656			(367,596	)
Cash used in investing activities—discontinued operations				—			—			(19,836	)

		Cash (used in) provided by investing activities		(366,713	)		8,656			(387,432	)

Cash flows from financing activities:
Net proceeds from issuance of common and preferred stock, net of tax effect				4,411			7,662			347,068
Cost of treasury stock purchases				(63,693	)		(74,821	)		—
Receipts from CMS contract deposits				4,161,518			3,498,773			1,284,919
Withdrawals from CMS contract deposits				(3,383,056	)		(3,713,841	)		(1,710,472	)
Deposits and interest credited to policyholder account balances				4,357			17,051			19,761
Surrenders and other withdrawals from policyholder account balances				(17,548	)		(54,382	)		(70,090	)
Principal repayment on loan payable and other long term debt				(6,867	)		(28,500	)		(156,438	)
Issuance of new debt				—			—			450,000
Payment of debt issue costs				(1,171	)		—			(5,895	)

		Cash provided by (used in) financing activities		697,951			(348,058	)		158,853

Net increase (decrease) in cash and cash equivalents				345,926			(156,653	)		125,555
Cash and cash equivalents at beginning of period				511,032			667,685			542,130

Cash and cash equivalents at end of period			$	856,958		$	511,032		$	667,685

See notes to consolidated financial statements.

F-7

Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND COMPANY BACKGROUND

Universal American Corp., which we refer to as "we," 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. Universal American was incorporated in the State of New York in 1981. Collectively, our insurance company subsidiaries are licensed to sell life, accident and health insurance and annuities in all fifty states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. We currently sell Medicare Advantage private fee-for-service Plans, known as PFFS Plans, Medicare coordinated care Plans, which we call HMOs, Medicare coordinated care products built around contracted networks of providers, which we call PPOs, Medicare Part D prescription drug benefit Plans, known as PDPs, Medicare supplement, fixed benefit accident and sickness, insurance, and senior life insurance. We distribute these products through career and independent general agency systems and on a direct to consumer basis.

On April 24, 2009, we completed the closing of the previously announced Life Insurance and Annuity Reinsurance transaction with the Commonwealth Annuity and Life Insurance Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS). Under this transaction, effective April 1, 2009, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty. This transaction is discussed in more detail in Note 11 of notes to the Consolidated Financial Statements.

Under the Part D program, we offer our Community CCRx^SM and Prescriba Rx^SM stand alone PDPs throughout the United States and the U.S. territories. We also operate a pharmacy benefits manager, or PBM, servicing the PDPs as well as the members in our Medicare Advantage plans offering a Part D benefit.

We currently operate Medicare Advantage PFFS and PPO plans through American Progressive Life & Health Insurance Company of New York and The Pyramid Life Insurance Company and our Medicare Advantage HMOs in Houston and Beaumont, Texas through SelectCare of Texas, L.L.C., in North Texas through SelectCare Health Plans, Inc., and in Oklahoma through SelectCare of Oklahoma, Inc. and GlobalHealth, Inc. All of these companies are our subsidiaries. In addition, beginning in 2007, we expanded into new health plan markets in Wisconsin.

CHCS Services, Inc., our administrative services company, provides administrative services for both affiliated and unaffiliated insurance companies for senior market insurance and non-insurance programs.

2. BASIS OF PRESENTATION

We have prepared the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, in accordance with Article 10 of the Securities and Exchange Commission's Regulation S-X, and consolidate the accounts of Universal American and its subsidiaries:

•: American Exchange Life Insurance Company;
•: American Pioneer Life Insurance Company;
•: American Progressive;

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•: Constitution Life Insurance Company;
•: Marquette National Life Insurance Company;
•: Pennsylvania Life Insurance Company;
•: Pyramid Life;
•: Union Bankers Insurance Company;
•: Heritage Health Systems, Inc.;
•: MemberHealth, LLC, and
•: CHCS.

During 2005, we entered into a strategic alliance with Caremark and created Part D Management Services, L.L.C., known as PDMS. PDMS was 50% owned by Universal American and 50% owned by Caremark. We did not control PDMS and therefore we did not consolidate PDMS in our financial statements. We accounted for our investment in PDMS on the equity basis and included it in other assets. PDMS was dissolved in December 2009. See Note 10—Unconsolidated Subsidiary, for additional information on PDMS and its dissolution,

For the insurance and health plan subsidiaries, U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities.

We have eliminated all material intercompany transactions and balances.

Subsequent events were evaluated through the date these consolidated financial statements were issued.

Use of Estimates: The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported by us in our consolidated financial statements and the accompanying notes. Critical accounting policies are ones that require significant subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results. In our judgment, the accounts involving estimates and assumptions that are most critical to the preparation of our financial statements are policy related liabilities and expense recognition, deferred policy acquisition costs, goodwill and other intangible assets, investment valuation, revenue recognition—Medicare Advantage products, and income taxes. There have been no changes in our critical accounting policies during the current year.

Reclassifications: We have reclassified $228.5 million in the December 31, 2008 consolidated balance sheet from Policy and contract claims—health to Other Part D liabilities, consistent with its presentation at December 31, 2009. This amount relates to payments owed to pharmacies for which we are reimbursed by Centers for Medicare and Medicaid Services, known as CMS, through low income

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cost sharing subsidies and catastrophic reinsurance. We do not recognize claims expense for these subsidies and the related receivables are recorded as CMS contract deposits in our consolidated balance sheets. We believe that separation of this liability from Policy and contract claims—health provides a clearer presentation based on the amounts for which we are at risk.

Commencing with our filing on Form 10-Q for the period ended September 30, 2009, we have reclassified certain balances within the consolidated balance sheets and statements of operations for all periods presented with respect to following line items:

•: Policy loans have been included in other invested assets;
•: Amounts due from reinsurers have been bifurcated between Reinsurance recoverables—life and Reinsurance recoverables—health;
•: Reserves for future policy benefits—health, previously included in Reserves for future policy benefits, is now reported as a separate line item. The remaining balance of reserves, which are related to life insurance, has been combined with Policyholder account balances and Policy and contract claims—life in a new line, Reserves and other policy liabilities—life;
•: Direct premium and policyholder fees earned, Reinsurance premiums assumed and Reinsurance premiums ceded have been combined and are now reported as Net premiums and policyholder fees earned;
•: Claims and other benefits, Change in reserves for future policy benefits and Interest credited to policyholders have been combined and are now reported as Claims and other benefits.

We believe that these changes made after our life reinsurance transaction will enhance the usefulness of our consolidated financial statements by combining immaterial balances and providing a clear differentiation of reinsurance and reserve balances between health and life insurance business. These reclassifications had no effect on total assets, total liabilities, stockholders' equity, net income, or earnings per share as previously reported.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents: We consider all highly liquid investments that have maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents include such items as certificates of deposit, commercial paper, and money market funds.

Investments: The Company follows Accounting Standards Codification No. 320,Investments—Debt and Equity Securities, known as ASC 320. ASC 320 requires that debt and equity securities be classified into one of three categories and accounted for as follows:

•: Debt securities that we have the positive intent and the ability to hold to maturity are classified as "held to maturity" and reported at amortized cost;
•: Debt and equity securities that are held for current resale are classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings; and

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•: Debt and equity securities not classified as held to maturity or as trading securities are classified as "available for sale" and reported at fair value.

Unrealized gains and losses on available for sale securities are excluded from earnings and reported as accumulated other comprehensive income (loss), net of tax and deferred policy acquisition cost adjustments unless the losses are determined to be other-than-temporary.

As of December 31, 2009 and 2008, we classified all fixed maturity securities as available for sale and carried them at fair value, with the unrealized gain or loss, net of tax and deferred policy acquisition cost adjustments, included in accumulated other comprehensive income (loss). We stated policy loans at the unpaid principal balance. We carried short-term investments at cost, which approximates fair value. Other invested assets consist principally of equity securities, mortgage loans and collateral loans. We carried equity securities at current fair value. We carried mortgage loans at the unpaid principal balance. We carried the collateral loans at the underlying value of their collateral that is the cash surrender value of life insurance.

The fair value for fixed maturity securities is largely determined by third party pricing service market prices. The typical inputs that third party pricing services use are

•: reported trades,
•: benchmark yields,
•: issuer spreads,
•: bids,
•: offers,
•: and estimated cash flows and prepayment speeds.

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adverse change is solely a result of changes in estimated market interest rates. We also recognized impairment losses when we determine declines in fair values based on quoted prices to be other than temporary.

•: changes in general economic conditions,
•: the issuer's financial condition or near term recovery prospects,
•: the effects of changes in interest rates or credit spreads, and
•: the recovery period.

Our accounting policy requires that we assess a decline in the value of a security below its cost or amortized cost basis to determine if the decline is other-than-temporary. During 2009, ASC 320-10-65-1 modified the criteria for recognition of other-than-temporary impairment (OTTI) of a debt security and we have adopted this new criterion into our accounting policy for investments.

•: If we intend to sell a debt security, or it is more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis, we recognize an OTTI in earnings equal to the entire difference between the debt security's amortized cost basis and its fair value at the balance sheet date.
•: If we do not intend to sell the debt security and it is not more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the debt security (referred to as the credit loss), an OTTI is considered to have occurred. In this instance, we bifurcate the total OTTI into the amount related to the credit loss, which we recognize in earnings, with the remaining amount of the total OTTI attributed to other factors (referred to as the noncredit portion) recognized as a separate component in other comprehensive loss.

•: the length of time and the extent to which the fair value has been or is expected to be less than cost or amortized cost,
•: the financial condition, credit rating and near-term prospects of the issuer,

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•: whether the debtor is current on contractually obligated interest and principal payments, and
•: our intent and ability to retain the investment for a period of time sufficient to allow for recovery.

Realized investment gains and losses on the sale of securities are based on the specific identification method.

We generally record investment income when earned. We amortize premiums and discounts arising from the purchase of mortgage-backed and asset-backed securities into investment income over the estimated remaining term of the securities, adjusted for anticipated prepayments. We use the prospective method to account for the impact on investment income of changes in the estimated future cash flows for these securities. We amortize premiums and discounts on other fixed maturity securities using the interest method over the remaining term of the security.

Deferred Policy Acquisition Costs: We defer the cost of acquiring new business, principally non-level commissions, agency production, policy underwriting, policy issuance, and associated costs, all of which vary with, and are primarily related to the production of new and renewal business.

For other life and health products, we amortize DAC in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with ASC 944. Under ASC 944,Financial Services—Insurance, any unamortized DAC relating to lapsed policies must be amortized as of the date of the lapse.

We test for the recoverability of DAC at least annually. To the extent that we determine that the present value of future policy premiums would not be adequate to recover the unamortized costs, we would write off the excess deferred policy acquisition costs. Based on our review of DAC recoverability, we determined the DAC was recoverable.

Goodwill and other intangible assets:

Valuation of acquired intangible assets: 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 these fair values as the new accounting basis. We base the present value of future profits on an estimate of the cash flows of the in-force business acquired, discounted to reflect the present value of those cash flows. The discount rate we select depends upon the general market conditions at the time of the acquisition and the inherent risk in the transaction. We allocate purchase consideration in excess of the fair value of net assets acquired, including the present value of future profits and other identified intangibles, for a specific acquisition, to goodwill. We perform the allocation of purchase price in the period in which we consummate the

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purchase. Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies, tax matters and refinements made to estimates of fair value in connection with the preliminary allocation.

Amortizing intangible assets: We must estimate and make assumptions regarding the useful life we assign to our amortizing intangible assets. Set forth below are our annual amortization policies for each of the main categories of amortizing intangible assets:

Description		Amortization Basis

Insurance policies acquired	7–9	The pattern of projected future cash flows for the policies acquired over the estimated weighted average life of the policies acquired
Distribution channel acquired	3–30	Straight line over the estimated life of the asset
Membership base acquired	7–10	Straight line over the estimated weighed average life of the membership base
Trademarks/tradenames	9	Straight line over the estimated weighted average life of the trademarks/tradenames
Licenses	15	Straight line over the estimated weighed average life of the licenses
Provider contracts	10	Straight line over the estimated weighted average life of the contracts
Non-compete	7	Straight line over the length of the agreement
Administrative service contracts	6	The pattern of projected future cash flows for the customer contracts acquired over the estimated weighted average life of the contracts
Hospital network contracts	10	The pattern of projected future cash flows for the hospital network contracts acquired over the estimated weighted average life of the contracts

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In accordance with ASC 350,Intangibles—Goodwill and Other, we periodically review amortizing intangible assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. If these estimates or their related assumptions change in the future, we may be required to record impairment losses for these assets. There were no impairment losses relating to our amortizing intangible assets during 2009.

Goodwill: ASC 350 requires that goodwill balances be reviewed for impairment at the reporting unit level at least annually, or more frequently if events occur or circumstances change that would indicate that a triggering event, as defined in ASC 350, has occurred. A reporting unit is defined as an operating segment or one level below an operating segment. Our reporting units are equivalent to our operating segments.

The Company performed its annual goodwill assessment for the individual reporting units as of October 1, 2009. The conclusion reached as a result of the annual goodwill impairment testing for 2009 was that the fair value of each reporting unit, for which goodwill had been allocated, was in excess of the respective reporting unit's carrying value (the first step of the goodwill impairment test).

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test as of October 1, 2009), the company's weighted average cost of capital and the company's stock price and market capitalization. Based on our review of these items through the reporting date, we believe that our estimate of fair value for each of our reporting units remains reasonable.

Recognition of Premium Revenues and Policy Benefits—Medicare Plans: Medicare is a federal health insurance program that provides Americans age 65 and over, and some disabled persons under the age of 65, certain hospital, medical and prescription drug benefits. The Medicare program consists of four parts, labeled Parts A–D.

Part A—Hospitalization benefits are provided under Part A. These benefits are financed largely through Social Security taxes. Beneficiaries are not required to pay any premium for Part A benefits, however, they are still required to pay out-of-pocket deductibles and coinsurance.

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developed from our historical experience in the preceding month (adjusted for known changes in estimates of recent hospital and drug utilization data), provider contracting changes, changes in benefit levels, product mix and seasonality. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results.

Membership

Medicare Risk Adjustment Provisions

Medicare Advantage Health Benefit Plans

We receive monthly payments from CMS related to members in our HMO, PPO and PFFS Plans. The recognition of the premium and cost reimbursement components under these Plans is described below:

CMS Direct Premium Subsidy—We receive a monthly premium from CMS based on the Plan year bid we submitted to CMS. The monthly payment is a risk-adjusted amount per member and is based upon the member's risk score status, as determined by CMS. The CMS premium is recognized over the contract period and reported as premium revenue.

Revenue Adjustments—The monthly CMS Direct Premium Subsidy is based upon the members' health status, which is determined by CMS, as more fully described above under "Medicare Risk

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Adjustment Provisions." All health benefit organizations must capture, collect, and submit the necessary diagnosis code information to CMS within prescribed deadlines. Accordingly, we collect, capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines for our HMO, PPO and PFFS plans. We estimate changes in CMS premiums related to revenue adjustments based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. Risk scores are updated annually by CMS and reconciled to our estimated amounts by us with any adjustments recorded in premium revenue. Although such adjustments have not been considered to be material in the past, future adjustments could be material.

Low-Income Premium Subsidy—For qualifying low-income status, or LIS, members of our Medicare Advantage Health Benefit Plans with Part D benefits, CMS pays us for some or all of the LIS member's monthly premium. The CMS payment is dependent upon a member's income level which is determined by the Social Security Administration. Low-income premium is recognized over the contract period and reported as premium revenue.

Catastrophic Reinsurance—We receive payments from CMS for catastrophic reinsurance for members of our Medicare Advantage Health Benefit Plans with Part D benefits.

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CMS Risk Corridor Provisions for the Part D benefits of our HMO and PPO Plans —Premiums from CMS for members of our HMO and PPO Plans with Part D benefits, are subject to risk corridor provisions. The CMS risk corridor calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual Plan bid (target amount) to actual experience. Variances of more than 5% above the target amount will result in CMS making additional payments to us, and variances of more than 5% below the target amount will require us to refund to CMS a portion of the premiums we received. Risk corridor payments due to or from CMS are estimated throughout the year and are recognized as adjustments to premium revenues and due and unpaid premiums. This estimate requires us to consider factors that may not be certain, including: membership, risk scores, prescription drug events, or PDEs, and rebates. After the close of the annual Plan year, CMS reconciles actual experience to the target amount and any differences are settled between CMS and the Plan.

Medicare Part D Plans

We receive monthly payments from CMS related to members in our stand-alone Part D Plans. The recognition of the premium and subsidy components under Part D is described below:

CMS Direct Subsidy Premium—We receive a monthly premium from CMS based on the Plan year bid we submitted to CMS. The monthly payment is a risk-adjusted amount per member and is based upon the member's risk score status, as determined by CMS. The CMS premium is recognized over the contract period and reported as premium revenue.

