HealthMarkets (UCI) 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007.

OR

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

FOR THE TRANSITION PERIOD FROM                    TO                    

COMMISSION FILE NO. 001-14953

HealthMarkets, Inc.

(Exact name of registrant as specified in its charter)

Delaware	75-2044750
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

9151 Boulevard 26, North Richland Hills, Texas	76180
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (817) 255-5200

Not Applicable

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YESþ NOo

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.

Large accelerated filero      Accelerated filero      Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YESo NOþ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On July 27, 2007 the registrant had 26,852,260 outstanding shares of Class A-1 Common Stock, $.01 Par Value, and 3,853,346 outstanding shares of Class A-2 Common Stock, $.01 Par Value.

INDEX

HEALTHMARKETS, INC. AND SUBSIDIARIES

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated condensed balance sheets – June 30, 2007 (unaudited) and December 31, 2006		3
	Consolidated condensed statements of income (unaudited) – Three and six months ended June 30, 2007 and 2006		4
	Consolidated condensed statements of comprehensive income (unaudited) – Three and six months ended June 30, 2007 and 2006		5
	Consolidated condensed statements of cash flows (unaudited) – Six months ended June 30, 2007 and 2006		6
	Notes to consolidated condensed financial statements (unaudited) – June 30, 2007		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		26
Item 4.	Controls and Procedures		26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 4.	Submission of Matters to a Vote of Security Holders		28
Item 6.	Exhibits		29
SIGNATURES			30
Certificate of Incorporation
Rule 13a-14(a)/15d-14(a) Certification
Rule 13a-14(a)/15d-14(a) Certification
Certifications Required by Rule 13a-14(b) or Rule 15d-14(b)

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTHMARKETS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

	June 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Investments
Securities available for sale —
Fixed maturities, at fair value (cost:
2007—$1,337,915; 2006—$1,391,275)	$	1,302,075		$	1,374,403
Equity securities, at fair value (cost:
2007—$313; 2006—$283)		348			318
Policy loans		14,254			14,625
Short-term and other investments		158,746			412,498
Total Investments		1,475,423			1,801,844
Cash and cash equivalents		—			32,756
Student loans		100,644			105,846
Restricted cash		9,197			16,238
Investment income due and accrued		20,672			22,633
Due premiums		3,557			3,299
Reinsurance receivables		105,066			155,283
Agents’ and other receivables		43,321			39,232
Deferred acquisition costs		199,784			197,757
Property and equipment, net		67,795			64,436
Goodwill and other intangible assets		86,015			86,871
Recoverable federal income taxes		5,400			23,929
Other assets		42,443			38,205
	$	2,159,317		$	2,588,329
LIABILITIES AND STOCKHOLDERS’ EQUITY
Policy liabilities
Future policy and contract benefits	$	460,488		$	453,715
Claims		489,675			517,132
Unearned premiums		105,294			151,758
Other policy liabilities		11,401			12,569
Accounts payable and accrued expenses		52,449			48,363
Cash overdraft		1,263			—
Other liabilities		96,178			128,018
Deferred federal income tax payable		72,939			73,575
Debt		481,070			556,070
Student loan credit facility		105,100			118,950
Net liabilities of discontinued operations		3,032			3,794
		1,878,889			2,063,944
Commitments and Contingencies (Note E)
Stockholders’ Equity
Preferred stock, par value $0.01 per share		—			—
Common stock, par value $0.01 per share		308			300
Additional paid-in capital		51,372			12,529
Accumulated other comprehensive loss		(23,277	)		(12,552	)
Retained earnings		257,036			527,978
Treasury stock, at cost		(5,011	)		(3,870	)
		280,428			524,385
	$	2,159,317		$	2,588,329

NOTE: The balance sheet data as of December 31, 2006 has been derived from the audited financial statements at that date.

See Notes to Consolidated Condensed Financial Statements (Unaudited).

3

HEALTHMARKETS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
REVENUE
Premiums:
Health	$	334,504		$	448,480	$	668,266		$	891,030
Life premiums and other considerations		17,444			16,341		33,825			32,480
		351,948			464,821		702,091			923,510
Investment income		26,271			24,155		52,731			51,313
Other income		27,593			26,201		53,208			51,334
Gains on sales of investments		(3,155	)		366		(752	)		2,541
		402,657			515,543		807,278			1,028,698
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses		196,513			255,797		411,844			528,522
Underwriting, acquisition, and insurance expenses		131,898			155,098		253,896			310,505
Variable non-cash stock-based compensation (benefit) expense		1,546			490		(5	)		730
Other expenses		24,677			77,872		46,459			102,411
Interest expense		12,849			12,558		25,845			14,338
		367,483			501,815		738,039			956,506
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		35,174			13,728		69,239			72,192
Federal income taxes		12,207			8,048		23,648			27,666
INCOME FROM CONTINUING OPERATIONS		22,967			5,680		45,591			44,526
DISCONTINUED OPERATIONS
Income from discontinued operations (net of income tax expense (benefit) of $213 and $(19,725) in the three months ended June 30, 2007 and 2006, respectively, and $250 and $(20,568) in the six months ended June 30, 2007 and 2006, respectively)		396			19,701		463			20,362
NET INCOME	$	23,363		$	25,381	$	46,054		$	64,888
Earnings per share:
Basic
Income from continuing operations	$	0.76		$	0.17	$	1.51		$	1.13
Income from discontinued operations		0.01			0.58		0.01			0.52
Net income	$	0.77		$	0.75	$	1.52		$	1.65
Diluted
Income from continuing operations	$	0.74		$	0.16	$	1.47		$	1.11
Income from discontinued operations		0.01			0.57		0.01			0.51
Net income	$	0.75		$	0.73	$	1.48		$	1.62

                    See Notes to Consolidated Condensed Financial Statements (Unaudited).

4

HEALTHMARKETS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Net income	$	23,363		$	25,381		$	46,054		$	64,888
Other comprehensive income (loss):
Unrealized losses on securities available for sale		(21,256	)		(16,040	)		(18,320	)		(38,143	)
Reclassification for investment gains (losses) included in net income		229			(504	)		(648	)		(492	)
Effect on other comprehensive income from investment securities		(21,027	)		(16,544	)		(18,968	)		(38,635	)
Unrealized gains on derivatives used in cash flow hedging during the period		3,647			2,523			2,738			2,523
Reclassification adjustment for gains (losses) included in net income		(213	)		(20	)		(273	)		(20	)
Effect on other comprehensive income from hedging activities		3,434			2,503			2,465			2,503
Other comprehensive loss before tax		(17,593	)		(14,041	)		(16,503	)		(36,132	)
Income tax benefit related to items of other comprehensive loss		(6,160	)		(4,914	)		(5,778	)		(12,647	)
Other comprehensive loss net of tax provision benefit		(11,433	)		(9,127	)		(10,725	)		(23,485	)
Comprehensive income	$	11,930		$	16,254		$	35,329		$	41,403

See Notes to Consolidated Condensed Financial Statements (Unaudited).

5

HEALTHMARKETS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)

	Six Months Ended
	June 30,
	2007			2006
	(In thousands)
Operating Activities
Net income	$	46,054		$	64,888
Income from discontinued operations		(463	)		(20,362	)
Adjustments to reconcile net income to cash provided by operating activities:
Gains (losses) on sales of investments		752			(2,541	)
Change in accrued investment income		(259	)		(3,045	)
Change in due premiums		(258	)		27,047
Change in reinsurance receivables		50,217			662
Change in other receivables		(6,856	)		80
Change in current income tax payable		18,529			(2,656	)
Change in deferred income tax asset		5,141			(18,483	)
Change in deferred acquisition costs		(2,027	)		6,481
Depreciation and amortization		12,803			10,820
Change in policy liabilities		(65,131	)		(64,952	)
Change in other liabilities and accrued expenses		(658	)		4,461
Variable non-cash stock-based compensation (benefit) expense		(5	)		730
Change in prepaid monitoring fees		(6,250	)		—
Other items, net		4,064			1,665
Cash Provided by continuing operations		55,653			4,795
Cash (Used in) Provided by discontinued operations		(299	)		19,874
Net cash Provided by operating activities		55,354			24,669
Investing Activities
Decrease in investment assets		301,308			127,401
Decrease in student loans		7,423			4,010
Decrease in restricted cash		7,041			2,232
Additions to property and equipment		(12,940	)		(5,955	)
Intangible asset acquired		—			(47,500	)
Distribution from investment in Grapevine Finance LLC		468			—
Decrease (increase) in agents’ receivables		2,767			(7,925	)
Decrease in other investing activities		—			2,334
Net cash Used in investing activities		306,067			74,597
Financing Activities
Increase in investment products		(3,183	)		(4,618	)
Repayment of student loan credit facility		(13,850	)		(5,300	)
Debt proceeds (proceeds received for merger)		—			603,100
Repayment of debt		(75,000	)		(1,250	)
Exercise of stock options		51			118
Purchase of treasury stock		(21,344	)		(1,615,276	)
Dividends paid		(316,996	)		—
Change in cash overdraft		1,263			(1,695	)
Capitalized debt issuance costs		—			(32,539	)
Equity costs related to Merger		—			(31,650	)
Contributions from private equity investors		—			985,000
Proceeds from issuance of common stock, net of expenses		404			1,289
Sale of shares to agent plans		34,354			—
Other		124			3,555
Net Cash Used in financing activities		(394,177	)		(99,266	)
Net change in Cash and cash equivalents		(32,756	)		—
Cash and cash equivalents at beginning of period		32,756			—
Cash and cash equivalents at end of period in continuing operations	$	—		$	—

          See Notes to Consolidated Condensed Financial Statements (Unaudited).

