Caremark Ulysses Holding (UHCO) 10-Q 2010 Q1 Quarterly report

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

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
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)

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

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

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

        Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

Class of Common Stock	Outstanding at April 26, 2010
$0.01 par value	75,448,814 shares

TABLE OF CONTENTS

	Item	Description	Page
PART I		Financial Information
	1	Financial Statements (unaudited):
		Consolidated Balance Sheets		4
		Consolidated Statements of Operations—Three Months		5
		Consolidated Statements of Stockholders' Equity and Comprehensive Income		6
		Consolidated Statements of Cash Flows		7
		Notes to Consolidated Financial Statements		8
	2	Management's Discussion and Analysis of Financial Condition and Results of Operations		28
	3	Quantitative and Qualitative Disclosures About Market Risk		40
	4	Controls and Procedures		42
PART II		Other Information
	1	Legal Proceedings		43
	1A	Risk Factors		43
	2	Unregistered Sales of Equity Securities and Use of Proceeds		45
	3	Defaults Upon Senior Securities		45
	5	Other Information		45
	6	Exhibits		45
		Signatures		47

1

        As used in this quarterly report on Form 10-Q, "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 quarterly report on Form 10-Q, such as those set forth or incorporated by reference under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", and oral statements made from time to time by our representatives 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.

2

        The risks and uncertainties set forth in this report in Part I—Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the risks and uncertainties incorporated by reference into Part II—Item 1A "Risk Factors," 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.

3

PART I

ITEM 1—FINANCIAL STATEMENTS (Unaudited)

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)

				March 31, 2010			December 31, 2009
				(Unaudited)
ASSETS
Investments:
	Fixed maturities available for sale, at fair value (amortized cost: 2010, $921,829; 2009, $961,265)			$	931,664		$	964,553
	Other invested assets				1,287			1,276
		Total investments			932,951			965,829
Cash and cash equivalents					946,275			856,958
Accrued investment income					8,071			9,005
Deferred policy acquisition costs					147,414			150,398
Reinsurance recoverables—life					606,862			622,547
Reinsurance recoverables—health					130,237			126,524
Due and unpaid premiums					194,726			35,466
Present value of future profits and other amortizing intangible assets					161,649			167,545
Goodwill and other indefinite lived intangible assets					530,031			530,031
Income taxes receivable					26,281			3,441
Other Part D receivables					212,286			168,159
Advances to agents					74,149			66,418
Other assets					125,937			112,535
		Total assets		$	4,096,869		$	3,814,856
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Reserves and other policy liabilities—life				$	590,941		$	599,442
Reserves for future policy benefits—health					409,563			408,625
Policy and contract claims—health					505,146			380,519
Premiums received in advance					21,103			12,535
Loan payable					312,926			313,758
Other long term debt					110,000			110,000
Amounts due to reinsurers					5,383			7,078
Deferred income tax liability					28,840			31,564
CMS contract deposit liabilities					380,917			169,169
Other Part D liabilities					100,732			163,332
Other liabilities					161,617			169,370
		Total liabilities			2,627,168			2,365,392
STOCKHOLDERS' EQUITY
Preferred stock (Authorized: 3 million shares):
Series A preferred stock (Authorized: 300,000 shares, issued and outstanding: 42,105 shares, liquidation value 2010, $64,842; 2009, $49,263)					42			42
Series B preferred stock (Authorized: 300,000 shares)					—			—
Common stock—voting (Authorized: 200 million shares, issued and outstanding: 2010, 78.1 million shares; 2009, 87.9 million shares)					781			879
Common stock—non-voting (Authorized 30 million shares)					—			—
Additional paid-in capital					789,397			880,709
Accumulated other comprehensive loss					(4,433	)		(7,915	)
Retained earnings					711,096			709,695
Less: treasury stock (2010, 2.7 million shares; 2009, 13.5 million shares)					(27,182	)		(133,946	)
		Total stockholders' equity			1,469,701			1,449,464
			Total liabilities and stockholders' equity	$	4,096,869		$	3,814,856

See Notes to unaudited consolidated financial statements.

4

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2010 and 2009

(Unaudited)

(in thousands, per share amounts in dollars)

				2009			2008
	Net premium and policyholder fees earned			$	1,497,448		$	1,349,134
	Net investment income				10,797			15,736
	Fee and other income				4,813			4,128
	Realized loss:
		Total other-than-temporary impairment losses on securities			(131	)		(8,076	)
		Portion of loss recognized in other comprehensive income			—			—
		Net other-than-temporary impairment losses on securities recognized in earnings			(131	)		(8,076	)
		Realized (loss) gain, excluding other-than-temporary impairment losses on securities			(153	)		854
	Net realized losses on investments				(284	)		(7,222	)
			Total revenues		1,512,774			1,361,776
Benefits, claims and expenses:
	Claims and other benefits				1,334,773			1,193,591
	Change in deferred acquisition costs				2,984			7,699
	Amortization of present value of future profits				5,937			5,893
	Commissions				30,798			31,706
	Reinsurance commissions and expense allowances				(4,639	)		(5,519	)
	Interest expense				5,013			5,259
	Other operating costs and expenses				139,334			143,787
			Total benefits, claims and expenses		1,514,200			1,382,416
Loss before equity in earnings of unconsolidated subsidiary					(1,426	)		(20,640	)
	Equity in earnings of unconsolidated subsidiary				—			97
Loss before taxes					(1,426	)		(20,543	)
	Benefit from income taxes				(2,827	)		(7,395	)
Net income (loss)				$	1,401		$	(13,148	)
Earnings (loss) per common share:
	Basic			$	0.02		$	(0.16	)
	Diluted			$	0.02		$	(0.16	)
Weighted average shares outstanding:
Weighted average common shares outstanding					84,895			86,850
			Less weighted average treasury shares		(11,274	)		(8,446	)
Basic weighted shares outstanding					73,621			78,404
Weighted average common equivalent of preferred shares outstanding					4,211			4,211
			Effect of dilutive securities		306			406
Diluted weighted shares outstanding					78,138			83,021

See Notes to unaudited consolidated financial statements.

5

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2010 and 2009

(Unaudited)

(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
2009
Balance at January 1, 2009	$	42	$	—	$	874		$	870,520		$	(36,422	)	$	558,675		$	(77,605	)	$	1,316,084
Net loss		—		—		—			—			—			(13,148	)		—			(13,148	)
Other comprehensive loss		—		—		—			—			(2,828	)		—			—			(2,828	)
Comprehensive loss		—		—		—			—			—			—			—			(15,976	)
Issuance of common stock		—		—		1			48			—			—			—			49
Stock based compensation		—		—		—			4,331			—			—			—			4,331
Treasury shares purchased at cost		—		—		—			—			—			—			(21,925	)		(21,925	)
Treasury shares reissued		—		—		—			(124	)		—			—			3,658			3,534
Balance at March 31, 2009	$	42	$	—	$	875		$	874,775		$	(39,250	)	$	545,527		$	(95,872	)	$	1,286,097
2010
Balance at January 1, 2010	$	42	$	—	$	879		$	880,709		$	(7,915	)	$	709,695		$	(133,946	)	$	1,449,464
Net income		—		—		—			—			—			1,401			—			1,401
Other comprehensive income		—		—		—			—			3,482			—			—			3,482
Comprehensive income		—		—		—			—			—			—			—			4,883
Issuance of common stock		—		—		2			1,159			—			—			—			1,161
Stock based compensation		—		—		—			1,782			—			—			—			1,782
Retired treasury stock		—		—		(100	)		(98,959	)		—			—			99,059			—
Treasury shares purchased at cost		—		—		—			—			—			—			(1,256	)		(1,256	)
Treasury shares reissued		—		—		—			4,706			—			—			8,961			13,667
Balance at March 31, 2010	$	42	$	—	$	781		$	789,397		$	(4,433	)	$	711,096		$	(27,182	)	$	1,469,701

See Notes to unaudited consolidated financial statements.