Revenue Adjustments—The monthly CMS Direct Premium Subsidy is based upon the members' health status, which is determined by CMS, as more fully described above under "Medicare Risk Adjustment Provisions." We do not have access to diagnosis data with respect to our stand-alone PDP members and therefore, we cannot anticipate changes in our members' risk scores. Changes in CMS premiums related to risk-score adjustments for our stand alone PDP membership are recognized when the amounts become determinable and collectability is reasonably assured, which occurs when we are notified by CMS of such adjustments. Although such adjustments have not been considered to be material in the past, future adjustments could be material.

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the Plan. See "Deposit Accounting" below for a description of the accounting for low-income cost sharing subsidies.

Recognition of Premium Revenues and Policy Benefits for our Traditional Accident & Health Insurance Products: Our traditional accident and health products include Medicare supplement, fixed benefit accident and sickness and other health, and long term care products. These products are considered to be long-duration contracts in accordance with ASC 944-40,Financial Services—Insurance—Claim Costs and Liabilities for Future Policy Benefits, because they are largely guaranteed renewable (renewable at the option of the insured). For these products, we record premiums as revenue over the premium-paying periods of the contracts when due from policyholders. We recognize benefits and expenses associated with these policies over the current and anticipated renewal periods of the policies so as to result in recognition of profits over the life of the policies. We accomplish this association by recording a provision for future policy benefits and amortizing deferred policy acquisition costs. The liability for future policy benefits for accident & health policies consists of active life reserves and the estimated present value of the remaining ultimate net cost of incurred claims. Active life reserves consist primarily of unearned premiums and additional contract reserves. We compute the additional contract reserves on the net level premium method using assumptions for future investment yield, mortality and morbidity. The assumptions are based on past experience. We establish claim

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reserves for future payments not yet due on incurred claims, primarily relating to individual disability and long term care insurance and group long-term disability insurance products. We initially establish these reserves based on past experience, continuously reviewed and updated with any related adjustments recorded to current operations. Claim liabilities represent policy benefits due for unpaid claims, consisting primarily of claims in the course of settlement and a liability for incurred but not yet reported claims, known as IBNR.

Our accounting for premium revenues and policy benefits, particularly a) the recognition of benefits and expenses associated with earned premiums as the related premiums are earned and b) the recording a liability for future policy benefits consisting of active life reserves and the estimated present value of the remaining ultimate net cost of incurred claims is as follows:

•: Premiums are recognized as revenue, net of reinsurance, over the period to which they relate. While these products are long-duration, they are typically one-year policies that are guaranteed renewable at the option of the insured, therefore the annual premium is recorded as revenue over the policy period (one year), with any premium paid in advance recorded as a liability. Premiums due and unpaid are recorded as an asset. Changes in advance and due and unpaid premium, net of reinsurance, are reported in the net premium and policyholder fees earned line in our consolidated statements of operations.
•: Claims liabilities are accrued when events occur, including (i) claims in the course of settlement and (ii) incurred but not yet reported claims. The change in the claim liability, net of reinsurance, is reported in the claims and other benefits line in our consolidated statements of operations.
•: Active life reserves ("ALR") are established, consisting primarily of unearned premiums and additional contract reserves computed on the net level premium method. Additionally, claim reserves are established for the present value of future payments not yet due on incurred claims ("PVANYD"). Changes in the ALR and the PVANYD, net of reinsurance, are reported in reserves and other policy benefits—health line in our consolidated statements of operations.
•: Expenses eligible for capitalization as deferred policy acquisition costs, such as commissions in excess of the ultimate commission and underwriting costs, are capitalized and amortized over the anticipated life of the policy.

Recognition of Revenues, Contract Benefits and Expenses for Investment and Universal Life Type Policies: Revenues for universal life-type policies and investment products consist of mortality charges for the cost of insurance and surrender charges assessed against policyholder account balances during the period. We do not reflect amounts received for investment and universal life type products as premium revenue; rather we account for these amounts as deposits, with the related liability reflected in policyholder account balances. We expense benefit claims incurred in excess of policyholder account balances. We determine the liability for policyholder account balances for universal life-type policies and investment products under ASC 944-20, Financial Services—Insurance—Insurance Activities, following a "retrospective deposit" method. The retrospective deposit method establishes a liability for policy benefits at an amount determined by the account or contract balance that accrues to the benefit of the policyholder, which consists principally of policy account values before any applicable surrender charges. As of September 30, 2006, we ceased selling annuity products. On April 24, 2009, we reinsured all of our interest sensitive life insurance and annuity business to the Commonwealth Annuity and Life

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Insurance Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS). This transaction is discussed in more detail at Note 11 of notes to the consolidated Financial Statements.

Recognition of Premium Revenues and Policy Benefits for Traditional Life Products: We generally recognize premiums from traditional life policies as revenue when due. We match benefits and expenses with this revenue so as to result in the recognition of profits over the life of the contracts. We accomplish this matching by recording a provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs. The liability for future policy benefits represents the present value of future benefits to be paid to or on behalf of policyholders, less the future value of net premiums and we calculate it based on actuarially recognized methods using morbidity and mortality tables, which we modify to reflect our actual experience when appropriate. The liability for unpaid claims, including IBNR, reflects estimates of amounts to fully settle known reported claims related to insured events that we estimate have occurred, but have not yet been reported to us.

Recognition of Administrative Service Revenue: We generally recognize fees for administrative services over the period for which we are obligated to provide service.

Income Taxes: We use the asset and liability method of accounting for income taxes. Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates that we expect to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date of a change in tax rates.

We establish valuation allowances based upon an analysis of projected taxable income and our ability to implement prudent and feasible tax planning strategies. We carried valuation allowances on deferred tax assets of $5.8 million at December 31, 2009 and $4.4 million at December 31, 2008. At December 31, 2009, we assessed the amount of the deferred tax asset that was more likely than not to be realized under ASC 740,Income Taxes, and concluded that we can record tax benefits related to our realized losses relating to our investments for financial statement purposes.

Reinsurance: We reflect amounts recoverable under reinsurance contracts in total assets as reinsurance recoverables rather than netting those amounts against the related policy asset or liability. We account for the cost of reinsurance related to long-duration contracts over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our exposure to significant losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement. As of December 31, 2009, all of our primary reinsurers were rated "A –" (Excellent) or better by A.M. Best. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured business.

Derivative Instruments—Cash Flow Hedge: We use interest rate swap agreements to manage risk arising from interest rate volatility. Interest rate swap agreements, which are cash flow hedges, are contracts to exchange interest payments on a specified principal or notional amount for a specified

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period. By using derivatives to manage risk, we expose ourselves to credit risk and additional market risk. Credit risk is the exposure to loss if a counterparty fails to perform under the terms of the derivative contract. We minimize credit risk by entering into transactions with counterparties that maintain high credit ratings. Market risk is the exposure to changes in the market price of the underlying instrument and the related derivative. These price changes result from movements in interest rates, and as a result, assets and liabilities will appreciate or depreciate in market value. We recognize these derivative instruments on the consolidated balance sheets at their fair value, based on external quotes provided by banks. We report the fair value of the derivative instruments as assets or liabilities in other assets or other liabilities.

On the date we enter into the interest rate swap contract, we may designate it as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability, or a cash flow hedge, if specified criteria are met. At the inception of the contract, we formerly document all relationships between the hedging instrument and the hedged item, as well as its risk-management objective and strategy for undertaking each hedge transaction. We also formerly assess, both at the hedge's inception and on an ongoing basis, whether the derivative used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items.

For a derivative designated as a cash flow hedge, we record the effective portion of changes in the fair value of the derivative in accumulated other comprehensive income (loss) and recognize it in the income statement when the hedged item affects results of operations. If we determine that

•: an interest rate swap is not highly effective in offsetting changes in the cash flows of a hedged item,
•: the derivative expires or is sold, terminated or exercised, or
•: the derivative is undesignated as a hedge instrument because it unlikely that a forecasted transaction will occur,
•: we discontinue hedge accounting prospectively.

If we discontinue hedge accounting, we will continue to carry the derivative at fair value, with change in the fair value of the derivative recognized in the current period results of operations. When we discontinue hedge accounting because it is probable that a forecasted transaction will not occur, we recognize the accumulated gains and losses included in other accumulated other comprehensive income (loss) immediately in results of operations.

Stock Based Compensation: We have various stock-based incentive plans for our employees, non-employee directors and agents. Detailed information for activity in our stock plans can be found in Note 22—Stock-Based Compensation. As of January 1, 2006, the Company adopted ASC 718,Compensation—Stock Compensation, using the modified prospective method. ASC 718 requires companies to recognize compensation costs for share-based payments to employees and non-employee directors based on the grant date fair value of the award and permits them to amortize this fair value over the grantees' service period. The provisions of this standard require the fair value to be calculated using a valuation model such as the Black-Scholes or binomial-lattice models. We have elected to use the Black-Scholes valuation model to value employee stock options, as we had done for our previous pro forma stock compensation disclosures. Under the modified prospective method, we recognize

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

compensation cost for the fair value of the unvested portion of existing arrangements as of January 1, 2006, as well as the fair value for all new share-based arrangements.

We determine stock-based compensation for agents based on guidance contained in ASC 505-50,Equity—Equity-Based Payments to Non-Employees. We expense the fair value of the awards over the vesting period of each award.

4. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

GAAP Codification: In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification, or ASC, also known collectively as the "Codification," is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. The Codification is effective for financial statements issued for reporting periods that end after September 15, 2009. Updates to the ASC are issued as Accounting Standards Updates, or ASU. Because the Codification did not change GAAP, the Codification had no impact on our consolidated financial statements and footnotes, other than the replacement of pre-codification references with ASC or ASU references herein.

Measuring Liabilities at Fair Value: On August 28, 2009, the FASB issued ASU No. 2009-05,Measuring Liabilities at Fair Value. ASU 2009-05 provides guidance on several key issues regarding the estimate of fair value for liabilities and amends ASC 820,Fair Value Measurements and Disclosures. Among other things, the guidance addresses restrictions on the transfer of a liability, and clarifies how the price of a traded debt security should be considered in estimating the fair value of the issuer's liability. This pronouncement did not have a material impact on our consolidated financial statements.

Fair Value Measurements: In April 2009, the FASB issued new guidance to address concerns about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2) recording impairment charges on investments in debt securities. The FASB also issued new guidance to require disclosures of fair values of certain financial instruments in interim financial statements.

Fair Value Measurements and Disclosures Topic ASC 820-10-65 provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. It also requires new disclosures relating to fair value measurement inputs and valuation techniques (including changes in inputs and valuation techniques).

Investments Debt and Equity Securities Topic—ASC 320-10-65-1 modified the criteria for recognition of other-than-temporary impairment (OTTI) of a debt security. If management intends to sell the debt

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4. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

security, or it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the debt security's amortized cost basis and its fair value at the balance sheet date. After recognition of the OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.

If management does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before recovery of its amortized cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the debt security (referred to as the credit loss), an OTTI is considered to have occurred. In this instance, the total OTTI is bifurcated into the amount related to the credit loss, which is recognized in earnings, with the remaining amount of the total OTTI attributed to other factors (referred to as the noncredit portion) and recognized as a separate component in other comprehensive loss. After the recognition of an OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. In addition, ASC 820 expands and increases the frequency of existing disclosures about OTTIs for debt and equity securities regarding expected cash flows, credit losses and an aging of securities with unrealized losses.

We adopted the aforementioned changes effective April 1, 2009, resulting in an increase in the opening balance of retained earnings by $10.7 million, with a corresponding increase to the accumulated other comprehensive loss on our consolidated statements of stockholders' equity and comprehensive income to reclassify the noncredit portion of previously impaired debt securities held as of April 1, 2009.

The following summarizes the components of the adjustment (in thousands):

	Unrealized OTTI

Increase in amortized cost	$	16,487
Income Tax		(5,771	)

Net cumulative effect adjustment	$	10,716

The adjustment was calculated for all debt securities held as of April 1, 2009, for which an OTTI was previously recognized, but as of April 1, 2009, we did not intend to sell the security and it was not more likely than not that we would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be received as of April 1, 2009, to the amortized cost basis of the debt securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate for each respective debt security in effect before recognizing any OTTI, except for on variable rate debt securities, on which the rate used was the current rate in effect as of the date the cash flow estimate was being made.

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4. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

Following is a summary of the adjustment as of April 1, 2009, by asset class (in thousands):


Subprime	$	15,689
Non-agency residential mortgage-backed securities		798

	$	16,487

In addition, we have enhanced our financial statement presentation to separately present the total OTTI recognized in realized loss, with an offset for the amount of noncredit impairments recognized in accumulated other comprehensive loss, on the face of our consolidated statements of operations. The enhanced financial statement disclosures required under ASC 825,Financial Instruments, are included in Notes 5 and 6.

Subsequent Events Disclosure—On June 30, 2009, we adopted ASC 855-10-50,Subsequent Events—Disclosure, which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. ASC 855-10-50 defines two types of subsequent events. The effects of events or transactions that provide additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements, are recognized in the financial statements. The effects of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date are not recognized in the financial statements.

Business Combinations—In December 2007, the FASB issued guidance codified into ASC 805,Business Combinations, which replaced previous business combination accounting guidance. The new guidance revises how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree and any goodwill acquired. The guidance as amended includes recognition provisions for assets acquired and liabilities assumed that arise from contingencies and the treatment of contingent purchase price. It also requires additional disclosure requirements intended to enable users to evaluate the nature and financial effects of the business combination. The Company adopted the new guidance on January 1, 2009, and will apply the provisions prospectively to all new acquisitions closing on or after that date. The adoption did not have an impact on our consolidated financial statements.

Future Adoption of Accounting Standards:

We determined that all other recently issued accounting standards that are not yet effective will not have a material impact on our consolidated financial statements, or do not apply to our operations.

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5. INVESTMENTS

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

	December 31, 2009

Classification	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Gross Unrealized OTTI			Mkt Value
	(in thousands)
U.S. Treasury securities and obligations of U.S. Government	$	35,572	$	554	$	(4	)	$	—		$	36,122
Government sponsored agencies		137,839		3,051		(59	)		—			140,831
Other political subdivisions		10,020		223		(229	)		—			10,014
Corporate debt securities		312,225		16,826		(1,206	)		—			327,845
Foreign debt securities		19,465		1,259		—			—			20,724
Mortgage-backed and asset-backed securities		446,144		14,588		(13,598	)		(18,117	)		429,017

	$	961,265	$	36,501	$	(15,096	)	$	(18,117	)	$	964,553

	December 31, 2008

Classification	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Gross Unrealized OTTI		Mkt Value
	(in thousands)
U.S. Treasury securities and obligations of U.S. Government	$	33,963	$	1,372	$	—		$	—	$	35,335
Government sponsored agencies		90,030		4,999		—			—		95,029
Other political subdivisions		9,993		133		(241	)		—		9,885
Corporate debt securities		441,681		4,055		(25,453	)		—		420,283
Foreign debt securities		32,779		41		(1,930	)		—		30,890
Mortgage-backed and asset-backed securities		466,632		8,109		(33,770	)		—		440,971

	$	1,075,078	$	18,709	$	(61,394	)	$	—	$	1,032,393

At December 31, 2009, total gross unrealized and OTTI losses of $31.7 million on mortgage-backed and asset-backed securities reflect unrealized losses of $27.4 million on subprime residential mortgage loans, as discussed below, and $4.3 related to obligations of other mortgage-backed and asset-backed securities. The value of a majority of these securities is depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Corporate debt securities have gross unrealized losses of $1.2 million at December 31, 2009. These unrealized losses relate to corporate securities across select sectors, and reflect company specific credit risks that existed at December 31, 2009. Management and the Investment Committee have evaluated these holdings, with input from our investment managers, and do not believe them to be other-than-temporarily impaired.

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5. INVESTMENTS (Continued)

The amortized cost and fair value of fixed maturities at December 31, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value

	(in thousands)
Due in 1 year or less	$	84,044	$	85,873
Due after 1 year through 5 years		328,216		344,688
Due after 5 years through 10 years		85,332		88,495
Due after 10 years		17,529		16,480
Mortgage and asset-backed securities		446,144		429,017

	$	961,265	$	964,553

The fair value and unrealized loss as of December 31, 2009 and December 31, 2008 for fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are shown below:

	Less than 12 Months					12 Months or Longer					Total

December 31, 2009	Fair Value		Gross Unrealized Losses and OTTI			Fair Value		Gross Unrealized Losses and OTTI			Fair Value		Gross Unrealized Losses and OTTI
	(in thousands)
U.S Treasury securities and obligations of U.S. Government	$	—	$	—		$	48	$	(4	)	$	48	$	(4	)
Government sponsored agencies		52,666		(59	)		—		—			52,666		(59	)
Other political subdivisions		25		—			1,771		(229	)		1,796		(229	)
Corporate debt securities		7,409		(366	)		11,373		(840	)		18,782		(1,206	)
Foreign debt securities		25		—			—		—			25		—
Mortgage-backed and asset-backed securities		100,339		(5,668	)		28,643		(26,047	)		128,982		(31,715	)

Total fixed maturities	$	160,464	$	(6,093	)	$	41,835	$	(27,120	)	$	202,299	$	(33,213	)


Total number of securities in an unrealized loss position														64

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5. INVESTMENTS (Continued)

	Less than 12 Months					12 Months or Longer					Total

December 31, 2008	Fair Value		Gross Unrealized Losses and OTTI			Fair Value		Gross Unrealized Losses and OTTI			Fair Value		Gross Unrealized Losses and OTTI
	(in thousands)
U.S Treasury securities and obligations of U.S. Government	$	53	$	—		$	—	$	—		$	53	$	—
Other political subdivisions		878		(162	)		920		(79	)		1,798		(241	)
Corporate debt securities		182,411		(12,942	)		51,017		(12,511	)		233,428		(25,453	)
Foreign debt securities		26,803		(1,318	)		1,872		(612	)		28,675		(1,930	)
Mortgage-backed and asset-backed securities		79,877		(9,748	)		57,370		(24,022	)		137,247		(33,770	)

Total fixed maturities	$	290,022	$	(24,170	)	$	111,179	$	(37,224	)	$	401,201	$	(61,394	)


Total number of securities in an unrealized loss position														209

Fixed maturity securities in an unrealized loss position were diversified, representing 64 different securities as of December 31, 2009. Collectively, the fair value to amortized cost ratio for these securities was over 86%, meaning that unrealized losses were less than 14% of amortized cost. The fair value for these securities was approximately 73% of their par value. Individually, the fair value to amortized cost ratio for approximately 59% of these securities was greater than 75%.

