Caremark Ulysses Holding (UHCO) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

oTRANSITION 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 FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

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

Large accelerated filer  o                     Accelerated filer  x                     Non-accelerated filer  o

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

As of April 30, 2007, 59,442,873 shares of the registrant’s common stock were issued and outstanding.

TABLE OF CONTENTS

	Item		Description	Page
PART 1			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		30
		3	Quantitative and Qualitative Disclosures About Market Risk		55
		4	Controls and Procedures		56
PART II			Other Information		57
		1	Legal Proceedings		57
		1A	Risk Factors		57
		2	Unregistered Sales of Equity Securities and Use of Proceeds		58
		3	Defaults Upon Senior Securities		58
		4	Submission of Matters to a Vote of Security Holders		58
		5	Other Information		58
		6	Exhibits		58
			Signatures		60

2

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Portions of the information in this Quarterly Report on Form 10-Q, including, but not limited to, those set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and certain oral statements made from time to time by our representatives may be considered “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, without limitation, the identification of acquisition candidates and the completion of transactions with them, our future economic performance, plans and objectives for future operations and projections of revenue and other financial items. Forward-looking statements can be identified by the use of words such as “prospects,” “outlook,” “believes,” “estimates,” “intends,” “may,” “will,” “should,” “anticipates,” “expects” or “plans,” or the negative or other variation of these or similar words, or by discussion of trends and conditions, strategy or risks and uncertainties. Forward-looking statements are inherently subject to risks, trends and uncertainties, many of which are beyond 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 such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that its expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

Important factors that may cause actual results to differ materially from forward-looking statements include, but are not limited to, the risks and uncertainties set forth in this report in Item 1A “Risk Factors” and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Item 1 “Business”, Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006,as well as other reports that we file with the Securities and Exchange Commission. 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 FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

	March 31, 2007			December 31, 2006
ASSETS
Investments (Note 5):
Fixed maturities available for sale, at fair value (amortized cost: 2007, $1,153,659; 2006, $1,110,323)	$	1,156,417			$	1,112,086
Policy loans	21,978				22,032
Other invested assets	1,744				1,725
Total investments	1,180,139				1,135,843
Cash and cash equivalents (Note 2)	925,914				542,130
Accrued investment income	11,789				12,927
Deferred policy acquisition costs	251,377				262,144
Amounts due from reinsurers	312,105				293,350
Due and unpaid premiums	83,605				11,043
Present value of future profits and other amortizing intangible assets (Note 4)	62,007				54,738
Goodwill and other indefinite lived intangible assets (Note 4)	79,648				71,332
Income taxes receivable	749				—
Other Part D receivables (Note 2)	78,259				85,871
Advances to agents	72,306				48,912
Other assets	86,110				66,752
Total assets	$	3,144,008			$	2,585,042
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Policyholder account balances (Note 2)	$	475,313			$	485,189
Reserves for future policy benefits	606,766				600,497
Policy and contract claims—life	12,760				12,901
Policy and contract claims—health	429,320				201,811
Advance premium	210,804				26,120
CMS contract deposits for amounts not at risk (Note 2)	209,188				134,184
Loan payable (Note 9)	139,250				90,563
Other long term debt (Note 10)	125,000				75,000
Amounts due to reinsurers	77,295				100,397
Income taxes payable	—				20,502
Deferred income tax liability	17,223				19,573
Other Part D liabilities	107,417				106,599
Other liabilities	100,231				87,797
Total liabilities	2,510,567				1,961,133
Commitments and contingencies (Note 12)
STOCKHOLDERS’ EQUITY (Note 6)
Common stock (Authorized: 100 million shares, issued: 2007, 60.1 million shares; 2006, 59.9 million shares)	601				599
Additional paid-in capital	256,042				252,542
Accumulated other comprehensive income (Notes 6 and 13)	2,258				1,883
Retained earnings	383,872				379,511
Less: Treasury stock (2007, 0.6 million shares; 2006, 0.7 million shares)	(9,332		)		(10,626		)
Total stockholders’ equity	633,441				623,909
Total liabilities and stockholders’ equity	$	3,144,008			$	2,585,042

See notes to unaudited consolidated financial statements.

4

UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2007 and 2006
(In thousands, per share amounts in dollars)

	2007			2006
Revenues:
Direct premium and policyholder fees earned	$	795,631		$	467,750
Reinsurance premiums assumed	8,628			8,317
Reinsurance premiums ceded	(216,361		)	(183,993		)
Net premiums and policyholder fees earned	587,898			292,074
Net investment income	22,362			17,347
Fee and other income	6,255			6,240
Net realized gains on investments	1,904			(1		)
Total revenues	618,419			315,660
Benefits, Claims and Expenses:
Claims and other benefits	497,740			236,557
Increase in reserves for future policy benefits	3,251			4,805
Interest credited to policyholders	4,705			4,470
Change in deferred acquisition costs	10,334			(4,079		)
Amortization of intangible assets (Note 4)	2,109			2,368
Commissions	35,041			31,481
Reinsurance commission and expense allowances	(18,190		)	(17,799		)
Interest expense	3,439			3,042
Other operating costs and expenses	87,392			56,861
Total benefits, claims and other deductions	625,821			317,706
Income (loss) from continuing operations, before equity in earnings of unconsolidated subsidiary	(7,402		)	(2,046		)
Equity in earnings of unconsolidated subsidiary (Note 14)	13,203			9,807
Income from continuing operations, before income taxes	5,801			7,761
Provision for income taxes	1,440			2,829
Income from continuing operations	4,361			4,932
Discontinued Operations (Note 16):
Income from discontinued operations, net of income taxes	—			2,089
Net income	$	4,361		$	7,021
Earnings per common share:
Basic:
Income from continuing operations	$	0.07		$	0.08
Income from discontinued operations	—			0.04
Net income	$	0.07		$	0.12
Diluted:
Income from continuing operations	$	0.07		$	0.08
Income from discontinued operations	—			0.04
Net income	$	0.07		$	0.12
Weighted average shares outstanding:
Weighted average shares outstanding	59,968			59,056
Less weighted average treasury shares	(667		)	(751		)
Basic weighted shares outstanding	59,301			58,305
Effect of dilutive securities	1,328			1,611
Diluted weighted shares outstanding	60,629			59,916

See notes to unaudited consolidated financial statements.

5

UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIE

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2007 and 2006
(In thousands)

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income				Retained Earnings		Treasury Stock			Total
2006
Balance, January 1, 2006		$	590	$	242,433		$	39,896		$	260,205	$	(11,240	)	$	531,884
Net income		—		—			—			7,021		—			7,021
Other comprehensive loss (Note 13)		—		—			(11,456		)	—		—			(11,456		)
Comprehensive loss		—		—			—			—		—			(4,435		)
Issuance of common stock (Note 6)		1		306			—			—		—			307
Stock-based compensation (Note 7)		—		1,075			—			—		—			1,075
Treasury shares purchased, at cost (Note 6)		—		—			—			—		(8		)	(8		)
Treasury shares reissued (Note 6)		—		1			—			—		17			18
Balance, March 31, 2006		$	591	$	243,815		$	28,440		$	267,226	$	(11,231	)	$	528,841
2007
Balance, January 1, 2007		$	599	$	252,542		$	1,883		$	379,511	$	(10,626	)	$	623,909
Net income		—		—			—			4,361		—			4,361
Other comprehensive income (Note 13)		—		—			375			—		—			375
Comprehensive income		—		—			—			—		—			4,736
Issuance of common stock (Note 6)		2		1,966			—			—		—			1,968
Stock-based compensation (Note 7)		—		1,225			—			—		—			1,225
Treasury shares purchased, at cost (Note 6)		—		—			—			—		—			—
Treasury shares reissued (Note 6)		—		309			—			—		1,294			1,603
Balance, March 31, 2007		$	601	$	256,042		$	2,258		$	383,872	$	(9,332	)	$	633,441

See notes to unaudited consolidated financial statements.

6

UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2007 and 2006
(In thousands)

	2007			2006
Cash flows from operating activities:
Net income	$	4,361		$	7,021
Adjustments to reconcile net income to net cash provided by operating activities, net of balances acquired or sold:
Income from discontinued operations	—			(2,089		)
Equity in (earnings) loss of unconsolidated subsidiary	(13,203		)	(9,807		)
Distribution from unconsolidated subsidiary	14,000			—
Deferred income taxes	(5,829		)	(7,398		)
Realized gains on investments	(1,904		)	1
Amortization of present value of future profits and other intangibles	2,109			2,368
Net amortization of bond premium	417			654
Change in deferred policy acquisition costs	10,334			(4,079		)
Change in reserves for future policy benefits	6,270			46,434
Change in policy and contract claims payable	224,450			5,421
Change in reinsurance balances	(42,206		)	(22,536		)
Change in advance and due premium, net	112,084			43,763
Change in income taxes payable (receivable)	6,609			9,449
Change in other Part D receivables	7,612			(43,814		)
Change in other Part D liabilities	818			26,667
Advances to agents, net	(23,394		)
Other, net	(7,205		)	4,092
Cash from operating activities—continuing operations	295,323			56,147
Cash from operating activities—discontinued operations	—			2,388
Cash from operating activities	295,323			58,535
Cash flows from investing activities:
Proceeds from sale or redemption of fixed maturities	66,212			16,481
Cost of fixed maturities purchased	(113,434		)	(7,619		)
Proceeds from sale of discontinued operations, net of cash sold (Note 16)	8,364			—
Taxes paid for gain on sale of discontinued operations (Note 16)	(28,200		)	—
Proceeds from sale of subsidiary, net of cash sold (Note 17)	5,102			—
Purchase of business, net of cash acquired	(17,722		)	(12,075		)
Other investing activities	4,355			77
Cash from investing activities—continuing operations	(75,323		)	(3,136		)
Cash from investing activities—discontinued operations	—			(1,954		)
Cash from (used for) investing activities	(75,323		)	(5,090		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	1,968			559
Cost of treasury stock purchases	—			(7		)
Receipts from CMS contract deposits	248,759			270,397
Withdrawals from CMS contract deposits	(173,755		)	(118,852		)
Deposits and interest credited to policyholder account balances	5,583			16,509
Surrenders and other withdrawals from policyholder account balances	(15,458		)	(11,335		)
New debt issued, net of issue costs	98,000			—
Principal repayment on loan payable	(1,313		)	(1,313		)
Cash from financing activities—continuing operations	163,784			155,958
Cash from financing activities—discontinued operations	—			—
Cash used for financing activities	163,784			155,958
Net increase (decrease) in cash and cash equivalents	383,784			209,403
Cash and cash equivalents at beginning of year	542,130			138,899
Cash and cash equivalents at end of year	925,914			348,302
Less cash and cash equivalents of discontinued operations at end of period	—			(2,403		)
Cash and cash equivalents of continuing operations at end of period	$	925,914		$	345,899

See notes to unaudited consolidated financial statements.

7

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

1.ORGANIZATION AND COMPANY BACKGROUND

Universal American Financial Corp. (“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 and accident and health insurance and annuities in all fifty states, the District of Columbia, and Puerto Rico. The principal insurance products currently sold by the Company are Medicare Advantage private fee-for-service plans (“PFFS”), Medicare prescription drug benefit plans (“PDPs”), Medicare Supplement, fixed benefit accident and sickness disability insurance and senior life insurance. The Company distributes these products through an independent general agency system and a career agency system. The career agents sell for Pennsylvania Life Insurance Company (“Pennsylvania Life”) and The Pyramid Life Insurance Company (“Pyramid Life”) while the independent general agents sell for American Pioneer Life Insurance Company (“American Pioneer”), American Progressive Life & Health Insurance Company of New York (“American Progressive”), Constitution Life Insurance Company (“Constitution”), Marquette National Life Insurance Company (“Marquette”) and Union Bankers Insurance Company (“Union Bankers”).

In 2006, we began offering PDPs pursuant to Medicare Part D (“Part D”) through Pennsylvania Life and American Progressive, in connection with a strategic alliance with PharmaCare Management Services, Inc. (“PharmaCare”), a third party pharmacy benefits manager (“PBM”) and wholly-owned subsidiary of CVS Corporation (“CVS”).

The Company operates Medicare Advantage health plans in Texas through SelectCare of Texas, L.L.C. and SelectCare HealthPlans, Inc., in Oklahoma through SelectCare of Oklahoma, Inc. and GlobalHealth, Inc. (“GlobalHealth”), in Florida through American Pioneer HealthPlans, Inc. and in Wisconsin through Abri Health Plan, Inc. and our Medicare Advantage PFFS plans through American Progressive and Pyramid Life.

CHCS Services, Inc. (“CHCS”), the Company’s administrative services company, acts as a service provider for both affiliated and unaffiliated insurance companies for senior market insurance and non-insurance programs.

On December 1, 2006, the Company completed the sale of Penncorp Life Insurance Company (“PennCorp Life Canada”), its Canadian subsidiary. Consequently, the Company has accounted for the operations of PennCorp Life Canada as discontinued operations. All prior period amounts have been reclassified to conform to this presentation. See Note 16—Discontinued Operations.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:   The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and consolidate the accounts of Universal American and its subsidiaries:  American Progressive, American Pioneer, American Exchange Life Insurance Company (“American Exchange”), Pennsylvania Life, Union Bankers, Constitution, Marquette, Pyramid Life, Heritage Health Systems, Inc. (“Heritage”) and CHCS. During 2005, we entered into a strategic alliance with PharmaCare and created Part D Management Services, L.L.C. (“PDMS”). PDMS is 50% owned by us and 50% owned by PharmaCare. We do not control PDMS and therefore PDMS is not consolidated in our financial statements. Our investment in PDMS is accounted for on an equity basis and is included in other assets. PDMS principally performs marketing and risk management services on behalf of our PDPs and PharmaCare Captive Re, Ltd (“PharmaCare Re”) a

8

wholly-owned subsidiary of PhamaCare, for which it receives fees and other remuneration from our PDPs and PharmaCare. As noted above, the operations of PennCorp Life Canada are reported as discontinued operations.

For the insurance subsidiaries, GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. All material intercompany transactions and balances between Universal American and its subsidiaries have been eliminated.

The interim financial information herein 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 such periods. The results of operations for the three months ended March 31, 2007 and 2006 are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Use of Estimates:   The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of assets and liabilities reported by us at the date of the financial statements and the revenues and expenses reported during the reporting period. As additional information becomes available or actual amounts become determinable, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates. In our judgment, the accounts involving estimates and assumptions that are most critical to the preparation of our financial statements are future policy benefits and claim liabilities, deferred policy acquisition costs, goodwill, present value of future profits and other intangibles, the valuation of certain investments and income taxes. There have been no changes in our critical accounting policies during the current year.

Supplemental Cash Flow Information:   Cash and cash equivalents include cash on deposit, money market funds, and short term investments that had an original maturity of three months or less from the time of purchase. Included in cash and cash equivalents at March 31, 2007 is $297 million relating to our PDPs that cannot be used for other lines of business or general corporate purposes. Supplemental cash flow information for interest and income taxes paid for continuing and discontinued operations is as follows:

	Three months ended March 31,
	2007		2006
	(in thousands)
Supplemental cash flow information from continuing operations:
Cash paid for interest	$	3,209	$	3,061
Cash paid for income taxes	$	27,009	$	—
Supplemental cash flow information from discontinued operations:
Cash paid for income taxes	$	—	$	2,311

Significant Accounting Policies:   For a description of significant accounting policies, see Note 2—Summary of Significant Accounting Policies in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Accounting for Prescription Drug Benefits under Medicare Part D:   Effective January 1, 2006, we began providing prescription drug coverage in accordance with Part D as a stand-alone benefit to Medicare-eligible beneficiaries under PDPs.