6

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2010 and 2009

(Unaudited)

(in thousands)

			2010			2009
Cash flows from operating activities:
Net income (loss)			$	1,401		$	(13,148	)
Adjustments to reconcile net income (loss) to net cash used in operating activities, net of balances acquired:
Equity in earnings of unconsolidated subsidiary				—			(97	)
Distribution from unconsolidated subsidiary				—			6,800
Deferred income taxes				(4,599	)		(8,115	)
Realized losses on investments				284			7,222
Amortization of intangible assets				5,936			5,893
Net amortization of bond premium				791			358
Changes in operating assets and liabilities:
	Deferred policy acquisition costs			2,984			7,699
	Reserves for future policy benefits			(7,015	)		1,204
	Policy and contract claims payable			124,080			(196,820	)
	Reinsurance balances			7,716			(4,064	)
	Due and unpaid/advance premium, net			(150,692	)		(137,956	)
	Income taxes payable/receivable			(22,840	)		12,743
	Other Part D (payables)/receivables			(106,727	)		(101,479	)
	Other, net			(8,365	)		10,754
		Cash used in operating activities		(157,046	)		(409,006	)
Cash flows from investing activities:
Proceeds from sale or redemption of fixed maturity investments				44,631			109,172
Cost of fixed maturity investments purchased				(6,269	)		(54,053	)
Purchase of fixed assets				(2,641	)		(6,218	)
Other investing activities				(388	)		20
		Cash provided by investing activities		35,333			48,921
Cash flows from financing activities:
Net proceeds from issuance of common and preferred stock, net of tax effect				1,370			2,617
Cost of treasury stock purchases				(1,256	)		(21,925	)
Receipts from CMS contract deposits				990,103			955,467
Withdrawals from CMS contract deposits				(778,355	)		(602,792	)
Deposits and interest credited to policyholder account balances				—			4,357
Surrenders and other withdrawals from policyholder account balances				—			(17,012	)
Principal repayment on loan payable and other long term debt				(832	)		(875	)
		Cash provided by financing activities		211,030			319,837
Net increase (decrease) in cash and cash equivalents				89,317			(40,248	)
Cash and cash equivalents at beginning of period				856,958			511,032
Cash and cash equivalents at end of period			$	946,275		$	470,784

See Notes to unaudited consolidated financial statements.

7

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Part D prescription drug benefit Plans, known as PDPs, Medicare coordinated care Plans, which we call HMOs, Medicare coordinated care products built around contracted networks of providers, which we call PPOs, Medicare Advantage private fee-for-service Plans, known as PFFS Plans, 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 entered in to an agreement 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) to reinsure substantially all of our in force life insurance and annuity business as of April 1, 2009, under a 100% coinsurance treaty. This transaction is discussed in more detail at Note 14 of Notes to the Consolidated Financial Statements.

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, for interim reporting in accordance with Article 10 of the Securities and Exchange Commission's Regulation S-X. Accordingly, they do not include all of the disclosures normally required by U.S. GAAP or those normally made in an annual report on Form 10-K. 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. The interim financial information in this report is unaudited, but in the opinion of management, includes all adjustments, including normal, recurring adjustments necessary to present fairly the financial position and results of operations for the periods reported. For further information, the reader of this quarterly report on Form 10-Q should refer to our annual report on Form 10-K for the year ended December 31, 2009, that was filed with the Securities and Exchange Commission, or the SEC, on March 1, 2010. The results of operations for the three months ended March 31, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

        Use of Estimates:    The preparation of our financial statements in conformity with U.S. 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 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

8

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

valuation, revenue recognition—Medicare Advantage products, and income taxes. There have been no changes in our critical accounting policies during the current quarter.

        Reclassifications:    Commencing with the filing of our quarterly report on Form 10-Q for the period ended September 30, 2009, we modified the presentation of certain amounts within the consolidated balance sheets and statements of operations. We have conformed prior year amounts with our current presentation with respect to following line items:

•

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 will enhance the usefulness of our consolidated financial statements by combining similar balances into single financial statement line items. These reclassifications had no effect on stockholders' equity, net income, or earnings per share as previously reported.

        Significant Accounting Policies:    For a description of significant accounting policies, see Note 2—Summary of Significant Accounting Policies in the Notes to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2009.

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

        Subsequent Events Disclosure:    On February 24, 2010, the FASB issued an update to address certain implementation issues related Accounting Standards Codification, or ASC, 855-10-50,Subsequent Events—Disclosure, regarding an entity's requirement to perform and disclose subsequent events procedures. Effective upon its issuance, the update exempts Securities and Exchange Commission registrants from disclosing the date through which subsequent events have been evaluated. This update affected disclosure only and had no impact on our financial position or results of operations.

        Fair Value Disclosures:    In January 2010, the FASB issued ASC Update No. 2010-06,Fair Value Measurements and Disclosures, which updates ASC 820-10-20,Fair Value Measurements and Disclosures. The new literature requires disclosures about transfers into and out of Levels 1 and 2 fair value measurements and clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. These new rules impact disclosures only and had no impact on our financial position or results of operations. The new rules also require additional disclosures regarding Level 3 fair value measurements which are effective for reporting periods beginning after December 15, 2010.

        Variable Interest Entities:    In December 2009, the FASB issued ASC Update No. 2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which updates ASC 810-10,Consolidations. ASU 2009-17 clarifies the definition of a variable interest entity and updates the definition of the primary beneficiary of a variable interest entity. The Company adopted ASU 2009-17 as of January 1, 2010, and the adoption of ASU 2009-17 had no impact on our financial position or results of operations.

9

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

        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.

4. INVESTMENTS

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

	March 31, 2010
Classification	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Gross Unrealized OTTI(1)			Mkt Value
	(in thousands)
U.S. Treasury securities and obligations of U.S. Government	$	36,487	$	460	$	(13	)	$	—		$	36,934
Government sponsored agencies		128,038		3,250		—			—			131,288
Other political subdivisions		10,526		321		(248	)		—			10,599
Corporate debt securities		307,992		17,566		(815	)		—			324,743
Foreign debt securities		19,455		1,307		—			—			20,762
Mortgage-backed and asset-backed securities		419,331		16,026		(10,213	)		(17,806	)		407,338
	$	921,829	$	38,930	$	(11,289	)	$	(17,806	)	$	931,664

	December 31, 2009
Classification	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Gross Unrealized OTTI(1)			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

(1)

Other-than-temporary impairments.

        At March 31, 2010, gross unrealized losses on mortgage-backed and asset-backed securities totaled $28.0 milion, consisting of unrealized losses of $24.4 million on subprime residential mortgage loans, as discussed below, and $3.6 million related to obligations of commercial mortgage-backed securities and other 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. 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.

10

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

        The amortized cost and fair value of fixed maturity investments at March 31, 2010 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	$	128,496	$	131,474
Due after 1 year through 5 years		277,092		293,249
Due after 5 years through 10 years		79,394		82,791
Due after 10 years		17,516		16,812
Mortgage and asset-backed securities		419,331		407,338
	$	921,829	$	931,664

        The fair value and unrealized loss as of March 31, 2010 and December 31, 2009 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
March 31, 2010		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	$	2,513	$	(10	)	$	49	$	(3	)	$	2,562	$	(13	)
	Government sponsored agencies		—		—			—		—			—		—
	Other political subdivisions		530		(1	)		1,752		(247	)		2,282		(248	)
	Corporate debt securities		9,699		(98	)		7,320		(717	)		17,019		(815	)
	Foreign debt securities		25		—			—		—			25		—
	Mortgage-backed and asset-backed securities		25,452		(504	)		27,558		(27,515	)		53,010		(28,019	)
	Total fixed maturities	$	38,219	$	(613	)	$	36,679	$	(28,482	)	$	74,898	$	(29,095	)
Total number of securities in an unrealized loss position															44

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

		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

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, especially with regard to securities issued in 2006 and 2007 that are collateralized by interests in mortgages originated in 2006 and 2007. These factors 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.