The group of securities in an unrealized loss position for less than twelve months was comprised of 22 securities. Collectively, the fair value to amortized cost ratio for these securities was 96%, meaning that unrealized losses for the securities in this group were 4% of amortized cost. The fair value for the securities in this group was 87% of their par value. The majority of the securities in the group are depressed due to the deterioration of value in the mortgage-backed security market.

The group of securities depressed for twelve months or more was comprised of 42 securities. Collectively, the fair value to amortized cost ratio for these securities was 61%, meaning that unrealized losses for the securities in this group was approximately 39% of their amortized cost. The fair value for the securities in this group was 45% of their par value. Individually, the fair value to amortized cost ratio for approximately 55% of these securities was greater than 75%. Mortgage and asset-backed securities represent approximately 68% of the total fair value for the more than twelve month group and Corporate debt securities represent approximately 27%. There were 3 corporate debt securities with a fair value to amortized cost ratio below 90%, which had a combined unrealized loss of $0.5 million. The majority of the securities in the group are depressed due to the deterioration of value in the mortgage-backed security market and related businesses, subprime securities in particular. Subprime securities in the portfolio represented $22.8 million of the $27.1 million unrealized loss on the 12 months or longer mortgage-backed securities. A description of the factors considered, in determining that recording an other-than-temporary impairment was not warranted, are outlined below.

As part of the Company's ongoing security monitoring process by a committee of investment and accounting professionals, the Company has reviewed its investment portfolio and recorded an other-than-temporary decline in the value of certain of our securities with exposure to subprime mortgages totaling $10.5 million in the year ended December 31, 2009. In addition, we recorded $6.4 million in other-than-temporary impairments on other mortgage backed securities. There were no

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

impairments of corporate securities in 2009. We recorded $48.0 million in other-than-temporary impairments on certain subprime mortgages and $11.8 million in other-than-temporary impairments on corporate and other mortgage backed securities for the year ended December 31, 2008. We recorded $41.0 million in other-than-temporary impairments on certain subprime mortgages for the year ended December 31, 2007.

Subprime Residential Mortgage Loans

The following table presents our exposure to subprime residential mortgages by vintage year.

Vintage Year	Amortized Cost		Fair Value		Unrealized Loss

	(in thousands)
2003	$	4,229	$	3,389	$	(840	)
2004		2,102		1,614		(488	)
2005		23,384		14,914		(8,470	)
2006		17,478		4,298		(13,180	)
2007		5,427		1,730		(3,697	)

Totals	$	52,620	$	25,945	$	(26,675	)

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5. INVESTMENTS (Continued)

The following table summarizes, on a pre-tax basis, our other-than-temporary impairments recorded since the subprime deterioration began in 2007:

					2009 Quarter Ended

	Cumulative		2009		December 31		September 30		June 30		March 31		2008		2007
	(in thousands)
Subprime	$	99,458	$	10,497	$	3,841	$	146	$	2,135	$	4,375	$	47,964	$	40,997
Other structured		11,043		6,398		201		108		2,388		3,701		4,645		—
Corporate		7,177		—		—		—		—		—		7,177		—

	$	117,678	$	16,895	$	4,042	$	254	$	4,523	$	8,076	$	59,786	$	40,997

At December 31, 2007, we recognized an other-than-temporary impairment on fourteen 2006 and 2007 vintage year subprime holdings. As of December 31, 2008, we recognized an additional other-than-temporary impairment on the same fourteen securities impaired at December 31, 2007 plus four additional subprime holdings that were initially impaired during the first quarter of 2008. In addition, during 2008, we recognized an other-than-temporary impairment on five other structured securities and three corporate securities. The corporate other-than-temporary impairment included $6.1 million on two Lehman Brothers securities. During the year ended December 31, 2009, we recognized an additional other-than-temporary impairment on twelve subprime securities impaired in 2007 and 2008, plus one additional subprime holding in 2009. Further, we recognized other-than-temporary impairments on twelve other structured securities, seven of which had not been previously impaired.

The components of the change in unrealized gains and losses for fixed maturity securities included in the consolidated statements of stockholders' equity are as follows:

		2009			2008			2007

		(in thousands)
Change in net unrealized gains and losses:
	Fixed maturities	$	45,973		$	(42,152	)	$	(2,295	)
	Other invested assets		—			—			(8	)
	Adjustment relating to deferred policy acquisition costs		(6,617	)		6,392			(670	)

Change in net unrealized losses before income tax			39,356			(35,760	)		(2,973	)
Income tax benefit			(13,775	)		12,516			1,040

Change in net unrealized losses		$	25,581		$	(23,244	)	$	(1,933	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

The details of net investment income are as follows:

		2009			2008			2007

		(in thousands)
Investment Income:
	Fixed maturities	$	47,557		$	59,170		$	62,090
	Cash and cash equivalents		1,851			21,303			44,428
	Policy loans		805			1,971			1,342
	Other		918			632			1,095

Gross investment income			51,131			83,076			108,955
Investment expenses			(1,317	)		(1,806	)		(1,985	)

Net investment income		$	49,814		$	81,270		$	106,970

There was no non-income producing fixed maturity securities for the years ended December 31, 2009 or 2007. The two Lehman Brothers securities referred to above were the only non-income producing fixed maturity securities for the year ended December 31, 2008.

Subsequent to the Life and Annuity Reinsurance transaction in April 2009, we elected to reduce the risk and exposure of our investment portfolio to be more conservative in nature and more appropriately aligned with our health insurance focused businesses. Due to this risk reducing effort, we incurred net realized losses totaling $10.8 million. The table below reflects gross realized gains and gross realized losses included in the consolidated statements of operations, which includes the results of the risk reduction program:

		2009			2008			2007

		(in thousands)
Realized gains:
	Fixed maturities	$	7,300		$	1,788		$	324
	Other		337			12			2,073

			7,637			1,800			2,397

Realized losses:
	Fixed maturities, excluding OTTI		(15,158	)		(1,234	)		(644	)
	OTTI on fixed maturities		(16,895	)		(59,786	)		(40,997	)
	OTTI on equity maturities		(481	)		—			—
	Other		(91	)		(461	)		(934	)

			(32,625	)		(61,481	)		(42,575	)

Net realized losses		$	(24,988	)	$	(59,681	)	$	(40,178	)

At December 31, 2009 and 2008, we held unrated or less-than-investment grade corporate debt securities as follows:

	2009			2008

	(in thousands)
Carrying value (estimated fair value)	$	4,461		$	22,492

Percentage of total assets		0.2	%		0.6	%

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5. INVESTMENTS (Continued)

The holdings of less-than-investment grade securities are diversified and the largest investment in any one such security was $1 million, or 0.1% of total assets at December 31, 2009 and $5.4 million, or 0.1% of total assets at December 31, 2008.

We have reflected investments held by various states as security for our policyholders within those states in fixed maturities. These investments had carrying values of $43.4 million at December 31, 2009 and $41.9 million at December 31, 2008.

Changes in the amount of other-than-temporary impairments recognized in earnings on securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive income:

		2009

		(in thousands)
Balance, April 1, 2009 (implementation date)		$	390
Credit related impairments recognized in current period earnings on securities:
	With credit related impairments previously recognized		3,949
	With credit related impairments not previously recognized		3,507

Cumulative credit related impairments as of December 31, 2009		$	7,846

In addition, during 2009, we recognized other-than-temporary impairments of approximately $1.4 million, on fixed maturity securities for which the impairment was not split between earnings and other comprehensive income.

6. FAIR VALUE MEASUREMENTS

We carry fixed maturity investments, equity securities and interest rate swaps at fair value in our consolidated financial statements. These fair value disclosures consist of information regarding the valuation of these financial instruments, followed by the fair value measurement disclosure requirements of ASC 820,Fair Value Measurements and Disclosure.

Effective April 1, 2009, we applied the provisions of ASC 820 prospectively to financial instruments that we record at fair value. Our adoption of ASC 820 did not have an impact on opening retained earnings.

Fair Value Disclosures

The following section applies the ASC 820 fair value hierarchy and disclosure requirements to our financial instruments that we carry at fair value. ASC 820 establishes a fair value hierarchy that prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels, numbered 1, 2, and 3.

Level 1 observable inputs reflect quoted prices for identical assets or liabilities in active markets that we have the ability to access at the measurement date. We currently have no Level 1 securities.

Level 2 observable inputs, other than quoted prices included in Level 1, reflect the asset or liability or prices for similar assets and liabilities. Most debt securities and some preferred stocks are model priced by vendors using observable inputs and we classify them within Level 2. Derivative instruments

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6. FAIR VALUE MEASUREMENTS (Continued)

that are priced using models with observable market inputs, such as interest rate swap contracts, also fall into Level 2 category.

Level 3 valuations are derived from techniques in which one or more of the significant inputs, such as assumptions about risk, are unobservable. Generally, Level 3 securities are less liquid securities such as highly structured or lower quality asset-backed securities, known as ABS, and private placement equity securities. Because Level 3 fair values, by their nature, contain unobservable market inputs, as there is no observable market for these assets and liabilities, we must use considerable judgment to determine the ASC 820 Level 3 fair values. Level 3 fair values represent our best estimate of an amount that we could realize in a current market exchange absent actual market exchanges.

The following table presents our assets and liabilities that we carry at fair value by ASC 820 hierarchy levels, as of December 31, 2009 and 2008 (in thousands):

		Total		Level 1		Level 2		Level 3

December 31, 2009
Assets:
Fixed maturties, available for sale		$	964,553	$	—	$	962,990	$	1,563
Equity securities			9		—		—		9

	Total assets	$	964,562	$	—	$	962,990	$	1,572

Liabilities:
Interest rate swaps		$	15,465	$	—	$	15,465	$	—

December 31, 2008
Assets:
Fixed maturties, available for sale		$	1,032,393	$	—	$	1,028,449	$	3,944
Equity securities			490		—		—		490

	Total assets	$	1,032,883	$	—	$	1,028,449	$	4,434

Liabilities:
Interest rate swaps		$	20,298	$	—	$	20,298	$	—

In many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, we will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value.

Determination of fair values

The valuation methodologies used to determine the fair values of assets and liabilities under the "exit price" notion of ASC 820 reflect market participant objectives and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. We determine the fair value of our financial assets and liabilities based upon quoted market prices where available. Fair values of our interest rate swap liabilities reflect adjustments for counterparty credit quality, our credit standing, liquidity and, where appropriate, risk margins on unobservable parameters.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above table.

Valuation of Fixed Maturity and Equity Securities

We determine the fair value of the majority of our fixed maturity and equity securities using third party pricing service market prices. The following are examples of typical inputs used by third party pricing services:

•: reported trades,
•: benchmark yields,
•: issuer spreads,
•: bids,
•: offers, and
•: estimated cash flows and prepayment speeds.

Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services may use matrix or model processes to develop a security price where the pricing services develop future cash flow expectations based upon collateral performance, discounted at an estimated market rate. The pricing for mortgage-backed and asset-backed securities reflects estimates of the rate of future prepayments of principal over the remaining life of the securities. The pricing services derive these estimates based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral.

We have analyzed the third party pricing services' valuation methodologies and related inputs, and have also evaluated the various types of securities in our investment portfolio to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, we classified each price into Level 1, 2, or 3. We classified most prices provided by third party pricing services into Level 2 because the inputs used in pricing the securities are market observable.

Due to a general lack of transparency in the process that brokers use to develop prices, we have classified most valuations that are based on broker's prices as Level 3. We may classify some valuations as Level 2 if we can corroborate the price. We have also classified internal model priced securities, primarily consisting of private placement asset-backed securities, as Level 3 because this model pricing includes significant non-observable inputs. We have classified private placement equity securities as Level 3 due to the lack of observable inputs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

The following table presents the fair value of the significant asset sectors within the ASC 820 Level 3 securities as of December 31, 2009 and 2008:

	December 31, 2009					December 31, 2008

	Fair Value		% of Total Fair Value			Fair Value		% of Total Fair Value
	(in thousands)
Mortgage and asset-backed securities	$	50		3.2	%	$	1,862		42.0	%
Corporate debt securities		1,513		96.2	%		2,082		47.0	%
Equity securities		9		0.6	%		490		11.0	%

Total Level 3 securities	$	1,572		100.0	%	$	4,434		100.0	%

Mortgage and asset-backed securities represent private-placement securities that are thinly traded and priced using an internal model or modeled by independent brokers.

Interest rate swaps

We report interest rate swaps in other liabilities on our consolidated balance sheets at fair value. Their fair value is based on the present value of cash flows as determined by the LIBOR forward rate curve and credit spreads, including our own credit.

We have classified interest rate swaps as Level 2. We have determined their valuations using pricing models with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3 Rollforward

We classify the fair values of financial instruments within Level 3 if there are no observable markets for the instruments or, in the absence of active markets, the majority of the inputs used to determine the fair value of the instruments are based on assumptions about market participant assumptions. Rollforward tables for each quarter from January 1, 2009 to December 31, 2009 for the

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

Level 3 financial instruments for which we have used significant unobservable inputs in the fair value measurement on a recurring basis are presented below:

	Fixed Maturities			Equity Securities			Total

	(in thousands)
Fair value as of Junuary 1, 2009	$	3,944		$	490		$	4,434
Net purchases and sales		(157	)		—			(157	)
Net transfers in/(out)		(464	)		—			(464	)
Unrealized losses included in AOCL(1),(2)		7			—			7

Fair value as of March 31, 2009		3,330			490			3,820
Net purchases and sales		(57	)		—			(57	)
Net transfers in/(out)		(95	)		—			(95	)
Unrealized losses included in AOCL(1),(2)		(710	)		—			(710	)

Fair value as of June 30, 2009		2,468			490			2,958
Net purchases and sales		(72	)		—			(72	)
Realized loss		—			(481	)		(481	)
Unrealized gains included in AOCL(1),(2)		472			—			472

Fair value as of September 30, 2009		2,868			9			2,877
Net purchases and sales		(1	)		—			(1	)
Net transfers in/(out)		(1,260	)		—			(1,260	)
Unrealized losses included in AOCL(1),(2)		(44	)		—			(44	)

Fair value as of December 31, 2009	$	1,563		$	9		$	1,572

(1): AOCI: Accumulated other comprehensive income (loss).
(2): Unrealized losses represent losses from changes in values of Level 3 financial instruments only for the periods in which the instruments are classified as Level 3.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INTANGIBLE ASSETS

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

					December 31, 2009				December 31, 2008

			Weighted Average Life (Years)		December 31, 2009				December 31, 2008
			Weighted Average Life (Years)		Value Assigned		Accumulated Amortization		Value Assigned		Accumulated Amortization
					(in thousands)
Traditional Insurance:
	Policies in force—Health			9	$	17,246	$	12,996	$	18,473	$	13,068
	Distribution channel			3		4,628		3,085		4,628		1,543
	Policies in force—Life/Annuity			7		—		—		4,127		2,465
Medicare Part D:
	Membership base			10		135,426		30,809		135,426		17,267
	Trademarks/tradenames			9		20,433		5,165		20,433		2,895
	Licenses			15		3,500		531		3,500		297
Senior Managed Care—Medicare Advantage:
	Membership base			7		23,988		11,821		23,988		9,785
	Distribution channel			30		22,055		4,962		22,055		4,227
	Provider contracts			10		15,539		7,072		15,539		5,462
	Non-compete			7		1,425		528		1,425		325
Senior Administrative Services:
	Administrative service contracts			6		7,671		7,671		7,671		7,628
	Hospital network contracts			10		1,797		1,523		1,797		1,358

		Total		12	$	253,708	$	86,163	$	259,062	$	66,320

The following table shows the changes in the amortizing intangible assets:

		2009			2008

		(in thousands)
Balance, beginning of year		$	192,742		$	213,518
	Additions and adjustments		(1,637	)		2,987
	Amortization, net of interest		(23,560	)		(23,763	)

Balance, end of year		$	167,545		$	192,742

The adjustment in 2009 relates to the reduction related to the reinsurance of substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty—refer to Note 11 of notes to Consolidated Financial Statements. We had approximately $1.6 million, net, of amortizing intangibles related to the policies in force—Life/Annuity as of the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding commission. The additions in 2008 relate to the acquisition of a distribution system, net of adjustments to the amortizing intangibles related to the MemberHealth acquisition. The additions in 2007 relate to primarily to the acquisition of MemberHealth in the third quarter of 2007.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INTANGIBLE ASSETS (Continued)

Amortization, net of interest increased in 2008 over 2007 as a result of a full year of amortization of MemberHealth intangible assets in 2008 compared with 3 months in 2007.

