<PAGE>

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

                                   ----------

                                    FORM 10K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
                            COMMISSION FILE #0-11321

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

                                   ----------

              NEW YORK                                       11-2580136
     (State of Incorporation)                      (I.R.S. Employer I.D. Number)

SIX INTERNATIONAL DRIVE, SUITE 190, RYE BROOK, NY              10573
    (Address of Principal Executive Offices)                 (Zip Code)

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

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

<TABLE>
<CAPTION>
                                                     NAME OF EACH EXCHANGE
             TITLE OF CLASS                           ON WHICH REGISTERED
             --------------                           -------------------
<S>                                                  <C>
Common Stock, par value $.01 per share                     NASDAQ
</TABLE>

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

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

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Securities Exchange Act Rule 12b-2): Yes |X| No | |

      The aggregate market value of all common equity held by non-affiliates of
the registrant as of March 3, 2003 was approximately $130,000,000.

      The number of shares outstanding of the Registrant's Common Stock as of
March 3, 2003 was 53,272,351.

                       DOCUMENTS INCORPORATED BY REFERENCE

      The Proxy Statement for the 2003 Annual Meeting is incorporated by
reference into Part II and Part III of this 10-K.


                                       1
<PAGE>
                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                    FORM 10-K
                                      2002
                                    CONTENTS

<TABLE>
<CAPTION>
             ITEM                             DESCRIPTION                              PAGE
<S>          <C>      <C>                                                              <C>
PART 1          1     Business                                                           3
                2     Properties                                                        25
                3     Legal Proceedings                                                 26
                4     Submission of Matters to a Vote of Security Holders               26

PART II         5     Market for the Registrant's Common Stock and
                       Related Stockholder Matters                                      26
                6     Selected Financial Data                                           28
                7     Management's Discussion and Analysis of Financial
                       Condition and Results of Operations                              30
                7A    Quantitative and Qualitative Disclosures about Market
                       Risk                                                             52
                8     Financial Statements and Supplementary Data                       53
                9     Changes in and Disagreements with Accountants on
                       Accounting and Financial Disclosure                              53

PART III       10     Directors and Executive Officers of the Registrant                54
               11     Executive Compensation                                            56
               12     Security Ownership of Certain Beneficial Owners and
                       Management and Related Stockholder Matters                       56
               13     Certain Relationships and Related Transactions                    57
               14     Controls and Procedures                                           57

Part IV        15     Exhibits, Financial Statement Schedules and Reports
                       On Form 8-K                                                      57

                      Signatures                                                        59
                      Certifications                                                    61
</TABLE>


                                       2
<PAGE>
                                     PART I

ITEM 1 - BUSINESS

FORWARD-LOOKING STATEMENTS

      Certain statements in this report or incorporated by reference into this
report and oral statements made from time to time by our representatives
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
statements not based on historical information. They relate to future
operations, strategies, financial results or other developments. In particular,
statements using verbs such as "expect," "anticipate," "believe" or similar
words generally involve forward-looking statements. Forward-looking statements
include statements about development and distribution of our products,
investment spreads or yields, the impact of proposed or completed acquisitions,
the adequacy of reserves or the earnings or profitability of our activities.
Forward-looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many of
which are beyond our control and are subject to change. These uncertainties can
affect actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements. Whether or not actual results
differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable risks and uncertainties, some of which relate
particularly to our business, such as our ability to set adequate premium rates
and maintain adequate reserves, our ability to compete effectively and our
ability to grow our business through internal growth as well as through
acquisitions. Other risks and uncertainties may be related to the insurance
industry generally or the overall economy, such as regulatory developments,
industry consolidation and general economic conditions and interest rates. We
disclaim any obligation to update forward-looking statements.

GENERAL

      Universal American Financial Corp. ("the Company" or "Universal American")
was incorporated in the State of New York in 1981 as a life and accident &
health insurance holding company. Collectively, the Company's insurance
subsidiaries are licensed to sell life and accident & health insurance and
annuities in all fifty states, the District of Columbia and all the provinces of
Canada. These products are designed primarily for the senior and self-employed
markets. The principal insurance products are Medicare supplement, fixed benefit
accident and sickness disability insurance, long term care, home health care,
senior life insurance and fixed annuities. We distribute these products through
an independent general agency system and a career agency system. Our
administrative services company acts as a service provider for both affiliated
and unaffiliated insurance companies for senior market insurance and
non-insurance programs.

      We have been able to achieve rapid, and profitable, growth as a result of
our focus on our core markets, enhanced by several acquisitions that have been
additive financially and strategically. Since 1999:

      -     Our net income has increased from $9.6 million to $30.1 million,

      -     Our gross premium has increased from $252.6 million to $586.7
            million,

      -     Our total assets have grown from $1.2 billion to $1.4 billion, and

      -     Our stockholders' equity has grown from $133.9 million to $286.8
            million.

SENIOR MARKET OPPORTUNITY

      We believe that attractive growth opportunities exist in serving the
senior market. The population of persons over age 65 in the United States is
projected to grow from the current level of approximately 35 million to
approximately 70 million by 2030, according to the U.S. Census Bureau. The shift
in population toward individuals over age 65 presents significant opportunities
for us to sell our insurance products, especially supplemental health insurance.
Further, as health and medical technologies increase life expectancy, we believe
that seniors and their adult children will increasingly focus on elder care
needs and the services required, including insurance, to address those needs.


                                       3
<PAGE>
OUR OPERATING SEGMENTS

      We currently manage our business through three principal business
segments: Senior Market Brokerage, Career Agency and Administrative Services. We
also report the corporate activities of our holding company in a separate
segment. During 2002 we modified the way we report segment information by
combining our previously defined Senior Market Brokerage and Special Markets
segments into a single segment, Senior Market Brokerage. Our decision to combine
the two segments was based on the significant reduction in the insurance in
force in the Special Markets segment as a result of our exit from the major
medical line of business. Information regarding each segment's revenue income or
loss before taxes and total assets is included in Note 21 to the financial
statements included in this Form 10-K.

      SENIOR MARKET BROKERAGE

      Our Senior Market Brokerage segment focuses on selling insurance products
designed for the senior market, including Medicare supplement, Medicare select,
long term care, senior life insurance and annuities through independent
marketing organizations and general agencies. This segment's operations are
conducted primarily by the following subsidiaries:

      -     American Pioneer Life Insurance Company ("American Pioneer")

      -     American Progressive Life & Health Insurance Company of New York
            ("American Progressive")

      -     Constitution Life Insurance Company ("Constitution")

      CAREER AGENCY

      Our career agency segment traditionally concentrated on selling fixed
benefit accident and sickness disability insurance and individual life insurance
products to the middle-income self-employed market. This segment has recently
expanded its focus to include senior market products as well. The producers in
our career agency segment are contracted to sell products only with our
companies; however, they may sell products of other companies through programs
sponsored by us. This segment's operations are conducted by the following
subsidiaries:

      -     Pennsylvania Life Insurance Company ("Pennsylvania Life")

      -     Penncorp Life Insurance Company (Canada) ("Penncorp Life (Canada)")

      ADMINISTRATIVE SERVICES

      Our administrative companies, primarily CHCS Services, Inc., provide
outsourcing services that support insurance and non-insurance products,
primarily for the senior market. CHCS Services, Inc. has emerged as a leading,
full-service administrator of senior insurance products and an innovator in
geriatric care management. We utilize state of the art technology and a national
network of highly trained health care professionals to provide the
administrative platform for these insurance and insurance-related products and
services. Currently, we provide services to more than 45 insurers and generated
fee income of $42.7 million in 2002 from both unaffiliated ($19.2 million) and
affiliated companies ($23.5 million).

      CORPORATE

      Our corporate segment reflects the activities of our holding company,
including the payment of interest on our debt, certain senior executive
compensation and the expense of being a public company.


                                       4
<PAGE>
OUR BUSINESS STRATEGY

      The principal components of our business strategy are to:

      -     Develop and market competitive and innovative insurance products,
            with an emphasis on the senior market in the U.S. and the self
            employed market in Canada;

      -     Expand our brokerage and career distribution channels through
            additional recruiting and geographic expansion;

      -     Build our fee-based administrative business in order to complement
            our risk-based insurance business;

      -     Sharpen our focus on core business by exiting lines of business that
            do not fit within our strategy or core competencies;

      -     Employ conservative risk management techniques, including
            maintaining a high quality investment portfolio, disciplined pricing
            and prudent use of reinsurance;

      -     Pursue selective acquisitions that fit our strategic and financial
            criteria in order to supplement our internal growth; and

      -     Execute efficiently, especially in regard to integrating the
            operations of companies and blocks of business that we acquire.

ACQUISITIONS, DIVESTITURES AND FINANCING ACTIVITY

      Pending Acquisition

      In December 2002, Pennsylvania Life entered into a definitive contract to
acquire Pyramid Life Insurance Company ("Pyramid Life") from Ceres Group, Inc.
for $56 million in cash. This transaction is subject to regulatory approvals and
other conditions and is scheduled to close by the end of the first quarter of
2003.

      Pyramid Life specializes in providing health and life insurance products
to the senior market. These products include Medicare supplement, long term
care, life insurance and annuities. Pyramid Life markets its products in 26
states through a career sales force of over 1,100 career agents operating out of
29 Senior Solutions Sales Centers. As of the end of 2002, Pyramid Life had
approximately $110 million of premium in force and in excess of $114 million of
assets.

      During 2002, Pyramid Life agents produced more than $25 million of
annualized new sales. We believe this acquisition will add further scale and
efficiencies to our operations in the rapidly expanding senior market. Following
a transition period, we plan to take advantage of our cost-effective and
efficient service center to administer the business; however, we will preserve
the marketing identity and quality service that has defined Pyramid Life.

      Trust Preferred Transaction

      In December 2002, a subsidiary trust of the Company issued $15.0 million
of floating rate trust preferred securities. These securities are due in 2032
and are not callable for the first five years. The floating rate is equal to the
three-month LIBOR plus 4.0%, currently 5.4%. Approximately $6.0 million of the
proceeds were used to augment the capital of our insurance subsidiaries and the
balance of approximately $9.0 million was retained at the parent company in
anticipation of funding the acquisition of Pyramid Life. In March 2003, a second
subsidiary trust of the Company issued $10.0 million of floating rate trust
preferred securities under terms similar to the above securities at a rate of
5.29%. The proceeds will be used to pay down a portion of the term loan and for
general corporate purposes.


                                       5
<PAGE>
      Acquisition of Block of Business

      In November 2002 we entered into an agreement with Nationwide Life
Insurance Company ("Nationwide") to acquire, through a 100% quota share
reinsurance agreement, Nationwide's individual Medicare supplement policies
representing approximately $20.0 million of annualized premium in force. In
connection with this transaction, administration of the business was transferred
to CHCS Services, Inc.

      Equity Offering

      In the third quarter of 2001, we completed a secondary equity offering in
which we sold 5.7 million shares of our common stock, with proceeds to the
Company of $26.0 million, net of expenses. In addition, 2.2 million shares were
sold by some of our shareholders as part of the offering. The primary reason for
the offering was to enhance the capital of our insurance subsidiaries to support
our growth and to improve our risk based capital ratios used by regulators and
rating agencies to evaluate the adequacy of capital of insurance companies. Out
of the proceeds of the offering, $9.3 million was contributed to the capital and
surplus of our insurance subsidiaries, $5.5 million was used to reduce the
intercompany debenture between our parent holding company and American
Progressive and the balance was held for general corporate purposes.

      Acquisition of Administrative Service Companies

      In November 2001, we acquired assets from Living Strategies, Inc., a
privately held company based in Bala Cynwyd, Pennsylvania, including certain
contracts, trademarks and proprietary web-based technology. Living Strategies is
a recognized provider of employer-sponsored elder care programs, providing
assistance and support to those dealing with the aging of their parents and
family members. As a result of the acquisition of the Living Strategies assets,
we have enhanced our technology infrastructure and expanded the audience for our
elder care management services.

      In August 2000, we acquired Capitated HealthCare Services, Inc. ("CHCS") a
privately held administrator of long term care products located in Weston,
Florida. At the time of the acquisition, CHCS performed outsourcing services for
more than 30 insurance companies. This acquisition enhanced our expertise in the
long term care business.

      In January 2000, we acquired CHCS Services, Inc., formerly American
Insurance Administration Group, Inc., a privately-held third party administrator
of senior health products located in Clearwater, Florida. At the time of the
acquisition, American Insurance Administration Group administered $125 million
of senior market premium. This acquisition strengthened our expertise and
capacity to administer senior market products.

      1999 Acquisition

      In July 1999, we acquired six insurance companies, including the insurance
subsidiaries that comprise our Career Agency segment, and other assets from
PennCorp Financial Group. This acquisition enhanced our prospects for internal
growth by increasing our scale, expanding our geographic reach and adding the
career agency marketing channel to supplement our senior market brokerage
marketing channel. We completed the integration of the acquired companies from
Raleigh, North Carolina into our existing locations in Toronto, Pensacola and
Orlando in February 2001.

      Cancellation of Major Medical Insurance

      In the fourth quarter of 2000, we decided to exit our individual major
medical business to the extent permitted by the policy forms. Of the $31.3
million of premium that was in force on December 31, 2000, approximately $1.6
million remained in force on December 31, 2002, which we are not able to cancel.


                                       6
<PAGE>
ADMINISTRATIVE SERVICES

      We have built our administrative services capabilities through internal
development and acquisition. Through our wholly owned subsidiary, CHCS Services,
Inc., we provide outsourcing services that support insurance and non-insurance
products, primarily for the senior market. Our administrative services
operations are located in Pensacola and Weston, Florida. During 2002, we closed
our Clearwater office and consolidated its operations into Pensacola.

      We perform a full range of administrative services for senior market
insurance products, primarily Medicare supplement and long term care, for both
affiliated and unaffiliated companies. The services include policy underwriting
and issuance, policy billing and collecting, telephone verification,
policyholder services, claims adjudication, clinical case management, care
assessment and referral to health care facilities.

      We are also increasingly performing similar services, particularly in the
long term care area, for non-insurance products offered both by insurance and
non-insurance companies. For example, we have begun to market our Nurse
Navigator(SM) product, a non-insurance elder care service product that includes
health related information and referrals and access to nationwide networks of
geriatric care nurses and long term care providers available on a discounted
basis.

      We utilize state of the art technology and a national network of highly
trained health care professionals to provide the administrative platform for
these insurance and insurance-related products and services. The information
technology includes imaging and workflow processes to ensure maximum efficiency
in policy issue, policy administration and claims processing. Our proprietary
network of registered nurses and social workers provides personalized support
and care for our senior programs nationwide. In addition, our proprietary
network of discount providers is an integral part of our geriatric care
management services. We have established a customer contact center that provides
around the clock access to our nurses on staff and can handle calls in several
different languages.

      The following table shows the sources of our service fee revenue by type
of product:

<TABLE>
<CAPTION>
                                              2002          2001          2000
                                              ----          ----          ----
                                                      (in thousands)
<S>                                          <C>           <C>           <C>
Affiliated Revenue
   Medicare supplement                       $19,322       $13,268       $ 8,467
   Long term care                              2,637         1,607           981
   Nurse Navigator(TM)                         1,089           272            --
   Other health insurance                        125           358           930
   Life insurance                                376           388           135
                                             -------       -------       -------

   Total Affiliated Revenue                   23,549        15,893        10,513
                                             -------       -------       -------

Unaffiliated Revenue
   Medicare supplement                         8,809         9,564         9,410
   Long term care                              8,544         5,577         2,725
   Other health insurance                        631           554           758
   Non-insurance assistance                    1,215         1,242           724
                                             -------       -------       -------

   Total Unaffiliated Revenue                 19,199        16,937        13,617
                                             -------       -------       -------

Total Administrative Service Revenue         $42,748       $32,830       $24,130
                                             =======       =======       =======
</TABLE>


                                       7
<PAGE>
      Included in unaffiliated revenue are fees received from a reinsurer of
100% of certain business of our insurance subsidiaries, which amounted to $6.9
million and $7.8 million in 2002 and 2001. These fees, together with the
affiliated revenue, were eliminated in consolidation.