        As of March 31, 2010, we held subprime securities with par values of $52.6 million, an amortized cost of $47.2 million and a market value of $22.9 million representing approximately 1.2% 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 AA by Standard & Poors, a division of the McGraw Hill Companies, Inc., known as S&P, or equivalent.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

Vintage Year	Amortized Cost		Fair Value		Unrealized Loss
	(in thousands)
2003	$	4,050	$	3,376	$	(674	)
2004		936		532		(404	)
2005		20,635		13,911		(6,724	)
2006		16,626		3,381		(13,245	)
2007		4,988		1,655		(3,333	)
Totals	$	47,235	$	22,855	$	(24,380	)

        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. 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, principally holdings from the 2006 and 2007 vintage years, 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 on fixed maturity investments recorded since the subprime deterioration began in 2007:

			Quarter Ended March 31, 2010		Year Ended
	Cumulative				2009		2008		2007
	(in thousands)
Subprime	$	99,589	$	131	$	10,497	$	47,964	$	40,997
Other structured		11,043		—		6,398		4,645		—
Corporate		7,177		—		—		7,177		—
	$	117,809	$	131	$	16,895	$	59,786	$	40,997

        During the quarter ended March 31, 2010, we recognized an other-than-temporary impairment on one previously impaired structured security.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

		For the three months ended March 31,
		2010			2009
		(in thousands)
Realized gains:
	Fixed maturities	$	568		$	1,347
Realized losses:
	Fixed maturities, excluding OTTI		(721	)		(493	)
	OTTI on fixed maturities		(131	)		(8,076	)
			(852	)		(8,569	)
Net realized losses		$	(284	)	$	(7,222	)

        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:

		Three months ended March 31, 2010
		(in thousands)
Balance, January 1, 2010		$	7,846
Credit related impairments recognized in current period earnings on securities:
	With credit related impairments previously recognized		—
	With credit related impairments not previously recognized		—
Cumulative credit related impairments as of March 31, 2010		$	7,846

        In addition, during the quarter ended March 31, 2010, we recognized other-than-temporary impairments of approximately $0.1 million on securities for which the impairment was not split between earnings and other comprehensive income.

5. 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 ofFair Value Measurements and Disclosures Topic, ASC 820-10.

Fair Value Disclosures

        The following section applies the ASC 820-10 fair value hierarchy and disclosure requirements to our financial instruments that we carry at fair value. ASC 820-10 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.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

        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 that are priced using models with observable market inputs, such as interest rate swap contracts, are also reflected as Level 2.

        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 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 are carried at fair value by hierarchy levels, as of March 31, 2010 (in thousands):

		Total		Level 1		Level 2		Level 3
Assets:
Fixed maturties, available for sale		$	931,664	$	—	$	930,231	$	1,433
Equity securities			9		—		—		9
	Total assets	$	931,673	$	—	$	930,231	$	1,442
Liabilities:
Interest rate swaps		$	16,655	$	—	$	16,655	$	—

        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 820-10 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. The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above table.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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 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.

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.

16

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

        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.

        The following table provides a summary of changes in the fair value of our Level 3 financial assets:

	Fixed Maturities			Equity Securities		Total
	(in thousands)
Fair value as of December 31, 2009	$	1,563		$	9	$	1,572
Net purchases and sales		(97	)		—		(97	)
Net transfers in/(out)		(50	)		—		(50	)
Unrealized losses included in AOCL (1),(2)		17			—		17
Fair value as of March 31, 2010	$	1,433		$	9	$	1,442

(1)

AOCL: Accumulated other comprehensive loss

(2)

Unrealized gains/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.

6. 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.

        At March 31, 2010 and 2009, we allocated earnings between common and participating preferred stock as follows:

	Three months ended March 31,
	2010		2009
	(in thousands)
Net income (loss) attributable to common stock	$	1,325	$	(12,483	)
Undistributed income (loss) allocated to participating preferred stock		76		(665	)
Net income (loss)	$	1,401	$	(13,148	)

7. SHARE REPURCHASE PLAN

        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

17

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. SHARE REPURCHASE PLAN (Continued)

programs. There have been no buybacks since December 31, 2009. As of March 31, 2010, we have $42.3 million that remains available to repurchase additional shares under these plans. We are not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

        Changes in treasury stock were as follows (in thousands except share data):

	For the three months ended March 31,
	2010								2009
	Shares			Amount			Weighted Average Cost Per Share		Shares			Amount			Weighted Average Cost Per Share
Treasury stock beginning of year		13,538,081		$	133,946		$	9.89		7,194,387		$	77,605		$	10.79
Retirement of treasury stock		(10,000,000	)	$	(99,059	)		9.91		—			—			—
Shares repurchased		85,148			1,256			14.75		2,674,279			21,925			8.20
Shares distributed in the form of employee bonuses		(956,640	)		(8,961	)		9.37		(339,168	)		(3,658	)		10.42
Treasury stock, end of period		2,666,589		$	27,182		$	10.19		9,529,498		$	95,872		$	10.06

        As a result of our stock buyback program we had accumulated 13.5 million shares of common stock in treasury as of December 31, 2009. We cancelled 10 million shares on March 15, 2010, reducing treasury stock and additional paid-in-capital by approximately $99 million, with no impact on total stockholders' equity.

8. ACCUMULATED OTHER COMPREHENSIVE LOSS

        The components of accumulated other comprehensive loss are as follows:

		March 31, 2010			December 31, 2009
		(in thousands)
Net unrealized gains (losses) on investments		$	27,641		$	21,405
Gross unrealized OTTI			(17,806	)		(18,117	)
Fair value of cash flow swap on debt			(16,655	)		(15,465	)
Deferred income taxes			2,387			4,262
	Total accumulated other comprehensive loss	$	(4,433	)	$	(7,915	)

18

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)

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

		Three months ended March 31,
		2010									2009
		Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
		(in thousands)
Net unrealized gain (loss) arising during the period (net of deferred acquisition costs)		$	6,263		$	2,192		$	4,071		$	(11,918	)	$	(4,172	)	$	(7,746	)
Reclassification adjustment for losses included in income			284			99			185			7,222			2,528			4,694
Net unrealized gain (loss) arising during the period			6,547			2,291			4,256			(4,696	)		(1,644	)		(3,052	)
Cash flow hedge			(1,190	)		(416	)		(774	)		368			129			239
Foreign currency translation adjustment			—			—			—			(23	)		(8	)		(15	)
	Other comprehensive income (loss)	$	5,357		$	1,875		$	3,482		$	(4,351	)	$	(1,523	)	$	(2,828	)

9. STOCK-BASED COMPENSATION

        We have various stock-based incentive plans for our employees, non-employee directors and agents. We issue shares upon the exercise of options granted under these plans. Detailed information for activity in our stock-based incentive plans can be found in Note 22—Stock-Based Compensation to the financial statements in our annual report on Form 10-K for the year ended December 31, 2009.

        The compensation expense that has been included in other operating costs and expenses for these plans and the related tax benefit were as follows:

			Three Months Ended March 31,
			2010		2009
			(in thousands)
Stock-based compensation expense by type:
		Stock options	$	1,572	$	1,764
		Restricted stock awards		1,833		985
Total stock-based compensation expense				3,405		2,749
Tax benefit recognized				1,192		962
	Stock-based compensation expense, net of tax		$	2,213	$	1,787

19

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

Stock Option Awards

        We recognize 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 in accordance with the provisions ofCompensation-Stock Compensation Topic, ASC 718-10. We use the Black-Scholes valuation model to value employee stock options.

        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:

	Quarter ended March 31,
	2010	2009
Weighted-average grant date fair value	$5.41	$3.97
Risk free interest rates	1.87%-2.13%	1.28%-3.05%
Dividend yields	0.0%	0.0%
Expected volatility	54.49%-54.91%	40.61%-55.63%
Expected lives of options (in years)	3.3-3.8	3.5-3.75

        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.

        A summary of option activity for the first quarter ended March 31, 2010 is set forth below:

Options	Shares (in thousands)			Weighted Average Exercise Price
Outstanding, January 1, 2010		5,351		$	14.55
Granted		805			13.60
Exercised		(144	)		8.05
Forfeited or expired		(148	)		20.22
Outstanding, March 31, 2010		5,864		$	14.49
Exercisable, March 31, 2010		3,466		$	14.47

        The total intrinsic value of options exercised during the first quarter of 2010 was $1.0 million and the total intrinsic value of options exercised during the first quarter of 2009 was less than $0.1 million. As of March 31, 2010, the total compensation cost related to non-vested awards not yet recognized was $12.1 million, which we expect to recognize over a weighted average period of 1.2 years.

        We received proceeds of $1.2 million from the exercise of stock options during the first quarter of 2010 and proceeds of less than $0.1 million from the exercise of stock options during the first quarter of 2009. ASC 718-10 also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow. We recognized $0.2 million of financing cash flows for these excess tax deductions for the first quarter ended March 31, 2010 and $2.6 million for the three months ended March 31, 2009.