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


2010	$	22,797
2011		20,948
2012		20,784
2013		20,652
2014		20,432
Thereafter		61,932

	$	167,545

Changes in the carrying amounts of goodwill and intangible assets with indefinite lives (primarily trademarks and licenses) are shown below:

		Total			Traditional			Medicare Part D			Senior Managed Care- Medicare Advantage			Senior Administrative Services

		(in thousands)
Balance, December 31, 2007		$	606,972		$	3,893		$	520,764		$	77,958		$	4,357
	Acquisitions		1,646			—			—			1,646			—
	Impairments		(3,893	)		(3,893	)
	Adjustments		(74,694	)		—			(72,549	)		(2,145	)

Balance, December 31, 2008			530,031			—			448,215			77,459			4,357
	Acquisitions		—			—			—			—			—
	Impairments		—			—			—			—			—
	Adjustments		—			—			—			—			—

Balance, December 31, 2009		$	530,031		$	—		$	448,215		$	77,459		$	4,357

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INTANGIBLE ASSETS (Continued)

Therefore, at December 31, 2008, we recorded an impairment charge of $3.9 million to eliminate the goodwill for our Traditional reporting unit.

The decrease in goodwill for Medicare Part D in 2008 was due to the reduction in the purchase price for MemberHealth of $81.9 million, net of $9.4 million of increases to goodwill as a result of our completion of the purchase price allocation process for the acquisition, including the finalization of the valuation and, measurement of the asset acquired. The decrease in goodwill in Senior Managed Care—Medicare Advantage in 2008 was the result of the pre-acquisition tax adjustment related to the Heritage acquisition and the settlement of pre-acquisition adjustments in connection with the Harmony Health acquisition.

8. DEFERRED POLICY ACQUISITION COSTS

Details with respect to deferred policy acquisition costs are as follows:

		2009			2008

		(in thousands)
Balance, beginning of year		$	237,630		$	245,511
	Capitalized costs, net of reinsurance commissions and allowances		37,766			43,659
	Adjustment relating to unrealized (losses) gains on fixed maturities		(6,617	)		6,392
	Amortization		(45,552	)		(57,932	)
	Adjustment in connection with reinsurance transaction		(72,829	)		—

Balance, end of year		$	150,398		$	237,630

In the first quarter of 2009, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty—refer to Note 11 of notes to Consolidated Financial Statements. We had approximately $72.8 million of deferred acquisition costs as of the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding commission.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. MEDICARE PART D

At December 31, 2009 and 2008, the balances due (to) from CMS for the 2006 through 2009 Plan years were ($191.0) million and $640.9 million, respectively. The following table provides balances due (to) from CMS by Plan year:

	December 31, 2009									December 31, 2008

Plan Year	Reinsurance/ Low-income Cost Subsidy(1)			Risk Corridor(2)			Total Due from (to) CMS			Reinsurance/ Low-income Cost Subsidy(1)			Risk Corridor(2)			Total Due from (to) CMS
	(in thousands)
2009	$	(194,062	)	$	(35,957	)	$	(230,019	)	$	—		$	—		$	—
2008(3)		—			—			—			528,993			16,551			545,544
2007(4)		21,433			12,536			33,969			85,909			16,917			102,826
2006		3,460			1,595			5,055			(5,609	)		(1,815	)		(7,424	)

Total due (to) from CMS	$	(169,169	)	$	(21,826	)	$	(190,995	)	$	609,293		$	31,653		$	640,946

(1): Amounts reported in CMS contract deposit (liabilities) receivables in the consolidated balance sheets.
(2): Amounts reported in Due and unpaid premiums in the consolidated balance sheets.
(3): We collected the amount due from CMS for the 2008 Plan year during the third quarter of 2009.
(4): For the 2007 Plan year, reconciliation data was received from CMS and amounts were preliminarily settled during the fourth quarter of 2008. Subsequent to this preliminary settlement, the Company requested a partial reopening of the 2007 Plan year and received an $80 million interim payment on January 2, 2009 as part of this request.

Prior Plan Year Settlements and Adjustments Under Stand-alone Medicare Part D Plans and MA-PD: The Medicare Part D prescription drug benefit program is detail oriented and relatively complex. The amount due to or from CMS consists of low-income cost subsidy, catastrophic reinsurance and the risk corridor adjustment. These amounts are affected by: membership; risk scores; prescription drug events ("PDEs") and rebates. Approximately 9 months after the close of the annual Plan year (December 31^st) CMS completes its reconciliation of membership and PDEs and provides the information needed to finalize the accounting for these items to each Plan.

For our stand-alone Part D Plans, retroactive revenue adjustments and Plan year settlements for the 2008 Plan year were received in the third quarter of 2009. Net premiums for the year ended December 31, 2009 included retroactive adjustments related to prior Plan years, which increased total revenue by approximately $14.7 million (net of the impact of government risk corridor). These adjustments were comprised of $9.2 million in risk adjustment revenue related to our 2008 membership and $5.5 million related to the final CMS PDE reconciliations for prior Plan years. For the 2007 Plan year, we received retroactive revenue adjustments and Plan year settlements in the third quarter of 2008. Net premiums for the year ended December 31, 2008 included retroactive adjustments which reduced total revenue by approximately $4.6 million (net of the impact of government risk corridor). These adjustments were comprised of $0.8 million related to risk adjustment revenue for our 2007 membership and $3.8 million related to the final CMS PDE reconciliation for the 2007 Plan year.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. MEDICARE PART D (Continued)

The reconciliation and settlement process with CMS for the Part D coverage within Medicare Advantage Plans is similar to Medicare Part D Plans with the two exceptions: 1) PFFS Plans are ineligible for aggregate risk corridor payments; and 2) prospective monthly catastrophic reinsurance payments to PFFS Plans are based on CMS estimated average reinsurance payments to other MA-PD Plans for their Part D coverage. In the third quarter of 2009, for MA-PD, we received a retroactive revenue adjustment for the 2008 Plan year that increased revenues by $1.3 million (net of risk corridor). In the third quarter of 2008, we received a retroactive revenue adjustment for the 2007 Plan year that increased revenues by $0.6 million (net of risk corridor). In the third quarters of 2009 and 2008, we received notification from CMS of an adjustment to our catastrophic reinsurance payment for the Part D coverage within our PFFS Plans for the prior Plan year that lowered the payment by $7.3 million and $4.5 million, respectively.

10. UNCONSOLIDATED SUBSIDIARY

During 2005, we entered into a strategic alliance with Caremark and created Part D Management Services, L.L.C., known as PDMS. PDMS was 50% owned by Universal American and 50% owned by Caremark. We did not control PDMS and therefore PDMS is not consolidated in our financial statements. We accounted for our investment in PDMS on the equity basis and included it in other assets. PDMS was dissolved in December 2009.

PDMS principally performed marketing and risk management services on behalf of our Prescription Pathway^SM PDP, for which it received fees and other remuneration from our PDPs and Caremark. Together with Caremark, on February 13, 2008, we announced that the strategic alliance would end as of December 31, 2008, subject to regulatory approval. On July 31, 2008, PDMS received approval from CMS of the Novation Agreement for Change of Ownership of a Medicare Prescription Drug Plan (PDP) Line of Business. As such, effective January 1, 2009, PDMS no longer managed the strategic alliance and did not earn revenue or incur expenses related to the 2009 PDP year. PDMS continued to operate in 2009 solely to service the run-off activity related to pharmacy claims, rebates, and revenue related to prior PDP years. On December 22, 2009, PDMS was dissolved and the remaining economic interest of PDMS was split equally between the Company and Caremark to match the 50% voting and ownership rights held by each entity.

Our investment in the equity in PDMS at December 31, 2009 was zero pursuant to the dissolution and final distribution. At December 31, 2008, our share in the equity of PDMS was $6.9 million. Our share in the income of PDMS is included in "equity in earnings (loss) of unconsolidated subsidiary." For the years ended December 31, 2009, 2008 and 2007, our share in the net income was $0.3 million, $72.8 million and $56.7 million, respectively. During the years ended December 31, 2009, 2008 and 2007, PDMS made distributions to its owners, including the 2009 final distribution, aggregating $11.2 million, $135.0 million and $116.7 million, respectively. Our share of these distributions was $5.6 million, $67.5 million and $58.4 million, respectively.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. UNCONSOLIDATED SUBSIDIARY (Continued)

The condensed financial information for 100% of PDMS is as follows:

As of December 31,		2009		2008

		(in thousands)
Assets
Cash and investments		$	—	$	580
Other			—		14,436

	Total Assets	$	—	$	15,016

Liabilities and Equity
Accrued expenses and other		$	—	$	1,148
Equity			—		13,868

	Total liabilities and equity	$	—	$	15,016

Years ended December 31,		2009			2008		2007

		(in thousands)
Total revenue		$	525		$	149,348	$	121,267
Total expenses			(35	)		3,722		7,939

	Net income	$	560		$	145,626	$	113,328

11. REINSURANCE

In the normal course of business, the Company reinsures portions of certain policies that it underwrites. The Company enters into reinsurance arrangements with unaffiliated reinsurance companies to limit our exposure on individual claims and to limit or eliminate risk on our non-core or underperforming blocks of business. Accordingly, the Company is party to various reinsurance agreements on its life and accident and health insurance risks. The Company's traditional accident and health insurance products are generally reinsured under quota share coinsurance treaties with unaffiliated insurers, while the life insurance risks are reinsured under either quota share coinsurance or yearly-renewable term treaties with unaffiliated insurers. Under quota share coinsurance treaties, the Company pays the reinsurer an agreed upon percentage of all premiums and the reinsurer reimburses the Company that same percentage of any losses. In addition, the reinsurer pays the Company certain allowances to cover commissions, cost of administering the policies and premium taxes. Under yearly-renewable term treaties, the reinsurer receives premiums at an agreed upon rate for its share of the risk on a yearly-renewable term basis. The Company also uses excess of loss reinsurance agreements for certain policies whereby the Company limits its loss in excess of specified thresholds. The Company's quota share coinsurance agreements are generally subject to cancellation on 90 days notice for future business, but policies reinsured prior to cancellation remain reinsured as long as they remain in force.

We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our exposure to significant losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement. As of December 31, 2009, all of our primary reinsurers were rated "A-" (Excellent) or better by A.M. Best. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured business.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. REINSURANCE (Continued)

We have several quota share reinsurance agreements in place with General Re Life Corporation, Hannover Life Re of America and Swiss Re Life & Health America, Wilton Reassurance Company and Commonwealth Annuity & Life Insurance Company (and affiliates). These agreements cover various insurance products, including Medicare supplement, long term care, life and annuity products and contain ceding percentages ranging between 15% and 100%.

In connection with the termination of our strategic alliance with CVS/Caremark on December 31, 2008, the agreement to reinsure the Prescription Pathway^SM PDPs sponsored by our subsidiaries on a 50% coinsurance funds withheld basis to PharmaCare Re ended. As result of the termination, during 2009, ceded premiums decreased to approximately $1.7 million from $277.9 million in 2008. On July 1, 2008, the agreement to provide an insured drug benefit for the employees of the State of Connecticut and to reinsure the risk with PharmaCare Re under a 100% quota-share contract was not renewed. Direct and ceded premium under this agreement was $171.8 million and $325.0 million for the years ended December 31, 2008 and 2007, respectively.

Life Insurance and Annuity Reinsurance Transaction: Effective April 1, 2009, we reinsured substantially all of the net in force life and annuity business with Commonwealth under a 100% coinsurance treaty. In accordance with ASC 944,Financial Services—Insurance Topic, reinsurance recoverables are to be reported as separate assets rather than as reductions of the related liabilities. Accordingly, we increased the amounts due from reinsurers by approximately $544 million as of the effective date of the transaction, April 1, 2009, representing the GAAP basis liabilities reinsured. We transferred approximately $454 million of cash, net of the ceding commission of $77 million, and $22 million of policy loans, related to the reinsured policies, to the reinsurer. We had approximately $74 million of deferred acquisition costs and present value of future profits as of the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding commission. On a GAAP basis, the transaction resulted in a loss and other related costs of approximately $7.6 million, including approximately $2.8 million related to the transition of the administration of the business to the reinsurer.

Reinsurance Premium: During 2009, we ceded premiums of $50.4 million to General Re, $39.5 million to Commonwealth, $38.6 million to Hannover, and $30.9 million to Fresenius Medical Care Re, representing 1.0%, 0.8%, 0.8%, and 0.6%, respectively of our total direct and assumed premiums. During 2008, we ceded premiums of $449.8 million to PharmaCare Re, $58.4 million to General Re, $49.2 million to Hannover and $10.6 million to Swiss Re, representing 8.6%, 1.1%, 1.0% and 0.2% respectively of our total direct and assumed premiums. During 2007, we ceded premiums of $580.3 million to PharmaCare Re, $67.8 million to General Re, $58.8 million to Hannover and $12.2 million to Swiss Re, representing 15.0%, 2.0%, 2.0% and 0.3% respectively of our total direct and assumed premiums.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. REINSURANCE (Continued)

Reinsurance Recoverables: Amounts recoverable from our reinsurers are as follows:

As of December 31,		2009		2008

Reinsurer
Commonwealth and affiliates		$	551,941	$	—
Rannover			27,197		28,322
Swiss Re			22,778		24,290
Other life			20,631		22,678

	Total life		622,547		75,290

Gen Re			78,310		82,486
Hannover			23,517		27,931
PharmaCare Re			4,190		12,271
Other health			20,507		23,008

	Total health		126,524		145,696

Total		$	749,071	$	220,986

At December 31, 2009, the total amount recoverable from reinsurers of $749.1 million included $727.6 million recoverable on future policy benefits and unpaid claims, $11.7 million in funds held and $9.8 million for amounts due from reinsurers on paid claims, commissions and expense allowances net of premiums reinsured. At December 31, 2008, the total amount recoverable from reinsurers of $221.0 million included $203.7 million recoverable on future policy benefits and unpaid claims, $13.1 million in funds held and $4.2 million for amounts due from reinsurers on paid claims, commissions and expense allowances net of premiums reinsured.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. REINSURANCE (Continued)

Reinsurance Summary:

			Year Ended December 31,

			2009			2008			2007
			(in thousands)
Premiums
	Life insurance		$	70,864		$	73,387		$	74,431
	Accident and health			4,978,196			5,103,721			3,603,318

		Total gross premiums		5,049,060			5,177,108			3,677,749

Ceded to other companies
	Life insurance			(55,509	)		(23,740	)		(20,340	)
	Accident and health			(129,856	)		(600,732	)		(755,927	)

		Total ceded premiums		(185,365	)		(624,472	)		(776,267	)

Assumed from other companies
	Life insurance			3,304			3,169			3,693
	Accident and health			51,899			44,649			36,244

		Total assumed premium		55,203			47,818			39,937

Net amount
	Life insurance			18,659			52,816			57,784
	Accident and health			4,900,239			4,547,638			2,883,635

		Total net premium	$	4,918,898		$	4,600,454		$	2,941,419

Percentage of assumed to net premium
	Life insurance			18	%		6	%		6	%
	Accident and health			1	%		1	%		1	%
		Total assumed to total net		1	%		1	%		1	%
Claims recovered				138,634			552,635			695,158

		As of December 31,

		2009			2008			2007
		(in thousands)
Life insurance in force
	Gross amount	$	2,569,753		$	2,915,595		$	2,962,286
	Ceded to other companies		(2,459,260	)		(887,677	)		(853,767	)
	Assumed from other companies		58,388			72,620			80,692

	Net amount	$	168,881		$	2,100,538		$	2,189,211

Percentage of assumed to net in force			35	%		3	%		4	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LIABILITIES FOR POLICY AND CONTRACT CLAIMS—HEALTH

Activity in the policy and contract claims—health liability is as follows:

		2009			2008

		(in thousands)
Balance at beginning of year		$	500,577		$	522,228
	Less reinsurance recoverable		(33,086	)		(56,580	)

Net balance at beginning of year			467,491			465,648

Incurred related to:
	Current year		3,979,830			3,846,808
	Prior year development		3,603			(44,803	)

Total incurred			3,983,433			3,802,005

Paid related to:
	Current year		3,640,970			3,210,310
	Prior year		447,358			589,852

Total paid			4,088,328			3,800,162

Net balance at end of period			362,596			467,491
	Plus reinsurance recoverable		17,923			33,086

Balance at end of period		$	380,519		$	500,577

Policy and contract claims—health decreased by $120.1 million from December 31, 2008 to December 31, 2009. This decrease was due primarily to a change in our Part D claims processing that resulted in reducing days' claims payable for Part D claims at December 31, 2009 compared to December 31, 2008.