In general, prescription drug benefits under Part D PDPs may vary in terms of coverage levels and out-of-pocket costs for beneficiary premiums, deductibles and co-insurance. However, all Part D PDPs

9

must offer either “standard coverage” or its actuarial equivalent (with out-of-pocket threshold and deductible amounts that do not exceed those of standard coverage). These defined “standard” benefits represent the minimum level of benefits mandated by Congress. We also offer other PDPs containing benefits in excess of standard coverage limits for an additional beneficiary premium.

Our PDPs receive monthly payments from CMS which generally represents our bid amount for providing insurance coverage. We recognize premium revenue for providing this insurance coverage during each month in which members are entitled to benefits. Our CMS payments also include catastrophic reinsurance allowances and Federal subsidies (CMS contract deposits) for which we do not bear risk.

Part D premium revenue is subject to risk corridor adjustment, which permits our PDPs and CMS to share the risk associated with the ultimate costs of the Part D benefit. The risk corridor adjustments may be positive or negative based upon the application of risk corridors that compare a plan’s actual prescription drug costs to their targeted costs, as reflected in their bids (“target amount’). Variances exceeding, or below, certain thresholds may result in CMS making additional payments to us or requiring us to refund to CMS a portion of the payments we received. Actual prescription drug costs subject to risk sharing with CMS are limited to the costs that are, or would have been, incurred under the CMS defined “standard” benefit plan. We estimate and recognize an adjustment to premium revenues related to the risk corridor payment adjustment based upon prescription drug claims experience to date, net of manufacturer rebates and other Part D revenues, at the end of each reporting period. Accordingly, this estimate does not consider future prescription drug claims experience. We record a receivable for rebates due to us which is included in other Part D receivables.

Certain subsidies represent reimbursements from CMS for claims we pay for which we assume little or no risk, including reinsurance payments and low-income cost subsidies. A large percentage of claims paid above the out-of-pocket or catastrophic threshold for which we are not at risk are reimbursed by CMS through the reinsurance subsidy for PDPs offering the standard coverage. Low-income cost subsidies represent reimbursements from CMS for all or a portion of the deductible, the coinsurance and the co-payment amounts for low-income beneficiaries. We account for these subsidies as a deposit in our balance sheet and as a financing activity in our statement of cash flows. We do not recognize premium revenue or claims expense for these subsidies. Receipt and payment activity is accumulated at the contract level and recorded in the balance sheet as a CMS contract deposit account asset or liability depending on the net contract balance at the end of the reporting period. A reconciliation and related settlement of CMS’s prospective subsidies against actual prescription drug costs we paid will be made after the end of the year.

We recognize pharmacy benefit costs as incurred. We have subcontracted the pharmacy claims administration to PharmaCare. Certain of our PDPs receive all or a portion of the rebates from drug manufacturers on prescriptions filled. A significant portion of these rebates are reflected as a reduction in pharmacy benefit costs with the balance offset against the catastrophic reinsurance claims reimbursed by CMS, for which we are not at risk. Pharmacy benefit costs are based on rates as contracted with PharmaCare.

The PDPs sponsored by subsidiaries of Universal American are reinsured, on a 50% coinsurance funds withheld basis, to PharmaCare Re. Pennsylvania Life also assumes, on a 33.3% quota share basis, risks of an unaffiliated prescription drug plan. The contract for the 33.3% assumed business will be terminated as of December 31, 2007, however, under the termination provisions of the contract, Pennsylvania Life will receive an amount equal to two years of the reinsurance profits generated by the block of business.

We based our membership for Part D on enrollment information provided by CMS which indicated that, as of March 31, 2007, approximately 490,400 members were enrolled in our PDPs for which we were paid by CMS. This includes approximately 466,500 members in our PDPs that we participate in on a 50%

10

basis and 23,900 members in the unaffiliated PDP that we participate in on a 33.3% basis. Our revenues and claims expense are based on earned premium and incurred pharmacy benefits for the reported enrolled membership. During 2006 and 2007, we also paid claims for individuals who ultimately were determined to be members of other plans. At March 31, 2007, we have a receivable of $36.5 million for these claims which is included in other Part D receivables on the consolidated balance sheet. Membership information continues to be reconciled and refined by CMS with respect to the enrollment of members among all plans participating in the Part D program. Additionally, as of March 31, 2007, we have a liability of $30.4 million, included in policy and contract claims—health on the consolidated balance sheet, for our estimate of claims paid by state Medicaid programs on behalf of members of our PDPs. As a result of the continuing reconciliation process, it is likely that the membership data upon which we based our results will change, with a corresponding change in the financial results for the segment. We are unable to precisely quantify the impact of any potential change until the membership data is fully reconciled with CMS; however, we do not believe that any change from the amounts reported as of March 31, 2007 is likely to be material.

Reclassifications:   Certain reclassifications have been made to prior years’ financial statements to conform to current period presentation.

3.RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS

Deferred Acquisition Costs—In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts. An internal replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. Initial application of SOP 05-1 should be as of the beginning of the entity’s fiscal year. The Company adopted SOP 05-1 effective January 1, 2007. Adoption of this statement did not have a material effect on the Company’s consolidated financial statements.

Income Taxes—In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The interpretation requires companies to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The amount recognized would be the amount that represents the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. A liability would be recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. FIN 48 will require a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to accrued interest and penalties for unrecognized tax benefits. Discussion will also be required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months. FIN 48 is effective for

11

fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial statements.

Fair Value—In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. SFAS 157 provides guidance on how to measure fair value when required under existing accounting standards. The statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (“Level 1, 2 and 3”). Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets the Company has the ability to access at the measurement date. Level 2 inputs are observable inputs, other than quoted prices included in Level 1, for the asset or liability. Level 3 inputs are unobservable inputs reflecting the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Quantitative and qualitative disclosures will focus on the inputs used to measure fair value for both recurring and non-recurring fair value measurements and the effects of the measurements in the financial statements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged only in the initial quarter of an entity’s fiscal year. Adoption of this statement is expected to have an impact on the Company’s consolidated financial statements; however, the timing for adoption and impact has not yet been determined.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This statement provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157, and SFAS 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. Adoption of this statement is expected to have an impact on the Company’s consolidated financial statements; however, the timing for adoption and impact has not yet been determined.

12

4.INTANGIBLE ASSETS

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

	Weighted
	Average		March 31, 2007					December 31, 2006
	Life (Years)		Value Assigned		Accumulated Amortization			Value Assigned		Accumulated Amortization
	(In thousands)
Senior Health Insurance:
Policies in force		9	$	18,473		$	10,596	$	18,473		$	9,786
Distribution Channel		30	22,055			2,941		22,055			2,757
Life Insurance/Annuity—PVFP		7	4,127			1,945		4,127			1,912
Senior Managed Care—Medicare Advantage:
Membership base		7	23,413			5,981		15,381			5,428
Provider contracts		10	15,539			2,646		15,539			2,244
Non-compete		7	1,346			16		—			—
Senior Administrative Services
Administrative service contracts		6	7,671			7,431		7,671			7,399
Hospital network Contracts		10	1,797			858		1,797			779
Total		17	$	94,421		$	32,414	$	85,043		$	30,305

The following table shows the changes in the amortizing intangible assets:

	Three months  ended March 31,
	2007			2006
Balance, beginning of year	$	54,738		$	50,724
Additions and adjustments	9,378			12,076
Amortization, net of interest	(2,109		)	(2,368		)
Balance, end of year	$	62,007		$	60,432

On March 1, 2007, the Company acquired Harmony Health, Inc. (“Harmony”), a provider-owned company that operates GlobalHealth, a Medicare Advantage and Commercial managed care plan in Oklahoma City, Oklahoma for $18.2 million in cash, including direct costs of acquisition of $0.2 million. Harmony was a majority-owned subsidiary of the Oklahoma City Clinic. Founded in 2002, GlobalHealth had approximately 3,800 Medicare Advantage members with annualized revenue of approximately $37 million at the date of acquisition. Under the terms of the agreement, the Oklahoma City Clinic has entered into a long-term agreement with Universal American to provide healthcare services to GlobalHealth members. In addition, Oklahoma City Clinic will retain the risk for commercial business under a global capitation arrangement.

13

The tangible book value at the date of acquisition was $3.8 million. The excess of purchase price over the tangible book value was $17.7 million, gross of deferred taxes of $3.3 million, and was allocated as follows:

Description	Amount (in millions)			Weighted Average Life At Acquisition		Amortization Basis
Membership base acquired		$	8.0		10	The pattern of projected future cash flows for the membership base acquired over the estimated weighted average life of the membership base
Non-compete agreement		1.4			7	Straight line over the length of the agreement
Goodwill		8.3			—	Non amortizing
Total excess of purchase price over tangible book value		$	17.7

During the first quarter of 2006, Heritage acquired an additional interest in the earnings of one of its risk pools, effective as of January 1, 2006, for $12.1 million. The purchase price was allocated to the amortizing intangible asset—Provider Contracts and represents the present value of the estimated future cash flows related to the additional interest, and will be amortized over ten years.

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

2007 remainder of year	$	7,469
2008	8,070
2009	7,394
2010	5,910
2011	4,231
2012	3,928
Thereafter	25,005
	$	62,007

Changes in the carrying amounts of goodwill and intangible assets with indefinite lives are shown below:

	December 31,  2006			Additions			Adjustments			March 31,  2007
	(In thousands)
Senior Market Health Insurance:
Goodwill		$	3,893		$	—		$	—		$	3,893
Other		4,867			—			—			4,867
Subtotal—Senior Market Health Insurance		8,760			—			—			8,760
Senior Managed Care—Medicare Advantage:
Goodwill		53,052			8,316			—			61,368
Other		5,163			—			—			5,163
Subtotal—Senior Managed Care—Medicare Advantage		58,215			8,316			—			66,531
Senior Administrative Services—Goodwill		4,357			—			—			4,357
Total		$	71,332		$	8,316		$	—		$	79,648

Other non-amortizing intangible assets consist primarily of trademarks and licenses. The addition of goodwill for Senior Managed Care—Medicare Advantage was the result of the acquisition of Harmony.

14

5.INVESTMENTS

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

	March 31, 2007
			Gross			Gross
	Amortized		Unrealized			Unrealized				Fair
Classification	Cost		Gains			Losses				Value
	(In thousands)
U.S. Treasury securities and obligations of U.S. government	$	144,826		$	408		$	(618	)	$	144,616
Corporate debt securities	422,242			7,721			(3,948		)	426,015
Foreign debt securities	34,302			478			(253		)	34,527
Mortgage-backed and asset-backed securities	552,289			2,693			(3,723		)	551,259
	$	1,153,659		$	11,300		$	(8,542	)	$	1,156,417

	December 31, 2006
			Gross			Gross
	Amortized		Unrealized			Unrealized				Fair
Classification	Cost		Gains			Losses				Value
	(In thousands)
U.S. Treasury securities and obligations of U.S. government	$	115,315		$	308		$	(1,067	)	$	114,556
Corporate debt securities	431,455			7,739			(4,424		)	434,770
Foreign debt securities	32,120			427			(359		)	32,188
Mortgage-backed and asset-backed securities	531,433			2,904			(3,765		)	530,572
	$	1,110,323		$	11,378		$	(9,615	)	$	1,112,086

The amortized cost and fair value of fixed maturities at March 31, 2007 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		Fair
	Cost		Value
	(In thousands)
Due in 1 year or less	$	79,921	$	84,181
Due after 1 year through 5 years	287,296		288,384
Due after 5 years through 10 years	167,978		168,050
Due after 10 years	66,175		64,543
Mortgage and asset-backed securities	552,289		551,259
	$	1,153,659	$	1,156,417

6.STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has 2.0 million authorized shares of preferred stock with no such shares issued or outstanding at March 31, 2007 or at December 31, 2006.

15

Common Stock

The Company has 100 million shares of common stock, par value $0.01 per share, authorized for issuance. Changes in the number of shares of common stock issued were as follows:

Three months ended March 31,	2007	2006
Common stock outstanding, beginning of year	59,890,500	59,042,685
Stock options exercised	139,288	47,283
Agent stock award	2,543	(639	)
Stock purchases pursuant to agents’ stock purchase and deferred compensation plans	21,043	1,200
Common stock outstanding, end of period	60,053,374	59,090,529

Treasury Stock

The Company currently has 984,472 shares of common stock available to purchase pursuant to share repurchase program approved by the Company’s Board of Directors in November 2005. Changes in treasury stock were as follows:

	For the three months ended March 31,
	2007										2006
	Shares			Amount				Weighted Average Cost Per Share			Shares		Amount			Weighted Average Cost Per Share
	(In thousands)			(In thousands)
Treasury stock beginning of year		712,868			$	10,626			$	14.91	751,473		$	11,240			$	14.96
Shares repurchased		—			—				—		513		8				14.85
Shares distributed in the form of employee bonuses		(86,823	)		(1,294		)		18.47		(1,156	)	(17		)		15.08
Treasury stock, end of period		626,045			$	9,332			$	14.91	750,830		$	11,231			$	14.96

Additional Paid In Capital

In connection with the 1999 acquisition of Pennsylvania Life and related companies, Universal American provided loans to certain members of management to purchase shares of common stock. The loans totaled $1.0 million at inception and were accounted for as a reduction of additional paid in capital in the financial statements. Through March 31, 2007, $0.9 million has been repaid. Repayments are reported as an increase to additional paid in capital. As of March 31, 2007, the outstanding balance of these loans was $0.1 million.

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are as follows:

	March 31, 2007				December 31, 2006
	(In thousands)
Continuing Operations:
Net unrealized appreciation on investments		$	2,765			$	1,769
Deferred acquisition cost adjustment		462				895
Foreign currency translation gains		247				233
Deferred tax		(1,216		)		(1,014		)
Total accumulated other comprehensive income		$	2,258			$	1,883

16

7.STOCK-BASED COMPENSATION

The Company has various stock-based incentive plans for its employees, non-employee directors and agents. The Company issues new shares upon the exercise of options granted under such stock-based incentive plans. Detailed information for activity in the Company’s stock-based incentive plans can be found in Note 8—Stock-Based Compensation to the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006.

Stock Option Awards

Beginning January 1, 2006, the Company adopted FAS 123-R using the modified prospective method, and began recognizing compensation cost for share-based payments to employees and non-employee directors based on the grant date fair value of the award, which is amortized over the grantees’ service period. The Company elected to use the Black-Scholes valuation model to value employee stock options, as it had done for its previous pro forma stock compensation disclosures. The adoption of FAS 123-R did not have a material effect on the Company’s method of computing compensation costs for options as compared to that used to prepare the pro forma disclosures in prior periods.

The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following range of assumptions:

	For options granted in:
	2007	Prior years
Risk free interest rates	4.68% - 4.93%	3.12% - 5.28%
Dividend yields	0.0%	0.0%
Expected volatility	37.62% - 39.60%	40.00% - 47.23%
Expected lives of options (in years)	3.75 - 4.25	3.0 - 9.0

The Company did not capitalize any cost of stock-based compensation for its employees or non-employee directors. Future expense may vary based upon factors such as the number of awards granted by the Company and the then-current fair market value of such awards.

A summary of option activity for the three months ended March 31, 2007 and March 31, 2006 is presented below:

Stock Options	Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)						(in years)		(in thousands)
Outstanding, January 1, 2006		4,823			$	6.81		5.2
Granted		41			17.98
Exercised		(47	)		6.10
Forfeited or expired		(25	)		13.10
Outstanding, March 31, 2006		4,792			$	6.82		4.7		$	42,107
Exercisable, March 31, 2006		3,637			$	6.04		4.3		$	34,544
Outstanding, January 1, 2007		4,325			$	7.73		4.0
Granted		940			18.47
Exercised		(139	)		9.74
Forfeited or expired		(56	)		14.21
Outstanding, March 31, 2007		5,070			$	9.59		4.0		$	49,636
Exercisable, March 31, 2007		3,786			$	7.16		3.7		$	46,262

17

The weighted-average grant-date fair value was $6.92 for options granted during the first three months of 2007 and was $4.72 for options granted during the first three months of 2006. The total intrinsic value of options exercised during the first three months of 2007 was $1.3 million and the total intrinsic value of options exercised during the first three months of 2006 was $0.4 million.