20

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

Employee and Director 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. A summary of the status of our non-vested restricted stock awards is set forth below:

Non-vested Restricted Stock	Shares (in thousands)			Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2010		609		$	13.32
Granted		521			13.67
Vested		(110	)		9.89
Forfeited		(7	)		14.12
Non-vested at March 31, 2010		1,013		$	13.87

        The total fair value of shares of restricted stock vested during the three months ended March 31, 2010 was $1.8 million and the total fair value of shares of restricted stock vested during the three months ended March 31, 2009 was $0.6 million.

        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 442 thousand performance shares to officers during 2010 and 373 thousand shares in 2009.

21

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. MEDICARE PART D

        The following table provides balances due from (to) CMS by Plan year:

	March 31, 2010									December 31, 2009
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)
2010	$	(209,000	)	$	105,410		$	(103,590	)	$	—		$	—		$	—
2009(3)		(196,962	)		(37,346	)		(234,308	)		(194,062	)		(35,957	)		(230,019	)
2008(4)		—			—			—			—			—			—
2007(5)		21,585			12,536			34,121			21,433			12,536			33,969
2006		3,460			1,596			5,056			3,460			1,595			5,055
Total due (to) from CMS	$	(380,917	)	$	82,196		$	(298,721	)	$	(169,169	)	$	(21,826	)	$	(190,995	)

(1)

Amounts reported in CMS contract deposit liabilities in the consolidated balance sheets.

(2)

Amounts reported in Due and unpaid premiums in the consolidated balance sheets.

(3)

We expect to pay the amount due to CMS for the 2009 Plan year during the fourth quarter of 2010.

(4)

We collected the amount due from CMS for the 2008 Plan year during the third quarter of 2009.

(5)

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 reopening of the 2007 Plan year and received an $80 million interim payment on January 2, 2009, as part of this request.

11. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGE

        On December 4, 2007, we entered into two separate interest rate swap agreements one with Citibank, N.A. and one with Caylon Corporate and Investment Bank, 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 to hedge the variability of cash flows to be paid under our credit facility. We have determined that the critical terms of the hedging instrument and the hedged forecasted transaction were the same and have designated these swaps as cash flow hedges. As a result, we reflect changes in the fair value in other comprehensive income and 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. The combined fair value of these swaps was a $16.7 million liability at March 31, 2010 and a $15.5 million liability at December 31, 2009. We have reflected this fair value in other liabilities.

        In connection with the swap transaction executed with Citibank, 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

22

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGE (Continued)

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 $8.2 million as of March 31, 2010 and $8.1 million as of December 31, 2009. The swap agreements and our credit facility are described in more detail in Note 16—Derivative Instruments—Cash Flow Hedges and Note 14—Loan Payable in the Notes to the Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2009.

12. 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 remaining defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch and Robert A. Waegelein, former officer Gary W. Bryant, as well as the three directors affiliated with Capital Z Partners who were 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 both by the officer defendants and by Capital Z Partners that the complaint alleges should be attributed to the three directors described above. Proceedings have now resumed in the lower court, and a scheduling conference has been set for May 21, 2010.

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.

23

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (Continued)

        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. An additional subpoena was received in March of 2010. We are cooperating with HHS-OIG and responding to the subpoenas. We are not aware of any other material regulatory proceeding or investigation underway or threatened involving allegations of potential wrongdoing.

13. 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.

        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.

24

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION (Continued)

        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:

		Three months ended March 31,
		2010						2009
		Revenues			Income (Loss) Before Income Taxes			Revenues			Income (Loss) Before Income Taxes
		(in thousands)
Senior Managed Care—Medicare Advantage		$	785,047		$	47,603		$	646,246		$	46,242
Medicare Part D			644,220			(31,986	)		615,739			(35,864	)
Traditional Insurance			80,289			(5,699	)		104,103			(15,489	)
Senior Administrative Services			9,116			1,337			12,004			3,425
Corporate			71			(12,397	)		169			(11,635	)
Intersegment revenues			(5,685	)		—			(9,166	)		—
Adjustments to segment amounts:
	Net realized losses(1)		(284	)		(284	)		(7,222	)		(7,222	)
	Equity in earnings of unconsolidated subsidiary(2)		—			—			(97	)		—
Total		$	1,512,774		$	(1,426	)	$	1,361,776		$	(20,543	)

(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.

(2)

We report the equity in the earnings of unconsolidated subsidiary as revenue for our Medicare Part D segment as the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, we included this amount as a separate line following income from continuing operations.

14. OTHER DISCLOSURES

        Income Taxes:    Our effective tax rate was a benefit of 198.3% for the first quarter of 2010, and an expense of 36.0% for the first quarter of 2009. The increase in the effective rate is attributable to $2.3 million of non-recurring tax benefits recognized during the first quarter of 2010. These benefits were recognized upon the completion of examinations by the Internal Revenue Service and are attributable to pre -acquisition tax returns of MemberHealth, Inc.

        Life Insurance and Annuity Reinsurance Transaction:    On April 24, 2009 we entered into an agreement 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) to reinsure substantially all of our in force life insurance and annuity business as of April 1, 2009, under a 100% coinsurance treaty. In accordance with ASC 944,Financial Services-

25

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

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, which was recognized during the second quarter of 2009.

        Restructuring Charges:    In 2009, we had 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. We engaged a consultant and began a comprehensive review of our ongoing business with an emphasis on potential operating cost reductions. These efforts had 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. Substantially all of these charges were included in restructuring costs in our Consolidated Statements of Operations for the second quarter of 2009. A summary of our restructuring liability balance as of March 31, 2010 and restructuring activity for 2010 is as follows:

	Segment	January 1, Balance		Charge to Earnings		Cash Paid		Non-cash			March 31, Balance
	(in thousands)
2010
Contract termination costs	Medicare Advantage	$	—	$	—	$	—	$	—		$	—
Workforce reduction	Traditional		147		—		—		—			147
Facility consolidation	Traditional		697		—		—		(37	)		660
Total		$	844	$	—	$	—	$	(37	)	$	807

        Reinsurance:    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 March 31, 2010, 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.

26

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

15. SUBSEQUENT EVENTS

        Sale of CHCS:    On April 27, 2010, we entered into an agreement to sell the outstanding common stock of the CHCS, Inc., our administrative services company, to Patni Americas, Inc, a wholly-owned subsidiary of Patni Computer Systems, Limited, for $6.0 million in cash. The purchase price is subject to an adjustment for any net working capital remaining at CHCS on the closing date. We are anticipating an immaterial loss on the transaction. The closing of the transaction is subject to regulatory approval and other customary closing conditions, with an effective date of April 1, 2010.

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ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

        The following discussion and analysis presents a review of our financial condition as of March 31, 2010 and our results of operations for the three months ended March 31, 2010 and 2009. You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the consolidated financial statements and related consolidated Footnotes included elsewhere in this quarterly report on Form 10-Q as well as the consolidated financial statements and related consolidated Footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2009. You should also read the following analysis in conjunction with the Risk Factors contained in our annual report on Form 10-K for the year ended December 31, 2009, as supplemented by the risk factors set forth in Part II, Item 1A "Risk Factors" below.

Significant First Quarter Items

•

Revenue increased 11% to $1.5 billion, compared to the first quarter of 2009.

•

Pre-tax loss narrowed by $19.2 million, compared to the first quarter of 2009.

•

Membership in our network-based Plans increased 39% year-over-year, including 12% growth in our HMO expansion markets in Oklahoma, Wisconsin and Dallas, TX. PFFS membership increased 12% for the same period.

•

For the 2010 Plan year, one or both of our Part D Plans bid under the benchmark in 30 of the 34 regions. As a result, we maintained all of our existing auto-assigned regions, and added three new regions and received 148,604 additional dual-eligible members in 2010.

•

Part D membership increased 181,000 from the first quarter of 2009 to 1.9 million members, and our Part D plans became the second largest plan sponsor in the country.

•

PFFS membership increased 15% from the first quarter of 2009 due to higher sales and lower attrition.

•

Other-than-temporary impairment of investment securities declined to $0.1 million, compared to $8.1 million recorded in the first quarter of 2009.

•

Recorded $2.3 million tax benefit related to non-recurring items.

•

First quarter diluted earnings per share of $0.02, compared with ($0.16) in the same period last year.

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Membership

        The following table presents our membership in Medicare Advantage and Part D products as of March 31, 2010 and 2009.