6

HEALTHMARKETS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2007

NOTE A – BASIS OF PRESENTATION

     The accompanying unaudited consolidated condensed financial statements for HealthMarkets, Inc. (the “Company” or “HealthMarkets”) and its subsidiaries have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments, except as otherwise described herein, consist of normal recurring accruals. Operating results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Recently Issued Accounting Pronouncements

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159). FAS 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. FAS 159 is effective for fiscal year 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. The Company is currently evaluating the impact, if any, of FAS 159 on the Consolidated Condensed Financial Statements.

     In September 2006, the FASB issued Statement 157,Fair Value Measurement(SFAS 157), which defines fair value as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. Statement 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company believes this statement will not have a material effect upon the financial condition or results of operations of the Company.

     In 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts, for implementation in the first quarter of 2007. The SOP requires that deferred acquisition costs be expensed in full when the original contract is substantially changed by election or amendment of an existing contract feature or by replacement with a new contract. The Company implemented the SOP for contract changes beginning in the first quarter of 2007 with no material effects to the financial statements at implementation.

NOTE B – DEBT

     In connection with the Merger completed on April 5, 2006, HealthMarkets, LLC entered into a credit agreement, providing for a $500.0 million term loan facility and a $75.0 million revolving credit facility (which includes a $35.0 million letter of credit sub-facility). The full amount of the term loan was drawn at closing, and the proceeds thereof were used to fund a portion of the consideration paid in the Merger. At June 30, 2007, the Company had an aggregate of $362.5 million of indebtedness outstanding under the term loan facility, which indebtedness bore interest at the London inter-bank offered rate (“LIBOR”) plus a borrowing margin (1.00%). The Company has not drawn on the $75.0 million revolving credit facility.

     The revolving credit facility will mature on April 5, 2011, and the term loan facility will mature on April 5,

7

2012. The term loan required nominal quarterly installments (not exceeding 0.25% of the aggregate principal amount at the date of issuance) until the maturity date at which time the remaining principal amount is due. Borrowings under the credit agreement may be subject to certain mandatory prepayments. At HealthMarkets, LLC’s election, the interest rates per annum applicable to borrowings under the credit agreement will be based on a fluctuating rate of interest measured by reference to either (a) LIBOR plus a borrowing margin, or (b) a base rate plus a borrowing margin. HealthMarkets, LLC will pay (a) fees on the unused loan commitments of the lenders, (b) letter of credit participation fees for all letters of credit issued, plus fronting fees for the letter of credit issuing bank, and (c) other customary fees in respect of the credit facility. Borrowings and other obligations under the credit agreement are secured by a pledge of HealthMarkets, LLC’s interest in substantially all of its subsidiaries, including the capital stock of The MEGA Life and Health Insurance Company (“MEGA”), Mid-West National Life Insurance Company of Tennessee (“Mid-West”) and The Chesapeake Life Insurance Company (“Chesapeake”).

     On April 5, 2006, HealthMarkets Capital Trust I and HealthMarkets Capital Trust II (two newly formed Delaware statutory business trusts) (collectively the “Trusts”) issued $100.0 million of floating rate trust preferred securities (the “Trust Securities”) and $3.1 million of floating rate common securities. The Trusts invested the proceeds from the sale of the Trust Securities, together with the proceeds from the issuance to HealthMarkets, LLC by the Trusts of the common securities, in $100.0 million principal amount of HealthMarkets, LLC’s Floating Rate Junior Subordinated Notes due June 15, 2036 (the “Notes”), of which $50.0 million principal amount accrue interest at a floating rate equal to three-month LIBOR plus 3.05% and $50.0 million principal amount accrue interest at a fixed rate of 8.367% through but excluding June 15, 2011 and thereafter at a floating rate equal to three-month LIBOR plus 3.05%. Distributions on the Trust Securities will be paid at the same interest rates paid on the Notes.

     The Notes, which constitute the sole assets of the Trusts, are subordinate and junior in right of payment to all senior indebtedness (as defined in the Indentures) of HealthMarkets, LLC. The Company has fully and unconditionally guaranteed the payment by the Trusts of distributions and other amounts payable under the Trust Securities. The guarantee is subordinated to the same extent as the Notes.

     The Trusts are obligated to redeem the Trust Securities when the Notes are paid at maturity or upon any earlier prepayment of the Notes. Prior to June 15, 2011, the Notes may be redeemed only upon the occurrence of certain tax or investment company events at 105.0% of the principal amount thereof in the first year reducing by 1.25% per year until it reaches 100.0%. On and after June 15, 2011 the Notes are redeemable, in whole or in part, at the option of the Company at 100.0% of the principal amount thereof.

     On April 29, 2004, UICI Capital Trust I (a newly formed Delaware statutory business trust) (the “2004 Trust”) completed the private placement of $15.0 million aggregate issuance amount of floating rate trust preferred securities with an aggregate liquidation value of $15.0 million (the “2004 Trust Preferred Securities”). The 2004 Trust invested the $15.0 million proceeds from the sale of the 2004 Trust Preferred Securities, together with the proceeds from the issuance to the Company by the 2004 Trust of its floating rate common securities in the amount of $470,000 (the “Common Securities” and, collectively with the 2004 Trust Preferred Securities, the “2004 Trust Securities”), in an equivalent face amount of the Company’s Floating Rate Junior Subordinated Notes due 2034 (the “2004 Notes”). The 2004 Notes will mature on April 29, 2034, which date may be accelerated to a date not earlier than April 29, 2009. The 2004 Notes may be prepaid prior to April 29, 2009, at 107.5% of the principal amount thereof, upon the occurrence of certain events, and thereafter at 100.0% of the principal amount thereof. The 2004 Notes, which constitute the sole assets of the 2004 Trust, are subordinate and junior in right of payment to all senior indebtedness (as defined in the Indenture, dated April 29, 2004, governing the terms of the 2004 Notes) of the Company. The 2004 Notes accrue interest at a floating rate equal to three-month LIBOR plus 3.50%, payable quarterly on February 15, May 15, August 15, and November 15 of each year. The quarterly distributions on the 2004 Trust Securities are paid at the same interest rate paid on the 2004 Notes.

8

     The following table sets forth detail of the Company’s debt and interest expense (dollars in thousands):

						Interest Expense
	Principal Amount					Three Months		Six Months
	at		Interest rate at			Ended		Ended
	June 30, 2007		June 30, 2007			June 30, 2007		June 30, 2007
2006 credit agreement:
Term loan	$	362,500		6.35	%	$	6,565	$	13,244
$75 Million revolver (non-use fee)							40		81
Trust preferred securities:
UICI Capital Trust I		15,470		8.86	%		346		689
HealthMarkets Capital Trust I		51,550		8.41	%		1,095		2,179
HealthMarkets Capital Trust II		51,550		8.37	%		1,090		2,169
Other:
Interest on Deferred Tax		—					1,110		2,153
Student loan credit facility		105,100		5.30	%		1,425		2,965
Amortization of financing fees		—					1,178		2,365
Total	$	586,170				$	12,849	$	25,845

     Set forth below is the supplemental calculation of the amortization of financing fees included in interest expense associated with the Company’s non-student loan debt (dollars in thousands):

					Amortization Expense
	Remaining				Three months		Six months
	capitalized				ended		ended
	amount		Life (years)		June 30, 2007		June 30, 2007
UICI Capital Trust I	$	155		5	$	21	$	42
Term loan credit facility (1)		13,897		6		740		1,493
HealthMarkets Capital Trust I		2,366		5		130		258
HealthMarkets Capital Trust II		2,370		5		129		256
$75 Million Revolver (Non-Use Fee)		2,371		5		158		316
Total	$	21,159			$	1,178	$	2,365

(1) Amortization of financing fees for the three and six month periods ended June 30, 2007 includes $1.2 million and $2.4 million, respectively, of amortization included in interest expense on the Company’s statement of income. An additional $2.9 million incurred in the three months ended June 30, 2007 relates to expense from early extinguishment of debt due to the prepayment of debt in the amount of $75.0 million. This additional amount is included in Gains on Sales of Investments in the Company’s statement of income in those periods.

     Principal payments required for the Company’s non-student loan debt for the remainder of 2007 and each of the next five years and thereafter are as follows (in thousands):

Remainder of 2007	$	0
2008		0
2009		0
2010		0
2011		0
2012		362,500
2013 and thereafter		118,570
	$	481,070

     Management uses derivative instruments to protect against the risk of changes in prevailing interest rates adversely affecting future cash flows associated with the term loan credit facility discussed above. The derivative instrument used by the Company to protect against such risk is the interest rate swap. The Company accounts for its interest rate swaps in accordance with SFAS 133,Accounting for Derivative Instruments and Hedging Activities.