As of March 31, 2007, the total compensation cost related to non-vested awards not yet recognized was $7.8 million, which is expected to be recognized over a weighted average period of 1.3 years.

Cash received from the exercise of stock options during the first three months of 2007 was $1.4 million and cash received from the exercise of stock options during first three months of 2006 was $0.3 million. FAS 123-R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the prior statement. The amount of financing cash flows recognized for such excess tax deductions was $0.3 million for the three months ended March 31, 2007 and was $0.3 million for the three months ended March 31, 2006.

Employee Stock Awards

In accordance with the Company’s 1998 Incentive Compensation Plan, the Company may grant restricted stock to its officers and non-officer employees. Restricted stock issued to non-officer employees vests upon issuance. Executive officers have been granted restricted stock in connection with their bonuses. This restricted stock vests ratably over four years. Restricted stock awards are valued equal to the market price of the Company’s common stock on the date of grant and are generally issued out of treasury shares. Compensation expense for restricted stock awards is recognized on a straight line basis over the vesting period. A summary of the status of the Company’s non-vested restricted stock awards is presented below:

	Three months ended March 31,
	2007						2006
Non-vested Restricted Stock	Shares			Weighted Average Grant-Date Fair Value			Shares			Weighted Average Grant-Date Fair Value
	(in thousands)						(in thousands)
Non-vested at beginning of year		148			$	13.60		157			$	12.05
Granted		87			18.47			—			—
Vested		(16	)		15.88			(18	)		15.88
Forfeited		—			—			—			—
Non-vested at end of period		219			$	15.35		139			$	11.55

The total fair value of shares of restricted stock vested during the three months ended March 31, 2007 was $0.3 million and the total fair value of shares of restricted stock vested during the three months ended March 31, 2006 was $0.3 million.

8.STATUTORY FINANCIAL DATA

The insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, substantially more than such minimum amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries’ operations. Each of the insurance subsidiaries’ statutory capital and surplus exceeds its respective minimum statutory requirement at levels we believe are sufficient to support their current levels of operation. Additionally, the National Association of Insurance Commissioners (“NAIC”) imposes regulatory risk-based capital (“RBC”) requirements on life insurance enterprises. At March 31, 2006, all of our insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the “authorized control level”. The combined statutory capital and surplus, including

18

asset valuation reserve, of the insurance subsidiaries totaled $321.6 million at March 31, 2007 and $242.9 million at December 31, 2006. For the three months ended March 31, 2007, the insurance subsidiaries generated statutory net income of $10.2 million. For the three months ended March 31, 2006, the insurance subsidiaries generated a statutory net income of $2.9 million.

Our health plan affiliates are also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and are also subject to RBC requirements. At March 31, 2007, the statutory capital and surplus of each of our health plan affiliates exceeds its minimum requirement and its RBC is in excess of the “authorized control level”. The statutory capital and surplus for our health plan affiliates was $52.5 million at March 31, 2007 and $44.0 million at December 31, 2006. Statutory net income for our health plan affiliates was $5.1 million for the three months ended March 31, 2007 and $3.1 million for the three months ended March 31, 2006.

9.LOAN PAYABLE

Amended Credit Agreement

In connection with the acquisition of Heritage on May 28, 2004, the Company amended its then existing credit agreement by increasing the facility to $120.0 million from $80.0 million (the “Amended Credit Agreement”), including an increase in the term loan portion to $105.0 million from $36.4 million (the balance outstanding at May 28, 2004) and maintaining the $15.0 million revolving loan facility. None of the revolving loan facility has been drawn as of March 31, 2007. Under the Amended Credit Agreement, the spread over LIBOR was reduced to 225 basis points. Effective April 1, 2007, the interest rate on the term loan was 7.6%. Principal repayments are scheduled at $5.3 million per year over a five-year period with a final payment of $80.1 million due upon maturity on March 31, 2009.

The Company made regularly scheduled principal payments of $1.3 million during the three months ended March 31, 2007 and $1.3 million during the three months ended March 31, 2006, in connection with its credit facilities.

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

2007 (remainder of the year)	$	3,937
2008	5,250
2009	80,063
	$	89,250

On January 18, 2007, the Company requested and received, from the administrative agent for the bank group an additional short-term revolving credit facility of $50.0 million. On March 13, 2007, the Company drew down all $50.0 million of the new short-term revolving credit facility. This new short-term revolving credit facility has a maturity date of September 30, 2007 and bears interest at a spread of 75 basis points over LIBOR. The initial rate is 6.1%.

The Company paid interest of $1.7 million during the three months ended March 31, 2007 and $1.6 million during the three months ended March 31, 2006, in connection with its credit facilities.

10.OTHER LONG TERM DEBT

The Company has formed separate statutory business trusts (the “Trusts”), which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trust, investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures of the Company (the “Junior Subordinated Debt”) and engaging in only

19

those activities necessary or incidental thereto. In accordance with the adoption of FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” the Company does not consolidate the trusts. In March, 2007 we issued $50 million of trust preferred securities at a fixed interest rate of 7.7%. As of March 31, 2007, the Trusts have issued a combined $125.0 million in thirty year trust preferred securities.

The Company paid $1.5 million in interest in connection with the Junior Subordinated Debt during the three months ended March 31, 2007, and $1.4 million during the three months ended March 31, 2006.

11.DERIVATIVE INSTRUMENTS—CASH FLOW HEDGE

Effective September 4, 2003, the Company entered into a swap agreement whereby it pays a fixed rate of 6.7% on a $15.0 million notional amount relating to the December 2002 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 400 basis points, capped at 12.5%. The swap contract expires in December 2007. Effective April 29, 2004, the Company entered into a second swap agreement whereby it pays a fixed rate of 6.98% on a $20.0 million notional amount relating to the October 2003 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 395 basis points, capped at 12.45%. The swap contract expires in October 2008. The combined fair value of the swaps was $1.0 million at March 31, 2007 and $1.2 million at December 31, 2006 and is included in other assets. We had applied the “short-cut method” to determine effectiveness and the swaps were initially designated as cash flow hedges, with changes in their fair value recorded in accumulated other comprehensive income. In 2006, the SEC affirmed its interpretation that prohibits the use of the “short-cut method” for all fair value hedges of fixed-rate trust preferred securities, as well as cash flow hedges of the variable cash flows associated with variable-rate trust preferred securities, whenever the issuer has the ability to defer interest payments at their election. As a result, these cash flow hedges are no longer deemed effective. In the fourth quarter of 2006, the fair value of the hedge was reversed out of accumulated other comprehensive income and reported in realized gains in our consolidated income statement. Any future changes in the fair value will also be reported in realized gains. During the three months ended March 31, 2007, $0.2 million relating to the reduction in the fair value of the cash flow swap agreements was reported as a realized loss.

12.COMMITMENTS AND CONTINGENCIES

Securities Class Action and Derivative Litigation

Five actions containing related factual allegations were filed against the Company and certain of its officers and directors between November 22, 2005 and February 2, 2006. One of these actions was voluntarily withdrawn by plaintiffs, and four actions are now pending, two of which have been consolidated.

In the first action, Robert Kemp filed a purported class action complaint (the “Kemp Action”) on November 22, 2005, in the United States District Court for the Southern District of New York. The Kemp Action is a purported class action asserted on behalf of those shareholders of the Company who acquired the Company’s common stock between February 16, 2005 and October 28, 2005. Plaintiffs in the Kemp

Action seek unspecified damages under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 based upon allegedly false statements by the Company and Richard A. Barasch, Robert A. Waegelein and Gary W. Bryant (hereinafter, the “Officer Defendants”) in press releases, financial statements and analyst conferences during the class period.

Another purported class action was filed by Western Trust Laborers-Employers Pension Trust (the “Western Trust Action”), a putative class member in the Kemp Action who has been appointed lead plaintiff in that action, on February 2, 2006, in the United States District Court for the Southern District of New York. The factual and legal allegations in the Western Trust Action, which also purports to be a class

20

action, are similar to those in the Kemp Action. By order dated May 1, 2006, the Kemp Action and the Western Trust Action were consolidated.

On June 26, 2006, a consolidated amended class action complaint was filed in the Kemp Action (the “Amended Complaint”), which now subsumes the Western Trust Action. The Amended Complaint asserts the same legal claims as in the original Kemp and Western Trust Actions, but also names an additional defendant and includes additional allegations. The additional defendant is William E. Wehner, a former director and former president of Pennsylvania Life Insurance Company, a subsidiary of the Company. The Amended Complaint alleges that Mr. Wehner is liable for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on grounds similar to those asserted against the Officer Defendants. The additional assertions are supposedly based in part upon information from six former employees and agents of the Company and its subsidiaries concerning, among other things, the Company’s medical loss ratio. Like the original complaints in the Kemp and Western Trust Actions, the Amended Complaint seeks damages in an unspecified amount. On August 14, 2006, defendants served a motion to dismiss the Amended Complaint in the Kemp Action. The lead plaintiff served opposition papers to the motion on October 17, 2006. The motion was argued before the Court on December 13, 2006, and, on January 10, 2007, the complaint was dismissed without prejudice.  On March 29, 2007, lead plaintiff in the Kemp Action served a second amended complaint, which carried forward most of the factual and legal assertions in the prior pleading and added certain new allegations from the alleged confidential witnesses referred to in the Amended Complaint. The second amended complaint dropped the claim that defendant Mr. Wehner directly violated Section 10(b) of the Securities Exchange Ace of 1934, as amended. Defendants served a motion to dismiss the second amended complaint on May 10, 2007.

Two additional actions have been brought derivatively by shareholders purporting to act on behalf of the Company, and not as class actions. One of these was filed by Green Meadows Partners LLP (the “Green Meadows Action”) on December 13, 2005, in the United States District Court for the Southern District of New York, and has been assigned to the same judge presiding over the Kemp Action and the Western Trust Action. In the Green Meadows Action, plaintiffs seek contribution under Section 10(b) and 21D of the Exchange Act on the ground that if the Company is found liable to have violated the securities laws in the Kemp Action, then the Officer Defendants are liable for contribution. The Green Meadows Action also asserts three claims under state law for breach of fiduciary duty against the Officer Defendants.

On July 19, 2006, the plaintiff in the Green Meadows Action filed a Verified Amended Shareholder Derivative Complaint (the “GM Amended Complaint”). The GM Amended Complaint adds as new defendants Mr. Wehner, Capital Z Financial Services Fund II, L.P. (“Capital Z”) and three directors of the Company who are affiliated with Capital Z, namely Bradley E. Cooper, Robert A. Spass and Eric W. Leathers. Capital Z is the largest shareholder of the Company. The GM Amended Complaint carries forward the legal claims asserted in the original complaint against the original defendants (with additional allegations), and adds new claims (i) against the new director defendants for alleged breach of fiduciary duty in connection with a secondary offering in June 2005 that included five million shares of the Company’s common stock that had been owned by Capital Z and (ii) against Capital Z for alleged unjust enrichment with respect to the proceeds Capital Z realized from the sale of the five million shares it formerly owned in the secondary offering. On September 8, 2006, defendants served a motion to dismiss the GM Amended Complaint. On October 26, 2006 (prior to the response date for plaintiff), the Court entered an order staying the case for 90 days. On January 22, 2007 (prior to the expiration of the previous stay), the Court entered an order staying the case for an additional 120 days.

The second derivative action was filed by plaintiff Arthur Tsutsui (the “Tsutsui Action”) on December 30, 2005, in the Supreme Court for New York State, Westchester County. The defendants in the Tsutsui Action are the three Officer Defendants named in the other actions, as well as all of the directors sitting on the Company’s Board of Directors as of the time the complaint was filed. The Tsutsui Action

21

alleges that the same alleged misstatements that are the subject of the Kemp Action 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 Defendants from the sale of Company stock that was in breach of their fiduciary duties. Defendants in the Tsutsui Action filed a motion to dismiss the complaint on June 9, 2006. On August 17, 2006, the Court issued an order staying the case until such time (i) as the Kemp Action is fully and finally resolved or settled, or (ii) the Green Meadows Action is fully and finally resolved, or shareholders in that case receive notice of a proposed settlement. Each of the Officer Defendants denies the allegations and has indicated that he intends to vigorously defend against the allegations. Management believes that after liability insurance recoveries, none of these actions will have a material adverse effect on the Company.

Class Action Litigation Relating to Acquisition Proposal

Between October 25, 2006 and November 6, 2006, six purported class actions were filed in New York state courts against the Company and other defendants concerning the acquisition proposal received by the Company on October 24, 2006, from members of management led by Richard A. Barasch, the Company’s Chairman and Chief Executive Officer, and private equity firms Capital Z Partners, Ltd., Lee Equity Partners, LLC, Perry Capital, LLC and Welsh, Carson, Anderson & Stowe X, L.P. to acquire all of the Company’s publicly held common stock for $18.15 per share in cash (the “Offer”). Three of these actions were filed in the Supreme Court for New York County as Stellato v. Universal American Financial Corp., et al. (06-116006) (“Stellato”), Green Meadows Partners LLP v. Barasch, et al. (603724-06) (“Green Meadows II”), and Sorrentino v. Barasch et al. (06-603853) (“Sorrentino”).

The Stellato action alleged that the offer was made at an “unfair price, under unfair terms and through improper means” and sought an injunction preventing the Offer from being consummated, or in the alternative, monetary damages. The Green Meadows II action alleged that Mr. Barasch and directors Bradley Cooper, Eric Leathers and Robert Spass dominate the board of directors of the Company, and have breached their fiduciary duties by, among other things, making a buyout proposal that “fails to take into account the value of UHCO, its improving financial results and its value in comparison to other similar companies.”  The action sought, among other things, an injunction preventing defendants from carrying out an unfair transaction, and monetary damages. The Sorrentino action also alleged board domination by Messers. Barasch, Cooper, Leathers, and Spass, and asserted that the Offer price is “unconscionable, unfair and grossly inadequate and constitutes unfair dealing.”  The action sought an injunction preventing the Offer from being consummated or rescinding the Offer, or, in the alternative, monetary damages.

Three other actions pertaining to the Offer were filed in the Supreme Court for Westchester County as Conolly v. Universal American Financial Corp, et al. (06-21712) (“Conolly”), McCormack v. Averill et al.(06-21365) (“McCormack”), and Zhang v. Barasch et al. (21672-06) (“Zhang”). The Conolly action alleged that the shareholder agreement to which Mr. Barasch and Capital Z are parties “deter[s] potential bids for the Company at a premium to the presently offered price,” and that the sponsors of the offer (excluding Mr. Barasch) are members of a “club” of elite private equity funds under investigation for violations of the anti-trust laws that have resulted in “driv[ing] down the prices of potential acquisition targets.”  The Conolly action further asserted that the director defendants have breached their fiduciary duties to maximize shareholder value by, among other things, failing immediately to reject the Offer. The complaint sought an injunction prohibiting consummation of the Offer, or in the alternative, monetary damages. The McCormack action also asserted that the buyout offer is “the product of unfair dealing” by the management of the Company and its largest shareholder, Capital Z, and sought an injunction ordering the directors to fulfill their fiduciary duties, and/or enjoining any transaction based upon the Offer, as well as monetary damages. The Zhang action asserted that the Offer price was unfair and failed to take into account the value of the Company; it sought injunctive relief and/or damages.

22

On January 11, 2007, the New York Supreme Court, Westchester County, signed an order consolidating each of the six actions in the Commercial Division of Westchester Court under the caption, In re Universal American Financial Corp. Buyout Offer Shareholder Litigation (the “Consolidated Action”). The defendants named in the consolidation order included the Company, Mr. Barasch and the other sponsors of the offer, including Capital Z, as well as eight other members of the Company’s board of directors. The court’s order provided that the plaintiff would file a consolidated amended complaint, and the defendants’ time to respond would extend to 40 days thereafter. The consolidated amended complaint has not yet been filed. A status conference with the court is scheduled in the Consolidated Action for May 25, 2007.