			As of March 31,
Membership by Segment			2010		2009
			(in thousands)
Medicare Advantage
	PFFS			197		171
	Network-based (HMO and PPO)			89		61
		Total Medicare Advantage		286		232
		Total Part D		1,877		1,696
Total Membership				2,163		1,928

Healthcare Reform

        In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act legislating broad-based changes to the U.S. health care system. Provisions of the health reform legislation become effective at various dates over the next several years. The Department of Health and Human Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and guidance with respect to the health reform legislation. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance and gradual implementation, the impact of the health reform legislation is difficult to predict and not yet fully known.

        The provisions of these new laws include the following key points:

•

Gradual closing of the coverage gap, or "donut hole" on Medicare Part D, through 2020;

•

Small differences between the Low Income Subsidy benchmark and bids for Medicare Part D can be made up if premium is waived;

•

Reduced reimbursement rates on Medicare Advantage products, beginning in 2012;

•

Implementation of a quality bonus for Star Ratings beginning in 2012;

•

Coding intensity adjustments, with mandatory minimums beginning in 2015;

•

Stipulated minimum medical loss ratios, beginning in 2014;

•

Shortened annual enrollment period, beginning with the 2011 selling season; and

•

Non-deductible federal premium taxes assessed to health insurers, beginning in 2014.

        Most of these provisions are not scheduled to go into effect immediately and may be delayed for several years. During this time, the bills may be subject to further adjustments. Because of the unsettled nature of these reforms and numerous steps required to implement and monitor them, we cannot predict what additional health insurance reforms will be implemented at the federal or state level, the effect that any future legislation or regulation will have on our business or how CMS will review our 2011 bid submissions.

        Recent rules promulgated by CMS include the limitation on the number of plan submissions by Medicare Advantage and Part D sponsors, a push to eliminate plans with few members and to increase the quality of plans and restrictions on benefit packages, among other items to consider in the 2011

29

bids due in June 2010, and in connection therewith, CMS is reviewing 2011 applications more critically to ascertain plan sponsors are conforming to the new rules. Consequently we are focusing our new 2011 Medicare Advantage filings on Network Private Fee for Service plans. For additional information, see Part II—Item 1A Risk Factors.

Results of Operations—Consolidated Overview

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

		Three months ended March 31,
		2010			2009
		(in thousands)
Senior Managed Care—Medicare Advantage(1)		$	47,603		$	46,242
Medicare Part D(1)			(31,986	)		(35,864	)
Traditional Insurance(1)			(5,699	)		(15,489	)
Senior Administrative Services(1)			1,337			3,425
Corporate(1)			(12,397	)		(11,635	)
Net realized losses on investments(1)			(284	)		(7,222	)
Income (loss) before provision for income taxes(1)			(1,426	)		(20,543	)
	Benefit for income taxes		(2,827	)		(7,395	)
Net income (losss)		$	1,401		$	(13,148	)
Earnings (loss) per common share (diluted)		$	0.02		$	(0.16	)

(1)

We evaluate the results of operations of our segments based on income before realized gains (losses) and income taxes. We believe that realized gains and losses are not indicative of overall operating trends. This differs from U.S. GAAP, which includes the effect of realized gains (losses) in the determination of net income. The schedule above reconciles our segment income before income taxes to net income in accordance with U.S. GAAP.

Three months ended March 31, 2010 and 2009

        Net income for the three months ended March 31, 2010 was $1.4 million, or $0.02 per diluted share, compared to a net loss of $13.1 million, or $0.16 per diluted share for the three months ended March 31, 2009. Net income for the first quarter of 2010 includes realized investment losses, net of taxes, of $0.2 million, or less than $0.01 per diluted share. Net income for the first quarter of 2009 includes realized investment losses, net of taxes, of $4.7 million, or $0.06 per diluted share, related primarily to the recognition of other-than-temporary impairments on investments. Our effective tax rate was a benefit of 198.3% for the first quarter of 2010, and an expense of 36.0% for the first quarter of 2009. The increase in the effective rate is attributable to $2.3 million of non-recurring tax benefits recognized during the first quarter of 2010. These benefits were recognized upon the completion of examinations by the Internal Revenue Service and are attributable to pre -acquisition tax returns of MemberHealth, Inc. Excluding these non-recurring tax benefits, the effective tax rate for the first quarter of 2010 was an expense of 36.9%, consistent with our historical effective tax rates.

        Our Senior Managed Care—Medicare Advantage segment generated income before taxes of $47.6 million in the three months ended March 31, 2010, an increase of $1.4 million compared to the three months ended March 31, 2009. The increase in earnings was driven by higher member months

30

and an improvement in the expense ratio of 74 basis points, offset by an increase in the benefit ratio of 192 basis points.

        Our Part D business generated a loss before taxes for the first quarters of 2010 and 2009, with these losses expected as a result of the seasonality of the Medicare Part D benefit design. The $32.0 million loss before taxes in the first quarter of 2010 was an improvement of $3.9 million or 10.8% from the $35.9 million loss before taxes in the first quarter of 2009. This improvement was attributable to on-going efforts to reduce general expenses, and was partially offset by an increase in the ratio of pharmacy benefits to net premiums.

        Our Traditional Insurance segment loss before taxes decreased by $9.8 million compared to the first quarter of 2009, due primarily to a reduction in commissions and general expenses. This reduction in expenses was partially offset by the decrease in net premiums, benefits expense, and investment income related to the lower level of business in-force.

        Segment income before taxes for our Senior Administrative Services segment declined by $2.1 million, or 61%, to $1.3 million for the first quarter of 2010, as compared to the same period of 2009. This decrease is primarily the result of anticipated reductions in service fee revenues, along with a corresponding decrease in general expenses.

        The loss from our Corporate segment increased by $0.8 million, or 7%, for the first quarter of 2010 compared to the first quarter of 2009. This was due primarily to slightly higher general expense and lower net investment income, partially offset by lower interest expense.

Segment Results—Senior Managed Care—Medicare Advantage

		Three months ended March 31,
		2010		2009
		(in thousands)
Net premiums		$	777,831	$	640,885
Net investment and other income			7,216		5,361
	Total revenue		785,047		646,246
Medical expenses			643,369		517,771
Amortization of intangible assets			1,140		1,146
Commissions and general expenses			92,935		81,087
	Total benefits, claims and expenses		737,444		600,004
Segment income before taxes		$	47,603	$	46,242

        Our Senior Managed Care—Medicare Advantage segment includes the operations of our PFFS business, 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 114 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.

31

Three months ended March 31, 2010 and 2009

        Our Senior Managed Care—Medicare Advantage segment generated income before taxes of $47.6 million in the three months ended March 31, 2010, an increase of $1.4 million compared to the three months ended March 31, 2009. The increase in earnings was driven by higher member months and an improvement in the expense ratio of 74 basis points, offset by an increase in the benefit ratio of 192 basis points.

        Revenues.    Net premiums for the Senior Managed Care—Medicare Advantage segment increased by $137.0 million compared to the three months ended March 31, 2009, due to an increase in premium levels for PFFS, HMO and PPO. This increase was driven by membership growth in all three lines and an increase in the levels of PFFS and HMO premium per member. In addition, our ongoing chart review process resulted in a $13.4 million favorable premium adjustment related to 2009 risk scores recorded during the first quarter 2010 compared to an $8.0 million favorable adjustment of 2008 risk scores recorded during the first quarter 2009.

        Benefits, Claims and Expenses.    Medical expenses increased by $125.6 million compared to the first quarter of 2009, consistent with the higher level of earned premium. The Medicare Advantage medical loss ratio increased to 82.7% for the first quarter of 2010 from 80.8% for the same period in 2009. This increase was due principally to $7.7 million of net positive development related to prior years in the PFFS and HMO lines in 2009 with no counterpart in 2010, partially offset by the increase in risk score revenues discussed above. Excluding these items, our benefit ratio was 84.4% for the three months ended March 31, 2010, as compared to 83.0% for the three months ended March 31, 2009 calculated on a similar basis. Commissions and general expenses increased by $11.8 million compared to the first quarter of 2009 primarily as the result of an increase in commissions and general expenses related to membership growth. The ratio of commissions and general expenses to premiums decreased to 11.9% in first quarter 2010 from 12.7% in first quarter 2009.