The claim reserve balances at December 31, 2008 settled during 2009 for $3.6 million more than originally estimated, representing 0.1% of the incurred claims recorded in 2008.

•: lower than estimated utilization of hospital and physician services, and
•: limited historical information from which to base trend rate estimates at December 31, 2007, due to the rapid growth in our PFFS product in new geographic areas.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LIABILITIES FOR POLICY AND CONTRACT CLAIMS—HEALTH (Continued)

During the fourth quarter of 2008, we determined that a number of PFFS claims had been submitted to us by fictitious providers, as well as by some actual providers seeking reimbursement for services that were not rendered. We believe that these activities were part of a pattern that targeted traditional Medicare, as well as several Medicare Advantage PFFS plans including ours. We estimated that we paid approximately $18.9 million in benefits as a result of these false claims, mostly incurred in the fourth quarter of 2008, which reduced our fourth quarter profits by approximately $0.14 per share. These false claims, which we reflected in claims and other benefits in the consolidated statements of operations, did not have any impact on our prior year claim reserve development incurred in 2008, as discussed above.

13. INCOME TAXES

The parent holding company files a consolidated return for federal income tax purposes that includes all of the life and non-life insurance company subsidiaries, including Heritage.

The Company's federal and state income tax expense (benefit) for continuing operations is as follows:

	2009		2008		2007

	(in thousands)
Current—United States	$	70,761	$	49,162	$	66,074
Deferred—United States		3,567		7,050		(17,520	)

Total tax expense	$	74,328	$	56,212	$	48,554

A reconciliation of the "expected" tax expense at 35% with the Company's actual tax expense applicable to operating income before taxes reported in the Consolidated Statements of Operations for continuing operations is as follows:

	2009			2008		2007

	(in thousands)
Expected tax expense	$	75,121		$	52,956	$	46,419
State taxes		2,053			1,067		(636	)
Change in valuation allowance		1,345			1,289		2,931
Foreign tax credit		(4,594	)		—		—
Other, net		403			900		(160	)

Actual tax expense	$	74,328		$	56,212	$	48,554

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES (Continued)

In addition to federal and state income tax, the Company's insurance company subsidiaries are subject to state premium taxes, which are included in other operating costs and expenses in the consolidated statements of operations.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for continuing operations are as follows:

		2009			2008

		(in thousands)
Deferred tax assets:
Reserves for future policy benefits		$	4,553		$	26,314
Deferred policy acquisition costs			5,388			—
Loss carryforwards			6,108			5,690
Asset valuation differences			7,631			18,907
Deferred revenues			298			342
Other			2,806			—
Unrealized losses on investments			4,262			19,612

	Total gross deferred tax assets		31,046			70,865
	Less valuation allowance		(5,778	)		(4,433	)

	Net deferred tax assets		25,268			66,432

Deferred tax liabilities:
Deferred policy acquisition costs			—			(2,782	)
Present value of future profits			(56,832	)		(65,362	)
Other			—			(5,165	)

	Total gross deferred tax liabilities		(56,832	)		(73,309	)

	Net deferred tax liability	$	(31,564	)	$	(6,877	)

At December 31, 2009, the Company had net operating loss carryforwards, subject to certain consolidating limitations, of approximately $1.0 million that expire in 2025.

The Company establishes valuation allowances based upon an analysis of projected taxable income and its ability to implement prudent and feasible tax planning strategies. The Company carried valuation allowances on its deferred tax assets of $5.8 million at December 31, 2009 and $4.4 million at December 31, 2008. During 2009, the Company established a deferred tax asset of $1.3 million for state net operating loss carry forwards; concurrently, a valuation allowance of $1.3 million also was established. At December 31, 2009, we assessed the amount of the deferred tax asset that was more likely than not to be realized under ASC 740,Income Taxes, and concluded that we can record tax benefits related to our realized losses relating to our investments for financial statement purposes. Management believes it is more likely than not that the Company will realize the recorded value of its net deferred tax assets.

The Company adopted provisions of ASC 740-10-25,Income Taxes—Recognition, related the recognition, measurement, presentation and disclosure of uncertain tax positions on January 1, 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES (Continued)

The Company has no material uncertain tax positions and no cumulative adjustment was required or recorded as a result of the adoption of ASC 740-10-25. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense when incurred. No material interest and penalties related to uncertain tax positions were accrued at December 31, 2009.

A federal tax return, generally, is open for examination for three years from the date on which it is filed, or, if applicable, from the extended due date unless the statute is extended by mutual consent. The Company has not entered into any agreement to extend the statute of limitations of any state tax return for any jurisdiction. In connection with the examination of the Company's 2005 federal tax return, the statute of limitations was extended to December 31, 2010. Consequently, federal tax returns for the years ending December 31, 2005 through 2008 are open. Certain earlier returns remain open to the extent that net operating loss carry forwards were used or generated in those years. Also, various state tax returns remain open for examination under specific state statutes of limitation for an additional period of time.

In 2009 we recognized foreign tax credit benefits of $4.6 million in our total tax expense. These benefits resulted from the settlement of the Internal Revenue Service examination of 2005 primarily related to the treatment of a controlled foreign corporation sold in 2006.

Currently, the Company's 2006 federal tax return and the pre-acquisition MemberHealth 2006 and 2007 federal tax returns are under examination by the Internal Revenue Service. The proposed adjustments would not impact any unrecognized tax benefits. It is reasonably possible that a change may occur within the next twelve months. While it is not possible to determine the range of any adjustment, no material impact is expected.

Our effective tax rate was 36.4% for the fourth quarter of 2009, and 36.7% for the fourth quarter of 2008. For the year ended December 31, 2009, our effective tax rate was 34.6%, compared with 37.2% for the same period of 2008. The decline in the effective rate for the year ended December 31, 2009 is due to the recording of $5.5 million of non-recurring tax benefits during the third quarter of 2009. These benefits resulted from the settlement of the Internal Revenue Service examination of 2005 primarily related to the treatment of a controlled foreign corporation sold in 2006.

14. LOAN PAYABLE

2007 Credit Facility

In connection with the MemberHealth transaction, we refinanced our Amended Credit Facility and Revolving Credit Facility with a new credit facility (the "2007 Credit Facility") consisting of a $350 million term loan and a $150 million revolver. A portion of the proceeds from the refinancing was used to repay in full the amounts outstanding on our previous credit facility and revolving credit facility. The 2007 Credit Facility contains certain covenants and requirements including a leverage ratio test, minimum risk based capital requirements for our insurance companies and, under certain conditions, the ability to pose limitations on certain investments, dispositions and our ability to make restricted payments. As of December 31, 2009, we were in compliance with all financial covenants.

In November 2009, the 2007 Credit Facility was amended (the "November 2009 Amendment") which provided us with the ability to make an additional $75 million of restricted payments, up to a total of $200 million, in exchange for prepayments of term loan debt principal at a rate of 50% of all restricted payments above the prior limit of $125 million. Since execution of the amendment, we have

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14. LOAN PAYABLE (Continued)

made $7.7 million of restricted payments, through repurchases of stock, in excess of the $125 million limit and prepaid $3.8 million of principal on our debt. In addition, we agreed to increases in our LIBOR-based spread and our unutilized revolving credit facility commitment fee. Interest under the 2007 Credit Facility is currently based on LIBOR plus a spread of 100 basis points, compared to 62.5 basis points prior to the amendment, and a commitment fee at an annualized rate of 25 basis points, compared to 10 basis points prior to the amendment.

In accordance with the credit agreement for the 2007 Credit Facility, the spread and fee are determined based on our consolidated leverage ratio. Effective December 31, 2009, the weighted average interest rate on the term loan portion of the 2007 Credit Facility was 1.28%. We had not drawn on the revolving loan facility as of the date of this report.

Our obligations under the 2007 Credit Facility are guaranteed by our subsidiaries, Heritage Health Systems, Inc. and MemberHealth LLC and if, and only if, a rating condition exists whereby we are either no longer rated by S&P or such rating falls below BBB –, this facility would be secured by substantially all of the assets of each of the Guarantors. In March 2008, S&P placed a rating of BB+ on us that triggered this added security requirement.

In connection with the 2007 Credit Facility, we had incurred additional loan origination fees of approximately $4.7 million, which were capitalized and are being amortized on a straight-line basis, which does not differ significantly from the effective yield basis, over the life of the 2007 Credit Facility. In connection with the November 2009 Amendment, we incurred amendment fees of approximately $1.2 million, which were capitalized and are also being amortized on a straight-line basis. The early extinguishment of the Amended Credit Facility in 2007 triggered the immediate amortization of the related capitalized loan origination fees, resulting in a pre-tax expense of approximately $0.9 million during the year ended December 31, 2007.

Under the original terms of the 2007 Credit Facility, we were required to make principal repayments quarterly at the rate of $3.5 million per year over a five-year period with a final payment of $308.4 million due upon maturity in September, 2012. As a result of the prepayments, we are required to ratably apply those prepayments through the remaining scheduled repayments. As a result of the $25 million prepayment in April 2008 and prepayments pursuant to the November 2009 Amendment, the following table reflects the schedule of principal payments remaining on the new credit facility as of December 31, 2009:

	2007 Credit Facility

	(in thousands)
2010	$	3,210
2011		3,210
2012		307,338

	$	313,758

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank to hedge the variability of cash flows for interest payments on a total notional amount of $250 million of our 2007 Credit Facility. In entering the swap with Citibank, N.A., we agreed to swap our floating rate interest payment based on

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14. LOAN PAYABLE (Continued)

the floating LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a fixed 4.14% locked in base rate. In entering the swap with Calyon Corporate and Investment Bank, we agreed to swap our floating rate interest payment based on the floating LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a fixed 4.13% locked in based rate. (See Note 16—Derivative Instruments—Cash Flow Hedges).

Principal and Interest Payments

We made regularly scheduled principal payments of $3.1 million and prepayments of $3.8 million, as a result of the November 2009 Amendment, during the year ended December 31, 2009, $3.5 million plus the $25.0 million prepayment discussed above during 2008, and $3.5 million during 2007 in connection with its credit facilities. The Company paid interest of $7.2 million during 2009 and $13.0 million during 2008 in connection with its credit facilities.

The following table sets forth certain summary information with respect to total borrowings of the Company:

	As of December 31,					Year Ended December 31,

	Amount Outstanding		Interest Rate			Maximum Amount Outstanding		Weighted Average Amount Outstanding(1)		Weighted Average Interest Rate(2)
	(in thousands)					(in thousands)		(in thousands)
2009	$	313,758		1.28	%	$	320,625	$	319,120		1.56	%

2008	$	320,625		4.46	%	$	349,125	$	330,595		4.06	%

(1): The average amounts of borrowings outstanding were computed by determining the arithmetic average of the months' average outstanding borrowings.
(2): The weighted-average interest rates were determined by dividing interest expense related to total borrowings by the average amounts outstanding of such borrowings.

15. OTHER LONG TERM DEBT

The Company has formed separate statutory business trusts (the "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 ASC 810-10-05,Consolidation—Variable Interest Entities, the Company does not consolidate the trusts.

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15. OTHER LONG TERM DEBT (Continued)

As of December 31, 2009, the Trusts have an outstanding balance of a combined $110.0 million in thirty year trust preferred securities (the "Capital Securities") as detailed in the following table:

Maturity Date	Amount Issued		Term	Spread Over LIBOR

	(in thousands)			(Basis points)
April 2033	$	10,000	Floating		400		4.3	%
May 2033		15,000	Floating		420		4.5	%
May 2033		15,000	Fixed/Floating		410	(1)	4.4	%
October 2033		20,000	Fixed/Floating		395	(2)	4.2	%
March 2037		50,000	Fixed/Floating		275	(3)	7.7	%

	$	110,000

(1): The rate on this issue was fixed at 7.4% for the first five years. On May 15, 2008, it converted to a floating rate equal to LIBOR plus 410 basis points.
(2): 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 expired in October 2008 and it reverted to a floating rate equal to LIBOR plus 395 basis points.
(3): The rate on this issue is fixed at 7.7% for the first five years. On March 15, 2012, it will convert to a floating rate equal to LIBOR plus 275 basis points.

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 March 2007). 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

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15. OTHER LONG TERM DEBT (Continued)

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.

The Company paid $7.2 million in interest in connection with the Junior Subordinated Debt during the year ended December 31, 2009, $8.3 million during 2008, and $8.7 million during 2007.

16. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGES

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, and one with Calyon Corporate and Investment Bank to hedge the variability of cash flows to be paid under the new credit facility described in Note 14—Loan Payable in the notes to the Consolidated Financial Statements. In entering into the swap with Citibank, we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a 4.14% locked-in fixed rate. In entering into the swap with Calyon, we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a 4.13% locked-in fixed rate. The objective of the hedges is to eliminate the variability of cash flows in the interest payments on a combined $250 million amount of the variable rate term loan portion of our new credit facility, which is due to changes in the LIBOR base rate, through September 2012. We expect changes in the cash flows of the interest rate swap to exactly offset the changes in cash flows from interest rate payments attributable to fluctuations in the LIBOR base rate on the $250 million portion of the variable rate term loan portion of our new credit facility. The combined fair value of these swaps was a $15.5 million liability at December 31, 2009 and a $20.3 million liability at December 31, 2008. We have reflected this fair value in other liabilities. In connection with the transaction executed with Citibank, N.A. we are required to post collateral when we are in a net liability position. The collateral amount required is based on the fair value of the swap including net accrued interest less a $1 million threshold amount as determined by our credit rating of BB+. Should we be downgraded or cease to be rated by S&P or Moody's, the threshold amount would be reduced to zero and we would need to post $1 million in additional collateral. This collateral is reflected in cash and cash equivalents and was $8.1 million as of December 31, 2009 and $9.3 million as of December 31, 2008. Based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction were the same, we have concluded that we expect changes in cash flows attributable to the risk being hedged to be completely offset by the hedging derivative, and have designated these swaps as cash flow hedges. As a result, we reflected the unrealized loss on these hedges in accumulated other comprehensive loss. We perform periodic assessments of hedge effectiveness by verifying and documenting whether the critical terms of the hedging instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

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16. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGES (Continued)

The Company paid $6.3 million in interest in connection with the $250 million of interest rate swap agreements pertaining to our credit facility during the year ended December 31, 2009. The Company paid $1.4 million in interest in connection with the $250 million of interest rate swap agreements pertaining to our credit facility during the year ended December 31, 2008, but did not make any payments during 2007. Effective September 4, 2003, we entered into a swap agreement whereby we pay 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%. This swap contract expired in December 2007. Effective April 29, 2004, we entered into a second swap agreement whereby we pay 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%. This swap contract expired in October 2008. The fair value of this swap was $0 at December 31, 2008 and $0.3 million at December 31, 2007 and is reflected in other assets. During the year ended December 31, 2008, we reported a net $0.3 million in realized gains relating to the increase in the fair value of the cash flow swap agreement. During the year ended December 31, 2007, we reported a realized loss of $0.9 million relating to the reduction in the fair value of the cash flow swap agreement.

17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

We used the following methods and assumptions estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Fixed maturity investments available for sale: The fair value for fixed maturity securities is largely determined by third party pricing service market prices. Typical inputs used by third party pricing services include, but are not limited to:

•: reported trades,
•: benchmark yields,
•: issuer spreads,
•: bids,
•: offers and
•: estimated cash flows and prepayment speeds.

Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services may use matrix or model processes to develop a security price where they develop future cash flow expectations based upon collateral performance and discount these at an estimated market rate. The pricing for mortgage-backed and asset-backed securities reflects estimates of the rate of future prepayments of principal over the remaining life of the securities. These estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates.

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17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Other invested assets: Other invested assets consists of collateralized loans which are carried at the underlying collateral value, cash value of life insurance and mortgage loans which are carried at the aggregate unpaid balance. The determination of fair value for these invested assets is not practical because there is no active trading market for such invested assets and therefore, the carrying value is a reasonable estimate of fair value. Equity securities are carried at fair value, based on quoted market price.

Cash and cash equivalents and policy loans: For cash and cash equivalents and policy loans, the carrying amount is a reasonable estimate of fair value.

Cash flow swaps: The cash flow swaps are carried at fair value, obtained from external quotes provided by banks.

Investment contract liabilities: For annuity contracts, the carrying amount is the policyholder account value; estimated fair value equals the policyholder account value less surrender charges. Effective April 1, 2009, these balances were 100% ceded.

Loan payable and trust preferred securities: For the loan payable and trust preferred securities fair value represents the present value of contractual cash flows discounted at current spreads for equivalent credit quality.