INSURANCE MARKETING AND DISTRIBUTION

      We distribute our insurance products through both a traditional general
brokerage agency system and a career agency channel. The following table shows
our new sales (issued annualized premiums) by distribution channel and by major
product line for the three years ended December 31, 2002 on a gross basis
(before reinsurance) and a net basis (after reinsurance):

<TABLE>
<CAPTION>
                                                          Gross                                    Net/Retained %
                                        ----------------------------------------       -------------------------------------
Product                                   2002            2001            2000           2002          2001            2000
-------                                   ----            ----            ----           ----          ----            ----
                                                    (In thousands)                               (In thousands)
<S>                                     <C>             <C>             <C>            <C>            <C>            <C>
SENIOR MARKET BROKERAGE
  Medicare Supplement/Select            $ 90,233        $103,044        $ 78,213       $46,019        $29,883        $19,553
  Long Term Care                           4,146           3,196           4,580         2,073          1,598          2,290
  Senior Life                              3,858           3,240           2,106         2,315          1,782          1,053
  Annuity Premium Equivalents (1)          1,756             714             519         1,756            714            519
                                        --------        --------        --------       -------        -------        -------

  TOTAL SENIOR MARKET BROKERAGE           99,993         110,194          85,418        52,163         33,977         23,415
                                        --------        --------        --------       -------        -------        -------
                                                                                            52%            31%            27%
CAREER AGENCY
  Accident & Sickness                     16,951          16,176          16,897        16,951         16,176         16,897
  Medicare Supplement                      1,826             276              --           913            138             --
  Long Term Care                           3,610           3,702           3,853         1,805          1,851          1,927
  Non-insurance Products                     825           1,423              --           825          1,423             --
  Life Insurance                           2,872           2,043           1,500         2,872          2,043          1,500
  Annuity Premium Equivalents (1)          3,302             841             300         3,302            841            300
                                        --------        --------        --------       -------        -------        -------

  TOTAL CAREER AGENCY                     29,386          24,461          22,550        26,668         22,472         20,624
                                        --------        --------        --------       -------        -------        -------
                                                                                            91%            92%            91%
COMPANY TOTAL
  Accident & Health                      117,591         127,817         103,543        68,586         51,069         40,667
                                                                                            58%            40%            39%
  Life                                     6,730           5,283           3,606         5,187          3,825          2,553
                                                                                            77%            66%            71%
  Annuity Premium Equivalents (1)          5,058           1,555             819         5,058          1,555            819
                                        --------        --------        --------       -------        -------        -------
                                                                                           100%           100%           100%
TOTAL                                   $129,379        $134,655        $107,968       $78,831        $56,449        $44,039
                                        ========        ========        ========       =======        =======        =======
                                                                                            61%            42%            41%
</TABLE>

----------
      (1)   Annuity premium equivalents are equal to $1.00 for every $10.00 of
            annuity deposit received.

      Beginning in 1998, many HMO's realized that their Medicare programs were
unprofitable and therefore decided to terminate these programs. As a result,
millions of seniors were involuntarily disenrolled from these programs. This
development contributed to our increased new sales of Medicare supplement
products in 2001 and 2000. Under applicable legislation, such dis-enrollees may
have the right to acquire Medicare supplement insurance without medical
underwriting or pre-existing condition limitations. As we expected, during 2002
new sales of our Medicare products have slowed since the HMO's are not
dis-enrolling members as much is as in prior years. We have continued to expand
geographically, and we have stepped up recruiting effort to augment our
production. Additionally, we have increased our retention on new Medicare
supplement business, in order to continue growing our net premium.

      In 2002, two agents produced 6.4% and 5.8%, respectively, of our total
annualized new sales. No other agents produced more than 5.0% of our total
annualized new sales.


                                       8
<PAGE>
      The following table shows our annuity deposits by distribution channel for
the three years ended December 31, 2002:

<TABLE>
<CAPTION>
                                               2002           2001          2000
                                               ----           ----          ----
                                                       (In thousands)
<S>                                           <C>           <C>           <C>
      Senior Market Brokerage                 $17,561       $ 7,141       $5,188
      Career Agency                            33,018         8,407        3,000
                                              -------       -------       ------

      TOTAL ANNUITY DEPOSITS                  $50,579       $15,548       $8,188
                                              =======       =======       ======
</TABLE>

      SENIOR MARKET BROKERAGE

      This segment focuses on the sale of products designed for the senior
market such as Medicare supplement, Medicare select, long term care, senior life
insurance and annuities. We distribute these products through independent
marketing organizations and general agencies. These marketing organizations and
general agencies typically recruit and train their own agents, bearing all of
the costs incurred in connection with developing their organization. We now sell
our products through approximately 22,000 independent licensed agents in 33
states and have plans to recruit more agents and expand into additional states.
In 2002, this segment accounted for $455.7 million, or 78% of our consolidated
gross premiums and $141.2 million, or 53% of our consolidated net premiums
earned. New sales for this segment amounted to $100.0 million in 2002 and $110.2
million in 2001.

      CAREER AGENCY

      As part of the 1999 acquisition, we acquired a career agency sales force
that historically distributed fixed benefit accident and sickness disability
insurance and individual life insurance products to the self-employed market in
the United States and Canada. In contrast to independent agents, career agents
have an exclusive arrangement with us, and only sell products that we provide or
authorize. In order to maximize this distribution channel, we introduced our
senior market insured and non-insured products to the Career Agency sales force.
As of December 31, 2002, the career field force had 49 branch offices throughout
the United States and 15 branch offices in Canada, with approximately 730 agents
in the United States and 335 agents in Canada. In 2002, this segment accounted
for $125.4 million, or 47% of our net premiums earned. Approximately 39% of net
premiums earned for this segment were generated by our Canadian operations. The
career agency segment issued $29.4 million of new business in 2002, and $24.5
million in 2001.

      The acquisition of Pyramid Life, when closed, will add another career
agency sales force, which specializes in providing health and life insurance
products to the senior market. These products include Medicare supplement,
long-term care, life insurance and annuities. Pyramid Life markets its products
in 26 states through a sales force of over 1,100 career agents operating out of
29 Senior Solutions Sales Centers. During 2002, Pyramid Life agents produced
more than $25 million of annualized new sales. We believe this acquisition will
add further scale and efficiencies to our operations in the rapidly expanding
senior market. Following a transition period, we plan to take advantage of our
cost-effective and efficient administrative services operation to administer the
business, however, we will preserve the marketing identity and quality service
that has defined Pyramid Life.

INSURANCE PRODUCTS

      Our senior market brokerage segment focuses on our senior market products
(Medicare supplement, Medicare select, long term care, senior life insurance and
annuities). While our career agency segment had historically focused on fixed
benefit disability products, they are now increasing their focus on our senior
market products. We currently market the following products:


                                       9
<PAGE>
      SENIOR MARKET PRODUCTS -- SUPPLEMENTAL HEALTH AND LONG TERM CARE

      Our core supplemental health insurance products include various Medicare
supplement and Medicare select plans. We also offer various long term care plans
consisting of fully integrated plans and nursing home only plans. These products
typically are guaranteed renewable for the lifetime of the policyholder, which
means that we cannot cancel the policy, but can seek to increase premium rates
on existing and future policies issued based upon our actual claims experience.
These rate increases are applied on a uniform, nondiscriminatory state by state
basis and are subject to state regulatory approval and Federal and state
loss-ratio requirements.

      Medicare Supplement/Select

      Under Federal and National Association of Insurance Commissioners ("NAIC")
model regulations, adopted in substantially all states, there are 11 standard
Medicare supplement plans (Plans A through J and a High Deductible Plan F).
These policies provide supplemental coverage for many of the medical expenses
that the Medicare program does not cover, such as deductibles, coinsurance and
specified losses that exceed the Federal program's maximum benefits. Plan A
provides the least extensive coverage, while Plan J provides the most extensive
coverage. Under NAIC regulations, Medicare insurers must offer Plan A, but may
offer any of the other plans at their option. Our insurance company subsidiaries
offer Medicare supplement policies primarily on plans A, B, C, D, F, G and High
Deductible F. In some areas, we also sell Medicare select policies in
conjunction with hospitals that contract with us to waive the Medicare Part A
deductible. We monitor the claim experience on our Medicare supplement and
Medicare select products and, when necessary, apply for rate increases in the
states in which we sell the products. Medicare supplement and Medicare select
issued gross premium amounted to $90.2 million in 2002 and $103.0 million in
2001, and were produced through our general agency system. The career agency
segment began to sell Medicare supplement and Medicare select products in 2001
and produced $1.8 million in 2002 and $0.3 million in 2001.

      Long Term Care

      Our long term care insurance products provide coverage, with limits
selected by the policyholders, for nursing home and assisted living care only
coverage, optional home health care coverage, or an integrated combination of
such coverage. The nursing home and assisted living care products are subject to
daily fixed dollar maximum limits, have various elimination periods which must
be satisfied by the insureds and have maximum lifetime benefits or benefit
periods. A new integrated long term care product, combining nursing home,
assisted living and home health care benefits was introduced in late 1999 in
several states and we have developed a new nursing home-assisted living product
with optional home health care riders which we introduced in 2001. Issued
premium for these long term care products amounting to $4.1 million in 2002 and
$3.2 million in 2001, were produced through our general agency system. In
addition, our career agents began to sell these long term care products in 2000
and produced $3.6 million of issued premium in 2002 and $3.7 million of issued
premium in 2001.

      SENIOR MARKET PRODUCTS -- SENIOR LIFE INSURANCE AND ANNUITIES

      Senior Life

      This series of low-face amount, simplified issue whole life products is
sold by both our senior market brokerage segment and our career agency segment.
Issued premium for these products was $3.9 million in 2002 and $3.2 million in
2001, and was produced primarily through the general agency system. In late
2000, our career agency segment began to sell senior life insurance and produced
$1.8 million of issued premium in 2002 and $1.2 million of issued premium in
2001.


                                       10
<PAGE>
      Annuities

      We market single and flexible premium deferred annuities primarily
focusing on the senior and retirement markets. Our currently marketed annuity
products have a minimum guaranteed interest rate of 3%, except for New York
which is 4%, and current credited interest rates that range from 3.75% to 8.05%.
We have the right to change the crediting rates at any time. In exercising our
right to change the interest rate, we take into account the current interest
rate environment and our relative competitive position. Our general agency
system produced $17.6 million of annuity deposits in 2002 and $7.1 million of
annuity deposits in 2001. Additionally, our career agency system produced $33.0
million of annuity deposits in 2002 and $8.4 million of annuity deposits in
2001.

      CAREER AGENCY PRODUCTS

      Fixed Benefit Accident and Health

      Fixed benefit accident and health products provide three principal types
of benefits:

            -     disability -- fixed periodic payments to an insured who
                  becomes disabled and unable to work due to an accident or
                  sickness,

            -     hospital -- fixed periodic payments to an insured who becomes
                  hospitalized, and

            -     surgical -- fixed single payments that vary in amount for
                  specified surgical or diagnostic procedures.

      Because the benefits we provide are fixed in amount at the time of policy
issuance and are not intended to provide full reimbursement for medical and
hospital expenses, payment amounts are not generally affected by inflation or
the rising cost of health care services. The disability income product is
typically sold to individuals in amounts which, when combined with other similar
coverages, do not provide monthly benefits in excess of $2,000, or 50% of the
insured's monthly income, if less. The hospital income product is typically sold
to individuals to provide the insured with a means of paying supplemental
expenses during a hospitalization stay and provides benefits of not more than
$250 per day ($1,000 if the insured is in intensive care). The surgical product
is typically sold as a rider to an accident policy and our practice is to
provide benefits of not more than $5,000 ($2,500 if the procedure is performed
on an out-patient basis).

      Life Insurance

      In late 2000, our career agency segment began to sell term life insurance
that provides a minimum coverage of $50,000 for a ten-year period (offered to
individuals ages 18 through 60) or a twenty-year period (offered to individuals
ages 18 through 50) as specified in the policy. Premium rates vary according to
age and sex and these policies are fully underwritten. No cash values are
accumulated in this policy and the policy can be renewed for a new term at an
increased premium on any expiration date, except for the final expiration date,
without evidence of insurability. Issued premium amounted to $0.5 million for
2002 and $0.3 million for 2001.

BUSINESS IN FORCE

      As of December 31, 2002, the Company had $619.2 million of annualized life
and accident & health premium in force and $271.6 million in account values on
annuities and interest sensitive life products.


                                       11
<PAGE>
      Our growth in direct, acquired and assumed annualized premium in force,
including only the portion of premiums on interest-sensitive products that is
applied to the cost of insurance, is shown in the following tables.

<TABLE>
<CAPTION>
           ANNUALIZED PREMIUM IN FORCE                             As of December 31,
                                                         --------------------------------------
                                                           2002           2001          2000
                                                         --------       --------       --------
                                                                     (In thousands)
<S>                                                      <C>            <C>            <C>
            Senior Market Brokerage
               Medicare Supplement                       $423,983       $363,470       $264,417
               Long Term Care                              25,320         21,594         20,395
               Other Senior Health                          1,283          1,347          1,304
               Other Health                                10,435         14,547         40,062
               Senior Life                                 12,082         11,363         10,341
               Other Life                                  13,538         14,436         15,931
                                                         --------       --------       --------
               Total Senior Market                        486,641        426,757        352,450
                                                         --------       --------       --------
            Career Agency
               Accident & Sickness Disability              85,076         83,562         88,668
               Hospital                                    14,938         16,229         16,635
               Long Term Care                              16,643         15,121         13,580
               Medicare Supplement                            833             --             --
               Other Health                                 1,099          1,067          1,050
               Total Life                                  13,940         13,233         13,234
                                                         --------       --------       --------
               Total Career Agency                        132,529        129,212        133,167
                                                         --------       --------       --------

               Total Accident & Health                    579,610        516,937        446,111
               Total Life                                  39,560         39,032         39,506
                                                         --------       --------       --------
               Total Consolidated                        $619,170       $555,969       $485,617
                                                         ========       ========       ========
</TABLE>

ACCOUNT VALUES ON INTEREST-SENSITIVE PRODUCTS

      The following table shows all outstanding account values for
interest-sensitive products as of December 31, 2002, 2001 and 2000. For these
products, we earn income on the difference between investment income that we
earn on our invested assets and interest credited to these account balances.

<TABLE>
<CAPTION>
                                                    As of December 31,
                                          --------------------------------------
                                            2002           2001           2000
                                          --------       --------       --------
                                                     (In thousands)
<S>                                       <C>            <C>            <C>
      Annuities                           $134,860       $ 99,632       $ 98,053
      Interest-sensitive Life              136,718        137,110        135,362
                                          --------       --------       --------

      Grand Total                         $271,578       $236,742       $233,415
                                          ========       ========       ========
</TABLE>


                                       12
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF PREMIUM

      Through our nine insurance subsidiaries, we are licensed to market our
products in all fifty states, the District of Columbia and in all the provinces
of Canada. The following table shows the geographical distribution of the direct
cash premium and annuity deposits collected, as reported on a statutory basis to
the regulatory authorities for the full year of 2002:

<TABLE>
<CAPTION>
                                                  Collected
                  State/Region                     Premium         % of Total
                  ------------                     -------         ----------
                                               (In thousands)
<S>                                            <C>                 <C>
                  Florida                          117,507             19.3%
                  Texas                             62,521             10.3%
                  New York                          48,111              7.9%
                  Wisconsin                         41,665              6.8%
                  Pennsylvania                      34,754              5.7%
                  Canada                            31,372              5.2%
                  Ohio                              29,370              4.8%
                  Indiana                           27,102              4.5%
                  Connecticut                       19,239              3.2%
                  Mississippi                       14,011              2.3%
                  Missouri                          13,027              2.1%
                  Georgia                           12,184              2.0%
                  North Carolina                    11,016              1.8%
                  Louisiana                         10,753              1.8%
                  Oklahoma                          10,191              1.6%
                                                   -------            -----
                       Subtotal                    482,823             79.3%

                  All other                        125,996             20.7%
                                                   -------            -----
                  Total                            608,819            100.0%
                                                   =======            =====
</TABLE>

REINSURANCE

      We enter into reinsurance arrangements with unaffiliated reinsurance
companies to limit our exposure on individual claims, and to limit or eliminate
risk on our non-core or under-performing blocks of business. The table below
details our gross annualized premium in force, the portion that we ceded to
reinsurers and the net amount that we retained as of December 31, 2002.