Segment Results—Medicare Part D

		Three months ended March 31,
		2010			2009
		(in thousands)
Direct and assumed premiums		$	539,029		$	496,669
Risk corridor adjustment/government reinsurance			104,023			117,729
Direct and assumed premiums after risk corridor adjustment			643,052			614,398
Ceded premiums			58			133
	Net premiums		643,110			614,531
Other Part D income—PDMS			—			97
Total Part D revenue			643,110			614,628
Net investment and other income			1,110			1,111
	Total revenue		644,220			615,739
Pharmacy benefits			628,998			593,785
Amortization of intangibles			4,012			4,011
Commissions and general expenses			43,196			53,807
	Total benefits, claims and expenses		676,206			651,603
Segment loss before taxes		$	(31,986	)	$	(35,864	)

32

        Reported results for our Medicare Part D business ("Part D") are subject to anticipated seasonality during a given calendar year. This is due to the 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. As a result, we generally anticipate a pattern of net losses from our Part D segment during the early part of the year, with a break-even point during the third quarter and most of the segment's net income earned during the fourth quarter resulting in a pattern of increasing reported net income attributable to the Part D business. For a discussion of the accounting for Part D see Note 3 of the Notes to the Consolidated Financial Statements in our annual report on Form 10-K.

Three months ended March 31, 2010 and 2009

        The Part D business generated a loss before taxes for the first quarters of 2010 and 2009, with these losses expected as a result of the seasonality of the Medicare Part D benefit design, discussed above. The $32.0 million loss before taxes in the first quarter of 2010 was an improvement of $3.9 million or 10.8% from the $35.9 million loss before taxes in the first quarter of 2009. This improvement was attributable to on-going efforts to reduce general expenses, and was partially offset by an increase in the ratio of pharmacy benefits to net premiums.

        Our 2010 first quarter loss reflected negative prior period development of $4.1 million, and consisted of negative claims development that was partially offset by additional rebates earned for the 2009 Plan year. The segment loss for the first quarter of 2009 reflected negative prior period development of $1.4 million, which represented an increase in reserves for the 2008 CMS PDE reconciliation.

        Direct and Assumed Premiums.    Net premiums for the first quarter of 2010 increased by $28.6 million, or 4.7%, versus the comparable period in 2009. The increase in net premiums was attributable to growth in membership by 181,000 members, and was partially offset by decreases in member premium rates and risk-adjusted direct subsidy rates paid by CMS. Risk-adjusted rates are determined by CMS based upon the member's health status and are described in further detail in Note 3 of the Notes to the Consolidated Financial Statements in our annual report on Form 10-K. The decrease in member premium rates was partially attributable to a larger portion of our 2010 membership enrolling in standard plans, which have lower member premium rates than enhanced plans.

        Benefits, Claims and Expenses.    Pharmacy benefits for the first quarter of 2010, increased by $35.2 million, or 5.9%, compared to the first quarter of 2009, and the ratio of incurred prescription drug benefits to net premium was 97.8% and 96.6% for the first quarters of 2010 and 2009, respectively. Pharmacy benefits increased as a percentage of net premiums by 120 basis points due to the combination of lower member premium and direct subsidy rates (previously described) and higher drug costs. Higher drug costs were attributable to price increases imposed by pharmaceutical manufacturers subsequent to the first quarter of 2009. These price increases are customary and were consistent with historical experience. Commissions and general expenses for the first quarter of 2010 decreased by $10.6 million, or 19.7%, versus the comparable period in 2009. This decrease was attributable to our continuing efforts to reduce general expenses, as well as the restructuring of the Part D call center and other member services which were completed during 2009. The ratio of commissions and general expenses to premiums decreased to 6.7% in first quarter 2010 from 8.8% in first quarter 2009.

33

Segment Results—Traditional Insurance

		Three months ended March 31,
		2010			2009
		(in thousands)
Net premiums		$	76,505		$	93,729
Net investment income			3,243			9,301
Other income			541			1,073
	Total revenue		80,289			104,103
Policyholder Benefits			62,405			77,764
Interest credited to policyholders			—			4,284
Change in deferred acquisition costs			2,984			7,699
Amortization of intangible assets			716			684
Commissions and general expenses, net of allowances			19,883			29,161
	Total benefits, claims and expenses		85,988			119,592
Segment loss before taxes		$	(5,699	)	$	(15,489	)

Three months ended March 31, 2010 and 2009

        Our Traditional Insurance segment loss before taxes decreased by $9.8 million compared to the first quarter of 2009, due primarily to a reduction in commissions and general expenses. This reduction in expenses was partially offset by the decrease in net premiums, benefits expense, and investment income related to the lower level of business in-force. The following table details premium for the segment by major lines of business:

Premium

		Three months ended March 31,
		2010							2009
		Gross		Ceded			Net		Gross		Ceded			Net
		(in thousands)
Senior market		$	78,680	$	(19,485	)	$	59,195	$	87,174	$	(22,972	)	$	64,202
Specialty health			17,126		(2,525	)		14,601		18,870		(2,820	)		16,050
Life insurance and annuity			16,158		(13,449	)		2,709		19,335		(5,858	)		13,477
	Total premium	$	111,964	$	(35,459	)	$	76,505	$	125,379	$	(31,650	)	$	93,729

        Revenues.    Net premium declined by $17.2 million, or 18.4%. The reinsurance transaction with Commonwealth, resulted in an increase in ceded life and annuity premium of $7.6 million. The remaining decrease in net premium is primarily due to the continued effect of lapsation of our senior market in-force business. The decrease in net investment income is primarily due to the decrease in invested assets as a result of the reinsurance transaction, as well as a lower yield on retained assets.

        Benefits, Claims and Expenses.    Policyholder benefits incurred declined by $15.4 million, or 19.8%, compared to the first quarter of 2009. This decline was primarily due to the reinsurance transaction with Commonwealth, which resulted in a decrease in net life and annuity benefits retained of $9.6 million. Individual loss ratios for the three months ended March 31, 2010 were 77.5% for senior market compared with 78.9% for the same period last year, and 101.6% for specialty health, compared with 98.5% for the same period last year. The increase in the specialty health loss ratio was caused by an increase in the number of long term care claims. The decrease in interest credited to policyholders of $4.3 million was due to the reinsurance of all interest sensitive type products to Commonwealth

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during 2009. The change in deferred acquisition cost decreased $4.7 million or 61.2%. 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, and a decrease in the lapsation rate of the senior market in-force business compared to the same period last year.

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

	Three months ended March 31,
	2010			2009
	(in thousands)
Commissions	$	11,516		$	15,311
Other operating costs		13,884			20,516
Reinsurance allowances		(5,517	)		(6,666	)
Commissions and general expenses, net of allowances	$	19,883		$	29,161

        Commissions and general expenses, net of allowances, decreased by $9.3 million compared to the first quarter of 2009. 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 $6.6 million for the quarter ended March 31, 2010, compared to the first quarter of 2009. This is primarily due to the lower levels of business in-force combined with ongoing cost savings realized as a result of the corporate restructuring that had occurred during the quarter ended June 30, 2009. Allowances received from reinsurers decreased $1.1 million for the first quarter of 2010 from the first quarter of 2009. This decrease in allowances is primarily due to a lower level of first year business which has higher allowances for commissions and expenses, partially offset by increased allowances on the business reinsured to Commonwealth.

Segment Results—Senior Administrative Services

			Three months ended March 31,
			2010		2009
			(in thousands)
Affiliated fee revenue
	Medicare supplement		$	2,783	$	3,556
	Long term care			723		1,101
	Life insurance			756		2,052
	Other			1,695		1,683
		Total affiliated revenue		5,957		8,392
Unaffiliated fee revenue
	Medicare Advantage			179		985
	Medicare supplement			1,355		1,207
	Long term care			1,332		1,286
	Non-insurance products			234		113
	Other			59		21
		Total unaffiliated revenue		3,159		3,612
		Total revenue		9,116		12,004
Amortization of present value of future profits				69		52
General expenses				7,710		8,527
		Total expenses		7,779		8,579
Segment income before taxes			$	1,337	$	3,425

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Three months ended March 31, 2010 and 2009

        Segment income before taxes for our Senior Administrative Services segment declined by $2.1 million, or 61%, to $1.3 million for the first quarter of 2010, as compared to the same period of 2009. This decrease is primarily the result of anticipated reductions in service fee revenues, along with a corresponding decrease in general expenses.