     As with any financial instrument, derivative instruments have inherent risks, primarily market and credit risk. Market risk associated with changes in interest rates is managed as part of the Company’s overall market risk monitoring process by establishing and monitoring limits as to the degree of risk that may be undertaken. Credit risk occurs when a counterparty to a derivative contract in which the Company has an unrealized gain fails to perform according to the terms of the agreement. The Company minimizes its credit risk by entering into transactions with counterparties that maintain high credit ratings.

9

     For a derivative instrument designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative instrument is recorded under the caption “Unrealized gains (losses) on securities and hedging activities” in the Company’s Consolidated Condensed Statement of Comprehensive Income and is recognized in the income statement when the hedged item affects results of operations. If it is determined that (i) an interest rate swap is not highly effective in offsetting changes in the cash flows of a hedged item, (ii) the derivative expires or is sold, terminated or exercised, or (iii) the derivative is undesignated as a hedge instrument because it is unlikely that a forecasted transaction will occur, the Company discontinues hedge accounting prospectively.

     If hedge accounting is discontinued, the derivative instrument will continue to be carried at fair value, with changes in the fair value of the derivative instrument recognized in the current period’s results of operations. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the accumulated gains and losses included in accumulated other comprehensive income will be recognized immediately in results of operations. When hedge accounting is discontinued because the derivative instrument has not been or will not continue to be highly effective as a hedge, hedge accounting is discontinued and the remaining amount in accumulated other comprehensive income is amortized into earnings over the remaining life of the derivative.

     At the effective date of the Merger, an affiliate of The Blackstone Group assigned to the Company three interest rate swap agreements with an aggregate notional amount of $300.0 million. The terms of the swaps are 3, 4 and 5 years beginning on April 11, 2006. The Company presents the fair value of the interest rate swap agreements at the end of the period in either “Other assets” or “Other liabilities,” as applicable, on its consolidated condensed balance sheet. At June 30, 2007, the interest rate swaps had an aggregate fair value of approximately $2.5 million, which is reflected under the caption “Other Assets.” The Company redesignated the hedging relationship in February 2007 to hedge the risk of changes in the Company’s cash flow attributable to changes in the LIBOR rate applicable to its variable-rate term loan. The Company assesses, on a quarterly basis, the ineffectiveness of the hedging relationship and any gains or losses related to the ineffectiveness are recorded in “Other investment income” on its consolidated condensed statement of income. During the three and six months ended June 30, 2007, the Company incurred a gain of $112,000 and $54,000, respectively, related to the ineffectiveness of the interest rate swap. The Company does not expect the ineffectiveness related to its hedging activity to be material to the Company’s financial results in the future. There were no components of the derivative instruments that were excluded from the assessment of hedge effectiveness.

     During the quarter ended June 30, 2007, pretax income of $264,000 ($172,000 net of tax) was reclassified into interest expense as adjustments to interest payments on variable rate debt. In addition, an amount of $163,000 ($106,000 net of tax) was reclassified into earnings from accumulated other comprehensive income associated with the previous termination of the hedging relationship in the fourth quarter of 2006. At June 30, 2007, accumulated other comprehensive income included a deferred after-tax net loss of $6,000 related to the interest rate swaps.

     During the six months ended June 30, 2007, pretax income of $543,000 ($353,000 net of tax) was reclassified into interest expense as adjustments to interest payments on variable rate debt. In addition, an amount of $324,000 ($211,000 net of tax) was reclassified into earnings from accumulated other comprehensive income associated with the previous termination of the hedging relationship in the fourth quarter of 2006. At June 30, 2007, the remaining amount of loss recorded in accumulated other comprehensive income associated with previous terminated hedging relationship was $2.2 million ($1.4 million net of tax). This amount is expected to be reclassified into earnings in conjunction with the interest payments on the variable rate debt through April 2011.

     The Company uses regression analysis to assess the hedge effectiveness in achieving the offsetting cash flows attributable to the risk being hedged. In addition, the Company utilizes the hypothetical derivative methodology for the measurement of ineffectiveness. Derivative gains and losses not effective in hedging the expected cash flows will be recognized immediately in earnings.

NOTE C – FEDERAL INCOME TAXES

     In June 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of the tax benefits from the tax position taken or expected to be taken in a tax return. Adoption of this pronouncement did not effect the Company’s financial position and no cumulative effect adjustment was required to the January 1, 2007 balance of retained earnings.

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     As of January 1, 2007, the Company maintained a liability for uncertain tax positions in the amount of $1.1 million which consists solely of accrued interest related to a tax position that involves the uncertain timing of a deduction claimed on a tax return. Accrued interest and applicable penalties, if any, on uncertain tax positions are recorded as a component of income taxes but is not significant for the quarter ended June 30, 2007. The uncertain tax position is currently under examination and, if resolved favorably, may decrease the Company’s effective tax rate within the next 12 months. The years that remain subject to federal tax examination are all years after 2002.

NOTE D – EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
	(In thousands, except per share amounts)
Income available to common shareholders:
Income from continuing operations	$	22,967	$	5,680	$	45,591	$	44,526
Income from discontinued operations		396		19,701		463		20,362
Net income for basic and diluted earnings per share	$	23,363	$	25,381	$	46,054	$	64,888
Weighted average shares outstanding¾ basic earnings per share		30,353		33,992		30,289		39,309
Effect of dilutive securities:
Employee stock options and other shares		804		717		817		785
Weighted average shares outstanding¾ dilutive earnings per share		31,157		34,709		31,106		40,094
Basic earnings per share:
From continuing operations	$	0.76	$	0.17	$	1.51	$	1.13
From discontinued operations		0.01		0.58		0.01		0.52
Net income	$	0.77	$	0.75	$	1.52	$	1.65
Diluted earnings per share:
From continuing operations	$	0.74	$	0.16	$	1.47	$	1.11
From discontinued operations		0.01		0.57		0.01		0.51
Net income	$	0.75	$	0.73	$	1.48	$	1.62

     As of June 30, 2007, 26,917,310 shares of Class A-1 common stock were issued, of which 26,852,260 were outstanding and 65,050 shares were held in treasury and 3,952,204 shares of Class A-2 common stock were issued, of which 3,892,678 shares were outstanding and 59,526 shares were held in treasury.

NOTE E – COMMITMENTS AND CONTINGENCIES

     The Company is a party to the following material legal proceedings:

Academic Management Services Corp. — Related Litigation

     As previously disclosed, in May and June 2004, HealthMarkets and certain officers and current and former directors of HealthMarkets were named as defendants in four separate class action suits arising out of HealthMarkets’ announcement in July 2003 of a shortfall in the type and amount of collateral supporting securitized student loan financing facilities of Academic Management Services Corp., formerly a wholly-owned subsidiary of HealthMarkets until its disposition in November 2003. On October 18, 2004, the four separate cases were consolidated as a single action, in HealthMarkets Securities Litigation, Case No. 3-04-CV-1149-P, pending in the United States District Court for the Northern District of Texas, Dallas Division. On May 27, 2005, plaintiffs on behalf of the purported class of similarly situated individuals who purchased HealthMarkets common stock during the period commencing February 7, 2002 and ending on July 21, 2003, filed a First Amended Consolidated Complaint alleging among other things that HealthMarkets, AMS, the Company’s former chief financial officer, the Company’s former chief executive officer and AMS’ former president failed to disclose all material facts relating to the condition of AMS, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On July 11, 2005, defendants filed a motion to dismiss the consolidated complaint. The Court denied the motion to dismiss the complaint on September 29, 2006. On May 2, 2007, the parties executed a memorandum of understanding confirming the terms of a settlement of this matter. The Company currently believes that resolution of this matter will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

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     HealthMarkets has agreed to advance the expenses of the individual defendants incurred in connection with the defense of the case, subject to the defendants’ undertaking to repay such advances unless it is ultimately determined that they are or would have been entitled to indemnification by HealthMarkets under the terms of the Company’s bylaws.

Association Group Litigation

     The health insurance products issued by the Company’s insurance subsidiaries in the self-employed market are primarily issued to members of various membership associations that make available to their members the health insurance and other insurance products issued by the Company’s insurance subsidiaries. The associations provide their membership with a number of benefits and products, including the opportunity to apply for health insurance underwritten by the Company’s health insurance subsidiaries. As previously disclosed, the Company and/or its insurance company subsidiaries have been named as defendants in numerous cases in California and in other jurisdictions challenging, among other things, the manner in which the defendants market health insurance products in the self-employed market and the nature of the relationship between the Company’s insurance companies and the associations that have made available to their members the insurance companies’ health insurance products. Plaintiffs in such cases generally seek injunctive relief and monetary damages in an unspecified amount. Reference is made to the discussion of these cases contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under the caption “Item 3 — Legal Proceedings” and in Note P of Notes to the Company’s Consolidated Financial Statements included in such report.

     The Company currently believes that resolution of these proceedings will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

Other Litigation Matters

     The Company and its subsidiaries are parties to various other pending and threatened legal proceedings, claims, demands, disputes and other matters arising in the ordinary course of business, including some asserting significant liabilities arising from claims, demands, disputes and other matters with respect to insurance policies, relationships with agents, relationships with former or current employees, and other matters. From time to time, some such matters, where appropriate, may be the subject of internal investigation by management, the Board of Directors, or a committee of the Board of Directors. The Company currently believes that the liability, if any, resulting from the disposition of such proceedings, claims, demands, disputes or matters would not be material to the Company’s financial condition or results of operations.