Other Litigation

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

13.OTHER COMPREHENSIVE INCOME

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

	Three months ended March 31,
	2007									2006
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount				Tax Expense (Benefit)				Net of Tax Amount
	(In thousands)
From continuing operations:
Net unrealized (loss) gain arising during the year (net of deferred acquisition costs)		$	468		$	164		$	304		$	(10,268	)		$	(3,593	)	$	(6,675	)
Reclassification adjustment for losses (gains) included in net income		95			33			62			1				—			1
Net unrealized (loss) gain		563			197			366			(10,267		)		(3,593		)	(6,674		)
Cash Flow Hedge		—			—			—			170				60			110
Foreign currency translation adjustment		14			5			9			(20		)		(7		)	(13		)
Other comprehensive (loss) income from continuing operations		577			202			375			(10,117		)		(3,540		)	(6,577		)
From discontinued operations:
Net unrealized gain arising during the year (net of deferred acquisition costs)		—			—			—			(7,239		)		(2,533		)	(4,706		)
Reclassification adjustment for gains included in net income		—			—			—			—				—			—
Net unrealized gain		—			—			—			(7,239		)		(2,533		)	(4,706		)
Foreign currency translation adjustment		—			—			—			(266		)		(93		)	(173		)
Other comprehensive income from discontinued operations		—			—			—			(7,505		)		(2,626		)	(4,879		)
Total other comprehensive (loss) income		$	577		$	202		$	375		$	(17,622	)		$	(6,166	)	$	(11,456	)

23

14.UNCONSOLIDATED SUBSIDIARY

During 2005, we entered into a strategic alliance with PharmaCare and created PDMS, which is 50% owned by Universal American and 50% owned by PharmaCare. PDMS principally performs marketing and risk management services on behalf of our PDPs and PharmaCare for which it receives fees and other remuneration from our PDPs and PharmaCare. We do not control PDMS and therefore PDMS is not consolidated in our financial statements. Our investment in PDMS is accounted for on an equity basis and is included in other assets. Our investment in PDMS was $5.1 million at March 31, 2007 and $6.0 million at December 31, 2006. Our share in the income or loss of PDMS is included in “equity in earnings of unconsolidated subsidiary.”  Our share in the net income of PDMS was $13.2 million for the three months ended March 31, 2007 and was $9.8 million for the three months ended March 31, 2006. PDMS made distributions to its owners aggregating $28.0 million during the three months ended March 31, 2007. Our share of these distributions was $14.0 million. No distributions were made during the three months ended March 31, 2006.

The condensed financial information for 100% of PDMS is as follows:

	March 31,			December 31,
	2007			2006
	(In thousands)
Assets
Cash and investments		$	4,072		$	7,237
Other		7,555			10,234
Total Assets		$	11,627		$	17,471
Liabilities and Equity
Accrued expenses and other		$	1,307		$	5,558
Equity		10,320			11,913
Total liabilities and equity		$	11,627		$	17,471

	Three months ended March 31,
	2007		2006
	(In thousands)
Total revenue	$	27,146	$	21,104
Total expenses	739		1,490
Income	$	26,407	$	19,614

15.BUSINESS SEGMENT INFORMATION

The Company’s principal business segments are based on product and include:  Senior Managed Care—Medicare Advantage, Senior Market Health Insurance, Specialty Health Insurance, Life Insurance and Annuity and Senior Administrative Services. The Company also reports the activities of our holding company in a separate segment. Reclassifications have been made to conform prior year amounts to the current year presentation. A description of these segments follows:

Senior Managed Care—Medicare Advantage—The Senior Managed Care—Medicare Advantage segment includes the operations of our initiatives in managed care for seniors. We operate various health plans, including SelectCare of Texas, that offer coverage to Medicare beneficiaries under a contract with CMS in Southeastern Texas, Oklahoma, Florida and Wisconsin. The health plans are sold by our career and independent agents and directly by employee representatives. In connection with the health plans, we operate separate Management Service Organizations (“MSO’s”) that manage that business and affiliated Independent Physician Associations (“IPA’s”). We participate in the net results derived from these affiliated IPA’s. Our Medicare Advantage private fee-for-service plans, also under a contract with CMS,

24

are sold by our career and independent agents. We currently market PFFS products in 2,600 counties throughout 35 states.

Senior Market Health Insurance—This segment consists of our Medicare Supplement business and other senior market health products distributed through our career agency sales force and through our network of independent general agencies, as well as our Medicare Part D plans, including the equity in the income or loss of PDMS, that began offering prescription drug coverage for seniors on January 1, 2006. The inclusion of the operating results from our Medicare Part D business with those of our Medicare Supplement business has resulted in an increase in the level of seasonality in our reported results during a given calendar year. These businesses generally see higher claim experience in the early quarters of the year, with lower claims experience in the later quarters of the year, resulting in a pattern of increasing reported net income attributable to those businesses.

Specialty Health Insurance—This segment includes specialty health insurance products, primarily fixed benefit accident and sickness disability insurance sold to the middle income self-employed market in the United States. This segment also includes certain products that we no longer sell such as long term care and major medical insurance. This segment’s products are distributed primarily by our career agents. The results for this segment for prior periods have been restated to exclude the results for PennCorp Life, since it is now classified as discontinued operations.

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

Senior Administrative Services—Our senior administrative services subsidiary acts as a third party administrator and service provider of senior market insurance products and geriatric care management for both affiliated and unaffiliated insurance companies. The services provided include policy underwriting and issuance, telephone and face-to-face verification, policyholder services agent licensing, commission payment, claims adjudication, case management, care assessment, referral to health care facilities and administration of our Part D prescription drug plans on behalf of our subsidiaries which commenced on January 1, 2006. In 2007, we began administration for private-fee-for-service business.

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

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

25

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

	Three months ended March 31,
	2007						2006
	Revenue			Income (Loss) Before Income Taxes			Revenue			Income (Loss) Before Income Taxes
	(In thousands)
Senior Managed Care—Medicare Advantage	$	382,017		$	5,992		$	91,034		$	9,232
Senior Market Health Insurance	191,218			(6,888		)	178,790			(860		)
Specialty Health Insurance	24,249			3,413			24,892			1,402
Life Insurance and Annuity	25,345			3,297			25,041			1,042
Senior Administrative Services	25,565			5,837			20,204			2,427
Corporate	653			(7,754		)	135			(5,481		)
Intersegment revenues	(19,329		)	—			(14,628		)	—
Adjustments to segment amounts:
Net realized gains (losses)(1)	1,904			1,904			(1		)	(1		)
Equity in (earnings) loss of unconsolidated subsidiary(2)	(13,203		)	—			(9,807		)	—
Total—Continuing Operations	$	618,419		$	5,801		$	315,660		$	7,761

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

(2)We report the equity in the earnings of unconsolidated subsidiary as revenue for our Senior Market Health Insurance segment for purposes of analyzing the ratio of net pharmacy benefits incurred because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, this amount is included as a separate line in income from continuing operations.

Identifiable assets by segment are as follows:

	March 31,			December 31,
	2007			2006
	(In thousands)
Senior Managed Care—Medicare Advantage	$	834,954			$	390,413
Senior Market Health Insurance	886,107				819,056
Specialty Health Insurance	593,032				527,486
Life Insurance and Annuity	721,210				731,003
Senior Administrative Services	29,811				31,326
Corporate	945,806				816,908
Intersegment assets(1)	(866,912		)		(731,150		)
Total Assets	$	3,144,008			$	2,585,042

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

26

16.DISCONTINUED OPERATIONS

On December 1, 2006, the Company completed the sale of UAFC (Canada) Inc., including PennCorp Life Canada. Pursuant to the Purchase Agreement, the Company sold all of the outstanding shares of UAFC (Canada) Inc., owner of the Company’s Canadian insurance subsidiary, PennCorp Life Canada, to a venture 70% owned by La Capitale and 30% owned by GMF, for an aggregate purchase price of approximately $131 million (CAD$146 million) in cash, on the terms and conditions set forth in the Purchase Agreement (the “Sale”). The purchase price is comprised of $121.9 million (CAD $137.0 million) in cash, plus an amount equal to the balance of net earnings generated by PennCorp Life Canada during the period from January 1, 2006 through the closing date, December 1, 2006, equal approximately $8.4 million (CAD $9.9 million). Universal American has accounted for the operations of PennCorp Life Canada as discontinued operations beginning in the third quarter of 2006. All prior period amounts have been reclassified to conform to this presentation.

The sale resulted in an after-tax realized gain of approximately $48.4 million and generated after tax cash proceeds of approximately $95 million comprised of approximately $84 million of cash received at closing plus approximately $8.4 million in March 2007 for the net earnings of PennCorp Life Canada for 2006 through the closing date plus an additional $2.6 million due upon the release of escrow in December 2008, subject to any claims. U.S. income tax on the sale of PennCorp Life Canada of approximately $28.2 million was paid in March 2007.

During the second quarter of 2006, PennCorp Life Canada paid dividends of C$4.9 million (approximately US$4.4 million) to Universal American. During 2005, PennCorp Life Canada became subject to a 5% withholding tax on dividends paid to Universal American. The withholding tax paid on the dividends from PennCorp Life Canada in 2006 was C$0.2 million (approximately US$0.2 million).

In order to mitigate the risk fluctuations in the value of the U.S. dollar as compared to the Canadian dollar between the date of the purchase agreement to the closing of the transaction, in connection with the sale of PennCorp Life Canada, on September 5, 2006, Universal American entered into a financial hedging currency collar, which set the upper value of the exchange rate at CAD$0.9124 per U.S. $1.00 and the lower value of the exchange rate at CAD$0.8900 per U.S. $1.00. The spot exchange rate was CAD$0.8993 per U.S. $1.00 at the time Universal American entered into the hedging transaction. At the closing, the spot exchange rate was CAD$0.8733 per U.S. $1.00 and the financial hedging currency collar was terminated. The resulting gain on the financial hedging currency collar on the closing date was approximately $2.2 million, which was included with the gain on the sale.

Summarized financial information for our discontinued operations for the three months ended March 31, 2007 and 2006 is presented below.

	2007			2006
Total revenue		$	—	$	20,062
Total expenses		—		16,766
Income before provision for taxes		—		3,296
Provision for income taxes		—		1,207
Income from discontinued operations		$	—	$	2,089

27

Total assets and liabilities of PennCorp Life Canada, located entirely in Canada, are as follows:

	March 31, 2007			December 1, 2006
	(In thousands)
Assets
Cash and investments		$	—		$	266,607
Deferred policy acquisition costs		—			33,942
Other assets		—			19,025
Total assets		$	—		$	319,574
Liabilities
Policyholder liabilities		$	—		$	223,656
Other liabilities		—			6,385
Total liabilities		$	—		$	230,041

17.SALE OF SUBSIDIARY

On January 19, 2007, the Company completed the sale of Peninsular Life Insurance Company, an inactive subsidiary, for approximately $7.9 million, resulting in a pre-tax gain of $2.0 million, which is included in net realized gains. At closing, $7.4 million of cash was received. The remaining $0.5 million is due upon the release of funds held in escrow in part, 30 days following the delivery of a statement of capital and surplus as of the closing date and the balance in January 2008, subject to any claims against the escrowed funds.

18.SUBSEQUENT EVENT

On October 25, 2006, the Company announced that its Board of Directors had received a proposal from members of management led by Richard A. Barasch, Universal American’s Chairman and Chief Executive Officer, and private equity firms Capital Z Partners, Ltd. (“Capital Z”), Lee Equity Partners, LLC (“Lee Equity”), Perry Capital, LLC (“Perry Capital”) and Welsh, Carson, Anderson & Stowe X, L.P. (“Welsh, Carson”) to acquire all of Universal American’s publicly held common stock for $18.15 per share in cash. Universal American’s Board of Directors has established a Special Committee consisting of four independent directors to review and evaluate the proposal and any strategic alternatives to the proposal that may be available to Universal American. On March 5, 2007, the Special Committee announced that it had rejected the management-led proposal, and on May 8, 2007, Universal American announced that the investor group had withdrawn its offer and that the Special Committee was disbanded by the Board of Directors.

On May 8, 2007, Universal American announced that it had entered into a definitive agreement to acquire MemberHealth, Inc., a privately-held pharmacy benefits manager and sponsor of CCRx, a national Medicare Part D plan with more than 1.1 million members (the “MemberHealth Transaction”). The purchase price will be approximately $630 million, consisting of 55% in cash and 45% in Universal American common stock valued at $20 per share, plus potential performance-based consideration of up to $150 million. The transaction, which is expected to close late in the third quarter of 2007, is subject to customary closing conditions, including approval by the shareholders of Universal American and appropriate regulatory approvals.

To fund the cash required to close the MemberHealth Transaction and to provide Universal American with the capital it needs to support its organic growth, private equity funds operated by Lee Equity Partners LLC, Perry Capital LLC, Union Square Partners Management, LLC (the successor to Capital Z Management, LLC) and Welsh, Carson, Anderson and Stowe (collectively, the “Equity Investors”), will acquire securities in Universal American valued at $20 per share. Pursuant to a Securities

28

Purchase Agreement (the “Stage 1 Securities Purchase Agreement”) with the Equity Investors, Universal American will issue and sell to the Equity Investors in a private placement an aggregate of 30,473 shares of Series A Preferred Stock and 19,527 shares of Series B Preferred Stock. Pursuant to a second Securities Purchase Agreement (the “Stage 2 Securities Purchase Agreement”) with the Equity Investors, Universal American will issue and sell to the Equity Investors an aggregate of 125,000 shares of Series B Preferred Stock (a portion of which may be issued to and purchased by an Equity Investor  under the Stage 2 Purchase Agreement instead in the form of Series A Preferred Stock at the request of such Investor).

The total amount to be invested by the Equity Investors in accordance with the Stage 1 Securities Purchase Agreement and Stage 2 Securities Purchase Agreement will be approximately $350 million, of which $100 million will be funded in the second quarter of 2007 with the balance to be funded in conjunction with the closing of the MemberHealth Transaction.

The Series A Preferred Stock and Series B Preferred Stock have not been registered under the Securities Act of 1933, as amended, and they may not be subsequently offered or sold by investors in the United States absent registration or an applicable exemption from the registration requirement. This report does not constitute an offer to sell or the solicitation of an offer to buy any security and shall not constitute an offer, solicitation or sale of any securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.

29

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

Introduction

The following discussion and analysis presents a review of the Company as of March 31, 2007 and its results of operations for the three months ended March 31, 2007, and 2006. The following analysis of our consolidated results of operations and financial condition should be read in conjunction with the consolidated financial statements and related consolidated footnotes as well as 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, 2006.

Overview

Our principal business segments are based on our products and include:  Senior Managed Care—Medicare Advantage, Senior Market Health Insurance, Specialty Health Insurance, Life Insurance and Annuity and Senior Administrative Services. We also report the activities of our holding company in a separate segment. Reclassifications have been made to conform prior year amounts to the current year presentation. See “Note 15—Business Segment Information” in our consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of our segments.

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

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of assets and liabilities reported by us at the date of the financial statements and the revenues and expenses reported during the reporting period. As additional information becomes available or actual amounts become determinable, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates. Accounts that, in our judgment, are most critical to the preparation of our financial statements include future policy benefits and claim liabilities, deferred policy acquisition costs, goodwill, present value of future profits and other intangible assets, the valuation of certain investments and deferred income taxes. There have been no changes in our critical accounting policies during the current quarter.

Policy related liabilities

We calculate and maintain reserves for the estimated future payment of claims to our policyholders using the same actuarial assumptions that we use in the pricing of our products. For our accident and health insurance business, we establish an active life reserve for expected future policy benefits, plus a liability for due and unpaid claims and incurred but not reported claims. Our net income depends upon the extent to which our actual claims experience is consistent with the assumptions we used in setting our reserves and pricing our policies. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities resulting in reduced net income and shareholders’ equity.