The estimated fair values of the Company's financial instruments are as follows:

		2009						2008

		Carrying Amount			Fair Value			Carrying Amount			Fair Value
		(in thousands)						(in thousands)
Financial assets:
Fixed maturities available for sale		$	964,553		$	964,553		$	1,032,393		$	1,032,393
Policy loans			19			19			22,274			22,274
Other invested assets			1,257			1,257			1,649			1,649
Cash and cash equivalents			856,958			856,958			511,032			511,032
Cash flow swap			(15,465	)		(15,465	)		(20,298	)		(20,298	)
Financial liabilities:
	Investment contract liabilities		204,875			197,954			237,752			228,160
	Loan payable		313,758			288,657			320,625			271,880
	Trust preferred securities		110,000			84,300			110,000			92,802

18. EARNINGS PER COMMON SHARE COMPUTATION

We calculate earnings per common share using the two-class method. This method requires that we allocate net income between net income attributable to participating preferred stock and net income attributable to common stock, based on the dividend and earnings participation provisions of the preferred stock. Basic earnings per share excludes the dilutive effects of stock options outstanding during the periods and is equal to net income attributable to common stock divided by the weighted average number of common shares outstanding for the periods.

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18. EARNINGS PER COMMON SHARE COMPUTATION (Continued)

At December 31, 2009, 2008, and 2007 we allocated earnings between common and participating preferred stock as follows:

	2009		2008		2007

	(in thousands)
Net income attributable to common stock	$	133,023	$	77,537	$	76,160
Undistributed income allocated to participating preferred stock		7,281		17,555		7,912

Net income	$	140,304	$	95,092	$	84,072

Diluted EPS gives the dilutive effect of the participating preferred stock and stock options outstanding during the year. We excluded 2,557,267, 3,770,080 and 450,185 stock options from the computation of diluted EPS at December 31, 2009, 2008 and 2007, respectively because they were antidilutive.

19. STOCKHOLDERS' EQUITY

Preferred Stock

We have 3.0 million authorized shares of preferred stock, of which we have designated 300,000 shares as Series A preferred stock and 300,000 shares as Series B preferred stock. The holders of both Series A preferred stock and Series B preferred stock possess specified rights whereby they may, in specified circumstances, convert the shares directly or indirectly into shares of common stock. In addition, we have the right to convert the shares of our Series B preferred stock to common stock, in the ratio of 100 shares of common stock for each share of Series B preferred stock, from and after the first anniversary of the issuance of the shares of Series B preferred stock. On November 24, 2008, we converted all of the then-outstanding 132,895 shares of Series B preferred stock into 13,289,500 shares of our common stock.

At December 31, 2009 and 2008, there were 42,105 shares of Series A preferred stock outstanding and no shares of Series B preferred stock outstanding.

Series A Participating Convertible Preferred Stock

Subject to the exceptions described below, each share of Series A preferred stock ranks equally in all respects and has the same rights, powers and preferences, and the same qualifications, and limitations, as our Series B preferred stock:

Rank. The Series A preferred stock ranks

•: senior and prior to our common stock and each other class or series of our equity securities, whether currently issued or issued in the future, that by its terms ranks junior to the Series A preferred stock, whether with respect to payment of dividends, rights upon liquidation, dissolution or winding up of our affairs, or otherwise,
•: on a parity with each other class or series of our equity securities, whether currently issued or issued in the future, that do not by their terms expressly provide that they rank senior to or

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19. STOCKHOLDERS' EQUITY (Continued)

junior to the Series A preferred stock whether with respect to payment of dividends, rights upon liquidation, dissolution or winding up of our affairs, or otherwise, and

•: junior to each other class or series of our equity securities, whether currently issued or issued in the future, that by their terms rank senior to the Series A preferred stock.

Dividends. Holders of shares of Series A preferred stock are entitled to participate equally and ratably with the holders of shares of common stock in all dividends and distributions paid on the shares of common stock as if, immediately prior to each record date for payment of a dividend or distribution on the common stock, the shares of Series A preferred stock then outstanding were converted into shares of common stock.

Liquidation Preference. In the event that we voluntarily or involuntarily liquidate, dissolve or wind up, the holders of shares of Series A preferred stock are, with respect to each such share of Series A preferred stock, entitled to receive the greater of

•: prior to the first anniversary of the original issuance in respect of a share of Series A preferred stock, $2,000 and on or after the first anniversary of the original issuance in respect of a share of Series A preferred stock, $1.00 in each case plus an amount equal to any dividends or distributions payable and remaining unpaid on the share, and
•: at any time, the payment the holders would have received had those holders, immediately prior to our liquidation, dissolution or winding up, converted the share of Series A preferred stock into shares of common stock, in each case before any payment or distribution is made on any shares of common stock. We estimate liquidation value on or after the first anniversary of the original issuance based on our closing share price on the balance sheet.

Neither a consolidation or merger nor a sale or transfer of all or any part of our assets for cash, securities or other property, is considered a liquidation, dissolution or winding up.

Voting Rights. Holders of shares of Series A preferred stock are not entitled to vote on any matter submitted to a vote of our shareholders, but are entitled to prior written notice of, and are entitled to attend and observe, all special and annual meetings of our shareholders. However, so long as any shares of Series A preferred stock are outstanding, we will not, without the written consent or affirmative vote by holders of at least a majority of the outstanding shares of Series A preferred stock, voting as a single and separate class:

•: amend, alter or repeal any provision of our certificate of incorporation, by any means, such as by merger, consolidation, reclassification, or otherwise so as to, or in a manner that would, adversely affect the preferences, rights, privileges or powers of the Series A preferred stock; or
•: increase the authorized or issued number of shares of Series A preferred stock.

Merger or Consolidation. Unless approved by holders of the shares of Series A preferred stock, we will not merge or consolidate into, or sell, transfer or lease all or substantially all of our property to any other entity, unless the successor, transferee or lessee entity expressly assumes the due and punctual performance and observance of each and every covenant and condition described above to be performed and observed by us and expressly agrees to exchange, at the holder's option, shares of

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19. STOCKHOLDERS' EQUITY (Continued)

Series A preferred stock for shares of the surviving entity's capital stock on terms substantially similar to the terms described above.

Conversion upon Transfer. Any share of Series A preferred stock owned by any equity investor that was an original purchaser of the share or any affiliate of an equity investor is not convertible into common stock so long as such share of Series A preferred stock is owned by that equity investor or affiliate. At any time when a share of Series A preferred stock is not or ceases to be owned by an equity investor or an affiliate of an equity investor, the share of Series A preferred stock, without any further action or deed on our part or any other individual, entity or group, will automatically convert into the number of fully paid and non-assessable shares of common stock determined by dividing $2,000 by the conversion price in effect at the time of conversion. The initial conversion price is $20.

Exchange of Shares. Under the securities purchase agreements that governed the original issue of the Series A preferred stock, we have agreed that, at an equity investor's request, we will exchange all or any shares of Series A preferred stock held by the equity investor for a like number of shares of Series B preferred stock; provided that, prior to the consummation of any exchange, the equity investor shall have obtained a clearance, approval or waiver, under specified laws governing insurance companies or the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or shall have represented to us that no clearance, approval or waiver is not required in connection with such an exchange.

Series B Participating Convertible Preferred Stock

Subject to the exceptions described below, each share of our Series B preferred stock ranks equally in all respects and has the same dividend and other rights, powers and liquidation and other preferences, and the same qualifications, limitations and restrictions as our Series A preferred stock.

Voting Rights. In addition to the voting rights described above, holders of our Series B preferred stock may vote with holders of our common stock together as one class on all matters submitted for a vote of holders of our common stock. Holders of our Series B preferred stock are entitled to a number of votes equal to the number of votes to which the shares of our common stock issuable upon conversion of their shares of Series B Preferred Stock would have been entitled if those shares of common stock had been outstanding at the time of the applicable record date.

Right to Convert. A holder of our Series B preferred stock has the right, at any time and from time to time, to convert any or all of the holder's shares of Series B into the number of fully paid and non-assessable shares of common stock determined by dividing $2,000 by the conversion price in effect at the time of conversion. The initial conversion price is $20.

We have the right to require the holder of each share of our Series B preferred stock, from and after the first anniversary of the date of original issuance of the share, from time to time, at our option, to convert the share of Series B preferred stock into fully paid and non-assessable shares of our common stock at the applicable conversion price. The number of shares of common stock into which one share of the Series B preferred stock is convertible is determined by dividing the preferred share price by the conversion price in effect at the time of conversion.

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Common Stock—Voting

We currently have authorized for issuance 200 million shares of voting common stock, par value $0.01 per share. Changes in the number of shares of common stock issued were as follows:

Years ended December 31,

Common stock outstanding, beginning of year	87,447,100		74,952,177		59,890,500
Conversion of Preferred B into common stock	—		13,289,500		—
Return of stock issued and stock issued in connection with MemberHealth acquisition	—		(2,027,071	)	14,175,000
Exercise of stock options	543,000		1,184,237		861,633
Retired shares	(50,537	)	—		—
Agent stock award	—		—		2,801
Stock purchases pursuant to agents' stock purchase and deferred compensation plans	3,100		48,257		22,243

Common stock outstanding, end of year	87,942,663		87,447,100		74,952,177

Common Stock—Non Voting

We currently have authorized for issuance 30 million shares of non-voting common stock, par value $0.01 per share. None of this class of stock is, or has been, issued.

Treasury Stock

Changes in treasury stock were as follows:

	For the years ended December 31,

	2009								2008
	Shares			Amount			Weighted Average Cost Per Share		Shares			Amount			Weighted Average Cost Per Share
Treasury stock beginning of year		7,194,387		$	77,605		$	10.79		285,545		$	4,258		$	14.91
Shares repurchased		7,024,097			63,693			9.07		7,028,154			74,821			10.65
Shares distributed in the form of employee bonuses		(680,403	)		(7,352	)		10.80		(119,312	)		(1,474	)		12.36

Treasury stock, end of period		13,538,081		$	133,946		$	9.90		7,194,387		$	77,605		$	10.79

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Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

As of December 31,		2009			2008

		(in thousands)
Net unrealized gains (losses) on investments		$	21,405		$	(42,685	)
Gross unrealized OTTI			(18,117	)		—
Deferred acquisition cost adjustment			—			6,617
Foreign currency translation gains			—			332
Fair value of cash flow swap on debt			(15,465	)		(20,298	)
Deferred income taxes			4,262			19,612

	Total accumulated other comprehensive loss	$	(7,915	)	$	(36,422	)

20. OTHER COMPREHENSIVE INCOME (LOSS)

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

For the Year ended December 31, 2009		Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount

		(in thousands)
Net unrealized gain arising during the period (net of deferred acquisition costs)		$	14,369		$	5,030		$	9,339
Reclassification adjustment for losses included in income			24,988			8,746			16,242

Net unrealized gain			39,357			13,776			25,581
ASC 320-10-65-1 implementation			16,487			5,771			10,716
Cash flow hedge			4,833			1,692			3,141
Foreign currency translation adjustment			(332	)		(117	)		(215	)

	Other comprehensive income	$	60,345		$	21,122		$	39,223

For the Year ended December 31, 2008		Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount

		(in thousands)
Net unrealized loss arising during the period (net of deferred acquisition costs)		$	(95,441	)	$	(33,404	)	$	(62,037	)
Reclassification adjustment for losses included in income			59,681			20,888			38,793

Net unrealized loss			(35,760	)		(12,516	)		(23,244	)
Cash flow hedge			(20,019	)		(7,006	)		(13,013	)
Foreign currency translation adjustment			(153	)		(54	)		(99	)

	Other comprehensive loss	$	(55,932	)	$	(19,576	)	$	(36,356	)

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For the Year ended December 31, 2007		Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount

		(in thousands)
Net unrealized loss arising during the period (net of deferred acquisition costs)		$	(43,151	)	$	(15,104	)	$	(28,047	)
Reclassification adjustment for losses included in income			40,178			14,064			26,114

Net unrealized loss			(2,973	)		(1,040	)		(1,933	)
Cash flow hedge			(279	)		(97	)		(182	)
Foreign currency translation adjustment			252			86			166

	Other comprehensive loss	$	(3,000	)	$	(1,051	)	$	(1,949	)

21. SHARE REPURCHASE PLAN

22. STOCK-BASED COMPENSATION

1998 Incentive Compensation Plan

On May 28, 1998, our shareholders approved the 1998 Incentive Compensation Plan, known as the 1998 ICP. The 1998 ICP superseded the Company's 1993 Incentive Stock Option Plan. Options previously granted under the Company's Incentive Stock Option Plan will remain outstanding in accordance with their terms and the terms of the respective plans. The 1998 ICP provides for grants of stock options, stock appreciation rights or SARs, restricted stock, deferred stock, other stock-related awards, and performance or annual incentive awards that may be settled in cash, stock, or other property.

The total number of shares of our common stock reserved and available for delivery to participants in connection with awards under the 1998 ICP, prior to amendment on August 23, 2007, was

•: 9.0 million, plus
•: the number of shares of common stock subject to awards under preexisting plans that become available, generally due to cancellation or forfeiture, after the effective date of the 1998 ICP, plus
•: 13% of the number of shares of common stock issued or delivered by us during the term of the 1998 ICP, excluding any issuance or delivery in connection with awards, or any of our other compensation or benefit plans,

provided, however, that the total number of shares of common stock with respect to which incentive stock options, or ISOs, may be granted, may not exceed 1.5 million. On August 23, 2007, our shareholders approved an amendment to increase the number of shares of common stock authorized

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for issuance under the 1998 ICP by 5.0 million shares. As of December 31, 2009, a total of 19.3 million shares were eligible for grant under the plan, giving effect to the potential conversion of our Series A preferred stock. We have awarded a total of 14.4 million shares under the plan, of which 6.5 million shares were reserved for delivery under outstanding options awarded under the 1998 ICP. As of December 31, 2009, 4.9 million shares were available for future awards.

Executive officers, directors, and other officers and employees of our parent holding company or any subsidiary, as well as other persons who provide services to us, are eligible to receive awards under the 1998 ICP, which is administered by our Board of Directors or a committee established pursuant to the plan. Our Board has designated its Compensation Committee to administer the 1998 ICP. The committee, may, in its discretion, accelerate the exercisability, the lapsing of restrictions, or the expiration of deferral or vesting periods of any award, and any accelerated exercisability, lapse, expiration and vesting occurs automatically in the case of a change in control of the Company, except to the extent otherwise determined by the committee at the date of grant or thereafter. The committee has not yet exercised any of its discretion noted above, except that in the case of some options issued under the plan, the committee has determined to restrict the automatic vesting on change of control.

The compensation expense that has been included in other operating costs and expenses for these plans and the related tax benefit were as follows for the years ended December 31,:

		2009		2008		2007

		(in thousands)
Stock-based compensation expense by type:
	Stock options	$	7,127	$	6,367	$	4,573
	Restricted stock awards		4,688		3,151		1,519

Total stock-based compensation expense			11,815		9,518		6,092
Tax benefit recognized			4,135		3,331		2,132

	Stock-based compensation expense, net of tax	$	7,680	$	6,187	$	3,960

The tax benefit recognized in our consolidated financial statements is based on the amount of compensation expense recorded for book purposes. The actual tax benefit realized in our tax return is based on the intrinsic value or the excess of the market value over the exercise or purchase price, of stock options exercised and restricted stock awards vested during the period. The actual tax benefit realized for the deductions taken on our tax returns from option exercises and restricted stock vesting totaled $1.6 million in 2009, $3.3 million in 2008, and $3.7 million in 2007. There was no capitalized stock-based compensation expense.

Stock Option Awards

Beginning January 1, 2006, we adopted provisions of ASC 718-10,Compensation-Stock Compensation, on share-based payments using the modified prospective method, and began recognizing compensation cost for share-based payments to employees and non-employee directors based on the grant date fair value of the award, which we amortize over the grantees' service period. We elected to use the Black-Scholes valuation model to value employee stock options, as we had done for our previous pro forma stock compensation disclosures.

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We estimated the fair value for these options at the date of grant using a Black-Scholes option pricing model with the following range of assumptions:

	For options granted in:

	2009	2008	2007
Weighted-average grant date fair value	$3.92	$2.85	$7.91
Risk free interest rates	1.28%–3.05%	1.33%–3.15%	4.01%–5.16%
Dividend yields	0.0%	0.0%	0.0%
Expected volatility	40.61%–55.63%	35.60%–49.31%	35.39%–42.53%
Expected lives of options (in years)	3.5–3.8	3.5–5.0	3.0–6.0

We did not capitalize any cost of stock-based compensation for our employees or non-employee directors. Future expense may vary based upon factors such as the number of awards granted by us and the then-current fair market value of such awards.