Regulatory Matters

     On March 22, 2005, HealthMarkets received notification that the Market Analysis Working Group of the National Association of Insurance Commissioners had chosen the states of Washington and Alaska to lead a multi-state market conduct examination of HealthMarkets’ principal insurance subsidiaries. The Company believes that approximately 36 states have elected to participate in the examination, which commenced in May 2005 and is ongoing. The examiners have completed the onsite phases of the examination. An exit interview was held on July 17, 2006, in which representatives of the lead states participated. The Company received a draft of the examination report on July 31, 2007. The Company is in the process of evaluating the draft examination report and will respond to it in a timely manner.

     The Company’s insurance subsidiaries are subject to various other pending market conduct examinations arising in the ordinary course of business. State insurance regulatory agencies have authority to levy monetary fines and penalties and require remedial action resulting from findings made during the course of such market conduct examinations. The Company currently believes that the liability, if any, resulting from the disposition of the multi-state market conduct examination or other market conduct examinations would not be material to the Company’s financial condition or results of operations.

NOTE F – SEGMENT INFORMATION

     The Company’s business segments for financial reporting purposes include (i) the Insurance segment (which includes the businesses of the Company’s Self-Employed Agency Division (“SEA”), the Life Insurance Division

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and Other Insurance); (ii) Other Key Factors (which includes investment income not allocated to the Insurance segment, realized gains or losses on sale of investments, interest expense on corporate debt, general expenses relating to corporate operations, merger transaction expenses, variable non-cash stock-based compensation and operations that do not constitute reportable operating segments); and (iii) Disposed Operations (which includes the Company’s former Star HRG Division and former Student Insurance Division).

     Allocations of investment income and certain general expenses are based on a number of assumptions and estimates, and the business segments reported operating results would change if different methods were applied. Certain assets are not individually identifiable by segment and, accordingly, have been allocated by formulas. Segment revenues include premiums and other policy charges and considerations, net investment income, fees and other income. Management does not allocate income taxes to segments. Transactions between reportable operating segments are accounted for under respective agreements, which provide for such transactions generally at cost.

     Revenues from continuing operations, income (loss) from continuing operations before federal income taxes, and assets by operating segment are set forth in the tables below:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands)						(In thousands)
Revenues from continuing operations:
Insurance:
Self-Employed Agency Division	$	362,380		$	366,401		$	722,620		$	729,770
Life Insurance Division		22,706			21,769			44,260			43,828
Other Insurance		7,882			9,454			15,508			19,321
Total Insurance		392,968			397,624			782,388			792,919
Other Key Factors		10,138			9,926			25,859			24,481
Intersegment Eliminations		(490	)		(300	)		(978	)		(579	)
Total revenues excluding disposed operations		402,616			407,250			807,269			816,821
Disposed Operations:
Student Insurance Division		—			70,815			—			135,914
Star HRG		41			37,478			9			75,963
Total Disposed Operations		41			108,293			9			211,877
Total revenues	$	402,657		$	515,543		$	807,278		$	1,028,698

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands)						(In thousands)
Income from continuing operations before federal income taxes:
Insurance:
Self-Employed Agency Division	$	49,500		$	72,216		$	84,930		$	119,239
Life Insurance Division		488			1,775			517			2,156
Other Insurance		1			1,026			1,761			2,747
Total Insurance		49,989			75,017			87,208			124,142
Other Key Factors:
Investment income on equity, interest expense, realized gains and losses, general corporate expenses and other items		(13,412	)		(17,633	)		(18,473	)		(13,705	)
Merger transaction expenses		—			(47,357	)		—			(48,019	)
Variable stock-based compensation benefit (expense)		(1,546	)		(490	)		5			(730	)
Total Other Key Factors		(14,958	)		(65,480	)		(18,468	)		(62,454	)
Total operating income excluding disposed operations		35,031			9,537			68,740			61,688
Disposed Operations:
Student Insurance Division		53			2,544			330			7,209
Star HRG Division		90			1,647			169			3,295
Total Disposed Operations		143			4,191			499			10,504
Total income from continuing operations before federal income taxes	$	35,174		$	13,728		$	69,239		$	72,192

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	June 30,		December 31,
	2007		2006
	(In thousands)
Assets:
Insurance:
Self-Employed Agency Division	$	895,062	$	930,856
Life Insurance Division		540,275		552,723
Other Insurance		15,654		20,419
Total Insurance		1,450,991		1,503,998
Other Key Factors		625,764		943,360
Total Assets excluding Disposed Operation		2,076,755		2,447,358
Disposed Operations:
Student Insurance Division		82,562		124,738
Star HRG Division		—		16,233
Total Disposed Operations		82,562		140,971
Total assets	$	2,159,317	$	2,588,329

     The Student Insurance Division assets of $82.6 million at June 30, 2007 represent a reinsurance receivable associated with a coinsurance agreement entered into with an insurance affiliate of UnitedHealth Group, Incorporated.

NOTE G – AGENT AND EMPLOYEE STOCK PLANS

     Agent Stock Accumulation Plans

     The Company sponsors a series of stock accumulation plans (the “Agent Plans”) established for the benefit of the independent insurance agents and independent sales representatives associated with UGA — Association Field Services, New United Agency, and Cornerstone America.

     The Agent Plans generally combine an agent-contribution feature and a Company-match feature. The agent-contribution feature generally provides that eligible participants are permitted to allocate a portion (subject to prescribed limits) of their commissions or other compensation earned on a monthly basis to purchase shares of HealthMarkets Class A-2 common stock at the fair market value of such shares at the time of purchase. Under the Company-match feature of the Agent Plans, participants are eligible to have posted to their respective Agent Plan accounts book credits in the form of equivalent shares based on the number of shares of HealthMarkets Class A-2 common stock purchased by the participant under the agent-contribution feature of the Agent Plans. The “matching credits” vest over time (generally in prescribed increments over a ten-year period, commencing the plan year following the plan year during which contributions are first made under the agent-contribution feature), and vested matching credits in a participant’s plan account in January of each year are converted from book credits to an equivalent number of shares of HealthMarkets common stock. Matching credits forfeited by participants no longer eligible to participate in the Agent Plans are reallocated each year among eligible participants and credited to eligible participants’ Agent Plan accounts. Share requirements of the Agent Plans may be met from either unissued or treasury shares.

     The Agent Plans do not constitute qualified plans under Section 401(a) of the Internal Revenue Code of 1986 or employee benefit plans under the Employee Retirement Income Security Act of 1974 (“ERISA”), and the Agent Plans are not subject to the vesting, funding, nondiscrimination and other requirements imposed on such plans by the Internal Revenue Code and ERISA.

     For financial reporting purposes, the Company accounts for the Company-match feature of its Agent Plans by recognizing compensation expense over the vesting period in an amount equal to the fair market value of vested shares at the date of their vesting and distribution to the participants. The Company estimates its current liability for unvested matching credits by reference to the number of unvested credits, the prevailing “fair market value” (as determined by the Company’s Board of Directors) of the Company’s common stock, and the Company’s estimate of the percentage of the vesting period that has elapsed up to the current quarter end. Changes in the liability from one quarter to the next are accounted for as an increase in, or decrease to, compensation expense, as the case may be. Upon vesting, the Company reduces the accrued liability (equal to the market value of the vested shares at date of vesting) with a corresponding increase to equity. Unvested matching credits are considered share equivalents outstanding for purposes of the computation of earnings per share.

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     The portion of compensation expense associated with the Agent Plans reflected in the results of the SEA Division is based on the prevailing fair value of Class A-2 common stock (as determined by the Board of Directors of the Company since the Merger or, prior to the Merger, by reference to the fair value of the Company’s common stock) on or about the time the unvested matching credits are granted to participants. In accordance with the terms of the Agent Plans, the Board of Directors of the Company establishes the fair market value of Class A-2 common stock on a quarterly basis. The remaining portion of the compensation expense associated with the Agent Plans (consisting of variable stock-based compensation expense) is reflected in the results of the Company’s “Other Key Factors” business segment.

     Set forth in the table below is the total compensation expense and tax benefit associated with the Company’s Agent Plans for the three and six months ended June 30, 2007 and 2006:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007			2006
	(In thousands)				(In thousands)
SEA Division stock-based compensation expense (1)	$	1,476	$	2,986	$	6,097		$	5,491
Other Key Factors variable non-cash stock-based compensation (benefit) expense (2)		1,546		490		(5	)		730
Total Agent Plan compensation expense		3,022		3,476		6,092			6,221
Related Tax Benefit		1,058		1,217		2,132			2,177
Net expense included in financial results	$	1,964	$	2,259	$	3,960		$	4,044

(1)

Represents the cost of Class A-2 common stock (determined by reference to the prevailing fair value of Class A-2 common stock as determined by the Board of Directors of the Company or, prior to the Merger, by reference to the market price of HealthMarkets (formerly UICI) common shares) on or about the time that unvested matching credits are granted to participants in the Agent Plan. This amount is reflected in the caption “Underwriting, policy acquisition costs, and insurance expenses” on the Company’s Consolidated Condensed Statement of Operations.