<TABLE>
<CAPTION>
      ANNUALIZED PREMIUM IN FORCE                            As of December 31, 2002                     2001
                                           ------------------------------------------------------     ----------
                                             Gross         Ceded            Net        % Retained     % Retained
                                           --------       --------       --------      ----------     ----------
                                                       (In thousands)
<S>                                        <C>            <C>            <C>                <C>           <C>
      Senior Market Brokerage
        Medicare Supplement                $423,983       $322,442       $101,541           24%           20%
        Long Term Care                       25,320         10,732         14,588           58%           60%
        Other Senior Health                   1,283            290            993           77%           78%
        Other Health                         10,435          6,819          3,616           35%           51%
        Senior Life                          12,082          5,059          7,023           58%           64%
        Other Life                           13,538          1,086         12,452           92%           92%
                                           --------       --------       --------
        Total Senior Market                 486,641        346,428        140,213           29%           27%
                                           --------       --------       --------
      Career Agency
        Accident & Sickness Disability       85,076             --         85,076          100%          100%
        Hospital                             14,938             --         14,938          100%          100%
        Long Term Care                       16,643          3,000         13,643           82%           86%
        Medicare Supplement                     833            416            417           50%           --%
        Other Health                          1,099             --          1,099          100%          100%
        Total Life                           13,940             --         13,940          100%          100%
                                           --------       --------       --------
        Total Career Agency                 132,529          3,416        129,113           97%           98%
                                           --------       --------       --------

      Total Accident & Health               579,610        343,699        235,911           41%           40%
      Total Life                             39,560          6,145         33,415           84%           86%
                                           --------       --------       --------
      Total Consolidated                   $619,170       $349,844       $269,326           43%           43%
                                           ========       ========       ========
</TABLE>


                                       13
<PAGE>
      We are obligated to pay claims in the event that any reinsurer to whom we
have ceded an insured claim fails to meet its obligations under the reinsurance
agreement. As of December 31, 2002, all of our primary reinsurers were rated "A"
or better by A.M. Best. We do not know of any instances where any of our
reinsurers has been unable to pay any policy claims on any reinsured business.

      In addition to the reinsurance agreements discussed below by segment, we
reinsure portions of the coverage of our life insurance products to unaffiliated
reinsurance companies under various reinsurance agreements, which allows us to
write policies in amounts larger than the risk we are willing to retain on any
one life. Our mortality risk retention limit on each policy varies between
$25,000 and $100,000.

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

      SENIOR MARKET BROKERAGE

      We reinsure most of our Senior Market Brokerage products to unaffiliated
reinsurers under various quota share agreements. Under these reinsurance
agreements, we reinsure a portion of the premiums earned, claims incurred and
commissions on a pro rata basis and receive additional expense allowances for
policy issue and administration and premium taxes. Medicare supplement premium
in force is reinsured under quota share reinsurance agreements ranging from 50%
to 75% based upon geographic distribution. Effective January 1, 2003, new
Medicare supplement premium will be reinsured under quota share reinsurance
agreements of 25% or 50% based upon the geographic distribution. We have also
acquired various blocks of Medicare supplement premium, which we reinsure under
quota share reinsurance agreements ranging from 50% to 100%. Our long term care
products currently produced are reinsured at percentages averaging 50%, while
the long term care business acquired in 1999 is 100% retained. Senior life
insurance products currently being issued are reinsured under 50% quota share
reinsurance agreements, except for certain states where our retention is 100%.

      We have 50% quota share and excess of loss reinsurance agreements with
unaffiliated reinsurance companies on our medical insurance policies to reduce
the liability on individual risks to amounts ranging between $25,000 and
$325,000 per year. Under these treaties, we perform all the policy
administration and receive various allowances for commission and expenses on the
ceded portion of the premium. Excess of loss reinsurance passes the risk of
losses over a specified amount to the reinsurer, effectively capping our
exposure on any single claim to the specified amount. The major medical business
acquired in 1999 is 100% retained but has an excess of loss reinsurance
agreement limiting the liability on an individual risk to $325,000 per year.

      CAREER AGENCY

      Currently, we retain 100% of all life and health business issued in our
Career Agency segment other than the long term care and Medicare supplement
products, which we reinsure on a 50% quota share basis. We have excess of loss
reinsurance agreements to reduce our liability on individual risks for home
health care policies to $250,000. For other long term care policies issued in
the U.S. after 1999, we have reinsurance agreements which cover 100% of the
benefits on claims after the third year.

      ADMINISTRATION OF REINSURED BLOCKS OF BUSINESS

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


                                       14
<PAGE>
UNDERWRITING PROCEDURES

      Premiums charged on insurance products are based, in part, on assumptions
about expected mortality and morbidity experience. We have adopted and follow
detailed uniform underwriting procedures designed to assess and quantify various
insurance risks before issuing individual life insurance, health insurance
policies and annuity policies to individuals. These procedures are generally
based on industry practices, reinsurer underwriting manuals and our prior
underwriting experience. To implement these procedures, our insurance company
subsidiaries employ an experienced professional underwriting staff.

      Applications for insurance are reviewed on the basis of the answers that
the customer provides to the application questions. Where appropriate to the
type and amount of insurance applied for and the applicant's age and medical
history, additional information is required, such as medical examinations,
statements from doctors who have treated the applicant in the past and, where
indicated, special medical tests. If deemed necessary, we use investigative
services to supplement and substantiate information. For certain coverages, we
may verify information with the applicant by telephone. After reviewing the
information collected, we either issue the policy as applied for on a standard
basis, issue the policy with an extra premium charge due to unfavorable factors,
issue the policy excluding benefits for certain conditions, either permanently
or for a period of time, or reject the application. For some of our coverages,
we have adopted simplified policy issue procedures in which the applicant
submits an application for coverage typically containing only a few
health-related questions instead of a complete medical history. Under
regulations promulgated by the NAIC and adopted as a result of the Omnibus
Budget Reconciliation Act of 1990, we are prohibited from using medical
underwriting criteria for our Medicare supplement policies for certain
first-time purchasers and for dis-enrollees from Health Maintenance
Organizations (HMO's). If a person applies for insurance within six months after
becoming eligible by reason of age, or disability in some circumstances, the
application may not be rejected due to medical conditions. For other prospective
Medicare supplement policyholders, such as senior citizens who are purchasing
our products, the underwriting procedures are limited based upon standard
industry practices. In New York and some other states, some of our products,
including Medicare supplement, are subject to guaranteed issue "Community
Rating" laws that severely limit or prevent underwriting of individual
applications. See "Regulation" section of this document.

      RESERVES

      In accordance with applicable insurance regulations, we have established,
and carry as liabilities in our statutory financial statements, actuarially
determined reserves that are calculated to satisfy our policy and contract
obligations. Reserves, together with premiums to be received on outstanding
policies and contracts and interest at assumed rates on such amounts, are
calculated to be sufficient to satisfy policy and contract obligations. The
actuarial factors used in determining reserves for life insurance policies are
based on statutorily prescribed mortality tables and interest rates. In
addition, reserves for accident and health insurance policies use prescribed or
permitted morbidity tables. Reserves are also maintained for unearned premiums,
for premium deposits, for claims that have been reported and are in the process
of being paid or contested and for our estimate for claims that have been
incurred but have not yet been reported.

      The reserves reflected in our consolidated financial statements are
calculated in accordance with GAAP. These reserves are determined based on our
best estimates of mortality and morbidity, persistency, expenses and investment
income. We use the net level premium method for all non-interest-sensitive
products and the retrospective deposit method for interest-sensitive products.
GAAP reserves differ from statutory reserves due to the use of different
assumptions regarding mortality and morbidity, interest rates and the
introduction of lapse assumptions into the GAAP reserve calculation. See Note 2
to our consolidated financial statements.

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


                                       15
<PAGE>
COMPETITION

      The life and accident and health insurance industry in North America is
highly competitive. We compete with other insurance and financial services
companies, including large multi-line organizations, both in connection with the
sale of insurance and asset accumulation products and in acquiring blocks of
business. Many of these organizations have been in business for a longer period
of time and have substantially greater capital, larger and more diversified
portfolios of life and health insurance policies, larger agency sales operations
and higher ratings than we do. In addition, it has become increasingly difficult
for smaller and mid-size companies to compete effectively with their larger
competitors for insurance product sales in part as a result of heightened
consumer and agent awareness of the ratings and financial size of companies.

      We believe we can meet these competitive pressures by offering a high
level of service and accessibility to our field force and by developing
specialized products and marketing approaches. We also believe that our policies
and premium rates are generally competitive with those offered by other
companies selling similar types of products in the same jurisdictions.

RATINGS

      Increased public and regulatory concerns regarding the financial stability
of insurance companies have resulted in policyholders placing greater emphasis
upon company ratings and have created some measure of competitive advantage for
insurance carriers with higher ratings. A.M. Best is considered to be a leading
insurance company rating agency. In evaluating a company's financial and
operating performance, A.M. Best reviews profitability, leverage and liquidity
as well as the quality of the book of business, the adequacy and soundness of
reinsurance programs, the quality and estimated market value of assets, reserve
adequacy and the experience and competence of management. A.M. Best's ratings
are based upon factors relevant to policyholders, agents, insurance brokers and
intermediaries and are not directed to the protection of investors. In November
2001, A.M. Best upgraded the ratings for our American Pioneer, American
Progressive, Constitution Life, Pennsylvania Life and Penncorp Life (Canada)
subsidiaries to "B++" from "B+". In addition, A.M. Best reaffirmed the rating
for our Union Bankers subsidiary at "B+". In October 2002, A.M. Best assigned a
positive outlook to these companies. These ratings mean that, in A.M. Best's
opinion, these companies have demonstrated "very good" overall performance when
compared to standards it has established and have a "good" ability to meet their
obligations to policyholders and are in the "Secure" category of all companies
rated by A.M. Best. A.M. Best has also reaffirmed the rating for our Peninsular
Life subsidiary at "FPR5," which is based primarily on a quantitative evaluation
of Peninsular Life's financial strength and operating performance. Currently,
Peninsular has no business in force and is available for sale. A.M. Best does
not rate our other insurance company subsidiaries.

      In March 2002, Standard & Poor's assigned its "BBB+" counterparty credit
and financial strength ratings to our American Pioneer, American Progressive,
Pennsylvania Life and Penncorp Life (Canada) subsidiaries. In December 2002,
Standard and Poor's affirmed these ratings. This rating means that in Standard &
Poor's opinion, these companies have good financial security characteristics,
but are more likely to be affected by adverse business conditions than are
insurers that are rated higher by Standard & Poor's. A plus (+) or minus (-)
shows Standard & Poor's opinion of the relative standing of the insurer within a
rating category.

      Our insurance company subsidiaries are not currently rated by Moody's
Investors Service or Duff and Phelps rating organizations. Although a higher
rating by A.M. Best, Standard & Poor's or another insurance rating organization
could have a favorable effect on our business, we believe that our marketing has
enabled, and will continue to enable, our insurance company subsidiaries to
compete effectively.


                                       16
<PAGE>
INVESTMENTS

      Our investment policy is to balance the portfolio duration to achieve
investment returns consistent with the preservation of capital and maintenance
of liquidity adequate to meet payment of policy benefits and claims. We invest
in assets permitted under the insurance laws of the various jurisdictions in
which we operate. Such laws generally prescribe the nature, quality of and
limitations on various types of investments that may be made. We currently
engage the services of two investment advisors under the direction of the
management of the Company and our insurance company subsidiaries and in
accordance with guidelines adopted by the Investment Committees of their
respective boards of directors. Conning Asset Management Company manages our
fixed maturity portfolio in the United States, and MFC Global Investment
Management manages our Canadian fixed maturity portfolio.

      The following table summarizes the composition of our investment portfolio
by carrying value (which is an estimate of fair value) as of December 31, 2002
and 2001:

                              INVESTMENT PORTFOLIO

<TABLE>
<CAPTION>
                                                         December 31, 2002                           December 31, 2001
                                              -------------------------------------        -------------------------------------
                                                                       Percent of                                   Percent of
                                              Carrying Value              Total            Carrying Value              Total
                                               (Fair Value)          Carrying Value         (Fair Value)          Carrying Value
                                              --------------         --------------        --------------         --------------
                                                                                (In thousands)
<S>                                           <C>                    <C>                   <C>                    <C>
Fixed Maturity Securities:

  U.S. Government and
   Government agencies (1)                       $229,153                 22.9%                $131,696                 15.0%
  Mortgage-backed (1)                              66,131                  6.6%                  56,267                  6.4%
  Asset-backed                                     60,378                  6.0%                  88,977                 10.1%
  Foreign securities (2)                          176,450                 17.7%                 157,752                 18.0%
  Investment grade corporates                     400,309                 40.0%                 357,292                 40.6%
  Non-investment grade corporates                   2,529                  0.3%                   7,234                  0.8%
                                                 --------                -----                 --------                -----
Total fixed maturity securities                   934,950                 93.5%                 799,218                 90.9%

Cash and cash equivalents                          36,754                  3.7%                  47,990                  5.5%
Other Investments:
  Policy loans                                     23,745                  2.4%                  24,043                  2.7%
  Equity securities                                 1,645                  0.2%                   4,199                  0.5%
  Other invested assets                             2,808                  0.3%                   3,773                  0.4%
                                                 --------                -----                 --------                -----

Total cash and invested assets                   $999,902                100.0%                $879,223                100.0%
                                                 ========                =====                 ========                =====
</TABLE>

----------
(1)   U.S. Government and government agencies include GNMA and FMNA
      mortgage-backed securities.

(2)   Primarily Canadian dollar denominated bonds supporting our Canadian
      insurance reserves.


                                       17
<PAGE>
      The following table shows the distribution of the contractual maturities
of our portfolio of fixed maturity securities by carrying value as of December
31, 2002. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties:

               CONTRACTUAL MATURITIES OF FIXED MATURITY SECURITIES

<TABLE>
<CAPTION>
                                                                            Percent of
                                                        Carrying           Total Fixed
         Available for Sale                              Value              Maturities
         ------------------                              -----             -----------
                                                              (In thousands)
<S>                                                    <C>                 <C>
         Due in 1 year or less                         $  45,693                4.9%
         Due after 1 year through 5 years                139,343               14.9%
         Due after 5 years through 10 years              330,086               35.3%
         Due after 10 years                              156,016               16.7%
         Asset-backed securities                          60,378                6.5%
         Mortgage-backed securities                      203,434               21.7%
                                                       ---------              -----
                  Total                                $ 934,950              100.0%
                                                       =========              =====
</TABLE>

      The following table shows the distribution of the ratings assigned by
Standard & Poors Corporation to the securities in our portfolio of fixed
maturity securities as of December 31, 2002 and 2001:

               DISTRIBUTION OF FIXED MATURITY SECURITIES BY RATING

<TABLE>
<CAPTION>
                                       December 31, 2002                       December 31, 2001
                                 -----------------------------          ----------------------------
                                                          (In thousands)

                                  Carrying            % of               Carrying           % of
         Standard &                 Value              Total               Value            Total
           Poor's                (Estimated           Fixed             (Estimated          Fixed
           Rating                Fair Value)        Investment          Fair Value)       Investment
     ---------------             -----------        ----------          -----------       ----------
<S>                              <C>                <C>                 <C>               <C>
     AAA                          $ 389,447            41.6%             $ 259,847           32.5%
     AA                              92,734             9.9%                99,222           12.4%
     A                              346,538            37.1%               318,899           39.9%
     BBB                            100,965            10.8%               113,500           14.2%
     BB                               2,124             0.2%                 5,008            0.7%
     B                                2,747             0.3%                 2,603            0.3%
     CCC and below                      395             0.1%                   139             --
                                  ---------           -----              ---------          -----
     Total                        $ 934,950           100.0%             $ 799,218          100.0%
                                  =========           =====              =========          =====
</TABLE>

      At December 31, 2002 99.4% of our fixed maturity investments were
"investment grade". As of December 31, 2001, 99.0% of our fixed maturity
investments were "investment grade". "Investment grade" securities are those
rated "BBB-" or higher by Standard & Poor's Corporation or "Baa3" or higher by
Moody's Investors Service. This included approximately $263.8 million, as of
December 31, 2002 and $239.9 million, as of December 31, 2001, of collateralized
mortgage obligations secured by residential mortgages and asset-backed
securities, representing approximately 28.2% of our fixed maturity portfolio as
of December 31, 2002 and 30% of our fixed maturity portfolio as of December 31,
2001. Some classes of mortgage backed securities are subject to significant
prepayment risk, because in periods of declining interest rates, mortgages may
be repaid more rapidly than scheduled, as individuals refinance higher rate
mortgages to take advantage of the lower rates. As a result, holders of mortgage
backed securities may receive higher prepayments on their investments, which
they may not be able to reinvest at an interest rate comparable to the rate paid
on such mortgage backed securities.