        Revenue declined by $2.9 million, or 24%, during the first quarter of 2010 compared to the first quarter of 2009. Affiliated service fee revenue decreased by $2.4 million primarily as a result of a reduction in fee levels and lower policies in-force for our affiliated Medicare supplement business as well as a reduction in service levels on our affiliated life insurance business as a result of the reinsurance of substantially all of this business to Commonwealth in April 2009. Unaffiliated service fee revenue remained relatively flat in the first quarter of 2010 compared to the same period of 2009. General expenses for the segment decreased by $0.8 million, or 10%, primarily due to the decline in the business discussed above.

Segment Results—Corporate

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

		Three months ended March 31,
		2010		2009
		(in thousands)
Interest expense		$	5,013	$	5,259
Amortization of capitalized loan origination fees			380		262
Stock-based compensation expense			1,572		1,764
Other parent company expenses, net of revenues			5,432		4,350
	Segment loss before taxes	$	12,397	$	11,635

Three months ended March 31, 2010 and 2009

        The loss from our Corporate segment increased by $0.8 million, or 7%, for the first quarter of 2010 compared to the first quarter of 2009. This was due primarily to slightly higher general expense and lower net investment income, partially offset by lower interest expense.

        The decrease in interest expense of $0.2 million is due primarily to a reduction in the interest rates charged on our debt, as well as a lower balance on our loan payable as compared to the first quarter of 2009. The weighted average interest rate on our loan payable was 4.3% for the first quarter of 2010 compared to 4.6% for the first quarter of 2009. The weighted average interest rate on our other long term debt was 5.8% for the first quarter of 2010 compared to 6.4% for the first quarter of 2009. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt. The decrease in stock-based compensation resulted primarily from the full amortization of expense on older option awards that became fully vested prior to first quarter of 2010.

        The increase in other parent company expenses, net of revenues, of $1.1 million was primarily due to an $2.0 million increase in outside service and staff costs as well as an increase in sales and marketing costs of $0.3 million, partially offset by a $1.5 million increase in the release of excess prior year performance compensation accruals in excess of amounts distributed. In addition, net investment income decreased $0.1 million due to lower rates.

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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.

        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, 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 payments to our insurance subsidiaries holding company, UAC Holding, Inc. and from there 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 March 31, 2010, we held cash and cash equivalents totaling $801 million and fixed maturity securities that could readily be converted to cash with carrying values of $932 million at our insurance companies and HMO affiliates. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.

        In 2007, Pyramid issued $60.0 million of surplus notes payable to our parent 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, 2009, Pyramid's risk-based capital ratio was below 450%, thus no payments of principal or interest were made in the three months ended March 31, 2010.

        Our parent company did not make capital contributions to the insurance subsidiaries during the first quarter of 2010. Further, no dividends were declared by nor paid from the insurance subsidiaries during the first quarter of 2010.

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        Capital contributions to and dividends from for our HMO affiliates are made through our managed care holding company, Heritage Health Systems, Inc. ("HHSI"). HHSI did not make capital contributions to its HMO subsidiaries during the first three months of 2010. No dividends were declared nor paid to HHSI from its subsidiaries during the first three months of 2010.

        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), as of March 31, 2010, 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. As of March 31, 2010, $312.9 million was outstanding under the term loan agreement and the weighted average interest rate on the term loan portion of the credit facility was 1.25%. $250 million of this $312.9 million term loan outstanding has been swapped from a LIBOR-based floating rate to an average fixed rate of 4.14% (see Note 11Derivative Instruments—Cash Flow Hedges and the ensuing paragraph), resulting in a total blended interest rate of 4.35% on the $312.9 million as of March 31, 2010. 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 $0.8 million and repayments of less than $0.1 million, as a result of the November 2009 Amendment, and interest payments totaling $1.0 million during the three months ended March 31, 2010.

        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. In the first three months of 2010, we paid a net amount of $2.5 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 securities have floating interest rates based on LIBOR and are currently at an average rate of 4.31%. The remaining $50 million is fixed at 7.68% until March 2012. We made interest payments on the trust preferred securities totaling $1.6 million during the three months ended March 31, 2010.

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 March 31, 2010, 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 March 31, 2010, approximately 50% of our portfolio is in cash equivalents, largely in government money market funds, and, in the aggregate, approximately 84% of our portfolio is securities backed by the US government or its agencies.

        The net yields on our cash and invested assets decreased to 2.3% for the quarter ended March 31, 2010, from 4.2% for the quarter ended March 31, 2009.

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        For additional information on Liquidity and Capital Resources, please refer to our annual report on form 10-K for the year ended December 31, 2009.

Critical Accounting Policies

        There have been no changes in our critical accounting policies during the current quarter. For a description of significant accounting policies, see Note 2—Summary of Significant Accounting Policies in the Notes to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2009.

Policy and Contract Claims—Accident and Health Policies

        The following table presents the components of the change in our liability for policy and contract claims—health for the three months ended March 31, 2010:

		March 31, 2010
		(in thousands)
Balance at beginning of year		$	380,519
	Less reinsurance recoverable		(17,923	)
Net balance at beginning of year			362,596
Incurred related to:
	Current year		1,330,052
	Prior year development		2,211
Total incurred			1,332,263
Paid related to:
	Current year		947,318
	Prior year		263,525
Total paid			1,210,843
Net balance at end of period			484,016
	Plus reinsurance recoverable		21,130
Balance at end of period		$	505,146

        Policy and contract claims—health increased by $124.6 million at March 31, 2010 from December 31, 2009. This increase was primarily attributable to timing with regards to the payment of claims and seasonality of the Part D business. Due to the nature of the plan design, the Part D 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. Growth in our Medicare Advantage membership was another contributing factor.

        The medical cost amount, noted as "prior year development" in the table above, represents 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.

        During the first quarter of 2010, claim reserves settled for $2.2 million more than estimated at December 31, 2009. Prior period development represents less than 0.1% of the incurred claims recorded in 2009.

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Sensitivity Analysis

        The following table illustrates the sensitivity of our accident and health IBNR payable at March 31, 2010 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%	$	1,271			-3%	$	(14,427	)
	-2%	$	847			-2%	$	(9,618	)
	-1%	$	423			-1%	$	(4,809	)
	1%	$	(423	)		1%	$	4,809
	2%	$	(846	)		2%	$	9,618
	3%	$	(1,270	)		3%	$	14,427

(1)

Reflects estimated potential changes in medical and other expenses payable, caused by changes in completion factors for incurred months prior to the most recent three months.

(2)

Reflects estimated potential changes in medical and other expenses payable, caused by changes in annualized claims trend used for the estimation of per member per month incurred claims for the most recent three months.

Effects of Recently Issued and Pending Accounting Pronouncements

        A summary of other recent and pending accounting pronouncements is provided in Note 3 of the consolidated financial statements in the Quarterly Report on Form 10-Q under the caption "Recently Issued and Pending Accounting Pronouncements." We do not anticipate any material impact from the future adoption of the pending accounting pronouncements discussed in that Note.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        In general, market risk to which we are subject relates to changes in interest rates that affect the market prices of our fixed income securities 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 March 31, 2010, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest rates.

	Effect of Change in Market Interest Rates on Market Value of Fixed Income Portfolio as of March 31, 2010
March 31, 2010
	200 Basis Point Decrease	100 Basis Point Decrease	100 Basis Point Increase	200 Basis Point Increase
Market Value of Fixed Income Portfolio
	(in millions)
$931.7	$42.4	$25.0	$(30.9)	$(62.4)

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 March 31, 2010, 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.

        We regularly conduct various analyses to gauge the financial impact of changes in interest rates on our financial condition. The ranges selected in these analyses reflect our assessment as being reasonably possible over the succeeding twelve-month period. The magnitude of changes modeled in the accompanying analyses should not be construed as a prediction of future economic events, but rather, be treated as a simple illustration of the potential impact of such events on our financial results.

        The sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the nine months ended March 31, 2010, 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 March 31, 2010
			Weighted Average Balance Outstanding
Description of Floating Rate Debt	Weighted Average Interest Rate				200 Basis Point Decrease(1)		100 Basis Point Decrease(1)		100 Basis Point Increase			200 Basis Point Increase
					(in millions)
Loan payable		1.24%	$	63.8	$	—	$	—	$	(0.2	)	$	(0.3	)
Other long tern debt		4.32%	$	60.0		0.1		0.1		(0.1	)		(0.3	)
Total					$	0.1	$	0.1	$	(0.3	)	$	(0.6	)

(1)

During the first three months of 2010, the LIBOR rate on our loan payable and our other long term debt has steadily decreased to approximately 25 basis points as of March 31, 2010. As a result, for the purposes of this illustration, decreases in monthly rates over this period have been limited to the year to date average of 24 basis points on our loan payable and 26 basis points on our other long term debt.