30

A summary of the liabilities by category is presented in the following table:

	March 31, 2007					December 31, 2006
Liability Type	Amount		% of Total Policy Liabilities			Amount		% of Total Policy Liabilities
	($ in thousands)
Policyholder Account Balances	$	475,313		31	%	$	485,189		37	%
Future Policy Benefit Reserves:
Traditional life insurance	193,156			13	%	189,243			14	%
Accident and health	413,610			27	%	411,254			32	%
Total Future Policy Benefit Reserves	606,766			40	%	600,497			46	%
Policy and contract claims—Accident and Health:
Due and Unpaid Claims	147,608			9	%	105,272			8	%
Incurred but not reported claims (“IBNR”)	281,712			19	%	96,539			8	%
Total Accident and Health Claim Liabilities	429,320			28	%	201,811			16	%
Policy and contract claims—Life	12,760			1	%	12,901			1	%
Total Policy Liabilities	$	1,524,159		100	%	$	1,300,398		100	%

Policyholder Account Balances

Policyholder account balances represent the balance that accrues to the benefit of the policyholder, otherwise known as the account value, as of the financial statement date. Account values are increased for additional deposits received and interest credited based on the account value. Account values are reduced by surrenders and other withdrawals, including withdrawals relating to the cost of insurance and expense charges. The interest crediting rates are reviewed periodically and adjusted (with certain minimum levels below which the crediting rate cannot fall).

Future Policy Benefit Reserves—Traditional Life Insurance Policies

The liability for future policy benefits represents the present value of future benefits to be paid to or on behalf of policyholders, less the future value of net premiums and is calculated based on actuarially recognized methods using morbidity and mortality tables, which are modified to reflect the Company’s actual experience when appropriate.

Future Policy Benefit Reserves—Accident and Health Policies

The liability for future policy benefits represents the present value of future benefits to be paid to or on behalf of policyholders, less the future value of net premiums and is calculated based on actuarially recognized methods using morbidity and mortality tables, which are modified to reflect the Company’s actual experience when appropriate.

For our fixed benefit accident and sickness and our long term care products, we establish a reserve for future policy benefits at the time each policy is issued based on the present value of future benefit payments less the present value of future premiums. (It should be noted that we no longer issue new long term care policies, however our current policies are renewably annually at the discretion of the policyholder, as evidenced by the policyholder continuing to make premium payments.)  In establishing these reserves, we must evaluate assumptions about mortality, morbidity, lapse rates and the rate at which new claims are submitted to us. We estimate the future policy benefits reserve for these products using the above assumptions and actuarial principles. For long-duration insurance contracts, these original assumptions are used throughout the life of the policy and generally are not subsequently modified.

31

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

Policy and Contract Claims—Accident and Health Policies

The Policy and Contract Claims liability for our Accident and Health Policies include a liability for unpaid claims, including claims in the course of settlement, as well as a liability for incurred but not yet reported claims (“IBNR”). Our IBNR, by major product grouping is as follows:

	Direct and Assumed
			% of Total						% of Total			Net of Reserves Ceded to Reinsurers
Accident & Health Claims Liability	March 31, 2007		Policy Liabilities			December 31, 2006			Policy Liabilities			March 31, 2007		December 31, 2006
	($ In thousands)
Due & Unpaid Claims:
Medicare Part D	$	66,840		4	%		$	44,052		4	%	$	33,702		$	22,179
Medicare Advantage—Health Plans	58,089			3	%		44,830			3	%	51,285			42,865
Other—Specialty	22,680			2	%		16,390			1	%	9,307			4,000
Total Due & Unpaid Claims	147,609			9	%		105,272			8	%	94,294			69,044
IBNR:
Medicare Supplement	51,492			3	%		51,860			4	%	31,575			37,801
Medicare Advantage—Private Fee-For-Service	223,007			15	%		32,985			3	%	223,007			32,985
Other—Specialty	7,212			1	%		11,694			1	%	6,174			11,695
Total IBNR	281,711			19	%		96,539			8	%	260,756			82,481
Total Accident and Health Claim Liabilities	$	429,320		28	%		$	201,811		16	%	$	355,050		$	151,525

Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability, premium rate increases and extra contractual damage awards. Therefore, the reserves and liabilities we establish are based on extensive estimates, assumptions and prior years’ statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of acquired policy liabilities is subject to similar estimates and assumptions. Establishing reserves involves inherent uncertainties, and it is possible that actual claims could materially exceed our reserves and have a material adverse effect on our results of operations and financial condition.

We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim payment and claim receipt patterns, as well as historical medical cost trends. Depending on the period for which incurred claims are estimated, we apply a different method in determining our estimate. For periods prior to the most recent three months, the key assumption used in estimating our IBNR is that the completion factor pattern remains consistent over a rolling 12-month period after adjusting for known changes in claim inventory levels and known changes in claim payment processes. Completion factors result from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For the most recent three months, the incurred claims are estimated primarily from a trend analysis based upon per member per month (“PMPM”) claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, product mix, and seasonality.

32

The completion factor method is used for the months of incurred claims prior to the most recent three months because the historical percentage of claims processed for those months is at a level sufficient to produce a consistently reliable result. Conversely, for the most recent three months of incurred claims, the volume of claims processed historically is not at a level sufficient to produce a reliable result, which therefore requires us to examine historical trend patterns as the primary method of evaluation. Due to the significant growth in our Private fee-for-service business and the limited historical claims experience in our expansion regions, we have determined our reserve based on our pricing for the product.

Medical cost trends potentially are more volatile than other segments of the economy. The drivers of medical cost trends include increases in the utilization of hospital facilities, physician services, prescription drugs, and new medical technologies, as well as the inflationary effect on the cost per unit of each of these expense components. Other external factors such as government-mandated benefits or other regulatory changes, increases in medical services, an aging population, catastrophes, and epidemics also may impact medical cost trends. Internal factors such as claims processing cycle times, changes in medical management practices and changes in provider contracts also may impact our ability to accurately predict estimates of historical completion factors or medical cost trends. All of these factors are considered in estimating IBNR and in estimating the PMPM claims trend for purposes of determining the reserve for the most recent three months. Additionally, we continually prepare and review follow-up studies to assess the reasonableness of the estimates generated by our process and methods over time. The results of these studies are also considered in determining the reserve for the most recent three months. Each of these factors requires significant judgment by management.

Our historical assumptions have not varied significantly from the actual amounts experienced to the extent that such variance resulted in a material adverse impact on reserves and net income. A summary of the activity in our accident & health policy and contract claim liability is included in Note 9—Accident & Health Policy and Contract Claim Liabilities in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.

Sensitivity Analysis

The following table illustrates the sensitivity of our accident and health IBNR payable at March 31, 2007 to certain 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(a):							Claims Trend Factor(b):
(Decrease) Increase in Factor			Increase (Decrease) in Net Accident & Health IBNR				(Decrease) Increase in Factor			(Decrease) Increase in Net Accident & Health IBNR
($ in thousands)
	(3	)%		$	459			(3	)%		$	(9,812	)
	(2	)%		$	306			(2	)%		$	(6,541	)
	(1	)%		$	153			(1	)%		$	(3,270	)
	1	%		$	(152	)		1	%		$	3,279
	2	%		$	(305	)		2	%		$	6,558
	3	%		$	(458	)		3	%		$	9,837

(a)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.

33

(b)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 for our Medicare Supplement business. Due to the significant growth in our Private fee-for-service business and the limited historical claims experience in our expansion regions, we have determined our reserve based on our pricing for the product. The amounts above reflect the estimated potential changes in medical and other expenses payable caused by changes in the loss ratio for our Private fee-for-service business.

Policy and Contract Claims—Life Policies

The liability for unpaid claims, including IBNR, include estimates of amounts to fully settle known reported claims as well as claims related to insured events that the Company estimates have been incurred, but have not yet been reported to the Company.

Deferred policy acquisition costs

The cost of acquiring new business, principally non-level commissions, agency production, policy underwriting, policy issuance, and associated costs, all of which vary with, and are primarily related to the production of new and renewal business, are deferred. For interest-sensitive life and annuity products, these costs are amortized in relation to the present value of expected gross profits on the policies arising principally from investment, mortality and expense margins in accordance with FAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”. The determination of expected gross profits for interest-sensitive products is an inherently uncertain process that relies on assumptions including projected interest rates, the persistency of the policies issued as well as anticipated benefits, commissions and expenses. It is possible that the actual profits from the business may vary materially from the assumptions used in the determination and amortization of deferred acquisition costs (“DAC”).

For other life and health products, these costs are amortized in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with FAS No. 60, “Accounting and Reporting by Insurance Enterprises.”

The Company utilizes a prospective unlocking approach to account for DAC for its Medicare supplement business. Assumptions for future rate increases, persistency and benefit-design are used in the determination of DAC. Actual experience may vary from assumed trends, however these assumptions are not changed unless prospective unlocking is triggered. Prospective unlocking revises the assumptions to bring them in line with emerging experience. Annually, during its third fiscal quarter, the Company performs an analysis to determine whether unlocking is triggered as a result of significant changes in the actual premium rate increase experience. At the point when unlocking is triggered, the DAC model is modified prospectively with assumptions for all components, including rate increases, persistency, benefit design and expenses updated based on actual experience. If and when unlocking of assumptions is triggered, there is not immediate impact on the DAC balance. Rather, the unlocking impacts the pattern of the future amortization of the DAC balance. The reserves for future policy benefits for Medicare supplement business also are impacted prospectively by unlocking and according, similar assumption revisions would occur.

At January 1, 2005, prospective unlocking was triggered due to the actual trend in premium rates of 11.6% exceeding the assumed trend of 10%. The balance of DAC for Medicare supplement business as of January 1, 2005 was approximately $81 million. The prospective unlocking had the effect of slowing the future amortization of DAC, as compared to the anticipated amortization had the prospective unlocking not been triggered. Prospective unlocking also had the effect of slowing the future increase in benefit reserves, as compared to the anticipated increase had the unlocking not been triggered.

34

During the third quarter of 2006, the annual test for unlocking was performed and we determined that there were no significant changes in the actual premium rate increase experience. Accordingly, there was no prospective unlocking of assumptions for DAC for the Company’s Medicare supplement business during 2006. However, based on current premium rate trends, we believe that it is likely that unlocking will be triggered during 2007. The balance of DAC for Medicare Supplement business as of March 31, 2007 was approximately $110.9 million. Should the unlocking be triggered in 2007, we anticipate the amortization subsequent to the unlocking will be slower in the initial quarters subsequent to unlocking by between $0.3 million and $0.7 million per quarter, and then it will increase.

Deferred policy acquisition costs are written off to the extent that it is determined that present value of future policy premiums and investment income or the net present value of expected gross profits would not be adequate to recover the unamortized costs.

Present value of future profits and other intangibles

Business combinations accounted for as a purchase result in the allocation of the purchase consideration to the fair values of the assets and liabilities acquired, including the present value of future profits, establishing such fair values as the new accounting basis. The present value of future profits is based on an estimate of the cash flows of the in force business acquired, discounted to reflect the present value of those cash flows. The discount rate selected depends upon the general market conditions at the time of the acquisition and the inherent risk in the transaction. Purchase consideration in excess of the fair value of net assets acquired, including the present value of future profits and other identified intangibles, for a specific acquisition, is allocated to goodwill. Allocation of purchase price is performed in the period in which the purchase is consummated. Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies and refinements made to estimates of fair value in connection with the preliminary allocation.

Other amortizing assets include acquired life and accident & health policy bases, managed care membership bases, provider contracts, customer contracts and hospital network contracts. Below is a table reflecting our amortization policies for each of these items:

Description	Weighted Average Life At Acquisition		Amortization Basis
Insurance policies acquired		7-9	The pattern of projected future cash flows for the policies acquired over the estimated weighted average life of the policies acquired.
Distribution Channel acquired		30	Straight line over the estimated life of the asset.
Membership base acquired		7	The pattern of projected future cash flows for the membership base acquired over the estimated weighted average life of the membership base
Provider Contracts		10	Straight line of the estimated weighted average life of the contracts
Administrative Service Contracts		6	The pattern of projected future cash flows for the customer contracts acquired, over the estimated weighted average life of the contracts
Hospital network contracts		10	The pattern of projected future cash flows for the hospital network contracts acquired over the estimated weighted average life of the contracts

35

At least annually, management reviews the unamortized balances of present value of future profits, goodwill and other identified intangibles to determine whether events or circumstances indicate the carrying value of such assets is not recoverable, in which case an impairment charge would be recognized. Management believes that no impairments of present value of future profits, goodwill or other identified intangibles existed as of March 31, 2007.

Investment valuation

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

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

Income taxes

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

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

During the three months ended March 31, 2007, we added approximately $0.6 million of valuation allowances on tax capital loss carryforwards, resulting from a portion of the tax capital loss that was generated from the sale of Peninsular during that period. As of March 31, 2007 we have $0.8 million of valuation allowances on tax capital loss carryforwards remaining.

36

Significant Transactions and Initiatives

Medicare Advantage

We entered the Medicare Advantage business in 2004 with the acquisition of Heritage Health Systems, Inc. which operates Medicare Advantage coordinated care plans in Southeastern Texas and began offering new PFFS plans in 2 states. During 2006, we increased the marketing of PFFS plans to a total of 15 states.

For 2007, we have expanded into new markets for our Medicare HMO and PFFS plans. We currently offer our Medicare Advantage coordinated care plans in 3 new markets; Florida, north Texas and Wisconsin. Through our insurance subsidiaries American Progressive and Pyramid Life, we currently offer our PFFS products in 35 states in 2007. We incurred approximately $25 million of additional costs in order to execute these expansion initiatives during the third and fourth quarters of 2006. As of March 1, 2007 our enrollment in PFFS plans has increased to approximately 146,000, representing approximately $1.2 billion of annualized premium.

On March 1, 2007, the Company acquired Harmony Health, Inc. (“Harmony”), a provider-owned company that operates GlobalHealth, Inc. (“GlobalHealth”), a Medicare Advantage and Commercial managed care plan in Oklahoma City, Oklahoma for $18.2 million in cash including direct costs of acquisition of $0.2 million. Harmony was a majority-owned subsidiary of the Oklahoma City Clinic. Founded in 2002, GlobalHealth had approximately 3,800 Medicare Advantage members with annualized revenue of approximately $37 million at the date of acquisition. Under the terms of the agreement, the Oklahoma City Clinic has entered into a long-term agreement with Universal American to provide healthcare services to GlobalHealth members. In addition, the Oklahoma City Clinic will retain the risk for commercial business under a global capitation arrangement.

Medicare Part D

Effective January 1, 2006, private insurers were permitted to sponsor insured stand-alone PDPs pursuant to Part D, which was established by the MMA. A portion of the premium for this insurance is paid by the Federal government, and the balance, if any, is paid by the individuals who enroll. The Federal government will also provide additional subsidies in the form of premium support and coverage of the cost-sharing elements of the plan to certain low income Medicare beneficiaries. For the 2007 plan year, we have been approved to offer, through our insurance subsidiaries, our Prescription Pathway SM prescription drug plans in all 32 regions designated by CMS in which we bid, which excludes only Hawaii and Alaska. In addition, we are entitled to receive auto assignment of dual eligibles and low income subsidy (“LIS”) beneficiaries who are dually eligible for Medicare and Medicaid in 28 of the 32 CMS regions. These regions include all of the 26 regions for which we were eligible to receive auto assignees in 2006, plus two new regions. We believe that this new program provides increased opportunities to offer a much needed coverage and to further serve our target markets.

Through our strategic alliance with PharmaCare, we retain 50% of the Medicare Part D business of our PDPs. The remainder is reinsured to PharmaCare Re on a 50% quota share basis. Additionally, as part of the strategic alliance, we created PDMS, which is 50% owned by us and 50% owned by PharmaCare. PDMS principally performs marketing and risk management services on behalf of our PDPs and PharmaCare Re.