                                       18
<PAGE>
      Fixed maturity securities with a less than investment grade rating had
aggregate carrying values of $5.3 million as of December 31, 2002 and $7.8
million as of December 31, 2001, amounting to 0.6% of total investments as of
December 31, 2002 and 1.0% of total investments as of December 31, 2001. These
securities represented 0.4% of total assets as of December 31, 2002 and 0.6% of
total assets as of December 31, 2001. Our holdings of less than investment grade
fixed maturity securities are diversified and the largest investment in any one
such security as of December 31, 2002 was $2.4 million, which was less than 0.2%
of total assets. We wrote down the value of some of our fixed maturity
portfolio's securities, considered to have been subject to an
other-than-temporary decline in value, by $10.6 million in the year ended
December 31, 2002 (primarily as a result of the impairment of our WorldCom
bonds, which were disposed of in the third quarter of 2002 at a price
approximating their carrying value after the other than temporary decline was
recognized) and $4.2 million in the year ended December 31, 2001, which were
included in net realized gains (losses) on investments in our consolidated
statements of operations.

INVESTMENT INCOME

      Investment income is an important part of our total revenues and
profitability. We cannot predict the impact that changes in future interest
rates will have on our financial statements.

      The following table shows the investment results of our total invested
asset portfolio, for the three years ended December 31, 2002:

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                    -----------------------------------------
                                                       2002            2001            2000
                                                    ---------        ---------       --------
                                                                 (In thousands)
<S>                                                 <C>              <C>             <C>
Total cash and invested assets, end of period       $ 999,902        $ 879,223       $824,930
                                                    =========        =========       ========

Net investment income                               $  57,716        $  57,812       $ 56,945
                                                    =========        =========       ========

Yield on average cash and investments                    6.12%            6.78%          6.88%
                                                    =========        =========       ========
Net realized investment gains (losses) on the
  sale of securities (including other-than-
  temporary declines in market value)               $  (5,083)       $   3,078       $    146
                                                    =========        =========       ========
</TABLE>

REGULATION

      General

      Our insurance company subsidiaries, like other insurance companies, are
subject to the laws, regulations and supervision of the jurisdictions in which
they are domiciled. The purpose of those laws and regulations is primarily to
provide safeguards for policyholders rather than to protect the interest of
shareholders.

The following table sets forth the domiciles of our insurance company
subsidiaries.

      NEW YORK
      American Progressive Life & Health
      Insurance Company of New York

      FLORIDA
      American Pioneer Life Insurance Company
      Peninsular Life Insurance Company

      PENNSYLVANIA
      Pennsylvania Life Insurance Company

      TEXAS
      American Exchange Life Insurance Company
      Constitution Life Insurance Company
      Marquette National Life Insurance Company
      Union Bankers Insurance Company

      CANADA
      Penncorp Life Insurance Company


                                       19
<PAGE>
      Pennsylvania Life, Constitution Life, Union Bankers, American Pioneer and
American Progressive are subsidiaries of American Exchange. Universal American
contributed the common stock of American Pioneer and American Progressive to
American Exchange during 2002. Marquette is a subsidiary of Constitution Life.
Peninsular Life is a subsidiary of American Pioneer. As part of its change in
ownership from American Exchange to American Pioneer, Peninsular Life
re-domesticated to Florida from North Carolina effective December 31, 2000.

      Each of our insurance company subsidiaries is also subject to regulation
and supervision by the insurance department in each of the jurisdictions in
which they are admitted and authorized to transact business. Such regulation and
supervision by the insurance departments covers, among other things, the
declaration and payment of dividends by our insurance company subsidiaries, the
setting of rates to be charged for some types of insurance, the granting and
revocation of licenses to transact business, the licensing of agents, the
regulation and monitoring of market conduct and claims practices, the approval
of forms, the establishment of reserve and minimum surplus requirements, the
regulation of maximum commissions payable, the mandating of some insurance
benefits, and the form and content of financial statements required by statute.
A failure to comply with legal or regulatory restrictions may subject us to a
loss of a right to engage in some businesses or an obligation to pay fines or
make restitution, which may affect our profitability.

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

      Under Federal and NAIC model regulations, adopted in substantially all
states, there are 11 standard Medicare supplement plans (Plans A through J and a
High Deductible Plan F). Plan A provides the least extensive coverage, while
Plan J provides the most extensive coverage. Under NAIC regulations, Medicare
insurers must offer Plan A, but may offer any of the other plans at their
option.

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

      Each of our insurance company subsidiaries is required to file detailed
reports with the insurance department of each jurisdiction in which it is
licensed to conduct business and its books and records are subject to
examination by each such insurance department. In accordance with the insurance
codes of their domiciliary states and the rules and practices of the NAIC, our
insurance company subsidiaries are examined periodically by examiners of each
company's domiciliary state and by representatives (on an "association" or
"zone" basis) of the other states in which they are licensed to do business.
There are no examinations currently in progress.

      Many states require deposits of assets by insurance companies for the
protection of policyholders either in those states or for all policyholders.
These deposited assets remain part of the total assets of the company. As of
December 31, 2002, securities totaling $35.3 million, representing approximately
3.7% of the carrying value of our total investments, were on deposit with
various state treasurers or custodians. As of December 31, 2001, securities
totaling $32.4 million, representing approximately 3.9% of total


                                       20
<PAGE>
investments, were on deposit. These deposits must consist of securities that
comply with the standards established by the particular state.

      Penncorp Life, our Canadian domiciled subsidiary, is subject to provincial
regulation and supervision in each of the provinces of Canada in which it
conducts business. Provincial insurance regulation is concerned primarily with
the form of insurance contracts and the sale and marketing of insurance and
annuity products, including the licensing and supervision of insurance marketing
personnel. Individual annuity products and the underlying segregated funds to
which they relate are subject to guidelines adopted by the Canadian Council of
Insurance Regulators and incorporated by reference into provincial insurance
regulations. These guidelines govern a number of matters relating to the sale of
these products and the administration of the underlying segregated funds. During
the first quarter of 2002, the Canadian Branch of Pennsylvania Life was merged
into Penncorp Life, consolidating our Canadian operations into a single entity.
This transaction was approved by the Office of the Superintendent of Financial
Institutions, in Canada, and the Pennsylvania Department of Insurance.

      Codification of Statutory Accounting Practices

      In 1998, the NAIC approved a codification of statutory accounting
principles, which became effective January 1, 2001 and serves as a comprehensive
and standardized guide to statutory accounting principles. The adoption of the
codification increased the capital and surplus of our U.S. insurance
subsidiaries by approximately $11.0 million at January 1, 2001, due primarily to
the recognition of certain loss carryforwards and income tax treatment of policy
acquisition costs as deferred tax assets.

      Other Insurance Regulatory Changes

      The NAIC and state insurance regulators are involved in a process of
re-examining existing laws and regulations and their application to insurance
companies. This re-examination has focused on insurance company investment and
solvency issues, risk-based capital guidelines, assumption reinsurance,
interpretations of existing laws, the development of new laws, the
interpretation of nonstatutory guidelines, and the circumstances under which
dividends may be paid. The NAIC has encouraged states to adopt model laws on
specific topics as follows:

      -     investment reserve requirements;

      -     risk-based capital standards;

      -     codification of insurance accounting principles;

      -     additional investment restrictions;

      -     restrictions on an insurance company's ability to pay dividends; and

      -     product illustrations.

      The NAIC is currently developing new model laws or regulations, including
product design standards and reserve requirements. While the Federal government
currently does not regulate the insurance business directly, Federal legislation
and administrative policies in a number of areas, such as Medicare, employee
benefits regulation, age, sex and disability-based discrimination, financial
services regulation and Federal taxation, can significantly affect the insurance
business. It is not possible to predict the future impact of changing regulation
on our operations or the operations of our insurance company subsidiaries.

      Since 1993, New York State has required that all health insurance sold to
individuals and groups with less than 50 employees be offered on an open
enrollment and community rated basis. The community rating aspect of the law
prohibits the use of age, sex, health or occupational factors in rating and
requires that the same average rate be used for all persons with the same policy
residing in the same location. Such insurance may continue to be sold to groups
with more than 50 employees on an underwritten basis, with premium set to
reflect expected or actual results. The Medicare supplement policies actively
marketed by American Progressive in New York State and some of its in force
business are subject to the community rating rules. Similar legislation is in
effect for certain products in other states. The extension of such legislation
to other states where we offer significant medically underwritten health
insurance might cause us to reconsider our health care coverage offerings in any
such state.


                                       21
<PAGE>
      Long Term Care Rate Stabilization

      In 2000, the NAIC adopted a model law intended to address the issue of the
rising cost of long term care insurance and other matters. Rate stabilization
laws have been adopted in a number of states. The Company is complying with the
laws as they are adopted by filing new policy forms. Insurers now have to
certify that rates will not be increased in moderately adverse circumstances.

      Dividend Restrictions

      American Progressive is a New York insurance company. New York State
Insurance Law provides that the declaration or payment of a dividend by American
Progressive requires the approval of the New York Superintendent of Insurance.
Management expects that no dividend would be approved until American Progressive
had generated sufficient statutory profits to offset its negative unassigned
surplus.

      Pennsylvania Life is a Pennsylvania insurance company and American
Exchange, Constitution, Marquette and Union Bankers are Texas insurance
companies. Pennsylvania and Texas insurance law provides that a life insurer may
pay dividends or make distributions from accumulated earning without the prior
approval of the Insurance Department, provided they do not exceed the greater of
(i) 10% of the insurer's surplus as to policyholders as of the preceding
December 31st; or (ii) the insurer's net gain from operations for the
immediately preceding calendar year with 30 days advance notification to the
insurance department. Accordingly, Pennsylvania Life would be able to pay
ordinary dividends of up to $10.6 million to American Exchange (its direct
parent) without the prior approval from the Pennsylvania Insurance Department in
2003. American Exchange, Constitution, Marquette and Union Bankers had negative
earned surplus at December 31, 2002 and would not be able to pay dividends in
2003 without special approval.

      American Pioneer and Peninsular are Florida insurance companies. Florida
State insurance law provides that a life insurer may pay a dividend or make a
distribution without the prior written approval of the department when: a) the
dividend is paid from that portion of the accumulated and available surplus of
the Company as is derived from the net operating profits of its business and its
net realized capital gains; b) the dividend is no more than the greater of (i)
10% of the insurer's surplus as to policyholders derived from net operating
profits on its business and net realized capital gains; or (ii) the insurer's
entire net operating profits and realized net capital gains derived during the
immediately preceding calendar year; c) the insurer will have surplus as to
policyholders equal to or exceeding 115% of the minimum required statutory
surplus as to policyholders after the dividend or distribution is made; and d)
the insurer has filed notice with the department at least 10 business days prior
to the dividend payment or distribution. American Pioneer and Peninsular had
negative unassigned surplus and would not be able to pay dividends in 2003
without special approval.

      Penncorp Life (Canada) is a Canadian insurance company. Canadian law
provides that a life insurer may pay a dividend after such dividend declaration
has been approved by its board of directors and upon at least 10 days prior
notification to the Superintendent of Financial Institutions. In considering
approval of a dividend, the board of directors must consider whether the payment
of such dividend would be in contravention of the Insurance Companies Act of
Canada. Accordingly, we anticipate that Penncorp Life (Canada) will be able to
pay dividends of up to $6.6 million to Universal American in 2003.

      Dividends Paid

      During the year ended December 31, 2002, Pennsylvania Life paid ordinary
dividends to American Exchange totaling $3.0 million. Penncorp Life (Canada)
paid dividends to Universal American totaling $5.9 million during 2002. CHCS
Services, Inc. also paid dividends to Universal American totaling $9.1 million
in 2002.


                                       22
<PAGE>
      During the year ended December 31, 2001, Union Bankers paid an ordinary
dividend to American Exchange of $1.7 million. Union Bankers also distributed
its investment in the common stock of Marquette to American Exchange in the form
of an extraordinary dividend. Additionally, Peninsular paid an extraordinary
dividend of $1.9 million to American Pioneer in 2001. CHCS Services, Inc. also
paid dividends to Universal American totaling $9.3 million in 2001.

      During the year ended December 31, 2000, Pennsylvania Life and Union
Bankers paid ordinary dividends to American Exchange of $2.9 million and $2.0
million, respectively. Additionally, Peninsular Life paid an extraordinary
dividend of $1.5 million to Universal American in 2000.

      Risk-Based Capital Requirements

      The NAIC's risk-based capital requirements for insurance companies adopted
by state regulators take into account asset risks, interest rate risks,
mortality and morbidity risks and other relevant risks with respect to the
insurer's business and specify varying degrees of regulatory action to occur to
the extent that an insurer does not meet the specified risk-based capital
thresholds, with increasing degrees of regulatory scrutiny or intervention
provided for companies in categories of lesser risk-based capital compliance.
Our Canadian domiciled subsidiary, Penncorp Life, is subject to minimum
continuing capital and surplus requirements, which Canadian regulators use to
assess financial strength and to determine when regulatory intervention is
needed. As of December 31, 2002 all of our U.S. insurance company subsidiaries
maintained ratios of total adjusted capital to risk-based capital in excess of
the authorized control level and Penncorp Life maintained minimum continuing
capital and surplus requirement ratios in excess of minimum requirements.
However, should our insurance company subsidiaries' risk-based capital position
decline in the future, their continued ability to pay dividends and the degree
of regulatory supervision or control to which they are subjected might be
affected.

      Guaranty Association Assessments

      Our insurance company subsidiaries can be required, under solvency or
guaranty laws of most jurisdictions in which they do business, to pay
assessments to fund policyholder losses or liabilities of unaffiliated insurance
companies that become insolvent. These assessments may be deferred or forgiven
under most solvency or guaranty laws if they would threaten an insurer's
financial strength and, in most instances, may be offset against future premium
taxes. Our insurance company subsidiaries have not incurred any significant
costs of this nature. The likelihood and amount of any future assessments is
unknown and is beyond our control.

      Health Care Reform

      From time to time, numerous proposals have been considered, and in some
cases enacted, in Congress and the state legislatures to reform aspects of the
health care financing system.

      The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),
a significant federal health care financing reform, restricted the ability of
insurers to utilize medical underwriting and pre-existing condition provisions
in health insurance policies issued to persons who were previously insured under
qualifying policies. These changes affect only a small part of the coverages we
write, but may have an adverse effect on them. HIPAA also mandates the adoption
of standards for the exchange of electronic health information and contains
privacy requirements that will govern the handling, use and security of
protected customer information, which will become effective in stages in 2002
through 2003. We have implemented some of the changes in our business procedures
needed to comply with these requirements, and are in the process of implementing
others. We have met the requirements effective in 2002 and anticipate that we
will meet the requirements which become effective in 2003.

      On the state level in 2000, the NAIC amended its Model Long Term Care
Insurance Regulation to include provisions intended to assure that rates on long
term care insurance policies, under which the insurer reserves the right to
increase premiums, are initially set high enough to make such increases
unlikely. This amendment has thus far been adopted only in a number of some
states where we sell, or intend to sell, such policies, and may become more
widely adopted. Where it is adopted, these rules


                                       23
<PAGE>
could increase the cost of policies sold by us and by our competitors. We have
not determined the impact this model regulation could have on our long term care
insurance business.

      Some states have enacted, and others states are considering, small group
insurance and rating reforms, which generally limit the ability of insurers and
health plans to use risk selection as a method of controlling costs for small
group businesses. These laws may generally limit or eliminate use of
pre-existing condition exclusions, experience rating, and industry class rating
and limit the amount of rate increases from year to year.