Activity for our option plans for the year ended December 31, 2009 is set forth below:

Options			Weighted Average Exercise Price

Outstanding at December 31, 2008	5,640		$	14.85
Granted	1,100			10.00
Exercised	(543	)		3.25
Forfeited or expired	(846	)		17.89

Outstanding at December 31, 2009	5,351		$	14.55

		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value Per Share(1)		Aggregate Intrinsic Value(1) (in thousands)

Options exercisable at December 31, 2009	3,150	$	14.32	2.8 years	$	1.53	$	4,825
Options vested and expected to vest at December 31, 2009(2)	5,351		14.55	3.2 years		1.21		6,487

(1): Computed based upon aggregate intrinsic value divided by shares under options.
(2): The Company began estimating forfeitures under ASC 718-10,Compensation—Stock Compensation Topic, upon adoption on January 1, 2006.

The total intrinsic value of stock options exercised during 2009, 2008, and 2007 was $3.2 million, $7.7 million, and $10.2 million, respectively.

We received proceeds of $1.8 million, $4.2 million, and $8.8 million from the exercise of stock options during the years ended December 31, 2009, 2008, and 2007, respectively. ASC 718-10 also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow, rather than as an operating cash flow as required under the prior statement. We recognized $2.6 million, $2.8 million, and $5.8 million of financing cash flows for these excess tax deductions for the years ended 2009, 2008, and 2007, respectively.

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The compensation expense related to non-vested awards not yet recognized was $9.4 million at December 31, 2009, which we expect to recognize over a weighted average period of 1.1 years.

Restricted Stock Awards

In accordance with our 1998 Incentive Compensation Plan, we may grant restricted stock to our officers and non-officer employees and directors. We have issued restricted stock grants which vest ratably over three and four year periods, and some restricted stock grants have contained portions that vest immediately. We value restricted stock awards at an amount equal to the market price of our common stock on the date of grant and generally issue restricted stock out of treasury shares. We recognize compensation expense for restricted stock awards on a straight line basis over the vesting period.

During 2009, the Board of Directors approved a performance share award program for our officers. The performance shares are structured such that target shares with a three-year cliff vesting period are awarded. The actual number of shares earned at the conclusion of the vesting period can vary from 0% to 150% of the target award, based on our total shareholder return relative to a group of peer companies that were selected prior to the award. Compensation expense is recognized on a straight line basis over the vesting period. Prior to vesting, previously recognized compensation expense may be reversed in the event a grantee resigns, however, once the vesting date is reached, previously recognized expense may not be changed, even if the actual award varies from the target. In connection with this program, we awarded 373,000 performance shares to officers during 2009. Related compensation cost of $1.2 million has been recognized in other operating costs and expenses.

The weighted-average grant date fair value of our restricted stock awards was $13.32 and $18.89 for the years ended December 31, 2009 and 2008, respectively. Activity for our restricted stock awards was as follows for the year ended December 31, 2009:

Non-vested Restricted Stock			Weighted Average Grant-Date Fair Value

Non-vested at December 31, 2008	471		$	18.89
Granted	403			10.28
Vested	(165	)		18.98
Forfeited	(100	)		17.96

Non-vested at December 31, 2009	609		$	13.32

The fair value of shares of restricted stock vested during the years ended 2009, 2008 and 2007 was $0.8 million, $1.8 million, and 1.1 million, respectively. Total compensation expense not yet recognized related to nonvested restricted stock awards was $6.0 million at December 31, 2009. We expect to recognize this compensation expense over a weighted average period of 4.0 years.

23. UNIVERSAL AMERICAN CORP. 401(k) SAVINGS PLAN

Effective April 1, 1992, we adopted the Universal American Corp. 401(k) Savings Plan. The 401(k) plan is a voluntary contributory plan under which employees may elect to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986. The employee is entitled to participate in the 401(k) plan by contributing through payroll deductions up to

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100% of the employee's compensation. The participating employee is not taxed on these contributions until they are distributed. Amounts credited to employee's accounts under the 401(k) plan are invested by the employer-appointed investment committee. Currently, we match employee contributions with our common stock in amounts equal to 100% of the employee's first 1% of contributions and 50% of the employee's next 4% of contributions to a maximum matching contribution of 3% of the employee's eligible compensation. Our matching contributions vest at the rate of 25% per plan year, starting at the end of the second year. We made discretionary matching contributions under the 401(k) plan of $2.2 million in 2009 and 2008 and $1.2 million in 2007. Employees must to hold the employer contribution in our common stock until vested, at which point the employee has the option to transfer the amount to any of the other investments available under the 401(k) plan. The 401(k) plan held 798,523 shares of our common stock at December 31, 2009, which represented 25% of total plan assets and 610,131 shares at December 31, 2008, which represented 22% of total plan assets. Generally, a participating employee is entitled to distributions from the 401(k) plan upon termination of employment, retirement, death or disability. 401(k) plan participants who qualify for distributions may receive a single lump sum, have the assets transferred to another qualified plan or individual retirement account, or receive a series of specified installment payments.

In connection with the September 21, 2007 acquisition of MemberHealth, Inc., the Company assumed responsibility for administration of the MemberHealth, Inc. Retirement Savings Plan. The MemberHealth savings plan is a voluntary contributory plan under which employees could elect to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees were entitled to participate in the MemberHealth savings plan by contributing through payroll deductions up to 75% of the employee's compensation. The participating employee does not pay tax on these contributions until they are distributed. Moreover, the employer's contributions vest after 5 years of credited service. MemberHealth matched employee contributions at an amount equal to 50% of the first 6% of the employee's contribution not to exceed 3% of employee compensation. We made matching contributions under our 401(k) plan of $0.1 million in 2007. Effective January 1, 2008, the MemberHealth savings plan was merged into our 401(K) plan.

24. STATUTORY FINANCIAL DATA

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 insurance subsidiaries' statutory capital and surplus exceeds its respective minimum statutory requirement and are at levels we believe are sufficient to support their currently anticipated levels of operation. Additionally, the National Association of Insurance Commissioners, known as NAIC, imposes regulatory risk-based capital, known as RBC, requirements on life insurance enterprises. At December 31, 2009, all of our 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 insurance subsidiaries totaled $695.6 million and $525.5 million at December 31, 2009 and 2008, respectively. For the years ended December 31, 2009, 2008 and 2007, the insurance subsidiaries generated statutory net income of $156.2 million, $67.8 million and $114.6 million, respectively.

Our health plan affiliates are also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and are also subject to RBC requirements. At December 31, 2009,

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24. STATUTORY FINANCIAL DATA (Continued)

the statutory capital and surplus of each of our health plan affiliates exceeds its minimum requirement and its RBC is in excess of the "authorized control level." The statutory capital and surplus for our health plan affiliates was $105.3 million and $86.6 million at December 31, 2009 and 2008, respectively. Statutory net income for our health plan affiliates was $8.4 million, $29.1 million and $15.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Effective for the quarter ended September 30, 2009, the National Association of Insurance Commissioners, known as the NAIC, required adoption of SSAP No. 43R,Loan-backed and Structured Securities. SSAP 43R supersedes SSAP 98, which amended SSAP 43. SSAP 43R establishes statutory accounting principles for evaluating and recording other-than-temporary impairments on investments in loan-backed and structured securities.

SSAP 43R effectively changed the impairment trigger for loan-backed and structures securities from an undiscounted cash flow test to a discounted cash flow test. In addition, SSAP 43R changes the method of valuing the new cost basis of the impaired security from an undiscounted cash flow basis to a discounted cash flow basis. We adopted SSAP 43R effective for September 30, 2009, as required. For the quarter ended September 30, 2009, we recognized an additional $50.9 million of realized losses, pre-tax, for other-than-temporary impairments of investments on a statutory basis, all related to the current quarter. Of this amount, $50.1 million related to securities with an NAIC rating of 6, which were, therefore, already marked to the lower of cost or market for statutory reporting purposes. Accordingly, at September 30, 2009, the implementation of SSAP 43R reduced surplus by $0.8 million.

Effective for the year ended December 31, 2009, the NAIC has adopted SSAP 10RIncome Taxes. SSAP 10R is a temporary replacement of SSAP 10 that effectively expands the amount of DTA's that qualify as admitted assets, with a sunset provision after December 31,2010. The adoption of SSAP 10R at December 31, 2009 allowed the companies to admit additional Deferred Tax Assets (and increase Capital & Surplus) of $19.0 million.

25. OTHER OPERATIONAL DISCLOSURES

Restructuring Charges: We have undertaken several initiatives to realign our organization and consolidate certain functions to increase efficiency and responsiveness to customers and reduce costs, in order to meet the challenges and opportunities presented by the current economic environment and anticipated Medicare reform. In 2009, we engaged a consultant and began a comprehensive review of our ongoing business with an emphasis on potential operating cost reductions. These efforts have taken on additional significance, in light of the reinsurance of the Life and Annuity business and the anticipated reductions in funding of Medicare Advantage Plans announced during the first quarter of 2009. As a result of this review, in the second quarter of 2009, we committed to a plan to reduce costs, including the in-sourcing of billing and enrollment for our health Plan business, workforce reduction and consolidation of facilities. This plan was substantially completed at December 31, 2009. We incurred total restructuring charges of $4.9 million during the year ended December 31, 2009. These charges are included in restructuring costs in our Consolidated Statements of Operations. A summary

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of our restructuring liability balance as of December 31, 2009 and restructuring activity for 2009 is as follows:

	Segment	January 1, Balance		Charge to Earnings		Cash Paid			Non-cash			December 31, Balance

	(in thousands)
2009
Contract termination costs	Medicare Advantage	$	—	$	3,500	$	(3,500	)	$	—		$	—
Workforce reduction	Traditional		—		608		(461	)		—			147
Facility consolidation	Traditional		—		796		—			(99	)		697

Total		$	—	$	4,904	$	(3,961	)	$	(99	)	$	844

Agent Balances: In late 2006 we began recruiting career managers to develop offices for distribution of our new Medicare Advantage products. We have opened a significant number of new "expansion" offices since then. The Company has advanced much of the cost of the development of these new offices; however, these costs are the responsibility of the manager of the individual office, to be repaid from future profits of the office.

We have considered the impact of these and other changes (the reinsurance of the Life and Annuity business and the overall cost savings initiatives associated with the 2010 bids) on our distribution. During the second quarter of 2009, we performed a review of our career offices. This review consisted of determining whether the office was in a "core" market, the level of expenses being incurred by the office, the level of in-force commission and the anticipated production. As a result of this review, we had identified a significant number of offices to be closed or restructured and we incurred charges totaling $13.6 million related to the underperforming offices.

Supplemental Cash Flow Information: Cash and cash equivalents reflect cash on deposit, money market funds, and short term investments that had an original maturity of three months or less from the time of purchase. At December 31, 2009, cash equivalents contained $960.1 million of government money market funds. Supplemental cash flow information for interest and income taxes paid for continuing and discontinued operations is as follows:

		2009		2008			2007

		(in thousands)
Supplemental cash flow information from continuing operations:
	Cash paid for interest	$	20,632	$	22,721		$	18,679

	Cash paid for income taxes	$	33,322	$	52,215		$	103,007

Non-cash financing activities:
	(Return) issuance of common stock in connection with MemberHealth acquisition	$	—	$	(34,541	)	$	283,500

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26. COMMITMENTS AND CONTINGENCIES

Derivative Litigation

Plaintiff Arthur Tsutsui filed a shareholder derivative action on December 30, 2005, in the Supreme Court for New York State, Westchester County. The defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch, Robert A. Waegelein and Gary W. Bryant, as well as all of the directors sitting on our board of directors as of the time the complaint was filed. The Tsutsui action alleges that the same alleged misstatements that were the subject of earlier shareholder actions, which have now all been dismissed or voluntarily withdrawn, constituted a breach of fiduciary duty by the officer defendants and the directors that caused the Company to sustain damages. The Tsutsui action also seeks recovery of any proceeds derived by the officer and director defendants from the sale of our stock that the plaintiff claims was in breach of their fiduciary duties. The defendants filed a motion to dismiss the complaint for failure to state a claim, as well as on other grounds. The court granted this motion in a decision and order dated May 16, 2008, and the plaintiff appealed the dismissal. On appeal, the Appellate Division for the Second Department issued a decision dated November 17, 2009 affirming the dismissal with respect to one count of the complaint concerning alleged false statements, but reversing with respect to the two remaining counts concerning stock sales by officer and director defendants. There have been no further developments in the lower court since the decision of the Appellate Division.

Other Litigation

We have litigation in the ordinary course of our business asserting claims for medical, disability and life insurance benefits and other matters. In some cases, plaintiffs seek punitive damages. We believe that after liability insurance recoveries, none of these actions will have a material adverse effect on our results of operations or financial condition.

Governmental Regulation

Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. We believe that we are in compliance with all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs.

In July 2009, we received a subpoena from the Department of Health and Human Services, Office of Inspector General, known as HHS-OIG, requesting documents related to our marketing, sales and enrollment practices for our Today's Health Medicare HMO Plans which are offered in the State of Wisconsin. We are cooperating with HHS-OIG and responding to the subpoena. We are not aware of any other material regulatory proceeding or investigation underway or threatened involving allegations of potential wrongdoing.

Lease Obligations

We are obligated under lease arrangements for our executive and administrative offices in New York, Florida, Indiana, Texas, Wisconsin, Oklahoma, Ohio, Virginia, Missouri, and Washington, D.C. Rent expense was $8.2 million for the year ended December 31, 2009, $7.1 million for 2008 and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26. COMMITMENTS AND CONTINGENCIES (Continued)

$5.8 million for 2007. Annual minimum rental commitments, subject to escalation, under non-cancelable operating leases (in thousands) are as follows:


2010	$	6,461
2011		5,659
2012		5,250
2013		4,689
2014		3,945
Thereafter		6,280

Total	$	32,284

In addition to the above, Pennsylvania Life is the named lessee on 33 properties occupied by career agents for use as field offices. The career agents reimburse Pennsylvania Life 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 2009, 2008 and 2007 was approximately $3.7 million, $4.0 million and $2.9 million, respectively.

27. BUSINESS SEGMENT INFORMATION

Our business segments are based on product and consist of

•: Senior Managed Care—Medicare Advantage,
•: Medicare Part D,
•: Traditional Insurance, and
•: Senior Administrative Services.

We also report the activities of our holding company in a separate segment. A description of these segments follows:

Senior Managed Care—Medicare Advantage—The Senior Managed Care—Medicare Advantage segment contains the operations of our initiatives in managed care for seniors.

•: We operate various HMOs, such as SelectCare of Texas, that offer coverage to Medicare beneficiaries under contracts with CMS in Southeastern Texas, North Texas, Oklahoma and Wisconsin. Our career and independent agents sell the HMOs' products, as do our employee representatives on a direct basis.
•: In connection with the HMOs, we operate separate Management Service Organizations, known as MSOs that manage that business and affiliated Independent Physician Associations or IPAs. We participate in the net results derived from these affiliated IPAs.
•: Our career and independent agents also sell our Medicare Advantage PFFS plans, which also operate under a contract with CMS. We currently market PFFS products in 3,005 counties throughout 45 states.
•: In addition, in late 2007, we began efforts to cultivate provider relationships to establish Medicare Advantage preferred provider organizations, known as PPOs. In December 2007, we

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

27. BUSINESS SEGMENT INFORMATION (Continued)

advised CMS of our intent to market PPO products. In 2009, we began offering PPO plans in 15 markets in 9 states. For 2010, we are expanding our PPO plans to 43 markets in 17 states.

Medicare Part D—This segment consists of

•: Our Medicare Part D plans including our Community CCRx^SM PDP, since the acquisition of MemberHealth on September 21, 2007 and our Prescriba Rx^SM PDP, the successor to the Prescription Pathway^SM PDP after the termination of the strategic alliance with CVS. We also operate a pharmacy benefits manager, or PBM, servicing the PDPs as well as the members in our Medicare Advantage plans offering a Part D benefit.
•: Our Prescription Pathway^SM PDP business, until its termination in December, 2008. In March 2005, we entered into a strategic alliance with PharmaCare Re, a subsidiary of CVS/Caremark, known as CVS, to offer the Prescription Pathway^SM prescription drug benefit plan. PharmaCare Re reinsured half of the risk assumed by our PDPs and the parties created Part D Management Services, L.L.C., known as PDMS, to perform marketing risk management services on behalf of the Prescription Pathway^SM PDPs. PDMS was owned 50% by us and 50% by PharmaCare Re. The strategic alliance with CVS was mutually terminated effective December 31, 2008, and PDMS was dissolved in December 2009. Upon termination of the strategic alliance, CVS and Universal American each assumed responsibility for the drug benefit of specified Prescription Pathway^SM plan members to achieve an approximately equal distribution of the value of business that has been generated by the strategic alliance. For 2009, we created Prescriba Rx^SM plans as our successor to the Prescription Pathway^SM plans for the members distributed to us upon termination of the strategic alliance with CVS, as well as new members.
•: Our participation, on a 33.3% basis, in an unaffiliated plan with Arkansas Blue Cross and Blue Shield and PharmaCare Re until the termination of the contract as of January 1, 2008. Under the termination provisions of the contract, we received $0.8 million, an amount equal to two years of the estimated future profits generated by the block of business, which was recorded in the first quarter 2008.