Medicare Supplement

Medicare Supplement insurance reimburses the policyholder for certain expenses that are not covered by standard Medicare coverage such as deductibles and co-pays. This coverage is designed for people who want the freedom to choose providers who participate in the standard Medicare program and limit their

37

out of pocket costs to the fixed annual premiums they pay, as opposed to the more restrictive networks that exist in Medicare Advantage healthplan markets and the co-payments and deductibles that exist in PFFS and other health plans. We believe that the market for Medicare supplement products will continue to be attractive, especially because many seniors may lose similar coverage that had previously been offered to them as a retiree benefit by their former employers.

In the last 15 months, there has been increased competition from other Medicare Supplement carriers, as well as from Medicare Advantage plans, which has affected our production and persistency of Medicare Supplement business. As a result, we continue to experience higher levels of lapsation in our Medicare Supplement business. This excess lapsation has accelerated the amortization of the deferred acquisition cost and present value of future profits assets associated with the business that lapsed. We cannot give assurances that lapsation of our Medicare Supplement business will decline, requiring faster amortization of the deferred costs.

Results of Operations

The inclusion of the operating results from our Medicare Part D business with those of our Medicare Supplement business has resulted in an increase in the level of seasonality in our reported results during a given calendar year. These businesses generally see higher claim experience in the early quarters of the year, with lower claims experience in the later quarters of the year, resulting in a pattern of increasing reported net income over the calendar year attributable to those businesses. The following table reflects income from each of our segments(1)and contains a reconciliation to reported net income:

Operations—Consolidated Overview

	Three months ended March 31,
	2007			2006
	(In thousands)
Senior Managed Care-Medicare Advantage(1)	$	5,992		$	9,232
Senior Market Health Insurance(1)	(6,888		)	(860		)
Specialty Health Insurance(1)(2)	3,413			1,402
Life Insurance and Annuity(1)	3,297			1,042
Senior Administrative Services(1)	5,837			2,427
Corporate(1)	(7,754		)	(5,481		)
Net realized gains on investments	1,904			(1		)
Income before income taxes(1)	5,801			7,761
Income taxes, excluding capital gains	773			2,829
Income taxes on capital gains	667			—
Total income taxes	1,440			2,829
Income from continuing operations	4,361			4,932
Income from discontinued operations(2)	—			2,089
Net income	$	4,361		$	7,021
Earnings per common share (diluted):
Income from continuing operations	$	0.07		$	0.08
Income from discontinued operations	—			0.04
Net income	$	0.07		$	0.12

38

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

(2)Prior periods adjusted to reflect the operations of our Canadian subsidiary as discontinued operations.

Three months ended March 31, 2007 and 2006

Net income for the three months ended March 31, 2007 decreased to $4.4 million, or $0.07 per diluted share, compared to $7.0 million, or $0.12 per diluted share for the first quarter of 2006. Income from continuing operations, after taxes, was $4.4 million, or $0.07 per diluted share for the first quarter of 2007 compared to income from continuing operations, after taxes, of $4.9 million, or $0.08 per diluted share for the first quarter of 2006. Income from continuing operations for 2007 includes realized investment gains, net of tax, of $1.2 million, relating primarily to the gain on the sale of Peninsular. Our effective tax rate for continuing operations was 24.8% for the first quarter of 2007, and 36.4% for the first quarter of 2006. The effective tax rate for the first quarter of 2007 includes a one-time benefit relating to state taxes of $0.7 million.

The first quarter of 2006 included income from discontinued operations, after taxes of $2.1 million or $0.04 per diluted share

Our Senior Managed Care—Medicare Advantage segment generated segment income of $6.0 million in the first quarter of 2007, a decrease of $3.2 million, compared to $9.2 million for the first quarter of 2006, primarily due to higher medical loss ratios and expenses relating to infrastructure expansion to support growth of our PFFS plans.

The Senior Market Health Insurance segment generated a loss of $6.9 million in the first quarter of 2007 compared to a loss of $0.9 million for the first quarter of 2006. Results for our Medicare Supplement business declined by $5.6 million compared to the first quarter of 2006 primarily as a result of the continued effect of higher levels of lapsation of our Medicare Supplement in force business, which resulted in accelerated amortization of deferred acquisition costs. A significant portion of the lapsation was attributable to the 15,000 Medicare Supplement policyholders who switched to our PFFS coverage during the first quarter. Segment income for our Part D business decreased by $0.5 million, or 8% compared to the first quarter of 2006.

Our Specialty Health Insurance segment income increased by $2.0 million, or 143%, compared to the first quarter of 2006, primarily as a result of lower commissions and general expenses.

Segment income from our Life Insurance and Annuity segment increased by $2.3 million, compared to the first quarter of 2006, primarily as a result of an increase in investment income and more favorable mortality.

Segment income for our Senior Administrative Services segment increased by $3.4 million, or 141%, to $5.8 million for the first quarter of 2007, as compared to the same period of 2006. This increase is primarily the result of the growth in business administered.

The loss from our Corporate segment increased by $2.3 million, or 41%, for the three months ended March 31, 2007 compared to the three months ended March 31, 2006. The increase was due primarily to increases in other parent company expenses, stock-based compensation and interest costs.

39

Segment Results—Senior Managed Care—Medicare Advantage

	Three months ended March 31,
	2007		2006
	(In thousands)
Net premiums	$	379,098	$	89,958
Net and other investment income	2,919		1,076
Total revenue	382,017		91,034
Medical expenses	317,027		66,200
Amortization of intangible assets	971		870
Commissions and general expenses	58,027		14,732
Total benefits, claims and other deductions	376,025		81,802
Segment income	$	5,992	$	9,232

Our Senior Managed Care—Medicare Advantage segment includes the operations of our initiatives in managed care for seniors. We operate various health plans that offer coverage to Medicare beneficiaries, under contracts with CMS, in Southeastern Texas, Oklahoma, Florida, Wisconsin and North Texas. The health plans are sold by our career and independent agents and directly by employee representatives. Our Medicare Advantage PFFS plans, also under a contract with CMS, are sold by our career and independent agents through American Progressive and Pyramid Life in approximately 2,600 counties across 35 states.

Three months ended March 31, 2007 and 2006

Our Senior Managed Care—Medicare Advantage segment generated segment income of $6.0 million in the first quarter of 2007, a decrease of $3.2 million, compared to $9.2 million for the first quarter of 2006, primarily due to higher medical loss ratios and expenses relating to infrastructure expansion to support growth of our PFFS plans.

Healthplans

	Three months ended March 31,
	2007		2006
	(In thousands)
Net premiums	$	114,632	$	73,672
Net and other investment income	1,673		1,005
Total revenue	116,305		74,677
Medical expenses	86,084		54,566
Amortization of intangible assets	971		870
Commissions and general expenses	22,529		12,603
Total benefits, claims and other deductions	109,584		68,039
Segment income	$	6,721	$	6,638

Three months ended March 31, 2007 and 2006

Revenues.   Net premiums for the Healthplans increased by $41.0 million, or 56%, compared to the first quarter of 2006. Approximately $38.3 million of the increase was due to growth in membership to approximately 46,000 members from 28,000 in the first quarter of 2006. Additionaly, in connection with the acquisition of Harmony Health in March 2007, we acquired approximately 10,600 commercial members, representing approximately $2.8 million of the increase in revenues. This commercial business has been capitated at an 89% medical loss ratio through an arrangement with the seller, the Oklahoma City Clinic.

40

Net investment income increased by $0.7 million, due primarily to growth in invested assets as a result of growth in business.

Benefits, Claims and Expenses.   Medical expenses increased by $31.5 million, or 58%, compared to the first quarter of 2006. Growth in membership added approximately $28.3 million and the Harmony Health commercial business added $2.5 million. The balance of $0.7 million was due to an increase in the loss ratio. Overall loss ratios for the healthplans, excluding the Harmony Health commercial business, increased to 74.7% for the first quarter of 2007, from 74.1% for the first quarter of 2006. Commissions and general expenses increased by $9.9 million compared to the first quarter of 2006, due primarily to the growth in business, as well as an increase in commissions, as more of the Medicare Advantage product is being sold by our agents.

Private Fee-for-Service

	Three months ended March 31,
	2007			2006
	(In thousands)
Net premiums	$	264,466		$	16,286
Net and other investment income	1,246			71
Total revenue	265,712			16,357
Medical expenses	230,943			11,634
Commissions and general expenses	35,498			2,129
Total benefits, claims and other deductions	266,441			13,763
Segment (loss) income	$	(729	)	$	2,594

Three months ended March 31, 2007 and 2006

Revenues.   Net premiums for the PFFS business increased by $248.2 million, or 1,524%, compared to the first quarter of 2006. Approximately $231.6 million of the increase was due to the growth in membership to approximately 146,000 members from 10,000 in the first quarter of 2006  The balance of the increase of $16.6 million was due to an increase in the average premium PMPM. Net investment income increased by $1.2 million, due primarily to the growth in invested assets as a result of the growth in business.

Benefits, Claims and Expenses.   Medical expenses increased by $219.3 million, or 1,885%, compared to the first quarter of 2006. Growth in membership added approximately $177.3 million. The balance of $42.0 million was due to an increase in the loss ratio. Overall loss ratios increased to 87.3% for the first quarter of 2007 from 71.4% for the first quarter of 2006 primarily due to more competitively priced products. Commissions and general expenses increased by $33.4 million compared to the first quarter of 2006, due primarily to the growth in business.

41

Segment Results—Senior Market Health Insurance

	Three months ended March 31,
	2007			2006
	(In thousands)
Premiums:
Direct and assumed	$	296,589		$	274,035
Ceded	(121,315		)	(107,534		)
Net premiums	175,274			166,501
Other Part D income—PDMS	13,203			9,807
Net investment income	2,783			1,970
Other income	(42		)	512
Total revenue	191,218			178,790
Policyholder benefits	156,901			145,578
Change in deferred acquisition costs	8,790			(2,788		)
Amortization of intangible assets	992			1,295
Commissions and general expenses, net of allowances	31,423			35,565
Total benefits, claims and other deductions	198,106			179,650
Segment (loss) income	$	(6,888	)	$	(860	)

Our Senior Market Health Insurance segment historically has included our Medicare Supplement business and other health insurance products designed for the senior market. On January 1, 2006, we began covering prescription drug benefits in accordance with Medicare Part D as a stand-alone benefit to Medicare eligible beneficiaries under PDPs. We reinsure 50% of the business of our PDPs to PharmaCare Re. The total results for the segment are presented above. Results for our Medicare Supplement business are separately presented below on a comparative basis. Additionally, we have also separately presented the results for our Part D business.

Three months ended March 31, 2007 and 2006

The Senior Market Health Insurance segment generated a loss of $6.9 million in the first quarter of 2007 compared to a loss of $0.9 million for the first quarter of 2006. Results for our Medicare Supplement business declined by $5.6 million compared to the first quarter of 2006 primarily as a result of the continued effect of higher levels of lapsation of our Medicare Supplement in force business, which resulted in accelerated amortization of deferred acquisition costs. A significant portion of the lapsation was attributable to the 15,000 Medicare Supplement policyholders who switched to our PFFS coverage during the first quarter. Segment income for our Part D business decreased by $0.5 million, or 8% compared to the first quarter of 2006.

42

Medicare Supplement

	Three months ended March 31,
	2007			2006
	(In thousands)
Premiums:
Direct and assumed	$	116,271		$	139,220
Ceded	(32,444		)	(40,847		)
Net premiums	83,827			98,373
Net investment income	1,547			1,488
Other income	(57		)	495
Total revenue	85,317			100,356
Policyholder benefits	65,513			78,712
Change in deferred acquisition costs	8,790			(2,788		)
Amortization of intangible assets	992			1,295
Commissions and general expenses, net of allowances	21,898			29,438
Total benefits, claims and other deductions	97,193			106,657
Segment loss	$	(11,876	)	$	(6,301	)

Three months ended March 31, 2007 and 2006

Revenues.   Net premiums for our Medicare Supplement business declined by $14.5 million, compared to the first quarter of 2006, due to the continued effect of higher lapsation of our Medicare Supplement in force business, offset, in part by the effect of rate increases on the remaining in force business. Approximately 15,000 Medicare Supplement policyholders switched to our PFFS coverage during the first quarter of 2007. As a result we lost approximately $30 million of Medicare Supplement premium revenues attributable to these policyholders, which was replaced with approximately $120 million of Medicare Advantage PFFS revenue. The average annual premium increased approximately 10.0% compared to the first quarter of 2006.

Benefits, Claims and Expenses.   Policyholder benefits incurred declined by $13.2 million, or 17%, compared to the first quarter of 2006. The reduction in business, as noted above, resulted in a reduction in benefits of $11.6 million. The decrease in the loss ratio further reduced benefits by $1.5 million to benefits compared to the first quarter of 2006. Overall loss ratios for our Medicare Supplement business decreased 180 basis points to 78.2% for the first quarter of 2007 compared to 80.0% for the first quarter of 2006.

There was net amortization of deferred acquisition costs in the first quarter of 2007 compared to an increase in deferred acquisition costs in the first quarter of 2006, an increase to expense of $11.6 million. Two factors contributed to the increase. First, amortization increased by approximately $5.7 million, primarily as a result of higher levels of lapsation of our Medicare supplement business, compared to the first quarter of 2006. Second, we incurred lower commissions and other acquisition costs as a result of lower production, resulting in a decrease in the costs capitalized of $5.9 million.

43

Commissions and general expenses, net of reinsurance allowances, decreased by $7.5 million, or 26%, compared to the first quarter of 2006. The following table details the components of commission and other operating expenses:

	Three months ended March 31,
	2007			2006
	(In thousands)
Commissions	$	13,145		$	18,710
Other operating costs	13,921			18,560
Reinsurance allowances	(5,168		)	(7,832		)
Commissions and general expenses, net of allowances	$	21,898		$	29,438

The ratio of commissions to gross premiums decreased to 11.3% for the first quarter of 2007, from 13.4% for the first quarter of 2006, as a result of lower overall commission rates associated with the continued growth of our in force renewal premium and less new business production that has higher commission rates. Other operating costs as a percentage of gross premiums were 12.0% for the first quarter of 2007, compared to 13.3% for the first quarter of 2006 as a result of lower acquisition expenses due to lower new business production and lower fixed costs. Commission and expense allowances received from reinsurers as a percentage of the premiums ceded decreased to 15.9% for the first quarter of 2007 from 19.2% for the first quarter of 2006, primarily due to the reduction in new business ceded and the effects of normal lower commission allowances on our aging base of ceded renewal business.

Medicare Part D

	Three months ended March 31,
	2007			2006
	(In thousands)
Direct and assumed premium	$	134,083		$	120,790
Risk corridor adjustment/government reinsurance	46,235			14,025
Direct and assumed premium after risk corridor adjustment	180,318			134,815
Ceded premiums	(88,871		)	(66,687		)
Net premiums	91,447			68,128
Other Part D income (loss)—PDMS	13,203			9,807
Total Part D revenue	104,650			77,935
Net investment and other income	1,251			499
Total revenue	105,901			78,434
Pharmacy benefits	91,388			66,866
Commissions and general expenses, net of allowances	9,525			6,127
Total benefits, claims and other deductions	100,913			72,993
Segment income	$	4,988		$	5,441

Three months ended March 31, 2007 and 2006

Our PDP segment income decreased by $0.5 million, or 8%, compared to the first quarter of 2006.

General.   A discussion of the accounting for Part D is included in Notes 2 and 14 of the notes to the consolidated financial statements in this Quarterly Report on Form 10-Q. Below we note certain variances in operating results in our Part D business between March 31, 2007 and 2006. During the first quarter of 2006, the Part D business was in a start-up phase with CMS guidance continually being developed requiring accounting for the business using certain estimates. As a result, the components of the income statements between the two periods might not be comparable though the year. We believe the Part D

44

business income statement for the year end December 31, 2006 appropriately reflects the results on a comparable basis on those reported in the first quarter of 2007.