      Congress and various states are considering some form of the "Patients'
Bill of Rights." This legislation, if enacted, is designed to provide consumers
more freedom of choice in the selection of doctors, facilities, and treatments.
Although the bill was originally conceived to regulate health maintenance
organizations, it will affect all facets of the nation's health care delivery
system, including insurers. The pending federal legislation, known as the
Bipartisan Patient Protection Act of 2001:

      -     requires a more stringent timeframe for claims review and
            processing, utilization review and internal and external appeals
            processes;

      -     provides that insureds have greater access to non-formulary drugs,
            clinical trials, physicians, specialists and emergency care; and

      -     allows insureds to bring suit after exhaustion of the administrative
            appeals process.

These changes, if enacted, are expected to result in higher total medical costs,
which could encourage more partnerships and associations between medical
providers and insurers to control costs, more community-based health
organizations, and greater use of higher deductibles to lower insurance costs
and reduce administrative expenses of smaller claims.

      Proposals for further federal reforms have included, among other things,
restricting coverage of deductible and co-payments on Medicare supplement
policies, expansion of Medicare to provide prescription drug benefits, provide
coverage to persons under age 65 and employer-based insurance systems,
subsidizing premiums for lower income people and programs, regulating policy
availability, affordability of public and private programs standardization of
major medical or long term care coverages, imposing mandated or target loss
ratios or rate regulation, and requiring the use of community rating or other
means that further limit the ability of insurers to differentiate among risks,
or mandating utilization review or other managed care concepts to determine what
benefits would be paid by insurers.

      In addition to federal regulation, many states have enacted, or are
considering, various health care reform statutes. These proposed reforms relate
to, among other things, managed care practices, such as waiting period
restrictions on pre-existing conditions, credit for certain prior coverage, and
limitations on rate increases and guaranteed renewability for small business
plans and policies for individuals. Most states have also enacted patient
confidentiality laws that prohibit the disclosure of confidential medical
information, some of which, as permitted by HIPAA, are more restrictive than
HIPAA's rules protecting health information privacy.

      These or other reform proposals could necessitate revisions in our
Medicare supplement products, and could increase or decrease the level of
competition among health care insurers and could significantly affect our health
insurance business, although it is not possible to predict which proposals will
be adopted and what their effect will be.

      Other potential initiatives, designed to tax insurance premiums or shift
medical care costs from government to private insurers, could affect our
business, perhaps adversely.

      Other Possible Changes in Legislation

      Since insurance is a regulated business, with a high public profile, it is
always possible that legislation may be enacted which would have an adverse
effect on our business.

      A portion of our insurance business is the sale of deferred annuities and
life insurance products, which are attractive to purchasers in part because
policyholders generally are not subject to Federal


                                       24
<PAGE>
income tax on increases in the value of an annuity or life and health insurance
contract until some form of distribution is made from the contract. From time to
time, Congress has considered proposals to reduce or eliminate the tax
advantages of annuities and life insurance, which, if enacted, might have an
adverse effect on our ability to sell the affected products in the future. We
are not aware that Congress is actively considering any legislation that would
reduce or eliminate the tax advantages of annuities or life or health insurance.
However, it is possible that the tax treatment of annuities or life or health
insurance products could change by legislation or other means, such as Internal
Revenue Service regulations or judicial decisions.

      Other potential changes in insurance and tax laws and regulations could
also have a material adverse effect on the operations of insurance companies.
Examples of potential regulatory developments that could have a material adverse
effect on the operation of the insurance industry include, but are not limited
to, the potential repeal of the McCarran-Ferguson Act, which exempts insurance
companies from a variety of Federal regulatory requirements. In addition, the
administration of insurance regulations is typically vested in state agencies
that have broad powers and are concerned primarily with the protection of
policyholders.

EMPLOYEES

      As of March 3, 2003, we employed approximately 900 employees, none of whom
is represented by a labor union in such employment. We consider our relations
with our employees to be good.

AVAILABLE INFORMATION

      Universal American files annual, quarterly and current reports, proxy
statements and other documents with the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The SEC
maintains an Internet website that contains reports, proxy and information
statements, and other information regarding issuers, including Universal
American, that file electronically with the SEC. The public can obtain any
documents that Universal American files with the SEC at http://www.sec.gov.

      Universal American also makes available free of charge on or through its
Internet website (http://UAFC.com). Universal American's Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after Universal
American electronically files such material with, or furnishes it to, the SEC.

      Shareholders may receive, without charge, a copy of the documents filed
with the Securities and Exchange Commission as exhibits to this report by
submitting a written request to Universal American Financial Corp., Director,
Shareholder Relations, Six International Drive, Rye Brook, NY 10573-1068, by
calling 914-934-5200, or by completing and submitting the information request
form in the Request Info page of our website.

ITEM 2 - PROPERTIES

      The executive offices of the Company are in Rye Brook, New York. Marketing
and professional staff for our U.S. insurance subsidiaries occupy space in
Orlando, Florida. Our Canadian operations are located in Mississauga, Ontario,
Canada. Our Administrative Services operations occupy office space in Pensacola
and Weston Florida. The Company leases all of the approximately 175,000 square
feet of office space that it occupies, Management considers its office
facilities suitable and adequate for the current level of operations.

      In addition to the above, Pennsylvania Life is the named lessee on
approximately 40 properties occupied by Career Agents for use as field offices.
Rent for these field offices is reimbursed by the agents.


                                       25
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS

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

      A lawsuit has been commenced against Universal American, its subsidiary
American Progressive Life & Health Insurance Company, and Richard Barasch, by
Marvin Barasch, the former Chairman of American Progressive. The suit primarily
arises out of Marvin Barasch's employment with American Progressive and includes
unrelated personal claims against Richard Barasch. The Company and Richard
Barasch believe that the allegations are totally without merit and that the
likelihood of material recovery by the plaintiff is remote.

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

      There were no matters submitted by us to a vote of stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year for which this report is filed.

                                    PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF PUBLICLY TRADED SECURITIES

      Our common stock is quoted on the Nasdaq National Market under the symbol
UHCO. The following table sets forth the high and low sales prices per share of
our common stock for the periods indicated.

<TABLE>
<CAPTION>
                                                                  Common Stock
                                                               --------------------
                                                                High           Low
                                                               ------        ------
<S>                                                            <C>           <C>
            2001

            First Quarter                                      $5.563        $3.438
            Second Quarter                                      7.000         4.625
            Third Quarter                                       6.310         4.510
            Fourth Quarter                                      7.650         5.270

            2002

            First Quarter                                      $ 6.99        $ 5.61
            Second Quarter                                       7.89          6.24
            Third Quarter                                        7.10          4.90
            Fourth Quarter                                       7.27          3.84

            2003

            First Quarter (through March 3)                    $ 5.95        $ 5.20
</TABLE>

      As of March 3, 2003, there were approximately 1,774 holders of record of
our common stock. On March 3, 2003, the closing bid and ask sales prices for our
common stock were $5.73 and $5.77.


                                       26
<PAGE>
DIVIDENDS

      We have neither declared nor paid dividends on our common stock and we are
currently prohibited from paying dividends to stockholders under our current
credit agreement. There are also various legal limitations governing the extent
to which the Company's insurance subsidiaries may extend credit, pay dividends
or otherwise provide funds to Universal American Financial Corp. Any future
decision to pay dividends will be made by our board of directors in light of
conditions then existing, including our results of operations, financial
condition and requirements, loan covenants, insurance regulatory restrictions,
business conditions and other factors. In addition, our ability to pay cash
dividends, if and when we should wish to do so, may depend on the ability of our
subsidiaries to pay dividends to our holding company and on compliance with the
covenants in our credit facility. See "Regulation - Dividend Restrictions".

EQUITY COMPENSATION PLANS

Information regarding our equity compensation plans is incorporated by reference
to our definitive proxy statement to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 within 120 days after the end of our fiscal
year ended December 31, 2002.


                                       27
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                       As of or for the year ended December 31,
                                                         -------------------------------------------------------------------------
                                                            2002            2001          2000 (3)        1999 (2)         1998
                                                         ---------       ---------       ---------       ---------       ---------
                                                                               (in thousands, except per share data)
<S>                                                      <C>             <C>             <C>             <C>             <C>
INCOME STATEMENT DATA:
   Direct premium and policyholder fees                  $ 586,686       $ 513,575       $ 451,323       $ 252,553       $ 131,044
   Reinsurance premium assumed                               5,075           2,549           3,055           1,751             998
   Reinsurance premium ceded                              (325,184)       (286,918)       (234,625)       (138,827)        (89,546)
                                                         ---------       ---------       ---------       ---------       ---------

   Net premium and other policyholder fees                 266,577         229,206         219,753         115,477          42,496
   Net investment income                                    57,716          57,812          56,945          29,313          10,721
   Realized gains (losses)                                  (5,083)          3,078             146            (241)            256
   Fee and other income                                     12,313          10,847           7,247           3,587           2,616
                                                         ---------       ---------       ---------       ---------       ---------

   Total revenues                                          331,523         300,943         284,091         148,136          56,089
   Total benefits, claims and other deductions             287,493         257,580         251,025         132,080          52,157
                                                         ---------       ---------       ---------       ---------       ---------
   Income before taxes                                      44,030          43,363          33,066          16,056           3,932

   Net income after taxes                                   30,127          28,925          22,885           9,813           2,608
   Net income applicable to common
     shareholders (1)                                       30,127          28,925          22,885           9,633           2,174


PER SHARE DATA:
   Net income applicable to common shareholders
     Basic                                               $    0.57       $    0.58       $    0.49       $    0.42       $    0.29
     Diluted                                             $    0.56       $    0.57       $    0.49       $    0.34       $    0.20

     Book value per share                                $    5.42       $    4.38       $    3.72       $    2.92       $    3.18

NON-GAAP FINANCIAL DATA:
Net income applicable to common shareholders(1)          $  30,127       $  28,925       $  22,885       $   9,633       $   2,174
Adjustments to net operating income(5);
   Realized (gains) losses, net of tax(4)                    3,304          (2,001)            (95)            157            (166)
                                                         ---------       ---------       ---------       ---------       ---------

Net operating income(5)                                  $  33,431       $  26,924       $  22,790       $   9,790       $   2,000

PER SHARE DATA:
Net operating income(5):
     Basic                                               $    0.63       $    0.54       $    0.49       $    0.42       $    0.27
     Diluted                                             $    0.62       $    0.53       $    0.48       $    0.35       $    0.19

Diluted book value per share(6)                          $    4.77       $    4.21       $    3.58       $    3.06       $    2.52

Tangible book value per share(7)                         $    4.57       $    4.00       $    3.33       $    2.94       $    2.11

RATIOS
Operating return on average equity(8)                        13.90%          13.70%          14.70%          11.60%           8.00%
Ratio of acquired intangibles to equity(9)                     3.8%            5.2%            7.2%            4.1%           20.9%
Ratio of deferred policy acquisition costs
   to equity(10)                                              32.1%           28.6%           28.0%           26.1%           85.8%
Debt to total capital ratio(11)                              19.50%          21.40%          28.60%          33.20%          14.70%
</TABLE>


                                       28
<PAGE>
<TABLE>
<CAPTION>
                                                                                        As of December 31,
                                                        ----------------------------------------------------------------------------
                                                           2002             2001             2000             1999            1998
                                                        ----------       ----------       ----------       ----------       --------
BALANCE SHEET DATA:                                                         (In thousands, except for per share data)
<S>                                                     <C>              <C>              <C>              <C>              <C>
Total cash and investments                              $  999,902       $  879,223       $  824,930       $  812,297       $164,674
Total assets                                             1,401,668        1,270,216        1,189,864        1,153,421        283,302
Policyholder related liabilities                           993,686          914,073          884,011          877,347        228,958
Outstanding bank debt                                       50,775           61,475           69,650           70,000          4,750
Trust preferred securities                                  15,000               --               --               --             --
Series B Preferred Stock                                        --               --               --               --          4,000
Series C Preferred Stock                                        --               --               --               --          5,168
Series D Preferred Stock                                        --               --               --               --          2,250
Total stockholders' equity                                 286,769          230,770          173,949          133,965         28,318

NON-GAAP FINANCIAL DATA:
Total stockholders' equity excluding
   accumulated other comprehensive
   income (12)                                          $  256,881       $  225,167       $  169,074       $  140,852       $ 27,460

DATA REPORTED TO REGULATORS (13):
Statutory capital and surplus                           $  129,679       $  123,285       $  101,367       $  105,281       $ 21,076
Asset valuation reserve                                        858            3,985            5,384            5,585          1,205
                                                        ----------       ----------       ----------       ----------       --------
Adjusted capital and surplus                            $  130,537       $  127,270       $  106,751       $  110,866       $ 22,281
                                                        ==========       ==========       ==========       ==========       ========
</TABLE>

----------
 (1)  After provision for Series C Preferred Stock dividends of $180 and $434
      for the years ended December 31, 1999 and 1998, respectively.

 (2)  Includes the results of the companies acquired in the 1999 Acquisition,
      since their acquisition on July 30, 1999.

 (3)  Includes the results of AIAG since its acquisition on January 6, 2000, and
      CHCS since its acquisition on August 10, 2000.

 (4)  Tax on realized gains and losses is computed based on a 35% effective
      rate for all periods.

 (5)  Represents net income applicable to common shareholders, excluding
      realized gains, net of tax. Management believes that realized gains and
      losses are not indicative of overall operating trends.

 (6)  Diluted book value per share represents total stockholders' equity,
      excluding accumulated other comprehensive income, plus assumed proceeds
      from the exercise of vested options, divided by the total shares
      outstanding plus the shares assumed issued from the exercise of vested
      options.

 (7)  Tangible book value per share represents total stockholders' equity,
      excluding accumulated other comprehensive income, goodwill and present
      value of future profits, plus assumed proceeds from the exercise of vested
      options, divided by the total shares outstanding plus the shares assumed
      issued from the exercise of vested options.

 (8)  Operating return on average equity represents net operating income divided
      by the average of the beginning and the end of year total stockholders'
      equity, excluding accumulated other comprehensive income.

 (9)  The ratio of acquired intangible assets to equity represents the sum of
      goodwill and present value of future profits divided by shareholders'
      equity.

(10)  The ratio of deferred policy acquisition costs to equity represents
      deferred policy acquisition costs divided by shareholders' equity.

(11)  The debt to total capital ratio is calculated as the ratio of the total
      outstanding bank debt plus trust preferred securities to the sum of total
      shareholders' equity, excluding accumulated other comprehensive income,
      plus total outstanding bank debt plus trust preferred securities.

(12)  Accumulated other comprehensive income includes the after tax net
      unrealized gain (loss) on available for sale securities and unrealized
      foreign exchange gain (loss).

(13)  Includes capital and surplus of Penncorp Life (Canada) of C$59,724 as of
      December 31, 2002, C$32,314 as of December 31, 2001, C$30,421 as of
      December 31, 2000 and C$31,531 as of December 31, 1999, as reported to the
      Office of the Superintendent of Financial Institutions Canada, converted
      at the related exchange rates of C$0.6377 per U.S. $1.00 as of December
      31, 2002, C$0.6261 per U.S. $1.00 as of December 31, 2001, C$0.6671 per
      U.S. $1.00 as of December 31, 2000, and C$0.6900 per U.S. $1.00 as of
      December 31, 1999.


                                       29
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

      Certain statements in this report or incorporated by reference into this
report and oral statements made from time to time by our representatives
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
statements not based on historical information. They relate to future
operations, strategies, financial results or other developments. In particular,
statements using verbs such as "expect," "anticipate," "believe" or similar
words generally involve forward-looking statements. Forward-looking statements
include statements about development and distribution of our products,
investment spreads or yields, the impact of proposed or completed acquisitions,
the adequacy of reserves or the earnings or profitability of our activities.
Forward-looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many of
which are beyond our control and are subject to change. These uncertainties can
affect actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements. Whether or not actual results
differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable risks and uncertainties, some of which relate
particularly to our business, such as our ability to set adequate premium rates
and maintain adequate reserves, our ability to compete effectively and our
ability to grow our business through internal growth as well as through
acquisitions. Other risks and uncertainties may be related to the insurance
industry generally or the overall economy, such as regulatory developments,
industry consolidation and general economic conditions and interest rates. We
disclaim any obligation to update forward-looking statements.

INTRODUCTION

      The following analysis of our consolidated results of operations and
financial condition should be read in conjunction with the consolidated
financial statements and related consolidated footnotes included elsewhere.