The growth in our Medicare Part D business has resulted in an increase in the level of seasonality in our reported results during a given calendar year. This is due to the uneven nature of the standard benefit design under Medicare Part D. As a result, this business generally sees higher claims experience in the first two quarters of the year while beneficiaries are in the deductible and initial coverage phases of the benefit design. As the beneficiary reaches the coverage gap and catastrophic phases of the benefit design, the plan experiences lower claims liability which is generally in the last two quarters of the year, resulting in a pattern of increasing reported net income attributable to the Part D business.

Traditional Insurance—This segment consists of

•: Medicare supplement and other senior health products,
•: specialty health insurance products, primarily fixed benefit accident and sickness disability insurance sold to the middle income self-employed market in the United States,
•: senior life insurance business distributed through our career agency sales force and through our network of independent general agencies,

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27. BUSINESS SEGMENT INFORMATION (Continued)

•: products that we no longer sell such as long term care, major medical, universal life and fixed annuities.

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.

Corporate—This segment reflects the activities of our parent holding company, such as debt service, senior executive compensation, and compliance with requirements resulting from our status as a public company.

We report intersegment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These intersegment revenues and expenses affect the amounts reported on the individual financial statement line items, but we eliminate them in consolidation and they do not change income before taxes. The most significant items eliminated are intersegment revenue and expense relating to 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 operating segments.

Financial data by segment, with 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:

		2009						2008						2007

		Revenues			Income(Loss) Before Income Taxes			Revenues			Income(Loss) Before Income Taxes			Revenues			Income(Loss) Before Income Taxes
		(in thousands)
Senior Managed Care—Medicare Advantage		$	2,642,990		$	134,810		$	2,420,693		$	94,625		$	1,943,451		$	52,726
Medicare Part D			1,984,391			178,344			1,896,070			127,444			642,538			116,888
Traditional Insurance			346,444			(20,518	)		455,584			4,845			514,663			14,106
Senior Administrative Services			42,221			8,486			84,888			22,020			106,954			24,124
Corporate			665			(61,502	)		3,426			(37,949	)		5,747			(35,040	)
Intersegment revenues			(27,943	)		—			(68,994	)		—			(81,888	)		—
Adjustments to segment amounts:
	Net realized losses(1)		(24,988	)		(24,988	)		(59,681	)		(59,681	)		(40,178	)		(40,178	)
	Equity in earnings of unconsolidated subsidiary(2)		(280	)		—			(72,813	)		—			(56,664	)		—

Total		$	4,963,500		$	214,632		$	4,659,173		$	151,304		$	3,034,623		$	132,626

(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 report the equity in the earnings of unconsolidated subsidiary as revenue for our Medicare Part D segment for purposes of analyzing the ratio of net pharmacy benefits incurred because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, this amount is included as a separate line following income from continuing operations.
(3): Income before income taxes for 2008 includes a $3.9 million charge related to impairment of goodwill.
(see Note 7—Intangible Assets).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

27. BUSINESS SEGMENT INFORMATION (Continued)

Identifiable assets by segment are as follows:

As of December 31,	2009			2008

	(in thousands)
Senior Managed Care—Medicare Advantage	$	877,920		$	970,297
Medicare Part D		1,133,976			1,133,596
Traditional Insurance		1,649,762			1,508,127
Senior Administrative Services		18,142			20,330
Corporate		1,915,020			1,661,194
Intersegment assets(1)		(1,779,964	)		(1,431,381	)

Total Assets	$	3,814,856		$	3,862,163

(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.

28. CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The quarterly results of operations are presented below. Due to the use of weighted average shares outstanding when determining the denominator for earnings per share, the sum of the quarterly per common share amounts may not equal the full year per common share amounts.

			Three Months Ended

2009			March 31,			June 30,		September 30,		December 31,
			(in thousands)
Total revenue			$	1,361,776		$	1,245,497	$	1,149,705	$	1,206,522

(Loss) income before income taxes				(20,543	)		7,970		87,722		139,483
(Benefit) provision for income taxes				(7,395	)		3,036		27,976		50,711

Net (loss) income			$	(13,148	)	$	4,934	$	59,746	$	88,772

(Loss) earnings per common share:
	Basic:
		Net (loss) income	$	(0.16	)	$	0.06	$	0.74	$	1.12

	Diluted:
		Net (loss) income	$	(0.16	)	$	0.06	$	0.74	$	1.12

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

28. CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)

			Three Months Ended

2008			March 31,			June 30,		September 30,		December 31,
			(in thousands)
Total revenue			$	1,224,787		$	1,242,041	$	1,097,999	$	1,094,346

(Loss) income before income taxes				(55,313	)		28,561		77,140		100,916
(Benefit) provision for income taxes				(9,313	)		193		28,328		37,004

Net (loss) income			$	(46,000	)	$	28,368	$	48,812	$	63,912

(Loss) earnings per common share:
	Basic:
		Net (loss) income	$	(0.50	)	$	0.32	$	0.57	$	0.75

	Diluted:
		Net (loss) income	$	(0.50	)	$	0.32	$	0.56	$	0.75

During the year ended 2009, the Company recognized other-than-temporary impairments in the value of certain of its securities with exposure to subprime mortgages totaling $10.5 million. During the year ended 2008, the Company recognized other-than-temporary impairments in the value of certain of its securities with exposure to subprime mortgages totaling $48.0 million.

F-74

Schedule I—Summary of Investments Other Than Investments in Related Parties

UNIVERSAL AMERICAN CORP.

December 31, 2009 and 2008

		December 31, 2009

Classification		Face Value		Amortized Cost		Fair Value		Carrying Value
		(in thousands)
U.S. Treasury securities and obligations of U.S. Government		$	35,195	$	35,572	$	36,122	$	36,122
Government sponsored agencies			137,405		137,839		140,831		140,831
Other political subdivisions			10,060		10,020		10,014		10,014
Corporate debt securities			309,538		312,225		327,845		327,845
Foreign debt securities			19,423		19,465		20,724		20,724
Mortgage-backed and asset-backed securities			532,822		446,144		429,017		429,017

	Sub-total	$	1,044,443		961,265	$	964,553		964,553

Policy loans					19				19
Other invested assets					1,257				1,257

	Total investments			$	962,541			$	965,829

		December 31, 2008

Classification		Face Value		Amortized Cost		Fair Value		Carryinge Value
		(in thousands)
U.S. Treasury securities and obligations of U.S. Government		$	33,155	$	33,963	$	35,335	$	35,335
Government sponsored agencies			90,314		90,030		95,029		95,029
Other political subdivisions			10,035		9,993		9,885		9,885
Corporate debt securities			441,943		441,681		420,283		420,283
Foreign debt securities			32,958		32,779		30,890		30,890
Mortgage-backed and asset-backed securities			565,537		466,632		440,971		440,971

	Sub-total	$	1,173,942		1,075,078	$	1,032,393		1,032,393

Policy loans					22,274				22,274
Other invested assets					1,649				1,649

	Total investments			$	1,099,001			$	1,056,316

F-75

Schedule II—Condensed Financial Information of Registrant

UNIVERSAL AMERICAN CORP.

(Parent Company)

CONDENSED BALANCE SHEETS

December 31, 2009 and 2008

	2009		2008

	(in thousands)
ASSETS
Cash and cash equivalents	$	112,571	$	165,029
Investments in subsidiaries		1,656,193		1,472,592
Advances to agents		8,504		19,530
Surplus note receivable from affiliate		60,000		65,550
Due from affiliates		36,950		37,115
Deferred loan origination fees		6,045		6,202
Income tax receivable		—		29
Deferred income tax asset		19,891		8,057
Other assets		9,761		8,690

Total assets	$	1,909,915	$	1,782,794

LIABILITIES AND STOCKHOLDERS' EQUITY
Loan payable	$	313,758	$	320,625
Other long tern debt		110,000		110,000
Fair value of cash flow hedges		15,465		20,298
Income tax payable		17,740		—
Amounts payable and other liabilities		3,488		15,787

Total liabilities		460,451		466,710

Total stockholders' equity		1,449,464		1,316,084

Total liabilities and stockholders' equity	$	1,909,915	$	1,782,794

See notes to condensed financial statements.

F-76

UNIVERSAL AMERICAN CORP.

(Parent Company)

CONDENSED STATEMENTS OF OPERATIONS

For the Three Years Ended December 31, 2009

		2009			2008			2007

		(in thousands)
REVENUES:
Surplus note investment income—affiliated		$	65		$	570		$	1,783
Net investment income—unaffiliated			485			3,491			5,849
Realized loss			—			(449	)		(928	)

Total revenues			550			3,612			6,704

EXPENSES:
Selling, general and administrative expenses			10,037			2,045			13,859
Stock compensation expense			7,127			6,369			4,572
Interest expense—loan payable			13,069			15,467			11,642
Interest expense—other long term debt			6,868			8,227			8,838

Total expenses			37,101			32,108			38,911

Loss before income taxes and equity in income of subsidiaries			(36,551	)		(28,496	)		(32,207	)
	Income tax benefit		13,820			11,946			11,394

Loss before equity in income of subsidiaries			(22,731	)		(16,550	)		(20,813	)
	Equity in income of subsidiaries, net of taxes		163,035			111,642			104,885

Net income		$	140,304		$	95,092		$	84,072

See notes to condensed financial statements.

F-77

UNIVERSAL AMERICAN CORP.

(Parent Company)

CONDENSED STATEMENTS OF CASH FLOWS

For the Three Years Ended December 31, 2009

		2009			2008			2007

		(in thousands)
Cash flows from operating activities:
Net income			140,304		$	95,092		$	84,072
Adjustments to reconcile net income to net cash used in operating activities:
	Equity in income of subsidiaries		(163,035	)		(111,642	)		(104,885	)
	Realized loss		—			449			928
	Stock based compensation		7,127			6,369			4,572
	Change in amounts due to/from subsidiaries		165			(2,034	)		(13,353	)
	Amortization of deferred loan origination fees		158			1,048			2,510
	Change in income taxes receivable/payable		17,769			6,756			—
	Deferred income taxes		(5,881	)		(1,571	)		(2,999	)
	Change in other assets and liabilities		(6,191	)		13,642			(193	)

Cash used in operating activities			(9,584	)		8,109			(29,348	)

Cash flows from investing activities:
Issuance of surplus note to affiliate			—			—			(60,000	)
Redemption of surplus note due from affiliate			5,549			12,000			10,000
Capital contributions to subsidiaries			—			—			(81,000	)
Purchase of business and return of purchase price			—			40,990			(358,286	)
Purchase of agent advances from subsidiaries, net of collections			11,026			12,464			4,740

Cash provided by (used in) investing activities—continuing operations			16,575			65,454			(484,546	)
Cash used in investing activities—discontinued operations			—			—			(19,836	)

Cash provided by (used in) investing activities			16,575			65,454			(504,382	)

Cash flows from financing activities:
Net proceeds from issuance of common stock			4,411			7,661			14,961
Proceeds from issuance of preferred stock			—			—			332,107
Purchase of treasury stock			(63,693	)		(74,821	)		—
Issuance of new debt			—			—			450,000
Principal repayment on debt			(6,867	)		(28,500	)		(156,438	)
Dividends received from subsidiaries			7,871			15,660			12,043
Other financing activities			(1,171	)		—			(5,895	)

Cash (used in) provided by financing activities			(59,449	)		(80,000	)		646,778

Net (decrease) increase in cash and cash equivalents			(52,458	)		(6,437	)		113,048
Cash and cash equivalents:
	At beginning of year		165,029			171,466			58,418

	At end of year	$	112,571		$	165,029		$	171,466

Supplemental disclosure of cash flow information:
	Cash paid during the year for:
	Interest	$	20,632		$	22,721		$	18,679

	Income taxes	$	53,301		$	36,950		$	39,100

See notes to condensed financial statements.

F-78

UNIVERSAL AMERICAN CORP.

(Parent Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

In the parent-company-only financial statements, the parent company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since date of acquisition. The parent company's share of net income of its wholly owned unconsolidated subsidiaries is included in its net income using the equity method. Certain reclassifications have been made to prior years' financial statements to conform to current period presentation. Parent-company-only financial statements should be read in conjunction with the Company's consolidated financial statements.

2. AGENT ADVANCES

Universal American's insurance subsidiaries advance commissions to their respective agents for business submitted by the agents. Universal American has agreements with certain of its insurance subsidiaries whereby it had purchased the related receivables. The advances are recovered as the commissions are earned through the balance of the policy period.

3. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGES

F-79

UNIVERSAL AMERICAN CORP.

(Parent Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

3. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGES (Continued)

hedging instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

4. SURPLUS NOTES RECEIVABLE FROM AFFILIATES

American Exchange made $5.6 million in principal payments on its surplus note during June 2009 resulting in the note being paid in full. Prior to repayment, this note had bore interest at LIBOR plus 250 basis points.

F-80

Schedule III—SUPPLEMENTAL INSURANCE INFORMATION

UNIVERSAL AMERICAN CORP.

(in thousands)

		Deferred Acquisition Costs		Reserves for Future Policy Benefits		Unearned Premiums		Policy and Contract Claims		Net Premium Earned			Net Investment Income		Policyholder Benefits			Net Change in DAC		Other Operating Expense

	2009
Senior Managed Care—Medicare Advantage		$	—	$	—	$	—	$	238,920	$	2,616,596		$	23,111	$	2,156,603		$	—	$	351,577
Medicare Part D			—		—		—		91,027		1,980,907			2,844		1,587,076			—		218,972
Traditional Insurance			150,398		992,736		—		65,903		321,423			23,062		254,991			7,786		104,185
Senior Administrative Services			—		—		—		—		—			1		—			—		33,735
Corporate			—		—		—		—		—			665		—			—		63,341
Intersegment and other adjustments			—		—		—		—		(28	)		131		(36	)		—		(29,082	)

	Segment Total	$	150,398	$	992,736	$	—	$	395,850	$	4,918,898		$	49,814	$	3,998,634		$	7,786	$	742,728

	2008
Senior Managed Care—Medicare Advantage		$	—	$	—	$	—	$	257,308	$	2,404,067		$	16,626	$	2,001,163		$	—	$	324,905
Medicare Part D			—		—		—		180,309		1,802,127			1,052		1,533,090			—		235,536
Traditional Insurance			237,630		1,021,712		—		73,093		394,275			60,189		317,344			14,273		119,122
Senior Administrative Services			—		—		—		—		—			—		—			—		62,868
Corporate			—		—		—		—		—			3,345		—			—		41,272
Intersegment and other adjustments			—		—		—		—		(15	)		58		(15	)		—		(68,876	)

	Segment Total	$	237,630	$	1,021,712	$	—	$	510,710	$	4,600,454		$	81,270	$	3,851,582		$	14,273	$	714,827

	2007
Senior Managed Care—Medicare Advantage		$	—	$	—	$	—	$	303,281	$	1,920,309		$	23,142	$	1,611,824		$	574	$	278,327
Medicare Part D			—		—		—		139,552		578,791			6,685		427,195			—		98,455
Traditional Insurance			245,511		1,051,309		—		91,608		442,163			71,189		350,790			15,389		134,378
Senior Administrative Services			—		—		—		—		—			—		—			—		82,830
Corporate			—		—		—		—		—			5,398		—			—		41,664
Intersegment and other adjustments			—		—		—		—		156			556		129			—		(82,894	)

	Segment Total	$	245,511	$	1,051,309	$	—	$	534,441	$	2,941,419		$	106,970	$	2,389,938		$	15,963	$	552,760

F-81

Universal American Corp.

Schedule V

Valuation and Qualifying Accounts

	Balance Jan 1		Charged to Statement of Operations		Write-offs against allowance			Acquisition and Other Adjs.		Balance Dec 31

	(in thousands)
2009
Due and unpaid premiums(1)	$	3,282	$	—	$	(3,282	)	$	—	$	—
Other Part D receivables(1)		16,079		—		(16,079	)		—		—
Advances to agents		10,412		14,034		—			—		24,446
Other assets(3)		20,814		18,549		(3,534	)		1,442		37,271
Deferred income taxes		4,433		1,551		—			—		5,984
2008
Due and unpaid premiums(1)	$	7,298	$	2,432	$	(8,881	)	$	2,433	$	3,282
Other Part D receivables(1)		13,836		7,959		(6,378	)		662		16,079
Advances to agents		4,682		5,730		—			—		10,412
Other assets(3)		18,100		2,817		(552	)		449		20,814
Deferred income taxes		3,144		1,289		—			—		4,433
2007
Due and unpaid premiums(1)	$	3,230	$	2,079	$	(89	)	$	2,078	$	7,298
Other Part D receivables(2)		5,830		—		(4,372	)		12,378		13,836
Advances to agents		3,494		1,188		—			—		4,682
Other assets(3)		—		17,548		—			552		18,100
Deferred income taxes		2,949		195		—			—		3,144

(1): Amount in Acquisition and Other Adjs. column includes 50% share of current year increment recovered from joint venture partner.
(2): Amount in Acquisition and Other Adjs. column includes valuation account acquired in connection with acquisition of MemberHealth.
(3): Represents valuation account on receivables related to Medicare Advantage products.

F-82

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Caremark Ulysses Holding (UHCO) Inactive 10-K2009 FY Annual report

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