(2)

Represents the total stock-based compensation expense associated with the Agent Plans less the expense incurred by the Company on or about the time that unvested matching credits are granted to participants in the Agent Plan. This amount is reflected in the caption “Variable non-cash stock-based compensation expense” on the Company’s Consolidated Condensed Statement of Operations.

     In connection with the extraordinary cash dividend (see Note I), the Company added 317,336 unvested credits to the Agent Plans in order to maintain the value of each agent’s account after payment of the dividend.

     At December 31, 2006, the Company had recorded 1,373,456 unvested matching credits associated with the Agent Plans, of which 423,145 vested in January 2007. Upon vesting, the Company increased additional paid-in capital by $17.3 million, decreased treasury shares by $3.9 million and decreased other liabilities by $21.2 million. At June 30, 2007, the Company had recorded 1,403,131 unvested matching credits.

     Agent Plan transactions are not reflected in the Consolidated Condensed Statement of Cash Flows because issuance of equity securities to settle the Company’s liabilities under the Agent Plans are non-cash transactions.

Employee Stock Option Plans

     At an Executive Compensation Committee meeting held on March 29, 2007, the Committee approved the granting of 4,000 options to purchase shares of Class A-1 common stock at an exercise price of $50.73 to an individual that did not begin employment until April 9, 2007 which corresponds to the grant date. At an Executive Compensation Committee meeting held on May 3, 2007, the Committee approved the granting of 36,500 options to purchase shares of Class A-1 common stock at an exercise price of $50.73, which represented the fair value of Class A-1 common stock as determined by the Board of Directors on the date of grant of such options.

     At the Board of Directors meeting held on May 3, 2007, the Board approved an amendment to the 1987 Stock Option Plan (the“1987 Plan”) which provided that in the event of an extraordinary cash dividend, the Company may make such adjustments to options granted under the 1987 Plan as it determines are equitable and/or appropriate. The Board approved an adjustment to options pursuant to which the number of options increased and the exercise price of such options decreased. The value of the options was maintained pre- and post-dividend. To prevent a

15

dilution in the rights of participants in the 2006 Management Stock Option Plan (the “2006 Plan”), the Board of Directors also approved an adjustment of options granted under the 2006 Plan pursuant to which the exercise price was reduced by $10.51 per share – the amount of the extraordinary cash dividend. The Company recognized a pre-tax expense of $1.6 million in the second quarter in connection with the modifications. The remaining modification expense of $1.8 million will be recognized over the remaining life of the options.

     Set forth below is a summary of stock option transactions including certain information with respect to the Performance-Based Options for which no performance goals have been established:

	Options Outstanding for					Performance-Based
	Accounting					Options with
	(Excludes Options with no					No Performance Based					Combined
	Performance Criteria)					Goals Established					Total
				Average					Average
	Number			Option		Number			Option		Number
	Of			Price per		Of			Price per		Of
	Shares			Share ($)		Shares			Share ($)		Shares
Outstanding options at March 31, 2007		1,089,303			36.43		318,759			39.55		1,408,062
Granted (a)		27,001			40.22		13,499			40.22		40,500
Modification additions (b)		24,862										24,862
Expired		—			—		—			—		—
Cancelled		(29,998	)		36.17		(10,002	)		36.17		(40,000	)
Exercised		(20,188	)		7.34		—					(20,188	)
Outstanding options at June 30, 2007		1,090,980			26.92		322,256			29.57		1,413,236
Options exercisable at June 30, 2007		253,995			18.96		—			—		253,995

(a)	Includes 4,000 options approved by the Executive Compensation Committee on March 29, 2007 for an individual whose employment commenced in April, 2007.
(b)	Includes 24,862 shares added in connection with the amendment of the 1987 Plan options.

NOTE H – TRANSACTIONS WITH RELATED PARTIES

     On April 5, 2006, the Company completed its Merger and, as a result, affiliates of The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners (the “Private Equity Investors”) held, as of the effective date of the Merger, approximately 55.3%, 22.7% and 11.3%, respectively, of the Company’s outstanding equity securities. At June 30, 2007, affiliates of The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners held approximately 53.6%, 22.0% and 11.0%, respectively, of the Company’s outstanding equity securities. Certain members of the Board of Directors of the Company are affiliated with the Private Equity Investors; in particular, Chinh E. Chu and Matthew Kabaker serve as Senior Managing Director and a Principal, respectively, of The Blackstone Group, Adrian M. Jones and Sumit Rajpal serve as a Managing Director and Vice President, respectively, of Goldman, Sachs & Co., and Kamil M. Salame is a partner of DLJ Merchant Banking Partners.

     In accordance with the terms of Transaction and Monitoring Fee Agreements with advisory affiliates of each of the Private Equity Investors, the advisory affiliates of each of the Private Equity Investors agreed to provide to the Company ongoing monitoring, advisory and consulting services, for which the Company agreed to pay to affiliates of each of The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners an annual monitoring fee in an amount equal to $7.7 million, $3.5 million and $1.3 million, respectively. The annual monitoring fees are in each case subject to upward adjustment in each year based on the ratio of the Company’s consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) in such year to consolidated EBITDA in the prior year, provided that the aggregate monitoring fees paid to all advisors pursuant to the Transaction and Monitoring Fee Agreements in any year shall not exceed the greater of $15.0 million or 3% of consolidated EBITDA in such year. The aggregate annual monitoring fees in the amount of $12.5 million payable with respect to 2007 were paid in full to the advisory affiliates of the Private Equity Investors on January 3, 2007. The Company has expensed $6.3 million through June 30, 2007.

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     On May 3, 2007, the Company’s Board of Directors declared an extraordinary cash dividend in the amount of $10.51 per share for Class 
A-1 and Class A-2 common stock to holders of record as of close of business on May 9, 2007, payable on May 14, 2007. In connection with the extraordinary cash dividend, affiliates of each of The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners were paid dividends in the amount of $173.3 million, $71.0 million and $35.5 million, respectively.SeeNote I.

     On April 20, 2007, the Company’s Board of Directors approved a $10.0 million investment by Mid-West National Life Insurance Company of Tennessee in Goldman Sachs Real Estate Partners, L.P., a commercial real estate fund managed by an affiliate of Goldman Sachs Capital Partners. The Company has committed such investment to be funded over a series of capital calls. On July 18, 2007, the Company funded the first capital call in the amount of $1.5 million.

     On April 20, 2007, the Company’s Board of Directors approved a $10.0 million investment by The MEGA Life and Health Insurance Company in Blackstone Strategic Alliance Fund L.P., a hedge fund of funds managed by an affiliate of The Blackstone Group. The Company has committed such investment to be funded over a series of capital calls, the first of which is expected during the third quarter of 2007.

NOTE I – EXTRAORDINARY CASH DIVIDEND

     On May 3, 2007, the Company’s Board of Directors declared an extraordinary cash dividend in the amount of $10.51 per share for Class 
A-1 and Class A-2 common stock to holders of record as of close of business on May 9, 2007, payable on May 14, 2007. In connection with the extraordinary cash dividend, the Company paid dividends to stockholders in the aggregate amount of $317.0 million.

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

Introduction

     The Company’s business segments for financial reporting purposes include (i) the Insurance segment (which includes the businesses of the Company’s Self-Employed Agency Division (“SEA”), the Life Insurance Division and Other Insurance); (ii) Other Key Factors (which includes investment income not allocated to the Insurance segment, realized gains or losses on sale of investments, interest expense on corporate debt, general expenses relating to corporate operations, merger transaction expenses, variable non-cash stock-based compensation and operations that do not constitute reportable operating segments); and (iii) Disposed Operations (which includes the Company’s former Star HRG Division and former Student Insurance Division).

Results of Operations

     The table below sets forth certain summary information about the Company’s operating results for the three and six months ended June 30, 2007 and 2006:

	Three Months Ended					Percentage			Six Months Ended					Percentage
	June 30,					Increase			June 30,					Increase
	2007			2006		(Decrease)			2007			2006		(Decrease)
	(Dollars in thousands)								(Dollars in thousands)
Revenue:
Premiums:
Health	$	334,504		$	448,480		(25.4	)%	$	668,266		$	891,030		(25.0	)%
Life premiums and other considerations		17,444			16,341		6.7	%		33,825			32,480		4.1	%
Total premium		351,948			464,821		(24.3	)%		702,091			923,510		(24.0	)%
Investment income		26,271			24,155		8.8	%		52,731			51,313		2.8	%
Other income		27,593			26,201		5.3	%		53,208			51,334		3.7	%
Gains on sale of investments		(3,155	)		366	NM				(752	)		2,541	NM
Total revenues		402,657			515,543		(21.9	)%		807,278			1,028,698		(21.5	)%
Benefits and Expenses:
Benefits, claims, and settlement expenses		196,513			255,797		(23.2	)%		411,844			528,522		(22.1	)%
Underwriting, policy acquisition costs, and insurance expenses		131,898			155,098		(15.0	)%		253,896			310,505		(18.2	)%
Variable stock compensation (benefit) expense		1,546			490	NM				(5	)		730	NM
Other expenses		24,677			77,872		(68.3	)%		46,459			102,411		(54.6	)%
Interest expense		12,849			12,558		2..3	%		25,845			14,338		80.3	%
Total expenses		367,483			501,815		(26.8	)%		738,039			956,506		(22.8	)%
Income from continuing operations before income taxes		35,174			13,728	NM				69,239			72,192		(4.1	)%
Federal income taxes		12,207			8,048		51.7	%		23,648			27,666		(14.5	)%
Income from continuing operations		22,967			5,680	NM				45,591			44,526		2.4	%
Income from discontinued operations (net of income tax)		396			19,701		(98.0	)%		463			20,362		(97.7	)%
Net income	$	23,363		$	25,381		(8.0	)%	$	46,054		$	64,888		(29.0	)%