      We own nine insurance companies (collectively, the "Insurance
Subsidiaries"): American Progressive Life & Health Insurance Company of New York
("American Progressive"), American Pioneer Life Insurance Company ("American
Pioneer"), American Exchange Life Insurance Company ("American Exchange"),
Constitution Life Insurance Company ("Constitution"), Marquette National Life
Insurance Company ("Marquette"), Peninsular Life Insurance Company
("Peninsular"), Pennsylvania Life Insurance Company ("Pennsylvania Life"),
Penncorp Life Insurance Company ("Penncorp Life (Canada)") and Union Bankers
Insurance Company ("Union Bankers"). The insurance company subsidiaries are
licensed to sell life and accident and health insurance in all fifty states, the
District of Columbia and all the provinces of Canada. In addition to the
Insurance Subsidiaries, we own a third party administrator, CHCS Services, Inc.,
that administers senior market business for more than 40 unaffiliated insurance
companies, as well as our own companies.

OVERVIEW

      Our principal business segments are: Career Agency, Senior Market
Brokerage and Administrative Services. We also report the corporate activities
of our holding company in a separate segment. During 2002 we modified the way we
report segment information by combining our previously defined Senior Market
Brokerage and Special Markets segments into one segment, Senior Market
Brokerage. Our decision to combine the two segments was based on the significant
reduction in the insurance in force in the Special Markets segment as a result
of our exit from the major medical line of business. Reclassifications have been
made to conform prior year amounts to the current year presentation. A
description of these segments follows:


                                       30
<PAGE>
      CAREER AGENCY -- The Career Agency segment is comprised of the operations
      of Pennsylvania Life and Penncorp Life (Canada), both of which we acquired
      in 1999. Penncorp Life (Canada) operates exclusively in Canada, while
      Pennsylvania Life operates in the United States. The Career Agency segment
      includes the operations of a career agency field force, which distributes
      fixed benefit accident and sickness disability insurance, life insurance,
      supplemental senior health insurance and annuities in the United States
      and Canada. The career agents are under exclusive contract with either
      Pennsylvania Life or Penncorp Life (Canada).

      SENIOR MARKET BROKERAGE -- This segment includes the operations of our
      other insurance subsidiaries, primarily American Pioneer, American
      Progressive and Constitution, that distribute senior market products
      through general agency and brokerage distribution systems. The products
      include Medicare supplement/select, long term care, senior life insurance
      and annuities. In 2002, we combined our Special Markets segment with our
      Senior Market Brokerage segment.

      ADMINISTRATIVE SERVICES -- CHCS Services, Inc. acts as a third party
      administrator and service provider for both affiliated and unaffiliated
      insurance companies, primarily with respect to senior market insurance
      products and non-insurance products. The services that we perform include
      policy underwriting and issuance, telephone and face-to-face verification,
      policyholder services, claims adjudication, case management, care
      assessment and referral to health care facilities.

      CORPORATE -- This segment reflects the activities of our holding company,
      including the payment of interest on our debt, certain senior executive
      compensation, and the expense of being a public company.

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

CRITICAL ACCOUNTING POLICIES

      Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("GAAP"). The
preparation of our financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the amounts of assets and liabilities
and disclosures of assets and liabilities reported by us at the date of the
financial statements and the revenues and expenses reported during the reporting
period. As additional information becomes available or actual amounts become
determinable, the recorded estimates may be revised and reflected in operating
results. Actual results could differ from those estimates. Accounts that, in our
judgment, are most critical to the preparation of our financial statements
include policy liabilities and accruals, deferred policy acquisition costs,
valuation of certain investments and deferred taxes.

      Policy liabilities and accruals

      We calculate and maintain reserves for the estimated future payment of
claims to our policyholders using the same actuarial assumptions that we use in
the pricing of our products. For our accident and health insurance business, we
establish an active life reserve plus a liability for due and unpaid claims,
claims in the course of settlement and incurred but not reported claims, as well
as a reserve for the present value of amounts not yet due on claims. Many
factors can affect these reserves and liabilities, such as economic and social
conditions, inflation, hospital and pharmaceutical costs, changes in doctrines
of legal liability and extracontractual damage awards. Therefore, the reserves
and liabilities we establish are based on extensive estimates, assumptions and
prior years' statistics. When we acquire other insurance companies or blocks of
insurance, our assessment of the adequacy of transferred policy liabilities is
subject to similar estimates and assumptions. Establishing reserves is an
uncertain process, and it is possible that actual claims will materially exceed
our reserves and have a


                                       31
<PAGE>
material adverse effect on our results of operations and financial condition.
Our net income depends significantly upon the extent to which our actual claims
experience is consistent with the assumptions we used in setting our reserves
and pricing our policies. If our assumptions with respect to future claims are
incorrect, and our reserves are insufficient to cover our actual losses and
expenses, we would be required to increase our liabilities resulting in reduced
net income and shareholders' equity.

      Deferred policy acquisition costs

      The cost of acquiring new business, principally commissions and certain
expenses of the agency, policy issuance, underwriting and related departments,
all of which vary with, and are primarily related to the production of new and
renewal business, have been deferred. These costs are being amortized in
relation to the present value of expected gross profits on the policies arising
principally from investment, mortality and expense margins in accordance with
SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments", for interest sensitive life and annuity products and in proportion
to premium revenue using the same assumptions used in estimating the liabilities
for future policy benefits in accordance with SFAS No. 60, "Accounting and
Reporting by Insurance Enterprises", for non-interest sensitive life and all
accident & health products.

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

      Investment valuation

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

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

      Deferred taxes

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


                                       32
<PAGE>
      We establish valuation allowances on our deferred tax assets for amounts
that we determine will not be recoverable based upon our analysis of projected
taxable income and our ability to implement prudent and feasible tax planning
strategies. Increases in these valuation allowances are recognized as deferred
tax expense. Subsequent determinations that portions of the valuation allowances
are no longer necessary are reflected as deferred tax benefits. To the extent
that valuation allowances were established in conjunction with acquisitions,
changes in those allowances are first applied to increasing or decreasing the
goodwill (but not below zero) or other intangibles related to the acquisition
and then applied as an increase or decrease in income tax expense.

ACQUISITIONS, DIVESTITURES AND FINANCING ACTIVITY

      Pending Acquisition

      In December 2002, Pennsylvania Life entered into a definitive contract to
acquire Pyramid Life Insurance Company ("Pyramid Life") from Ceres Group, Inc.
for $56 million in cash. This transaction is subject to regulatory approvals and
other customary conditions and is scheduled to close by the end of the first
quarter of 2003.

      Pyramid Life specializes in providing health and life insurance products
to the senior market. These products include Medicare supplement, long term
care, life insurance, and annuities. Pyramid Life markets its products in 26
states through a career agency sales force of over 1,100 career agents operating
out of 29 Senior Solutions Sales Centers. As of the end of 2002, Pyramid Life
had approximately $110 million of premium in force and in excess of $114 million
of assets.

      During 2002, Pyramid Life agents produced more than $25 million of
annualized new sales. We believe this acquisition will add further scale and
efficiencies to our operations in the rapidly expanding senior market. Following
a transition period, we plan to take advantage of our cost-effective and
efficient service center to administer the business; however, we will preserve
the marketing identity and quality service that has defined Pyramid Life.

      Trust Preferred Transaction

      In December 2002, the Company issued $15.0 million of floating rate trust
preferred securities through a subsidiary trust. These securities are due in
2032 and are not callable for the first five years. The floating rate is equal
to the three-month LIBOR plus 4.0%, currently 5.4%. Approximately $6.0 million
of the proceeds were used to augment the capital of our insurance subsidiaries
and the balance of approximately $9.0 million was retained at the parent company
in anticipation of funding the acquisition of Pyramid Life. In March 2003, a
second subsidiary trust of the Company issued $10.0 million of floating rate
trust preferred securities under terms similar to the above securities at a rate
of 5.29%. The proceeds will be used to pay down a portion of the term loan and
for general corporate purposes.

      Acquisition of Block of Business

      In November 2002 we entered into an agreement with Nationwide Life
Insurance Company ("Nationwide") to acquire, through a 100% quota share
reinsurance agreement, Nationwide's individual Medicare supplement policies
representing approximately $20.0 million of annualized premium in force. In
connection with this transaction, administration of the business was transferred
to CHCS Services, Inc.

      Equity Offering

      In the third quarter of 2001, we completed a secondary equity offering in
which we sold 5.7 million shares of our common stock with proceeds to the
Company of $26.0 million, net of expenses. In addition, 2.2 million shares were
sold by some of our shareholders as part of the offering. The primary reason for
the offering was to enhance the capital of our insurance subsidiaries to support
our growth and to improve our risk based capital ratios. Out of the proceeds of
the offering, $9.3 million was contributed to the capital and surplus of our
insurance subsidiaries, $5.5 million was used to reduce intercompany obligations
and the balance was held for general corporate purposes.


                                       33
<PAGE>
      Acquisition of Administrative Service Companies

      In November 2001, we acquired the assets of Living Strategies, Inc., a
privately held company based in Bala Cynwyd, Pennsylvania, including certain
contracts, trademarks and proprietary web-based technology. Living Strategies is
a recognized provider of employer-sponsored elder care programs, providing
assistance and support to those dealing with the aging of their parents and
family members. As a result of the acquisition of the Living Strategies assets,
we have enhanced our technology infrastructure and expanded the audience for our
elder care management services.

      In August 2000, we acquired CHCS a privately held administrator of long
term care products located in Weston, Florida. CHCS administers long term care
and home health care insurance and non-insurance products. This acquisition
enhanced our expertise in the long term care business.

      In January 2000, we acquired CHCS Services, Inc., formerly American
Insurance Administration Group, Inc., a privately-held third party administrator
located in Clearwater, Florida. American Insurance Administration Group is a
third party administrator of senior health insurance. This acquisition
strengthened our expertise and capacity to administer senior market products.

      1999 Acquisition

      In July 1999, we acquired six insurance companies, including the
subsidiaries that comprise our career agency segment, and other assets from
PennCorp Financial Group. This acquisition enhanced our prospects for future
growth by expanding our geographic reach and through the addition of a career
agency marketing channel to supplement our senior market brokerage agency
marketing channel.

      Cancellation of Major Medical Insurance

      In the fourth quarter of 2000, we decided to exit our under-performing
individual major medical business to the extent possible. Of the $31.3 million
of individual major medical premium that was in force on December 31, 2000,
approximately $1.6 million remained in force on December 31, 2002, which we are
not able to cancel.

HEALTH MAINTENANCE ORGANIZATION ("HMO'S") DIS-ENROLLMENT

      Beginning in 1998, many HMO's realized that their Medicare programs were
unprofitable and, therefore, decided to terminate these programs. As a result,
millions of seniors were involuntarily dis-enrolled from these programs. This
development contributed to our increased new sales of Medicare supplement
products in 2001 and 2000. Under applicable legislation, such dis-enrollees had
the right to acquire Medicare supplement insurance without medical underwriting
or pre-existing condition limitations. As we expected, during 2002 new sales of
our Medicare products have slowed since the HMO's are not dis-enrolling members
as much as they were in prior years. To offset this impact, we have continued to
expand geographically, and we have stepped up recruiting effort to augment our
production. Additionally, we have increased our retention on new Medicare
supplement business. As a result, we believe that we will continue to grow our
net premiums.


                                       34
<PAGE>
RESULTS OF OPERATIONS - CONSOLIDATED OVERVIEW

      The following table reflects each of our segment's operating income
contribution and contains a reconciliation to net income for these items.

<TABLE>
<CAPTION>
                                                                                               For the year ended December 31,
                                                                                       2002               2001               2000
                                                                                     --------           --------           --------
<S>                                                                                  <C>                <C>                <C>
Operating Income:
  Career Agency                                                                      $ 33,470           $ 28,427           $ 28,814
  Senior Market Brokerage                                                              14,904             13,716             10,281
  Administrative Services                                                               7,632              6,625              3,844
                                                                                     --------           --------           --------
    Segment operating income                                                           56,006             48,768             42,939

Corporate & Eliminations                                                               (6,893)            (8,483)           (10,019)
                                                                                     --------           --------           --------

Operating income before realized gains and income taxes (1)                            49,113             40,285             32,920

Income taxes (2)                                                                      (17,286)           (14,098)           (11,473)
Benefit of release of tax valuation allowance                                           1,604                737              1,343
                                                                                     --------           --------           --------
     Total income taxes on operating items                                            (15,682)           (13,361)           (10,130)
                                                                                     --------           --------           --------

Net operating Income (1)                                                               33,431             26,924             22,790

Realized gains (losses), net of tax (3)                                                (3,304)             2,001                 95
                                                                                     --------           --------           --------

Net income                                                                           $ 30,127           $ 28,925           $ 22,885
                                                                                     ========           ========           ========

Per share data (diluted):
  Net operating income (1)                                                           $   0.62           $   0.53           $   0.48
  Realized gains (losses), net of tax                                                   (0.06)              0.04               0.01
                                                                                     --------           --------           --------
Net income                                                                           $   0.56           $   0.57           $   0.49
                                                                                     ========           ========           ========
</TABLE>

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

      (2)   The effective tax rates were 35.2% for the year ended December 31,
            2002, 35.0% for 2001 and 34.8% for 2000.

      (3)   Tax on realized capital gains (losses) is based on a 35.0% effective
            tax rate for all periods.

YEARS ENDED DECEMBER 31, 2002 AND 2001

      Net income increased by $1.2 million to $30.1 million ($0.56 per share) in
2002, compared to $28.9 million ($0.57 per share) in 2001. The decease in the
per share amounts results from to the 7.5% increase in the weighted shares
outstanding in 2002 as a result of the equity offering in July, 2001.

      Our overall effective tax rate was 31.6% for 2002 as compared to 33.2% in
2001. As a result of the increased profitability of our Career Agency and Senior
Market Brokerage segments, valuation allowances on certain of the tax loss
carryforwards were no longer considered necessary during both 2002 and 2001. The
amount of the valuation allowance released through deferred income tax expense
during 2002 was $1.6 million, or $0.03 per share, compared to $0.7 million, or
$0.01, per share during 2001. Excluding the release of the tax valuation
allowance, the effective tax rate on operating income was 35.2% in 2002,
compared to 35.0% in 2001.

      We incurred realized losses, net of tax, of $3.3 million or $.06 per share
in 2002, largely as the result of the loss on our WorldCom bonds. This compares
to the net realized gain of $2.0 million or $.04 per diluted share in 2001.

      Net operating income for 2002, excluding realized gains (losses) and
excluding the benefit of the release of a portion of the reserve held against
the Company's deferred tax asset, was $31.8 million or $0.59 per share. This is
comparable to $26.2 million or $0.52 per share in 2001, representing increases
of 21.4% and 13.5%, respectively.


                                       35
<PAGE>
      Pre-tax operating income from our Career Agency segment increased by $5.0
million or 18%, compared to 2001. This reflects an increase in new sales and
improved loss ratios for our disability business.

      Our senior market brokerage segment improved results by more than 9%,
increasing pre-tax operating income by $1.2 million. This improvement is
primarily the result of improved loss ratios for our Medicare supplement/select
business. However, this was partially offset by an increase in claims relating
to a block of home health care policies that we stopped selling in 2000.

      Pre-tax operating income from our administrative services segment improved
by $1.0 million or 15% in 2002 compared to 2001. The increase is due primarily
to the growth in the Medicare supplement business being serviced by our
administrative services company.

      The decrease in the pre-tax operating loss from our corporate segment is
due primarily to the reduction in interest cost. This reduction was due to a
combination of a declining balance of debt outstanding as a result of principal
repayments and reductions in the weighted average interest rates for the year,
compared to 2001.

YEARS ENDED DECEMBER 31, 2001 AND 2000

      Net income increased by $6.0 million to $28.9 million ($0.57 per share) in
2001, compared to $22.9 million ($0.49 per share) in 2000.

      Our overall effective tax rate was 33.2% in 2001 as compared to 30.8% in
2000. As a result of the increased profitability of our operating segments,
valuation allowances on certain of the tax loss carryforwards were no longer
considered necessary during both 2001 and 2000. The amount of the valuation
allowance released through deferred income tax expense during 2001 was $0.7
million, or $0.01 per share, compared to $1.3 million, or $0.03, per share
during 2000. Excluding the release of the tax valuation allowance, the effective
tax rate on operating income was 35.0% in 2001, compared to 34.8% in 2000.