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        As Noted above, we have fixed the interest rate on $300 million of our $423 million of total debt outstanding, leaving $123 million of the debt exposed to rising interest rates, as of March 31, 2010. We had approximately $946 million of cash and cash equivalents as of March 31, 2010. 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 4—CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        We maintain disclosure controls and procedures that are designed to ensure that we record, process, summarize and report the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 within the time periods specified in the SEC's rules and forms, and that we accumulate this information and communicate it to management, including our Chief Executive Officer 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 we must consider the benefits of controls relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that we have detected all control issues and instances of fraud, if any, within Universal American. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. The individual acts of some persons or collusion of two or more people can also circumvent controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Evaluation of Effectiveness of Controls

        We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010, at a reasonable assurance level, to timely alert management to material information required to be included in our periodic filings with the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

        There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

ITEM 1—LEGAL PROCEEDINGS

        For information relating to litigation affecting us, please see Note 12—Commitments and Contingencies of the Notes to the consolidated financial statements in Part I—Item 1 of this report, which is incorporated into this Part II—Item 1—Legal Proceedings by reference.

ITEM 1A—RISK FACTORS

        Information concerning certain risks and uncertainties appears in Part I, Item 1A "Risk Factors" of the Company's annual report on Form 10-K for the fiscal year ended December 31, 2009. You should carefully consider these risks and uncertainties, which could materially affect our business, financial position and results of operations.

        We have identified the following additional risk factor to supplement those set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2009:

Recently enacted health care legislation and subsequent rules promulgated by CMS could have a material adverse effect on our opportunities for growth and our financial results.

        In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act legislating broad-based changes to the U.S. health care system. Provisions of the health reform legislation become effective at various dates over the next several years. The Department of Health and Human Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and guidance with respect to the health reform legislation. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance and gradual implementation, the impact of the health reform legislation is difficult to predict and not yet fully known.

        The provisions of these new laws include the following key points, which are discussed further below:

•

Gradual closing of the coverage gap, or "donut hole" on Medicare Part D, through 2020;

•

Small differences between the Low Income Subsidy benchmark and bids for Medicare Part D can be made up if premium is waived;

•

Reduced reimbursement rates on Medicare Advantage products, beginning in 2012;

•

Implementation of a quality bonus for Star Ratings beginning in 2012;

•

Coding intensity adjustments, with mandatory minimums beginning in 2015;

•

Stipulated minimum medical loss ratios, beginning in 2014;

•

Shortened annual enrollment period, beginning with the 2011 selling season; and

•

Non-deductible federal premium taxes assessed to health insurers, beginning in 2014.

        Gradual closing of the Part D donut hole—In 2010, a rebate of $250 will be provided for beneficiaries reaching the coverage gap. Then, on a gradual basis, the GAP is closed by 2020, with beneficiaries retaining a 25% co-pay. In addition, there is a 50% discount on brand-name drugs. While this change ultimately results in increased insurance coverage, such improved benefits could result in changes in member behavior with respect to drug utilization. Such actions could also impact the cost structure of our Part D programs.

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        Reduced Medicare Advantage reimbursement rates—Beginning in 2012, the new laws require that Medicare Advantage "benchmark" rates transition to target Medicare fee-for-service cost benchmarks of 95%; 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period will be 3, 5 or 7 years depending on county. The counties are divided into quartiles based on each county's fee-for-service Medicare costs. For counties in the highest cost quartile, the Medicare Advantage benchmark rate will equal 95% of the calculated Medicare fee-for-service costs. We estimate that approximately 36% of our current membership resides in the highest cost quartile counties, with 31% having a 7-year transition period. Under the new law, the premiums for such members will be transitioned to 95% of Medicare fee-for-service costs beginning in 2012. To address these rate reductions, we may have to reduce benefits, charge or increase member premiums, reduce profit margin expectations, or implement some combination of these actions. Such actions could adversely impact our membership growth and revenue expectations.

        Implementation of quality bonus for Star Ratings—CMS currently rates Medicare Advantage and PDP plans on certain quality metrics using a five-star rating system. Beginning in 2012, Medicare Advantage plans with a rating of four or five stars will be eligible for a "quality bonus" in their basic premium rates (1.5% in 2010, growing to 5% in 2014). In addition, also beginning in 2010, a Plan's star ratings will affect the rebate percentage available for a plan to provide additional member benefits. Plans with quality ratings of 3.5 stars or below will have their rebate percentage reduced to 50% by 2014. Notwithstanding concerted efforts to improve our star ratings and other quality measures prior to 2012, there can be no assurances that we will be successful in doing so. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.

        Coding intensity adjustments—The new laws make the coding intensity adjustment instituted in 2010 permanent, resulting in mandated minimum reductions in risk scores of 4.71% in 2014 increasing to 5.7% for 2019 and beyond. These coding adjustments may adversely affect our payment rates.

        Stipulated Minimum MLRs—Beginning in 2014, the new laws stipulate a minimum medical loss ratio, or MLR, of 85%. Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the year ended December 31, 2009, our reported Medicare Advantage MLR was 82.4%. The methodology for defining medical costs and for calculating MLRs has not yet been defined. Complying with such minimum ratio by increasing our medical expenditures or refunding any shortfalls to the federal government could have an adverse affect on our operating margins and results of operations.

        Shortened annual enrollment period—Medicare beneficiaries generally have a limited annual enrollment period during which they can choose to participate in a Medicare Advantage plan rather than receive benefits under the traditional fee-for-service Medicare program. After the annual enrollment period, most Medicare beneficiaries are not permitted to change their Medicare benefits.

        Beginning for the 2011 selling season, the new laws shorten the time in which we can sell our Medicare Advantage and Part D products. Also beginning in 2011, the laws mandate that persons enrolled in Medicare Advantage may disenroll at any time only during the first 45 days of the year and only to enroll in traditional Medicare fee-for-service, not another Medicare Advantage plan. Prior law allowed a member to disenroll during this period and to enroll in another Medicare Advantage plan. There can be no assurance that these changes will not restrict our member growth, limit our ability to enter new service areas, limit the viability of our internal sales force, or otherwise adversely affect our ability to market to or enroll new members in our established service areas.

        Non-deductible premium taxes—Beginning in 2014, the new laws impose an annual aggregate non-deductible tax of $8.0 billion (increasing incrementally to $14.3 billion by 2018) on health insurance premiums, including Medicare Advantage premiums. Our share of the new tax will be based on our pro

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rata percentage of premiums compared to the industry as a whole, calculated annually. Although there is time to take into account this new tax in adjusting our business model and in designing future years' plan bids, there can be no assurance that such tax will not result in reduced benefits, reduced profits, or both.

        Most of these provisions are not scheduled to go into effect immediately and may be delayed for several years. During this time, the bills may be subject to further adjustments. Because of the unsettled nature of these reforms and numerous steps required to implement and monitor them, we cannot predict what additional health insurance reforms will be implemented at the federal or state level, the effect that any future legislation or regulation will have on our business or how CMS will review our 2011 bid submissions.

        Recent rules promulgated by CMS include the limitation on the number of plan submissions by Medicare Advantage and Part D sponsors, a push to eliminate plans with few members and to increase the quality of plans and restrictions on benefit packages, among other items to consider in the 2011 bids due in June 2010, and in connection therewith, CMS is reviewing 2011 applications more critically to ascertain plan sponsors are conforming to the new rules. Consequently we are focusing our new 2011 Medicare Advantage filings on Network Private Fee for Service plans.

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

        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. There have been no buybacks since December 31, 2009. As of March 31, 2010, we have $42.3 million that remains available to repurchase additional shares under these plans. 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.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 5—OTHER INFORMATION

        None.

ITEM 6—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 at http://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).

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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).
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).
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.
May 7, 2010	/s/ RICHARD A. BARASCH
	Richard A. Barasch Chief Executive Officer
May 7, 2010	/s/ ROBERT A. WAEGELEIN
	Robert A. Waegelein Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

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