NM: not meaningful

18

     Revenues and income from continuing operations before federal income taxes (“operating income”) by business segment are summarized in the tables below:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands)						(In thousands)
Revenues from continuing operations:
Insurance:
Self-Employed Agency Division	$	362,380		$	366,401		$	722,620		$	729,770
Life Insurance Division		22,706			21,769			44,260			43,828
Other Insurance		7,882			9,454			15,508	��		19,321
Total Insurance		392,968			397,624			782,388			792,919
Other Key Factors		10,138			9,926			25,859			24,481
Intersegment Eliminations		(490	)		(300	)		(978	)		(579	)
Total revenues excluding disposed operations		402,616			407,250			807,269			816,821
Disposed Operations:
Student Insurance Division		—			70,815			—			135,914
Star HRG		41			37,478			9			75,963
Total Disposed Operations		41			108,293			9			211,877
Total revenues	$	402,657		$	515,543		$	807,278		$	1,028,698

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands)						(In thousands)
Income from continuing operations before federal income taxes:
Insurance:
Self-Employed Agency Division	$	49,500		$	72,216		$	84,930		$	119,239
Life Insurance Division		488			1,775			517			2,156
Other Insurance		1			1,026			1,761			2,747
Total Insurance		49,989			75,017			87,208			124,142
Other Key Factors:
Investment income on equity, realized gains and losses, interest expense, general corporate expenses and other		(13,412	)		(17,633	)		(18,473	)		(13,705	)
Merger transaction expenses		—			(47,357	)		—			(48,019	)
Variable stock-based compensation benefit(expense)		(1,546	)		(490	)		5			(730	)
Total Other Key Factors		(14,958	)		(65,480	)		(18,468	)		(62,454	)
Total operating income excluding disposed operations		35,031			9,537			68,740			61,688
Disposed Operations:
Student Insurance Division		53			2,544			330			7,209
Star HRG Division		90			1,647			169			3,295
Total Disposed Operations		143			4,191			499			10,504
Total income from continuing operations before federal income taxes	$	35,174		$	13,728		$	69,239		$	72,192

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     HealthMarkets’ results of operations for the three and six months ended June 30, 2007 were particularly impacted by the following factors:

Self- Employed Agency Division

     Set forth below is certain summary financial and operating data for the Company’s Self-Employed Agency (“SEA”) Division for the three and six months ended June 30, 2007 and 2006:

	Self-Employed Agency Division
	Three Months Ended						Percentage			Six Months Ended						Percentage
	June 30,						Increase			June 30,						Increase
	2007			2006			(Decrease)			2007			2006			(Decrease)
	(Dollars in thousands)
Revenue:
Earned premium revenue	$	327,183		$	332,888			(1.7	)%	$	653,840		$	664,653			(1.6	)%
Investment income (1)		7,681			8,066			(4.8	)%		15,590			15,976			(2.4	)%
Other income		27,516			25,447			8.1	%		53,190			49,141			8.2	%
Total revenues		362,380			366,401			(1.1	)%		722,620			729,770			(1.0	)%
Expenses:
Benefit expenses		177,885			165,587			7.4	%		376,493			352,070			6.9	%
Underwriting and policy acquisition expenses		119,740			113,196			5.8	%		231,817			228,056			1.6	%
Other expenses		15,255			15,402			(1.0	)%		29,380			30,405			(3.4	)%
Total expenses		312,880			294,185			6.4	%		637,690			610,531			4.4	%
Operating income	$	49,500		$	72,216			(31.5	)%	$	84,930		$	119,239			(28.8	)%
Other operating data:
Loss ratio (2)		54.4	%		49.7	%					57.6	%		53.0	%
Expense ratio (3)		36.6	%		34.0	%					35.5	%		34.3	%
Combined ratio		91.0	%		83.7	%					93.1	%		87.3	%
Average number of writing agents in period		2,037			2,232						2,070			2,204
Submitted annualized volume (4)	$	185,163		$	204,601					$	385,826		$	418,187

(1)	Allocations of investment income and certain general expenses are based on a number of assumptions and estimates, and the business division’s reported operating results would change if different methods were applied.
(2)	Defined as total benefit expenses as a percentage of earned premium revenue.
(3)	Defined as total underwriting and policy acquisition expenses as a percentage of earned premium revenue.
(4)	Submitted annualized premium volume in any period is the aggregate annualized premium amount associated with health insurance applications submitted by the Company’s agents in such period for underwriting by the Company.

     The SEA Division reported operating income in the three and six month periods ended June 30, 2007 of $49.5 million and $84.9 million, respectively, compared to operating income of $72.2 million and $119.2 million in the corresponding 2006 period. The decrease in operating income in the three-month period ended June 30, 2007 was primarily due to an increase in the loss ratio (from 49.7% in the 2006 three-month period to 54.4% in the 2007 three-month period) and an increase in underwriting and policy acquisition expenses.

     Operating income at the SEA Division as a percentage of earned premium revenue (i.e., operating margin) in the three and six month periods ended June 30, 2007 was 15.1% and 13.0%, compared to operating margin of 21.7% and 17.9% in the corresponding 2006 period. The decrease in operating margin is attributable primarily to the period-over-period increase in the loss ratio as a result of a product mix shift to new health insurance products in the Company’s recently introduced CareOne product suite (which provide a higher proportion of the premium as benefits) and cost containment expenses resulting from the Company’s initiatives to control medical costs, the benefits of which have not yet been fully realized. In addition, the Company has incurred additional costs related to certain project initiatives to enhance its administrative systems.

     In the second quarter of 2006, the Company determined that sufficient provision for large claims could be made within its normal reserve process, eliminating the need for the separate large claim reserve. This refinement resulted in a reduction in the claim liability of $10.8 million. During the second quarter of 2007, a reduction to the claim

20

liability (approximately $5.0 million) was attributable to an update of the completion factors used in estimating the claim liability for the Accumulated Covered Expense (“ACE”) rider, an optional benefit available with certain scheduled/basic health insurance products. This adjustment reflects increasing reliance upon actual historical data for the ACE rider and no longer utilizes large claim data derived from other products, though overall claims experience has been used where the historical ACE data is not sufficient. Previously, the completion factors were calculated partially based upon historical data derived from large claims on other products since there was insufficient data related to the ACE product rider to provide accurate and reliable completion factors.

     In the three and six months ended June 30, 2007, total SEA Division submitted annualized premium volume (i.e., the aggregate annualized premium amount associated with individual and small group health insurance applications submitted by the Company’s agents for underwriting by the Company) decreased to $185.2 million and $385.8 million, respectively, from $204.6 million and $418.2 million, respectively, in the corresponding 2006 periods. The period-over-period decreases in submitted annualized premium volume were attributable primarily to a decrease in the average number of writing agents in the field from 2,232 for the three months ended June 30, 2006 to 2,037 for the three months ended June 30, 2007 and a 3.5% decrease in the weekly applications submitted per writing agent. This was partially offset by a 4.8% increase in the average premium per policy in the second quarter of 2007 compared to the comparable period in 2006.

     The Company is in the process of implementing several new initiatives established to increase the average number of writing agents and agent productivity through the use of new commission incentive programs, new products and geographic expansion.

Life Insurance Division

     Set forth below is certain summary financial and operating data for the Company’s Life Insurance Division for the three and six months ended June 30, 2007 and 2006:

	Life Insurance Division
	Three Months Ended				Percentage			Six Months Ended				Percentage
	June 30,				Increase			June 30,				Increase
	2007		2006		(Decrease)			2007		2006		(Decrease)
	(Dollars in thousands)
Revenue:
Earned premium revenue	$	17,259	$	16,376		5.4	%	$	33,529	$	32,577		2.9	%
Investment income (1)		5,145		5,097		1.0	%		10,234		10,182		0.5	%
Other income		302		296		1.7	%		497		1,069		(53.5	)%
Total revenues		22,706		21,769		4.3	%		44,260		43,828		1.0	%
Expenses:
Benefit expenses		13,701		10,840		26.4	%		27,580		22,722		21.4	%
Underwriting and policy acquisition expenses		8,517		9,154		(7.0	)%		16,163		18,950		(14.7	)%
Total expenses		22,218		19,994		11.1	%		43,743		41,672		5.0	%
Operating income	$	488	$	1,775		(72.5	)%	$	517	$	2,156		(76.0	)%

(1) Allocations of investment income and certain general expenses are based on a number of assumptions and estimates, and the business division’s reported operating results would change if different methods were applied.