      Net operating income for 2001, excluding realized gains (losses) and
excluding the benefit of the release of a portion of the reserve held against
the Company's deferred tax asset, was $26.2 million or $0.52 per share. This is
comparable to $21.5 million or $0.46 per share in 2000.

      Pre-tax operating income from our Career Agency segment decreased by $0.4
million or 1%, compared to 2000. This decrease was due primarily to a reduction
in the underwriting profit of the U.S. operations, offset by a reduction in
general expenses.

      Our senior market brokerage segment improved results by more than 33%,
increasing pre-tax operating income by $3.4 million. In the fourth quarter of
2000, we wrote off $1.4 million of deferred acquisition costs as a result of our
decision to exit the major medical line of business. Adjusted for this item,
pre-tax operating income for the segment increased by $2.0 million. This
improvement is the result of continued internally generated growth of business
in this segment, primarily in the Medicare supplement line.

      Pre-tax operating income from our administrative services segment improved
by $2.8 million or 72% in 2001 compared to 2000. The increase is due primarily
to the growth in the Medicare supplement business being serviced by our
administrative services company.

      The decrease in the pre-tax operating loss from our corporate segment is
due primarily to the reduction in interest cost. This reduction was due to a
combination of a declining balance of debt outstanding as a result of principal
repayments and reductions in the weighted average interest rates for the year,
compared to 2000.


                                       36
<PAGE>
SEGMENT RESULTS - CAREER AGENCY

<TABLE>
<CAPTION>
                                                                            For the year ended December 31,
                                                                           2002           2001          2000
                                                                        ---------      ---------     ---------
                                                                                    (in thousands)
<S>                                                                     <C>            <C>           <C>
Net premiums and policyholder fees:
  Life and annuity                                                      $  14,900      $  14,116     $  17,258
  Accident & health                                                       110,450        112,028       112,100
                                                                        ---------      ---------     ---------
  Net premiums                                                            125,350        126,144       129,358
Net investment income                                                      33,537         32,768        31,714
Other income                                                                  328          1,383           647
                                                                        ---------      ---------     ---------
  Total revenue                                                           159,215        160,295       161,719
                                                                        ---------      ---------     ---------

Policyholder benefits                                                      75,519         83,947        81,432
Interest credited to policyholders                                          2,910          1,981         1,657
Change in deferred acquisition costs                                      (15,308)       (12,178)      (12,476)
Amortization of present value of future profits and goodwill                   --              7            28
Commissions and general expenses, net of allowances                        62,624         58,111        62,264
                                                                        ---------      ---------     ---------
  Total benefits, claims and other deductions                             125,745        131,868       132,905
                                                                        ---------      ---------     ---------

  Segment operating income                                              $  33,470      $  28,427     $  28,814
                                                                        =========      =========     =========
</TABLE>

YEARS ENDED DECEMBER 31, 2002 AND 2001

      Pre-tax operating income from our Career Agency segment increased by $5.0
million or 18%, compared to 2001. This reflects an increase in new sales and
improved loss ratios for our disability business.

      REVENUES. Net premiums for 2002 fell by approximately 0.6% compared to
2001. Canadian operations accounted for approximately 39% of the net premiums
for the segment in 2002, compared to 37% in 2001. New sales during 2002
increased by 10% over 2001. This increase was driven by a 9% increase in sales
in the U.S. and a 12% increase in sales in Canada. The increase in production in
the U.S. came from sales of our senior market products, such as Medicare
supplement, long term care and senior life, which accounted for 49% of the new
sales in the U.S. The Career agents also sold $33.0 million of fixed annuities
during 2002, compared to $8.4 million in 2001, that are not reported as premiums
for GAAP.

      Net investment income increased by approximately 2% over 2001. The
increase is due to an increase in the segment's invested assets, offset by a
decrease in the overall yield. Other income decreased by $1.1 million, due
primarily to a decrease in the sale of non-insurance products.

      BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, decreased by approximately 10% compared to 2001. Overall
loss ratios for the segment improved from 67% in 2001 to 60% in 2002, primarily
in our disability line as a result of active rate and claims management.
Interest credited increased by $1.0 million, consistent with the increase in
fixed annuities.

      The increase in deferred acquisition costs was approximately $3.1 million
more in 2002 than the increase in 2001. This is directly related to the increase
in the new business, including annuities, generated by the segment during 2002.

      Commissions and general expenses increased by approximately $4.5 million,
or 8%, in 2002 compared to 2001. This relates primarily to the increase in new
business, including annuities.

YEARS ENDED DECEMBER 31, 2001 AND 2000

      Pre-tax operating income from our Career Agency segment decreased by $0.4
million or 1%, compared to 2000. This decrease was due primarily to a reduction
in the underwriting profit of the U.S. operations, offset by a reduction in
general expenses.

      REVENUES. Net premiums for 2001 fell by approximately 2.5% compared to
2000. In the U.S. the decrease is due to a greater amount of annuities, which
are not reported as premiums for GAAP


                                       37
<PAGE>
purposes. The decrease in Canadian net premium is due to the run-off of the
older block of Canadian business. Canadian operations accounted for
approximately 37% of the net premiums for the segment in both 2001 and 2000.

      Net investment income increased by approximately 3% over 2000. The
increase is due to an increase in the segment's invested assets, offset by a
decrease in the overall yield.

      Other income increased by approximately $0.7 million in 2001 compared to
2000. This increase is due primarily to fees associated with the sale by Career
Agents of a recently introduced non-insurance product designed to provide access
to nursing home and home healthcare services. This increase in other income is
largely offset by an increase in commissions related to this non-insurance
product.

      BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately 3% compared to 2000. This was
due to higher overall loss ratios, primarily in the accident & health lines of
business, for the segment in 2001 compared to 2000 on lower premium, as noted
above.

      The increase in deferred acquisition costs was approximately $0.3 million
less in 2001, compared to the increase in 2000. This reflects a decrease in the
underwriting and issue costs and a higher level of amortization as the post
acquisition block of business increases.

      Commissions and general expenses decreased by approximately $4.2 million,
or 7%, in 2001 compared to 2000. This decrease is primarily due to the
consolidation of the operations from the Raleigh location into the existing
operations in Toronto, Canada and Pensacola, Florida.

SEGMENT RESULTS - SENIOR MARKET BROKERAGE

<TABLE>
<CAPTION>
                                                                                  For the year ended December 31,
                                                                          2002               2001               2000
                                                                       ---------          ---------          ---------
                                                                                        (in thousands)
<S>                                                                    <C>                <C>                <C>
Net premiums and policyholder fees:
  Life and annuity                                                     $  16,169          $  16,491          $  16,442
  Accident & health                                                      125,058             86,571             73,953
                                                                       ---------          ---------          ---------
  Net premiums                                                           141,227            103,062             90,395
Net investment income                                                     23,946             25,174             26,095
Other income                                                                 325                205                335
                                                                       ---------          ---------          ---------
  Total revenue                                                          165,498            128,441            116,825
                                                                       ---------          ---------          ---------

Policyholder benefits                                                    105,887             81,072             72,487
Interest credited to policyholders                                         8,053              8,288              8,473
Change in deferred acquisition costs                                     (12,575)            (7,038)            (3,449)
Amortization of present value of future profits and goodwill                 128                424                413
Commissions and general expenses, net of allowances                       49,101             31,979             28,620
                                                                       ---------          ---------          ---------
  Total benefits, claims and other deductions                            150,594            114,725            106,544
                                                                       ---------          ---------          ---------

  Segment operating income                                             $  14,904          $  13,716          $  10,281
                                                                       =========          =========          =========
</TABLE>

      The table below details the gross premiums and policyholder fees collected
for the major product lines in the Senior Market brokerage segment and the
corresponding average amount of net premium retained after reinsurance. Our
insurance subsidiaries reinsure our senior market brokerage products to
unaffiliated third party reinsurers under various quota share agreements.
Medicare supplement/select written premium in force as of December 31, 2002, is
reinsured under quota share reinsurance agreements ranging between 50% and 90%
based upon the geographic distribution. During the first quarter of 2002, we
increased our retention on certain new business written from 25% to 50%. We are
considering a further increase in our retention on new business further by the
end 2003. We have also acquired various blocks of Medicare supplement premium,
which are reinsured under quota share reinsurance agreements ranging from 75% to
100%.


                                       38
<PAGE>
<TABLE>
<CAPTION>
                                                                   2002                   2001                      2000
                                                                   ----                   ----                      ----
                                                            Gross       Net         Gross        Net          Gross        Net
                                                          Premiums   Retained     Premiums    Retained      Premiums   Retained
                                                          --------   --------     --------    --------      --------   --------
                                                                                      (in thousands)
<S>                                                       <C>        <C>          <C>         <C>           <C>        <C>
      Medicare supplement acquired                        $151,073       11%       $149,287        7%       $145,972        8%
      Medicare supplement/select written                   248,618       35%        161,121       31%         82,013       31%
      Other senior supplemental health                      24,949       60%         22,553       61%         20,701       56%
      Other health                                          13,111       45%         29,526       47%         46,917       54%
      Senior life insurance                                  8,227       58%          8,328       69%          6,625       50%
      Other life                                            14,716       79%         14,700       73%         17,677       72%
                                                          --------                 --------                 --------

      Total gross premiums                                $460,694       31%       $385,515       27%       $319,905       29%
                                                          ========                 ========                 ========
</TABLE>

YEAR ENDED DECEMBER 31, 2002 AND 2001

      Our senior market brokerage segment improved results by more than 9%,
increasing pre-tax operating income by $1.2 million. This improvement is
primarily the result of improved loss ratios for our Medicare supplement/select
business. However, this was partially offset by an increase in claims relating
to a block of home health care policies that we stopped selling in 2000.

      REVENUES. New production of our Senior Market products amounted to $98.2
million in 2002. This represents a 10% decrease compared to $109.5 million in
2001. As we anticipated, new sales of our Medicare products have slowed since
Health Maintenance Organizations ("HMOs") are not dis-enrolling members as much
as in prior years. We have continued to expand geographically and have increased
our recruiting efforts to further augment our production. Additionally, $17.6
million of fixed annuities were sold during 2002, compared to $7.1 million in
2001, that are not reported as premiums for GAAP.

      Gross premium increased $75.2 million, or 20%, over 2001 despite the slow
down in new production. The increase in gross premium includes a $87.5 million,
or 54%, increase on Medicare supplement/select business written as a result of
continued new sales. In addition, premiums increased due to normal rate
increases implemented by the Company and better than assumed persistency. Other
senior supplemental health premium, which includes long term care, nursing home
and home health care increased 11%, or $2.4 million. These increases were
partially offset by a decrease of $16.4 million, or 56%, in other health
premium, primarily as a result of our decision to exit the major medical line of
business.

      In November 2002, we entered into an agreement with Nationwide Life
Insurance Company to reinsure a block of its Medicare supplement business with
annualized premium in force of approximately $20.0 million. This added
approximately $3.5 million of premium to the Medicare supplement acquired line.

      Net premiums for 2002 increased to $141.2 million, an increase of 37%
compared to 2001. Net premiums grew more than gross premium as a result of our
decision to reinsure less premium and retain more risk. The net amount of
premium retained increased from 27% in 2001 to 31% in 2002 due to the increase
in retention on new Medicare supplement/select premiums written from 25% to 50%,
effective January 2002.

      Net investment income decreased by 5% compared to 2002, primarily as a
result of a decline in investment yields.

      BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately $24.8 million, or 31%,
compared to 2001. The increase is due primarily to higher annualized premium in
force in our Medicare supplement lines, even though our loss ratio for this line
improved. Additionally, we experienced an increase in claims in a block of home
health


                                       39
<PAGE>
care business that we stopped selling in 2000. We believe that we are taking the
necessary steps, particularly as to rate management, so that we can eliminate
the negative drag of this block as soon as possible. We implemented a 30% rate
increase on this block during 2002 and we will file for additional rate
increases in 2003 so that we can continue to mitigate the effect of this block
on the earnings of the segment. We have not experienced a similar increase in
claims in any of the long term care blocks that we are currently marketing.

      The increase in deferred acquisition costs was approximately $5.5 million
more in 2002, than in 2001. The increase in deferred acquisition costs relates
primarily to our higher retention on new business.

      Commissions and other operating expenses increased by approximately $17.1
million, or 54%, in 2002 compared to 2001. The following table details the
components of commission and other operating expenses:

<TABLE>
<CAPTION>
                                                                2002           2001
                                                              --------      --------
<S>                                                           <C>           <C>
      Commissions                                             $ 80,816      $ 66,956

      Other operating costs                                     60,455        50,354

      Reinsurance allowances                                   (92,170)      (85,331)
                                                              --------      --------

      Commissions and general expenses, net of allowances     $ 49,101      $ 31,979
                                                              ========      ========
</TABLE>

      The ratio of commissions to gross premiums increased to 17.5% in 2002 from
17.4% in 2001. Other operating costs as a percentage of gross premiums was 13.1%
in 2002, consistent with 2001. Commission and expense allowances received from
reinsurers as a percentage of the premiums ceded decreased to 28.9% in 2002 from
30.2% in 2001, primarily due to the reduction in new business ceded as a result
of our decision to increase our retention on new business.

YEAR ENDED DECEMBER 31, 2001 AND 2000

      Our senior market brokerage segment improved results by more than 33%,
increasing pre-tax operating income by $3.4 million. In the fourth quarter of
2000, we wrote off $1.4 million of deferred acquisition costs related to our
decision to exit the major medical line of business. Adjusted for this item,
pre-tax operating income for the segment increased by $2.0 million. This
improvement is the result of continued internally generated growth of business
in this segment, primarily in the Medicare supplement line.

      REVENUES. New production of our Senior Market products amounted to $109.5
million in 2001. This represents a 29% increase over the $84.9 million in 2000
and reflects a benefit from new sales of our Medicare products as a result of
the dis-enrollment of members from HMO's. We have continued to expand
geographically and have increased our recruiting efforts to further augment our
production. Additionally, $7.1 million of fixed annuities were sold during 2001,
compared to $5.2 million in 2000.

      Gross premium increased $65.6 million, or 21%, over 2000. The increase in
gross premium includes a $79.1 million, or 96%, increase on Medicare
supplement/select business written by the Insurance Subsidiaries as a result of
continued new sales. In addition, premiums increased due to normal rate
increases implemented by the Company and better than assumed persistency.
Medicare supplement acquired increased by $3.3 million, or 2%. Other senior
supplemental health premium, which includes long term care, nursing home and
home health care increased 9%, or $1.9 million. These increases were partially
offset by a decrease of $17.4 million, or 37%, in other health premium,
primarily as a result of our decision to exit the major medical line of
business.

      Net premiums for 2001 increased by $12.7 million, or 14%, compared to
2000. On a percentage basis, net premiums grew less than gross premium as a
result of our decision to exit the major medical business, which is 100%
retained. The decrease in the retained percentage from 29% to 27% was due
primarily to the reduction in major medical premium.


                                       40
<PAGE>
      Net investment income decreased by 4% compared to 2002, primarily as a
result of a decline in invested assets and decreasing investment yields.

      BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately $8.6 million, or 12%,
compared to 2000. The increase is due primarily to higher annualized premium in
force in our Medicare supplement lines, even though our loss ratio for this line
improved.

      The increase in deferred acquisition costs was approximately $3.6 million
more in 2001, than in 2000. This is net of the amortization of approximately
$1.4 million of deferred acquisition costs relating to our decision to exit the
major medical line of business. The increase in deferred acquisition costs
relates primarily to the increase in new sales.

      Commissions and other operating expenses increased by approximately $3.4
million, or 12%, in 2001 compared to 2000. The following table details the
components of commission and other operating expenses:

<TABLE>
<CAPTION>
                                                                2001          2000
                                                              --------      --------
<S>                                                           <C>           <C>
      Commissions                                             $ 66,956      $ 51,524

      Other operating costs                                     50,354        44,986

      Reinsurance allowances                                   (85,331)      (67,890)
                                                              --------      --------

      Commissions and general expenses, net of allowances     $ 31,979      $ 28,620
                                                              ========      ========
</TABLE>

      The ratio of commissions to gross premiums increased to 17.4% in 2001 from
16.1% in 2000 as a result of the increase in new business sold. Other operating
costs as a percentage of gross premiums decreased to 13.1% in 2001 from 14.1% in
2000. Commission and expense allowances received from reinsurers as a percentage
of the premiums ceded were relatively flat at 30.2% in 2001 compared to 29.6% in
2000.