Membership.   A discussion of the accounting for Part D is included in Notes 2 and 14 of the notes to the consolidated financial statements in this Quarterly Report on Form 10-Q. We based our membership for Part D on enrollment information provided by CMS which indicated that, as of March 31, 2007, approximately 490,400 members were enrolled in our PDPs for which we were paid by CMS, an increase of 34% over March 31, 2006 membership levels. The 2007 membership includes approximately 466,500 members in our PDPs that we participate in on a 50% basis with PharmaCare Re and 23,900 members in the unaffiliated PDP that we participate in on a 33.3% basis. The enrollment information provided by CMS for the first quarter of 2006 indicated that, as of March 31, 2006, approximately 367,000 members were enrolled in our PDPs for which we were paid by CMS, including approximately 350,700 members in our PDPs that we participate in on a 50% basis and 16,300 members in the unaffiliated PDP that we participate in on a 33.3% basis. Our revenues and claims expense are based on earned premium and incurred pharmacy benefits for the reported enrolled membership. The membership information continues to be reconciled and refined by CMS with respect to the enrollment of members among all plans participating in the Part D program. As a result of the continuing reconciliation process, it is likely that the membership data upon which we based our results will change, with a corresponding change in the financial results for the segment. We are unable to precisely quantify the impact of any potential change until the membership data is fully reconciled with CMS; however, we do not believe that any change from the amounts reported as of March 31, 2007 is likely to be material.

Revenues.   Direct and assumed premium increased by $13.3 million, or 11% over the first quarter of 2006. This growth was driven by the 34% increase in membership, partially offset by an 18% decrease in the average per member per month premium due to more competitive pricing of our PDP products and consistent with a decrease of 13% in the 2007 National average benchmark bid over 2006. The government risk corridor adjustment increased by $32.2 million, due to the change in the distribution of members among our various plans and a change in our benefit design. Other Part D revenue represents our equity in the earnings or loss of PDMS. We report this as revenue for segment reporting purposes in analyzing the ratio of net pharmacy benefits incurred because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, this amount is included as a separate line in income from continuing operations. See the reconciliation of segment revenues in Note 15 of the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Benefits, Claims and Expenses.   Pharmacy benefit increased by $24.5 million or 37% over the first quarter of 2006, due to the increase in membership. The ratio of incurred prescription drug benefits to net premium for the first quarter of 2007 was 99.9% compared to 98.1% for the first quarter of 2006. Generally, PDP designs result in the sponsor sharing in a greater portion of the responsibility for total pharmacy costs in the early stages of a member’s plan period and less in the later stages. Based on the coverage provided by our PDPs, we anticipate that results for our Part D business will be seasonal, with higher benefit ratios in the first and second quarters, decreasing in the third and fourth quarters. Changes in the benefit ratios are partially offset as a result of the risk corridor adjustments. Commissions and general expenses increased by $3.4 million, or 56% as a result of the increase in the membership.

45

Segment Results—Specialty Health Insurance

	Three months ended March 31,
	2007			2006
	(In thousands)
Premiums:
Direct and assumed	$	99,662		$	92,224
Ceded	(80,725		)	(71,984		)
Net premiums	18,937			20,240
Net investment income	5,279			4,564
Other income	33			88
Total revenue	24,249			24,892
Policyholder benefits	17,229			18,106
Change in deferred acquisition costs	294			(541		)
Commissions and general expenses, net of allowances	3,313			5,925
Total benefits, claims and other deductions	20,836			23,490
Segment income	$	3,413		$	1,402

Three months ended March 31, 2007 and 2006

Our Specialty Health Insurance segment income increased by $2.0 million, or 143%, compared to the first quarter of 2006, primarily as a result of lower commissions and general expenses.

Revenues.   Both direct and assumed and ceded premium include an increase of approximately $9.0 million, compared to the first quarter of 2006, as a result of the premiums relating to the PharmaCare Re reinsurance agreement for the State of Connecticut employees. Net premiums declined by approximately $1.3 million, or 6%, compared to the first quarter of 2006, primarily as a result of declines of $1.0 million in our U.S. fixed benefit accident and sickness line and $0.3 million in our long term care line.

Net investment income increased by approximately $0.7 million, or 16%, compared to the first quarter of 2006. The increase is due primarily to investing cash that we had been accumulating in anticipation of rising interest rates.

Benefits, Claims and Expenses.   Policyholder benefits incurred declined by $0.9 million, or 5%, compared to the first quarter of 2006, primarily as a result in the decline in premium, offset in part by an increase in the overall loss ratios for the segment to 91.0% for the first quarter of 2007 compared to 89.5% for the first quarter of 2006.

There was net amortization of deferred acquisition costs in the first quarter of 2007 compared to an increase in deferred acquisition costs in the first quarter of 2006, an increase to expense of $0.8 million. This was primarily due to an increase in the amortization during the first quarter of 2007 as compared to the first quarter of 2006.

Commissions and general expenses decreased by $2.6 million, or 44%, compared to the first quarter of 2006, primarily as a result of a reduction in commissions. Commissions declined by $1.7 million and general expenses declined by approximately $0.8 million, primarily as a result of the reduction in new business and renewal premium, particularly lower commission rates on renewal premium.

46

Segment Results—Life Insurance and Annuity

	Three months ended March 31,
	2007		2006
	(In thousands)
Premiums :
Direct and assumed	$ 19,240		$ 19,197
Ceded	(4,657	)	(3,825	)
Net premiums	14,583		15,372
Net investment income	10,683		9,582
Other income	79		87
Total revenue	25,345		25,041
Policyholder benefits	9,832		11,320
Interest credited to policyholders	4,705		4,470
Change in deferred acquisition costs	1,139		(750	)
Amortization of intangible assets	33		76
Commissions and general expenses, net of allowances	6,339		8,883
Total benefits, claims and other deductions	22,048		23,999
Segment income	$ 3,297		$ 1,042

Three months ended March 31, 2007 and 2006

Segment income from our Life Insurance and Annuity segment increased by $2.3 million, compared to the first quarter of 2006, primarily as a result of an increase in investment income and more favorable mortality.

Revenues.   Net premiums for the segment decreased by $0.8 million, or 5%, compared to the first quarter of 2006, primarily as a result of the decline of $0.7 million in our traditional life business due to the sale, in 2006, of our group life insurance business.

Since September 30, 2006, we are no longer issuing annuity product as we continue our focus more on providing health insurance alternatives to the growing senior market. Our agents sold $10.8 million of fixed annuities during the first quarter of 2006. Annuity deposits are not considered premiums for reporting in accordance with generally accepted accounting principles.

Net investment income increased by approximately $1.1 million, or 12%, compared to the first quarter of 2006, primarily as a result of the increase in portfolio yields.

Benefits, Claims and Expenses.   Policyholder benefits incurred declined by $1.5 million, or 13%, compared to the first quarter of 2006. The decline in business reduced policyholder benefits by approximately $0.6 million and claim costs were lower by approximately $0.9 million as a result of more favorable mortality in the first quarter of 2007 compared to the first quarter of 2006. There was net amortization of deferred acquisition costs in the first quarter of 2007 compared to an increase in deferred acquisition costs in the first quarter of 2006, an increase to expense of $1.9 million. This was primarily due to lower production of new life insurance and annuity business during the first quarter of 2007, resulting in a lower level of acquisition costs to capitalize as compared to the first quarter of 2006. Commissions and general expenses, net of allowances decreased by $2.5 million, or 29%, compared to the first quarter of 2006, primarily due to the lower production levels of new life insurance an annuity business, as noted above.

47

Segment Results—Senior Administrative Services

	Three months ended March 31,
	2007	2006
	(In thousands)
Affiliated fee revenue
Medicare supplement	$ 6,455	$ 7,722
Part D	6,202	3,929
Private Fee-for-service	3,096	—
Long term care	623	755
Life insurance	474	541
Other	1,979	781
Total affiliated revenue	18,829	13,728
Unaffiliated fee revenue
Medicare Advantage	2,479	1,771
Medicare supplement	1,555	1,857
Long term care	1,872	2,027
Non-insurance products	391	280
Part D	397	328
Other	42	213
Total unaffiliated revenue	6,736	6,476
Total revenue	25,565	20,204
Amortization of present value of future profits	110	123
General expenses	19,618	17,654
Total expenses	19,728	17,777
Segment income	$ 5,837	$ 2,427

Included in unaffiliated revenue are fees received to administer certain business of our insurance subsidiaries that is 100% reinsured to an unaffiliated reinsurer, which amounted to $0.7 million in the three months ended March 31, 2007 and $0.9 million for the three months ended March 31, 2006. These fees, together with the affiliated revenue, were eliminated in consolidation.

Three months ended March 31, 2007 and 2006

Segment income for our Senior Administrative Services segment increased by $3.4 million, or 141%, to $5.8 million for the first quarter of 2007, as compared to the same period of 2006. This increase is primarily the result of the growth in business administered.

Revenue increased by $5.4 million, or 27%, during the first quarter of 2007 compared to the first quarter of 2006. Affiliated service fee revenue increased by $5.1 million primarily as a result the growth in fees for the administration of our Private fee-for-service business as well as Part D prescription drug plans on behalf of our insurance subsidiaries. The increase in other fees relates to the administration of affiliated business that was previously performed by PennCorp Life Canada and was offset by the decline in fees for the administration of our Medicare Supplement business. Unaffiliated service fee revenue increased by $0.3 million, due primarily to an increase in additional administrative services performed for unaffiliated clients for Medicare Advantage business, partially offset by a decrease in Medicare supplement business. General expenses for the segment increased by $2.0 million, or 11%, primarily attributed to the growth of the affiliated PFFS and Part D business.

48

Segment Results—Corporate

	Three months ended March 31,
	2007	2006
	(In thousands)
Interest	$ 3,439	$ 3,042
Amortization of capitalized loan origination fees	280	229
Stock-based compensation expense	1,136	715
Other parent company expenses, net	2,899	1,495
Segment loss	$ 7,754	$ 5,481

Three months ended March 31, 2007 and 2006

The loss from our Corporate segment increased by $2.3 million, or 41%, for the three months ended March 31, 2007 compared to the three months ended March 31, 2006. The increase was due primarily to increases in other parent company expenses, stock-based compensation and interest costs. Other parent company expenses increased as a result of costs associated with our Board of Director’s review of the proposed buyout offer, as well as an increase in management bonuses over the prior year. The increase in stock-based compensation was due primarily to the advance in the timing of the annual awards to February in 2007 from April in 2006. Our combined outstanding debt was $264.3 million at March  31, 2007 compared to $170.8 million at March 31, 2006. The weighted average interest rate on our loan payable increased to 7.5% for the three months ended March 31, 2007 from 6.8% for the three months ended March 31, 2006. The weighted average interest rate on our other long term debt increased to 7.8% for the three months ended March 31, 2007 from 7.6% for the three months ended March 31, 2006. See “Liquidity and Capital Resources” for additional information regarding our loan payable and other long term debt.

Liquidity and Capital Resources

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

We require cash at our parent company to meet our obligations under our credit facility. We also require cash to pay the operating expenses necessary to function as a holding company (applicable insurance department regulations require us to bear our own expenses), and to meet the costs of being a public company.

We believe that our current cash position, the expected cash flows of our administrative service company and our senior managed care company, and the surplus note interest and principal payments from American Exchange can support our current parent company obligations. However, there can be no assurance as to our actual future cash flows or to the continued availability of dividends from our insurance company subsidiaries.

To provide the cash and capital for our insurance company subsidiaries to support our growth and expansion initiatives in Medicare Advantage, we have used the proceeds from the sale of our Canadian operations and, in March 2007, we drew down all $50 million of our new short-term revolving credit facility. Additionally, in March 2007 we issued $50 million of trust preferred securities. There can be no assurance as to our continued ability to access funds though the capital markets to support our growth and expansion initiatives.

49

Amended Credit Agreement

In connection with the acquisition of Heritage on May 28, 2004, the Company its existing credit agreement by increasing the facility to $120 million from $80 million (the “Amended Credit Agreement”), including an increase in the term loan portion to $105 million from $36.4 million (the balance outstanding at May 28, 2004) and maintaining the $15 million revolving loan facility. None of the revolving loan facility was drawn as of March 31, 2007. Under the Amended Credit Agreement, the spread over LIBOR was reduced to 225 basis points from 275 basis points. Effective April 1, 2007, the interest rate on the term loan was 7.6%. Principal repayments are scheduled at $5.3 million per year over a five-year period with a final payment of $80.1 million due upon maturity on March 31, 2009. The Company pays an annual commitment fee of 50 basis points on the unutilized revolving loan facility. Please refer to our 2006 Annual Report on Form 10-K for certain information regarding the terms of the Amended Credit Agreement.

On January 18, 2007, the Company entered into a new short-term revolving credit facility of $50.0 million (the ‘Revolving Credit Facility”). On March 13, 2007, the Company drew down all $50.0 million of the Revolving Credit Facility. The Revolving Credit Facility has a maturity date of September 30, 2007 and bears interest at a spread of 75 basis points over the three month LIBOR rate. The initial rate is 6.1%.

On March 22, 2007, the Company requested and received an amendment to each of the Amended Credit Facility and the Revolving Credit Facility incorporating the issuance of an additional series of trust preferred securities and raising the mandatory payment threshold.

The Company made regularly scheduled principal payments of $1.3 million during the three months ended March 31, 2007 and $1.3 million during the three months ended March 31, 2006 in connection with its credit facilities.

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

2007 (remainder of the year)	$ 3,937
2008	5,250
2009	80,063
	$ 89,250

The Company paid interest of $1.7 million during the three months ended March 31, 2007 and $1.6 million during the three months ended March 31, 2006 in connection with its credit facilities. Due to the variable interest rate for this Credit Agreement, the Company would be subject to higher interest costs if short-term interest rates rise.

Other Long Term Debt

We formed statutory business trusts, which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trust, investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures of our parent holding company (the “Junior Subordinated Debt”) and engaging in only those activities necessary or incidental thereto. In accordance with the adoption of FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” the Company does not consolidate the trusts.

We issued $50.0 million of trust preferred securities in late March 2007 at a fixed interest rate of 7.7% pursuant to terms similar to our other trust preferred securities. Please refer to our 2006 Annual Report on Form 10-K and Current Report on Form 8-K dated March 22, 2007 for certain information regarding the terms of the Junior Subordinated Debt.

50

Separate subsidiary trusts of our parent holding company (the “Trusts”) have issued a combined $125.0 million in thirty year trust preferred securities (the “Capital Securities”) as detailed in the following table:

Maturity Date	Amount Issued		Term	Spread Over LIBOR			Rate as of December 31, 2006
	(In thousands)			(Basis points)
December 2032		$ 15,000	Fixed/Floating		400	(1)		6.7	%
March 2033		10,000	Floating		400			9.4	%
May 2033		15,000	Floating		420			9.6	%
May 2033		15,000	Fixed/Floating		410	(2)		7.4	%
October 2033		20,000	Fixed/Floating		395	(3)		7.0	%
March 2037		50,000	Fixed/Floating		275	(4)		7.7	%
		$ 125,000

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

(2)The rate on this issue is fixed at 7.4% for the first five years. On May 15, 2008 it will be converted to a floating rate equal to LIBOR plus 410 basis points.

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

(4)The rate on this issue is fixed at 7.7% for the first five years. On March 23, 2012, it will be converted to a floating rate equal to LIBOR plus 275 basis points.

We paid $1.5 million in interest in connection with the Junior Subordinated Debt during the three months ended March 31, 2007, and $1.4 million during the three months ended March 31, 2006.

Shelf Registration

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

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

The aggregate amount that remains available for offering under the shelf registration statement is $77.2 million.