     The Company’s Life Insurance Division reported operating income in the three and six month periods ended June 30, 2007 of $488,000 and $517,000, respectively, compared to operating income of $1.8 million and $2.2 million in the corresponding 2006 periods. The decrease in operating income for the three and six month periods ended June 30, 2007 compared to the corresponding 2006 periods was primarily attributable to an increase in death and workers’ compensation claims during the first half of 2007 partially offset by a decrease in administrative expenses and a first quarter decrease in the amortization of deferred acquisition costs. The decrease in amortization of deferred acquisition costs in the first quarter 2007 period is associated with the refinement of the calculation due to the availability of additional information from the conversion to new actuarial reserving software. Partially offsetting the decrease in amortization of deferred acquisition costs was an increase in unearned revenue liability which decreased premium revenue. The increase in unearned revenue liability is also associated with the refinement of the calculation associated with additional information from the conversion to the new actuarial software.

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     In the three and six months ended June 30, 2007, the Company’s Life Insurance Division generated annualized paid premium volume (i.e., the aggregate annualized life premium amount associated with new life insurance policies issued by the Company) in the amount of $4.6 million and $8.9 million, compared to $5.9 million and $11.5 million in the corresponding 2006 period. The second quarter 2007 decrease in annualized premium was primarily due to a decrease in the number of agents.

Other Insurance

     Set forth below is certain summary financial and operating data for the Company’s Other Insurance division for the three and six months ended June 30, 2007 and 2006:

	Other Insurance Division
	Three Months Ended						Percentage			Six Months Ended						Percentage
	June 30,						Increase			June 30,						Increase
	2007			2006			(Decrease)			2007			2006			(Decrease)
	(Dollars in thousands)
Revenue:
Earned premium revenue	$	7,465		$	9,126			(18.2	)%	$	14,713		$	18,664			(21.2	)%
Investment income (1)		387			321			20.6	%		747			617			21.1	%
Other income		30			7		NM				48			40			20.0	%
Total revenues		7,882			9,454			(16.6	)%		15,508			19,321			(19.7	)%
Expenses:
Benefit expenses		5,074			5,505			(7.8	)%		8,249			10,700			(22.9	)%
Underwriting and policy acquisition expenses		2,807			2,923			(4.0	)%		5,498			5,874			(6.4	)%
Total expenses		7,881			8,428			(6.5	)%		13,747			16,574			(17.1	)%
Operating income	$	1		$	1,026			(99.9	)%	$	1,761		$	2,747			(35.9	)%
Other operating data:
Loss ratio (2)		68.0	%		60.3	%					56.1	%		57.3	%
Expense ratio (3)		37.6	%		32.0	%					37.4	%		31.5	%
Combined ratio		105.6	%		92.3	%					93.5	%		88.8	%

(1)	Allocations of investment income and certain general expenses are based on a number of assumptions and estimates, and the business division’s reported operating results would change if different methods were applied.
(2)	The loss ratio represents benefits, claims and settlement expenses related to accident insurance and reinsurance contracts stated as a percentage of earned premiums. The expense ratio represents underwriting, contract acquisition costs and expenses related to accident insurance and reinsurance contracts stated as a percentage of earned premiums.

     The Other Insurance division consists of the operations of ZON Re USA LLC (an 82.5%-owned subsidiary), which underwrites, administers and issues accidental death, accidental death and dismemberment (AD&D), accident medical and accident disability insurance products, both on a primary and on a reinsurance basis.

     For the three and six months ended June 30, 2007, operating income was $1,000 on revenues of $7.9 million and $1.8 million on revenues of $15.5 million, respectively, compared to $1.0 million in operating income on revenues of $9.5 million and $2.7 million in operating income on revenue of $19.3 million, respectively, for corresponding periods in 2006. The decrease in the revenue is due to lower sales for the current year related to increased competitive pressure, which impacts new and renewal business. The increase in the loss ratio from 60.3% for the three months ended June 30, 2006 to 68.0% for the three months ended June 30, 2007 is mainly due to the two large claims on the reinsured business during the second quarter of 2007. In addition to the higher than expected loss ratio, during the quarter the division incurred increased legal fees and settlement costs due to the settlement of certain litigation.

     The minor decrease in the loss ratio from 57.3% for the six months ended June 30, 2006 to 56.1% for the six months ended June 30, 2007 is due to better than anticipated experience on some contracts expiring during the first quarter of 2007.

22

Other Key Factors

     The Company’s Other Key Factors segment includes investment income not otherwise allocated to the Insurance segment, realized gains and losses, interest expense on corporate debt, general expenses relating to corporate operations, merger transaction expenses, variable stock compensation, and other unallocated items.

     Set forth below is certain summary financial data for the Company’s Other Key Factors segment for the three and six months ended June 30, 2007 and 2006:

	Other Key Factors
	Three Months Ended						Percentage			Six Months Ended						Percentage
	June 30,						Increase			June 30,						Increase
	2007			2006			(Decrease)			2007			2006			(Decrease)
	(Dollars in thousands)
Investment income on equity	$	10,836		$	7,346			47.5	%	$	21,941		$	17,182			27.7	%
Realized gain (losses) on investments		(3,155	)		366		NM				(752	)		2,541		NM
Merger transaction expenses		—			(47,357	)		(100.0	)%		—			(48,019	)		(100.0	)%
Interest expense on non-student loan debt		(11,424	)		(10,978	)		4.1	%		(22,879	)		(11,310	)	NM
Variable stock-based compensation benefit (expense)		(1,546	)		(490	)	NM				5			(730	)	NM
General corporate expenses and other		(9,669	)		(14,367	)		(32.7	)%		(16,783	)		(22,118	)		(24.1	)%
Operating (expense) income	$	(14,958	)	$	(65,480	)		(77.2	)%	$	(18,468	)	$	(62,454	)		(70.4	)%

     The Other Key Factors segment reported an operating loss in the three and six month periods ended June 30, 2007 of $15.0 million and $18.5 million, respectively, compared to operating losses of $65.5 million and $62.5 million, respectively in the corresponding 2006 periods.

     The decrease in operating loss in the 2007 periods is primarily due to merger related expenses incurred in 2006 partially offset by additional interest expense in the 2007 period associated with the second quarter 2006 Merger-related indebtedness. The decrease in general corporate expenses and other during 2007 compared to 2006 primarily reflects a decrease in spending with external professional service firms for various company initiatives. During the three months ended June 30, 2007, the Company expensed $2.9 million of capitalized debt issuance costs related to the prepayment of principal in the amount of $75.0 million on its term loan facility. This additional amount is included in Gains on Sales of Investments in the Company’s statement of income in those periods.SeeNote B of Notes to Consolidated Condensed Financial Statements (Unaudited).

Liquidity and Capital Resources

     Historically, the Company’s primary sources of cash on a consolidated basis have been premium revenues from policies issued, investment income, fees and other income, and borrowings under a secured student loan credit facility. The primary uses of cash have been payments for benefits, claims and commissions under those policies, servicing of the Company’s debt obligations, operating expenses and the funding of student loans generated under the Company’s College First Alternative Loan program. In the six months ended June 30, 2007, net cash provided by operations totaled approximately $55.4 million, compared to $24.7 million in the corresponding period of 2006.

     HealthMarkets, Inc., is a holding company, the principal assets of which are its investment in its wholly-owned subsidiary, HealthMarkets, LLC, to which, in connection with the Merger, HealthMarkets, Inc. contributed substantially all of its assets and liabilities. The holding company’s ability to fund its cash requirements is largely dependent upon its ability to access cash, by means of dividends or other means, from HealthMarkets, LLC. HealthMarkets, LLC’s principal assets are its investments in its separate operating subsidiaries, including its regulated insurance subsidiaries. The agreements governing certain indebtedness incurred by the Company in connection to the Merger contain restrictive covenants, including certain prescribed financial ratios, limitations on additional indebtedness as a percentage of certain defined equity amounts and restrictions on the disposal of certain subsidiaries, including primarily the Company’s regulated insurance subsidiaries.

     At June 30, 2007 and December 31, 2006, the aggregate cash and cash equivalents and short-term investments held at both the holding company level and HealthMarkets, LLC was $52.3 million and $311.5 million, respectively. The decrease for the six months ended June 30, 2007 is mainly due to a dividend payment in the amount of $317.0

23

million and a $75.0 million principal payment on the Term loan, partially offset by $55.4 million of net cash generated from operations.

     Prior approval by insurance regulatory authorities is required for the payment by a domestic insurance company of dividends that exceed certain limitations based on statutory surplus and net income. During 2007 (through August 09, 2007), the Company’s domestic insurance subsidiaries declared and paid dividends to HealthMarkets, LLC in the amount of $122.2 million, including an extraordinary dividend in the amount of $100.0 million. The extraordinary dividend resulted in the liquidation of approximately $83.6 million of fixed maturities. The remaining amount of ordinary dividends in calendar year 2007 that could be paid by the Company’s domestic insurance subsidiaries to HealthMarkets, LLC is approximately $49.0 million. As it has done in the past, the Company will continue to assess the results of operations of the regulated domestic insurance subsidiaries to determine the prudent dividend capability of the subsidiaries, consistent with HealthMarkets’ practice of maintaining risk-based capital ratios at each of the Company’s domestic insurance subsidiaries significantly in excess of minimum requirements. The agreements governing certain indebtedness incurred by the Company in connection with the Merger contain restrictive covenants, including certain prescribed financial ratios, limitations on additional indebtedness as a percentage of certain defined equity amounts and restrictions on the disposal of certain subsidiaries, including primarily the Company’s regulated insurance subsidiaries.

Contractual Obligations and Off Balance Sheet Obligations

     The agreements governing certain indebtedness incurred by the Company in connection with the Merger contain restrictive covenants, including certain prescribed financial ratios, limitations on additional indebtedness as a percentage of certain defined equity amounts and restrictions on the disposal of certain subsidiaries, including primarily the Company’s regulated insurance subsidiaries. Other contractual obligations or off balance sheet arrangements (which consist solely of commitments to fund student loans generated by its former College Fund Life Division and letters of credit) are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     Set forth below is a summary of the Company’s contractual obligations (on a consolidated basis) at June 30, 2007 and December 31, 2006 (dollars in thousands):

	At June 30, 2007		At December 31, 2006
Corporate indebtedness	$	481,070	$	556,070
Student loan credit facility		105,100		118,950
Future policy benefits		460,488		453,715
Claim liabilities		489,675		517,132
Capital lease obligations		982		1,709
Total	$	1,537,315	$	1,647,576

     In addition to the contractual obligations set forth in the table above, the Company also is a party to various operating leases for office space and equipment.

     All indebtedness issued under the secured student loan credit facility represents obligations solely of a special purpose entity (SPE) and not of the Company or any other subsidiary and is secured by student loans, accrued investment income, cash, cash equivalents and qualified investments.

     At each of June 30, 2007 and December 31, 2006, the Company had $11.8 million and $9.6 million, respectively, of letters of credit outstanding relating to its insurance operations.

Critical Accounting Policies and Estimates

     The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated condensed financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to health and life insurance claims and liabilities, deferred acquisition costs, bad debts, impairment of investments, intangible assets, income taxes, financing operations and contingencies and litigation. The Company bases its estimates on historical experience and on

24

various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Reference is made to the discussion of these critical accounting policies and estimates contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies and Estimates.”

Regulatory and Legislative Matters

     The business of insurance is primarily regulated by the states and is also affected by a range of legislative developments at the state and federal levels. Recently adopted legislation and regulations may have a significant impact on the Company’s business and future results of operations. Reference is made to the discussion under the caption“Business — Regulatory and Legislative Matters” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:

     Some of the matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “objective”, “plan”, “possible”, “potential” and similar expressions. Actual results may vary materially from those included in the forward-looking statements. Factors that could cause actual results to differ materially from those included in the forward-looking statements include, but are not limited to, the following:

• general economic conditions;

• the continued ability of the Company to compete for customers and insureds in an industry where many of its competitors may have greater market share and/or greater financial resources;

• the Company’s ability to accurately estimate medical claims and control costs;

• changes in government regulation that could increase the costs of compliance or cause the Company to discontinue marketing its products in certain states;

• the Company’s failure to comply with new or existing government regulation that could subject it to significant fines and penalties;

• changes in the relationship between the Company and the membership associations that make available to their members the health insurance and other insurance products issued by the Company’s insurance subsidiaries;

• changes in the laws and regulations governing so-called “association group” insurance (particularly changes that would subject the issuance of policies to prior premium rate approval and/or require the issuance of policies on a “guaranteed issue” basis);

• significant liabilities and costs associated with litigation;

• failure of the Company’s information systems to provide timely and accurate information;

• negative publicity regarding the Company’s business practices and/or regarding the health insurance industry in general;

• the Company’s inability to enter into or maintain satisfactory relationships with networks of hospitals, physicians, dentists, pharmacies and other health care providers;

• failure of the Company’s regulated insurance company subsidiaries to maintain their current ratings by A.M. Best Company, Fitch and/or Standard & Poor’s;

25

• the other risk factors set forth in the reports filed by the Company from time to time with the Securities and Exchange Commission.

     Reference is made to the discussion of these and other risk factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.”

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company has not experienced significant changes related to its market risk exposures during the quarter ended June 30, 2007. Reference is made to the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 in Item 7A –Quantitative and Qualitative Disclosures about Market Risk.

ITEM 4 – CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

     Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Change in Internal Control over Financial Reporting

     There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

26

PART II. OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

     The Company is a party to various material legal proceedings, which are described in Note E of Notes to the Consolidated Condensed Financial Statements included herein and/or in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2006 under the caption “Item 3 - Legal Proceedings.” The Company and its subsidiaries are parties to various other pending legal proceedings arising in the ordinary course of business, including some asserting significant damages arising from claims under insurance policies, disputes with agents and other matters. Based in part upon the opinion of counsel as to the ultimate disposition of such lawsuits and claims, management believes that the liability, if any, resulting from the disposition of such proceedings will not be material to the Company’s consolidated financial condition or results of operations. Except as discussed in Note E to Notes to the Company’s Consolidated Condensed Financial Statements included herein, during the fiscal quarter covered by this Quarterly Report on Form 10-Q, the Company has not been named in any new material legal proceeding, and there have been no material developments in the previously reported legal proceedings.

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

          During the three months ended June 30, 2007, the Company did not issue any unregistered shares of its Class A-1 or Class A-2 common stock.

          The following table sets forth the Company’s purchases of HealthMarkets, Inc. Class A-1 common stock during each of the months in the three-month period ended June 30, 2007.

					Total Number of Shares
	Total Number of		Average Price		Purchased as Part of		Maximum Number of Shares
	Shares		Paid per Share		Publicly Announced		That May Yet Be Purchased
Period	Purchased(1)		($)		Plans or Programs		Under The Plan or Program
4/1/07-4/30/07		—		—		—		—
5/1/07-5/31/07		30,464		40.22		—		—
6/1/07-6/30/07		34,586		40.22		—		—
Totals		65,050		40.22		—		—

(1) The number of shares purchased other than through a publicly announced plan or program includes 65,050 shares purchased from former or current officers or employees of the Company.

          The following table sets forth the Company’s purchases of HealthMarkets, Inc. Class A-2 common stock during each of the months in the three-month period ended June 30, 2007, pursuant to the terms of the Company’s agent stock accumulation plans established for the benefit of the Company’s agents (SeeNote G of the Notes to Consolidated Condensed Financial Statements):

					Total Number of Shares
	Total Number of		Average Price		Purchased as Part of		Maximum Number of Shares
	Shares		Paid per Share		Publicly Announced		That May Yet Be Purchased
Period	Purchased(1)		($)		Plans or Programs		Under The Plan or Program
4/1/07-4/30/07		218,247		49.98		—		—
5/1/07-5/31/07		118,311		45.54		—		—
6/1/07-6/30/07		59,526		40.22		—		—
Totals		396,084		47.19		—		—

(1) The number of shares purchased other than through a publicly announced plan or program includes 396,084 shares purchased with respect to the stock accumulation plans established for the benefit of Company’s agents.

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

     The Company’s Annual Meeting of Stockholders was held on May 23, 2007. As of March 30, 2007, the record date for the meeting, 30,355,947 shares of common stock were issued and 30,354,995 shares were outstanding. The following individuals were elected to the Company’s Board of Directors to hold office for the ensuing year.

Nominee	In Favor		Withheld/Against
Allen F. Wise		26,900,160		0
William J. Gedwed		26,900,160		0
Chinh E. Chu		26,900,160		0
Adrian M. Jones		26,900,160		0
Mural R. Josephson		26,900,160		0
Matthew S. Kabaker		26,900,160		0
Andrew S. Kahr		26,900,160		0
Kamil M. Salame		26,900,160		0
Steven J. Shulman		26,900,160		0

Nathaniel Zilkha was not a nominee for election because he notified the Company on May 14, 2007 that he was resigning from the Board of Directors of the Company.

     The results of the voting for the proposal to amend the Company’s Certificate of Incorporation to permit the redemption of Class A-2 Common Stock outstanding for less than six (6) months where such redemption is permitted under the Company’s agent stock accumulation plans were as follows:

For	Against		Abstain
26,900,160		0		0

     The results of the voting for the proposal to ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm to audit the accounts of the Company for the fiscal year ending December 31, 2007 were as follows:

For	Against		Abstain
26,900,160		0		0

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ITEM 6 – EXHIBITS

(a) Exhibits.

Exhibit
No.	Description
3.1	Certificate of Incorporation of HealthMarkets, Inc. as amended as of June 5, 2007.
31.1	Rule 13a-14(a)/15d-14(a) Certification, executed by William J. Gedwed, President and
	Chief Executive Officer of HealthMarkets, Inc.
31.2	Rule 13a-14(a)/15d-14(a) Certification, executed by Michael E. Boxer, Executive Vice
	President and Chief Financial Officer of HealthMarkets, Inc.
32	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of
	Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by William
	J. Gedwed, President and Chief Executive Officer of HealthMarkets, Inc. and Michael E.
	Boxer, Executive Vice President and Chief Financial Officer of HealthMarkets, Inc.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HealthMarkets, Inc. (Registrant)
Date: August 10, 2007	/s/ William J. Gedwed
	William J. Gedwed, President, Chief Executive
	Officer and Director

Date: August 10, 2007	/s/ Michael E. Boxer
	Michael E. Boxer, Executive Vice President
	and Chief Financial Officer

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