51

Sources of Liquidity to the Parent Company

We anticipate funding the obligations of the parent company and the capital required to grow our business from the following distinct and uncorrelated sources of cash flow within the organization:

·the expected cash flows of our senior administrative services company;

·the expected cash flows of our senior managed care company; and

·surplus note principal and interest payments from American Exchange.

In addition, we have access to $15.0 million under the revolving portion of our Amended Credit Agreement. Finally, we have the ability, from time to time, to access the capital markets for additional capital. In March of 2007, we drew down all $50 million of the Revolving Credit Facility. Additionally, in March 2007 we issued $50 million of trust preferred securities. In addition, in connection with the May 8, 2007 announcement of the signing of definitive agreements to acquire MemberHealth (see Note 18—Subsequent Event of the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q), we have signed stock purchase agreements with certain private equity investment funds to issue preferred securities totaling $350 million at $20 per common equivalent share. We anticipate that $100 million of these preferred securities will be issued during the second quarter of 2007. In connection with the MemberHealth Transaction, the Company anticipates refinancing its Amended Credit Facility and Revolving Credit Facility with a new credit facility consisting of a $350 million term loan and a $150 million revolver. A portion of the proceeds from the refinancing will be used to repay in full the outstanding amounts on the Amended Credit Facility and Revolving Credit Facility. The early extinguishment of this debt will trigger the immediate amortization of the related capitalized loan origination fees, resulting in a pre-tax expense of approximately $1 million. There can be no assurance as to our actual future cash flows, from the continued availability of dividends from our insurance company subsidiaries or from access to the capital markets to support our growth and expansion initiatives.

Senior Administrative Services Company.   Liquidity for our Senior Administrative Services subsidiary is measured by its ability to pay operating expenses and pay dividends to our parent company. The primary source of liquidity is fees collected from clients. We believe that the sources of cash for our Senior Administrative Services company exceed scheduled uses of cash and results in amounts available to dividend to our parent holding company.

Senior Managed Care Company.   Liquidity for our managed care company is measured by its ability to pay operating expenses and pay dividends to our parent company. The primary source of liquidity is management fees for administration of our healthplan affiliates and services provided to the IPA’s. Dividend payments by our healthplan affiliates to Heritage are subject to the approval of the insurance regulatory authorities of our healthplan affiliates’s respective state of domicile. SCOT is not able to pay dividends during 2007 without prior approval. However, we believe that the sources of cash to our managed care holding company exceed scheduled uses of cash which will result in funds available to dividend to our parent holding company.

Insurance Subsidiaries—Surplus Note, Dividends and Capital Contributions.   Cash generated by our insurance company subsidiaries will be made available to our holding company, principally through periodic payments of principal and interest on the surplus note owed to our holding company by our subsidiary, American Exchange Life. As of March 31, 2007, the principal amount of the surplus note was $26.5 million. The note bears interest to our parent holding company at LIBOR plus 250 basis points. We anticipate that the surplus note will be primarily serviced by dividends from Pennsylvania Life, a wholly owned subsidiary of American Exchange, by distributions from PDMS, and by tax-sharing payments among the insurance companies that are wholly owned by American Exchange and file a consolidated Federal income tax return. American Exchange made principal payments totaling $1.1 million during the three months ended March 31, 2007 and $1.0 million during the three months ended March 31, 2006. American

52

Exchange paid interest on the surplus note of $0.6 million during the three months ended March 31, 2007 and $0.5 million during the three months ended March 31, 2006.

Our parent holding company made capital contributions to American Exchange amounting to $64.0 million during the first three months of 2007. American Exchange made capital contributions of $32.0 million to American Progressive and $32.0 million to Pyramid during the first three months of 2007.

Our parent holding company made capital contributions to American Exchange amounting to $3.5 million during the first three months of 2006. In January 2006, Pyramid Life declared and paid a dividend in the amount of $10.8 million to Pennsylvania Life. American Exchange made capital contributions of $2.5 million to Constitution during the first three months of 2006.

Dividend payments by our U.S. insurance companies to our holding company or to intermediate subsidiaries are limited by, or subject to the approval of the insurance regulatory authorities of each insurance company’s state of domicile. Such dividend requirements and approval processes vary significantly from state to state. Pennsylvania Life is able to pay ordinary dividends of up to $21.9 million and Pyramid Life is be able to pay dividends of up to $2.7 million to American Exchange (their direct parent) in 2007 without the prior approval from the insurance department for their respective states of domicile.

Insurance Subsidiaries—Liquidity

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

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

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

Some of our life insurance and annuity policies are interest-sensitive in nature. The amount of surrenders and withdrawals is affected by a variety of factors such as credited interest rates for similar products, general economic conditions and events in the industry that affect policyholders’ confidence. Although the contractual terms of substantially all of our in force life insurance policies and annuities give the holders the right to surrender the policies and annuities, we impose penalties for early surrenders. As of March 31, 2007 we held reserves that exceeded the underlying cash surrender values of our net retained in force life insurance and annuities by $31.9 million. Our insurance subsidiaries, in our view, have not experienced any material changes in surrender and withdrawal activity in recent years.

Changes in interest rates may affect the incidence of policy surrenders and withdrawals. In addition to the potential impact on liquidity, unanticipated surrenders and withdrawals in a changed interest rate environment could adversely affect earnings if we were required to sell investments at reduced values in order to meet liquidity demands. We manage our asset and liability portfolios in order to minimize the

53

adverse earnings impact of changing market rates. We have segregated a portion of our investment portfolio in order to match liabilities that are sensitive to interest rate movements with fixed income securities containing similar characteristics to the related liabilities, most notably the expected duration and required interest spread. We believe that this asset/liability management process adequately covers the expected payment of benefits related to these liabilities.

At March 31, 2007, our insurance company subsidiaries held cash and cash equivalents totaling $587.6 million and fixed maturity securities that could readily be converted to cash with carrying values (and fair values) of $1.2 billion at March 31, 2007. In addition, our insurance company subsidiaries have cash totaling approximately $297.0 million for the operation of our PDPs that cannot be used for other lines of business or general corporate purposes.

The net yields on our cash and invested assets decreased to 4.7% for the three months ended March 31, 2007, from 5.1% for the three months ended March 31, 2006. A portion of these securities are held to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. The credited interest rates of the interest-sensitive policyholder account balances are determined by us based upon factors such as portfolio rates of return and prevailing market rates and typically follow the pattern of yields on the assets supporting these liabilities.

Our domestic insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, substantially more than the statutory minimum amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries’ operations. Each of our insurance subsidiaries’ statutory capital and surplus exceeds its respective minimum statutory requirement at levels we believe are sufficient to support their current levels of operation. Additionally, the National Association of Insurance Commissioners (“NAIC”) imposes regulatory risk-based capital (“RBC”) requirements on life insurance enterprises. At March 31, 2007, all of our insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the “authorized control level”. The combined statutory capital and surplus, including asset valuation reserve, of our U.S. insurance subsidiaries totaled $321.6 million at March 31, 2007 and $242.9 million at December 31, 2006. For the three months ended March 31, 2007, our U.S. insurance subsidiaries generated a statutory net income of $10.2 million. For the three months ended March 31, 2006, our U.S. insurance subsidiaries generated statutory net income of $2.9 million.

Our health plan affiliates are also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and are also subject to RBC requirements. At March 31, 2007, the statutory capital and surplus of each of our health plan affiliates exceeds its minimum requirement and its RBC is in excess of the “authorized control level”. The statutory capital and surplus for our health plan affiliates was $52.5 million at March 31, 2007 and $44.0 million at December 31, 2006. Statutory net income for our health plan affiliates was $5.1 million for the three months ended March 31, 2007 and $3.1 million for the three months ended March 31, 2006.

Investments

Our investment policy is to balance the portfolio duration to achieve investment returns consistent with the preservation of capital and maintenance of liquidity adequate to meet payment of policy benefits and claims. We invest in assets permitted under the insurance laws of the various states in which we operate. Such laws generally prescribe the nature, quality of and limitations on various types of investments that may be made. We do not currently have investments in partnerships, special purpose entities, real estate, commodity contracts, or other derivative securities. We currently engage the services of three investment advisors under the direction of the management of our insurance company subsidiaries and in accordance with guidelines adopted by the Investment Committees of their respective boards of directors. Conning Asset Management Company manages the portfolio of all of our United States subsidiaries, except for the portfolio of Pyramid Life, and certain floating rate portfolios, which are

54

managed by Hyperion Capital. We invest primarily in fixed maturity securities of the U.S. Government and its agencies and in corporate fixed maturity securities with investment grade ratings of “BBB-” (Standard & Poor’s Corporation), “Baa3” (Moody’s Investor Service) or higher.

As of March 31, 2007, approximately 99% of our fixed maturity investments had investment grade ratings from Standard & Poor’s Corporation or Moody’s Investor Service. There were no non-income producing fixed maturities as of March 31, 2007. During the quarters ended March 31, 2007 and 2006, we did not write down the value of any fixed maturity securities. A write-down of the value of a fixed maturity security would represent our estimate of an other than temporary decline in value and would be included in net realized gains and losses on investments in our consolidated statements of operations.

Effects of Recently Issued and Pending Accounting Pronouncements

A summary of other recent and pending accounting pronouncements is provided in Note 2 of the consolidated financial statements in the Annual Report on Form 10-K under the caption “Future Adoption of Accounting Standards.”  We do not anticipate any material impact from the future adoption of the pending accounting pronouncements discussed in that note.

ITEM 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. We no longer have any material exposure to changes in the currency exchange rate for the Canadian dollar as a result of the sale of our Canadian subsidiary.

Investment Interest Rate Sensitivity

Our profitability could be affected if we were required to liquidate fixed income securities during periods of rising and/or volatile interest rates. However, we attempt to mitigate our exposure to adverse interest rate movements through a combination of active portfolio management and by staggering the maturities of our fixed income investments to assure sufficient liquidity to meet our obligations and to address reinvestment risk considerations. Our insurance liabilities generally arise over relatively long periods of time, which typically permits ample time to prepare for their settlement.

Certain classes of mortgage-backed securities are subject to significant prepayment risk due to the fact that in periods of declining interest rates, individuals may refinance higher rate mortgages to take advantage of the lower rates then available. We monitor and adjust our investment portfolio mix to mitigate this risk.

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

The sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100 and 200 basis points from their levels as of March 31, 2007, and with all other variables held constant. A 100 basis point increase in market interest rates would result in a pre-tax decrease in the market value of our fixed income investments of $38.2 million and a 200 basis point increase in market interest rates would result in $78.9 million decrease. Similarly, a 100 basis point decrease in market interest rates would result in a pre-tax increase in the market value of our fixed income investments of $38.2 million and a 200 basis point decrease in market interest rates would result in a $73.0 million increase.

55

Debt

We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate (“LIBOR”) for one, two or three months. Due to the variable interest rate, the Company would be subject to higher interest costs if short-term interest rates rise. We have attempted to mitigate our exposure to adverse interest rate movements by fixing the rate on $65.0 million of the trust preferred securities for a five year period through the contractual terms of the security at inception and an additional $35.0 million through the use of interest rate swaps.

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

The sensitivity analysis of interest rate risk assumes scenarios with increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the three months ended March 31, 2007, and with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

				Weighted			Effect of Change in LIBOR on Pre-tax Income for the three months ended March 31, 2007
Description of Floating Rate Debt	Weighted Average Interest Rate			Average Balance Outstanding			200 Basis Point Decrease			100 Basis Point Decrease			100 Basis Point Increase				200 Basis Point Increase
	(in millions)
Loan Payable		7.46	%		$	100.6		$	0.5		$	0.3		$	(0.3	)		$	(0.5	)
Other long term debt		9.48	%		$	25.0		0.1			0.1			(0.1		)		(0.1		)
Total								$	0.6		$	0.4		$	(0.4	)		$	(0.6	)

As noted above, we have fixed the interest rate on $100 million of our $264 million of total debt outstanding, leaving $164 million of the debt exposed to rising interest rates. As of March 31, 2007 we had approximately $629 million of cash and cash equivalents (excluding cash for the operation of our PDPs) and $155 million in short duration floating rate investment securities. We anticipate that the net investment income on this $784 million will be positively impacted by rising interest rates and will mitigate the negative impact of rising interest rates on our debt.

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

ITEM 4—Controls and Procedures

Disclosure Controls and Procedures

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

Inherent Limitations on Effectiveness of Controls

Our disclosure controls and procedures and our internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can

56

provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Universal American have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons or by collusion of two or more people. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Evaluation of Effectiveness of Controls

An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2007. 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, 2007, at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1—LEGAL PROCEEDINGS

Please see Note 12—Commitments and Contingencies of the Notes to the Consolidated Financial Statements in Part I—Item 1 of this Form 10-Q, which is incorporated into this Part II—Item 1—Legal Proceedings by reference, for information relating to litigation affecting the Company.

ITEM 1A—RISK FACTORS

In addition to the other information set forth in this report, you should consider carefully the risks and uncertainties described under the caption “Part I—Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, the occurrence of any of which could materially adversely affect our business, prospects, financial condition or results of operations. We also could be materially adversely affected by additional risks and uncertainties of which we are not currently aware, or which we currently consider to be immaterial.

57

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

Issuer purchases of Equity securities

Period	Total Number of Shares Purchased(1)		Average Price Paid Per Share		Total Number of  Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2007—January 31, 2007		—		—		—		984,472
February 1, 2007—February 28, 2007		—		—		—		984,472
March 1, 2007—March 31, 2007		—		—		—		984,472
Total		—				—

Recent Sales of Unregistered Securities

None.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the first quarter of 2007.

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

None.

ITEM 5—OTHER INFORMATION

Universal American has elected to postpone its previously announced Annual Meeting of Stockholders, as a result of the proposed MemberHealth Transaction. Universal American will notify stockholders of the new meeting date, and the record date for such meeting, as soon as practicable.

ITEM 6—EXHIBITS

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 reference herein).
3.2	Amendment No. 1 to the Restated 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	Amended and Restated By-Laws of Universal American Financial Corp. (filed as Exhibit A to the Registrant’s Current Report on Form 8-K (File No. 0-11321) dated August 13, 1999, and incorporated by reference herein).
4.1	Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee (filed as Exhibit 4.01 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004, and incorporated by reference herein)

58

4.2		Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee (filed as Exhibit 4.02 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004, and incorporated by reference herein).
4.3		Shareholders Agreement dated July 30, 1999, among the Company, Capital Z Financial Services Fund II, L.P., UAFC, L.P., AAM Capital Partners, L.P., Chase Equity Associates, L.P., Richard A. Barasch and others (filed as Exhibit A of the Registrant’s Current Report on Form 8-K dated August 13, 1999, and incorporated by reference herein).
4.4		Registration Rights Agreement, dated July 30, 1999, among the Company, Capital Z Financial Services Fund II, L.P., Wand/Universal American Investments L.P.I., Wand/Universal American Investments L.P. II, Chase Equity Associates, L.P., Richard A. Barasch and others (filed as Exhibit A to the Registrant’s Current Report on Form 8-K dated August 13, 1999, and incorporated by reference herein).
10.1	*	Fourth Amendment dated March 22, 2007, to Amended and Restated Credit Agreement dated as of May 28, 2004 among the Company, the Banks party to the Credit Agreement and Bank of America, N.A., as the Administrative Agent.
10.2	*	First Amendment dated March 22, 2007, to Credit Agreement dated as of January 18, 2007, among the Company, one or more Lending Institutions, and Bank of America, N.A., as the Administrative Agent and L/C Issuer.
11.1	*	Statement re Computation of per share Earnings (contained in the Consolidated Statements of Operations in this Report).
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.

59

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 FINANCIAL CORP.
May 10, 2007	/s/ RICHARD A. BARASCH
	Richard A. Barasch
	Chief Executive Officer
May 10, 2007	/s/ ROBERT A. WAEGELEIN
	Robert A. Waegelein
	Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

60