SEGMENT RESULTS - ADMINISTRATIVE SERVICES

<TABLE>
<CAPTION>
                                                                     For the year ended December 31,
                                                                       2002       2001         2000
                                                                     -------     -------     -------
                                                                             (in thousands)
<S>                                                                  <C>         <C>         <C>
Service fee and other income                                         $42,748     $32,831     $24,130
Net investment income                                                    470         322          77
                                                                     -------     -------     -------
  Total revenue                                                       43,218      33,153      24,207
                                                                     -------     -------     -------

Amortization of present value of future profits and goodwill           1,514       2,206       2,920
General expenses                                                      34,072      24,322      17,443
                                                                     -------     -------     -------
  Total expenses                                                      35,586      26,528      20,363
                                                                     -------     -------     -------

Segment operating income                                               7,632       6,625       3,844

Depreciation, amortization and interest                                2,846       3,108       3,379
                                                                     -------     -------     -------
Earnings before interest, taxes, depreciation and amortization(1)    $10,478     $ 9,733     $ 7,223
                                                                     =======     =======     =======
</TABLE>

(1)   In addition to segment operating income, we also evaluate the results of
      our Administrative Services segment based on earnings before interest,
      taxes, depreciation and amortization ("EBITDA"), which is not in
      accordance with generally accepted accounting principles.


                                       41
<PAGE>
      The following table details the service fee revenue earned by our
Administrative Service segment:

<TABLE>
<CAPTION>
                                                 2002         2001        2000
                                                 ----         ----        ----
                                                         (in thousands)
<S>                                            <C>          <C>          <C>
Affiliated Revenue
   Medicare supplement                         $19,322      $13,268      $ 8,467
   Long term care                                2,637        1,607          981
   Non-insurance products                        1,089          272           --
   Other health insurance                          125          358          930
   Life insurance                                  376          388          135
                                               -------      -------      -------

   Total Affiliated Revenue                     23,549       15,893       10,513
                                               -------      -------      -------

Unaffiliated Revenue
   Medicare supplement                           8,809        9,564        9,410
   Long term care                                8,544        5,577        2,725
   Other health insurance                          631          554          758
   Non-insurance assistance                      1,215        1,242          724
                                               -------      -------      -------

   Total Unaffiliated Revenue                   19,199       16,937       13,617
                                               -------      -------      -------

Total Administrative Service Revenue           $42,748      $32,830      $24,130
                                               =======      =======      =======
</TABLE>

      Included in unaffiliated revenue are fees received from a reinsurer of
100% of certain business of our insurance subsidiaries, which amounted to $6.9
million and $7.8 million in 2002 and 2001. These fees, together with the
affiliated revenue, were eliminated in consolidation.

YEARS ENDED DECEMBER 31, 2002 AND 2001

      Operating income for the Administrative Services segment for 2002 improved
by more than 15% over 2001, primarily as the result of the increase in Medicare
premiums being serviced by our administrative services company and the scheduled
reduction in the amortization of the present value of future profits ("PVFP").
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased by approximately 8% to $10.5 million to in 2002.

      Service fee revenue increased by $9.9 million, or 30%, in 2002 as compared
to 2001. In 2002, approximately 44% of the total fees earned were from
non-affiliated companies compared to 52% in 2001. The relative decrease in the
non-affiliated fees is the result of continued growth of business from our
Senior Market Brokerage segment. Affiliated fee revenue increased $7.7 million
compared to 2001 primarily as the result of the increase in Medicare supplement
business in force at our insurance subsidiaries. Unaffiliated fee revenues
increased by approximately $2.3 million. This is primarily due to an increase in
fees for underwriting of long term care policies for our third party clients,
including the underwriting support work we performed for the consortium that is
offering long term care to employees of the Federal Government and their
families.

      General expenses for the segment increased by $9.8 million, or 40%,
compared to 2001. The increase is due primarily to the increase in business and
costs incurred to bring new clients on line. Additionally, during the second
quarter of 2002, we completed the closing of our Clearwater office and
consolidated those functions into our Pensacola operations. The total cost of
the transition was approximately $0.3 million, however most of this was offset
by efficiencies and cost savings as a result of the transition.

      The amortization of PVFP relates primarily to the acquisition of CHCS
Services, Inc., formerly American Insurance Administration Group, Inc. ("AIAG")
in 2000. Approximately $7.7 million of PVFP was established when AIAG was
acquired in January, 2000. It is being amortized in proportion to the expected
profits from the contracts in force on the date of acquisition. During 2002,
approximately $1.5 million was amortized compared to $2.1 million in 2001. As of
December 31, 2002, $1.3 million, or 17%, of the original amount


                                       42


<PAGE>
remains unamortized. It is anticipated that $0.4 million will be amortized in
2003. During 2001 amortization of goodwill was approximately $0.1 million. There
was no amortization of goodwill during 2002 as a result of the adoption of SFAS
142.

YEARS ENDED DECEMBER 31, 2001 AND 2000

      Operating income for the Administrative Services segment for 2001 improved
by more than 72% over the amount in 2000, primarily as the result of the
increase in Medicare premiums being serviced by our administrative services
company. EBITDA increased by approximately 35% to $9.7 million in 2001.

      Service fee income increased by $8.7 million, or 36%, in 2001 as compared
to 2000. Fees for our administration of Medicare supplemental business increased
by $4.6 million, or 46%, in 2001 compared to 2000, primarily as a result of the
increase in Medicare business issued by our Senior Market Brokerage segment.
Fees for our administration of long term care business increased $4.3 million in
2001 compared to 2000. This increase is due primarily to the inclusion of a full
year of operations of CHCS in 2001 compared to only five months in 2000. During
2001 our Administrative Services segment generated 48% of its revenues from the
administration of business on behalf of affiliates and 52% from unaffiliated
third party clients. During 2000, our Administrative Services segment generated
$24.1 million in service fee income with 42% of its revenues from the
administration of business on behalf of affiliates and 58% from unaffiliated
third party clients.

      Approximately $2.1 million of the PVFP was amortized during 2001 and $2.8
million of the PVFP was amortized during 2000. The remaining amortization
related to the goodwill established in connection with the acquisition of CHCS.

      General expenses for the segment increased by $6.9 million in 2001
compared to 2000. Expenses relating to the administration of long term care
business increased by approximately $4.3 million. This increase is due primarily
to the inclusion of a full year of operations of CHCS operations in 2001
compared to only five months in 2000. The remaining increase related to the
costs associated with the increase in Medicare business administered, primarily
for our affiliated insurance subsidiaries.

SEGMENT RESULTS - CORPORATE

      The following table presents the primary components comprising the
corporate segment's operating loss:

<TABLE>
<CAPTION>
                                                        For the year ended December 31,
                                                        2002         2001         2000
                                                      --------     --------     --------
                                                               (in thousands)
<S>                                                   <C>          <C>          <C>
Interest cost of acquisition financing                $  3,095     $  5,152     $  7,097
Amortization of capitalized loan origination fees          539          530          528
Stock-based compensation expense                           641          730          757
Other parent company expenses, net                       2,618        2,071        1,987
Insurance settlement                                        --           --         (350)
                                                      --------     --------     --------

  Segment operating loss                              $  6,893     $  8,483     $ 10,019
                                                      ========     ========     ========
</TABLE>

YEARS ENDED DECEMBER 31, 2002 AND 2001

      The decrease in the operating loss from our corporate segment for 2002 was
due primarily to the reduction in interest cost. This reduction was due to a
combination of the declining balance of debt outstanding as a result of
principal repayments and reductions in the weighted average interest rates for
the year, compared to 2001. During 2002, we repaid $10.7 million of our term
loan, resulting in a weighted average balance outstanding of $55.7 million
compared to $65.5 million for 2001. Additionally, the weighted average interest
rate on our debt decreased to 5.4% in 2002 from 7.8% in 2001. (See "Liquidity
and Capital Resources" for additional information regarding our credit
facility). The increase in other parent company expenses was due to an increase
in legal fees relating to litigation and an increase in the allocation of
salaries and related costs for corporate activity relating to merger and
acquisition efforts.


                                       43
<PAGE>
YEARS ENDED DECEMBER 31, 2001 AND 2000

      The decrease in the operating loss from our corporate segment in 2001 was
due primarily to the reduction in interest cost. This reduction was due to a
combination of the declining balance of debt outstanding as a result of
principal repayments and reductions in the weighted average interest rates for
the year, compared to 2000. During 2001, the weighted average balance
outstanding decreased by $4.6 million from $70.1 million for 2000. The weighted
average interest rate on our debt decreased to 7.8% in 2001 from 10.1% in 2000.

ELIMINATIONS

      The Corporate segment reflects the elimination of revenues and expenses
associated with services performed by our Administrative Services segment for
our insurance company subsidiaries. These eliminations amounted to $31.2 million
for 2002, $23.6 million for 2001 and $18.1 million for 2000. The Corporate
segment also reflects the elimination of interest income and expense on
debentures issued by our parent holding company to our subsidiaries subsidiary
of $1.6 million for 2002, $0.5 million for 2001, $0.7 million for 2000. (See
"Affiliated Obligations of the Parent Company" below).

LIQUIDITY AND CAPITAL RESOURCES

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

      We require cash at our parent company to meet our obligations under our
credit facility and our outstanding debentures held by our subsidiaries,
American Progressive and Pennsylvania Life. In January 2002, our parent company
issued a debenture to Pennsylvania Life in conjunction with the transfer of the
business of Pennsylvania Life's Canadian Branch to Penncorp Life (Canada).
Repayment of the debenture is anticipated to be funded from dividends from
Penncorp Life (Canada). We also require cash to pay the operating expenses
necessary to function as a holding company (applicable insurance department
regulations require us to bear our own expenses), and to meet the costs of being
a public company.

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

      Contractual Obligations and Commercial Commitments

      Our current credit facility consists of a term loan and a $10 million
revolving loan facility. The loans call for interest at LIBOR for one, two,
three or six months plus 350 basis points (4.84% beginning January 31, 2003).
Principal payments are due on a quarterly basis over a seven-year period that
commenced on July 31, 2000. The final maturity date of the facility is July 31,
2006. We pay a commitment fee of 50 basis points on the unutilized portion of
the revolving facility, which is currently $7.0 million. The term loan is
secured by a first priority security interest in 100% of the outstanding common
stock of American Exchange, American Progressive, and WorldNet Services and 65%
of the outstanding common stock of UAFC (Canada) Inc. (the parent of Penncorp
Life (Canada)) and a subordinate interest in 100% of the outstanding common
stock of American Pioneer. As of December 31, 2002, $47.8 million was
outstanding under the term loan and $3.0 million was outstanding under the
revolving loan facility. We incurred the revolving indebtedness in connection
with our acquisition of CHCS in August 2000. During January 2003, we made a
regularly scheduled principal repayment that further reduced the outstanding
balance of the term loan to $45.0 million. During 2002, we paid $2.6 million in
interest and repaid $10.7 million in principal on the term loan. For 2001, we
paid $5.2 million in interest and repaid


                                       44
<PAGE>
$8.2 million in principal on the term loan. For 2000, we paid $7.1 million in
interest and repaid $3.4 million in principal on the term loan.

      The following table shows the schedule of remaining principal payments (in
thousands) on the Company's outstanding term loan, with the final payment in
July 2006:

<TABLE>
<S>                             <C>
                 2003           $    8,700
                 2004               12,400
                 2005               13,275
                 2006               10,575
                                ----------
                  Total         $   44,950
                                ==========
</TABLE>

      In connection with the pending acquisition of Pyramid Life, we intend to
refinance the above term loan. We anticipate that our new credit facility will
total $85 million, consisting of a $70 million five year term loan with a $15
million revolver. We intend to use the proceeds from the term loan along with
existing cash to repay the existing term loan and finance the acquisition of
Pyramid Life. The refinancing, if consummated, would trigger the immediate
amortization of the capitalized loan origination fees from the existing term
loan resulting in an pre-tax expense of approximately $1.9 million.

      We are obligated under certain lease arrangements for its executive and
administrative offices in New York, Florida, Texas, and Ontario, Canada. Rent
expense for the three years ended December 2002, 2001 and 2000 was $1.7 million,
$1.8 million, and $2.9 million, respectively. The minimum rental commitments,
subject to escalation clauses, at December 31, 2002 under non-cancelable
operating leases (in thousands) are as follows:

<TABLE>
<S>                                          <C>
         2003                                $   2,005
         2004                                    1,807
         2005                                    1,279
         2006                                    1,145
         2007 and thereafter                     3,764
                                             ---------
                 Totals                      $  10,000
                                             =========
</TABLE>

      In addition to the above, Pennsylvania Life is the named lessee on
approximately 40 properties occupied by Career Agents for uses as field offices.
Rent for these field offices is reimbursed by the agents. Total annual rent
obligation for these field offices is approximately $633,000.

      Trust Preferred Offering

      In December 2002, the Company formed Universal American Statutory Trust I,
a Connecticut statutory business trust (the "Trust"), which issued, through a
private placement, $15.0 million, thirty year floating rate trust preferred
securities (the "Capital Securities"). The Trust will have the right to call the
Capital Securities at par after five years from the date of issuance. The
proceeds from the sale of the Capital Securities, together with proceeds from
the sale by the Trust of its common securities to the Company, were invested in
floating rate junior subordinated deferrable interest debentures of the Company
due 2032 (the "Junior Subordinated Debt"). The proceeds were used to support the
growth of the Company's insurance subsidiaries and a portion retained at the
parent company in anticipation of funding the acquisition of Pyramid Life.

      The Capital Securities represent an undivided beneficial interest in the
Trust's assets, which consist solely of the Junior Subordinated Debt. Holders of
Capital Securities generally have no voting rights. The Company owns all of the
common securities of the Trust. Holders of both the Capital Securities and the
Junior Subordinated Debt are entitled to receive cumulative cash distributions
accruing from December 4, 2002, the date of issuance, and payable quarterly in
arrears commencing March 4, 2003 at a floating rate equal to the three-month
LIBOR plus 4.0% (currently 5.4%) of the stated liquidation amount of $1,000 per
Capital Security. The floating rate resets quarterly and is limited to a maximum
of 12.5% through December 4, 2007. The Capital Securities are subject to
mandatory redemption upon repayment of the Junior Subordinated Debt at maturity
or upon earlier redemption. The Junior Subordinated Debt is unsecured and ranks
junior and subordinate in right of payment to all present and


                                       45
<PAGE>
future senior debt of the Company and are effectively subordinated to all
existing and future obligations of the Company's subsidiaries. The Company has
the right to redeem the Junior Subordinated Debt on or after December 4, 2007.

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

      The Capital Securities have not been and will not be registered under the
Securities Act of 1933, as amended (the "Securities Act"), and will only be
offered and sold under an applicable exemption from registration requirements
under the Securities Act.

      In March 2003, a second subsidiary trust of the Company issued $10.0
million of floating rate trust preferred securities under terms similar to the
above securities at a rate of 5.29%. The proceeds will be used to pay down a
portion of the term loan and for general corporate purposes.

      Equity Offering

      On July 12, 2001, the Company entered into an Underwriting Agreement with
Banc of America Securities LLC and Raymond James & Associates, Inc., as
representatives of the underwriters named therein, and certain shareholders of
the Company, with respect to the sale of up to 7,950,000 shares of the Company's
common stock (including 750,000 shares of Common Stock subject to an
over-allotment option granted to the Underwriters by the Company and some of the
selling shareholders). As a result, on July 12, 2001, the Company issued five
million shares of common stock at a price of $5.00 per share, generating
proceeds of $25 million. Expenses for this transaction, including the
underwriters' discounts and commissions, amounted to $2.4 million, resulting in
net proceeds of $22.6 million to the Company. The proceeds from this offering
were used to enhance the capital and surplus of certain of our insurance
subsidiaries through capital contribution totaling $9.3 million ($5.0 million to
American Pioneer and $4.3 million to American Exchange), to reduce intercompany
obligations by $5.5 million and to hold the balance at the parent company for
general corporate purposes. In connection with this offering, certain
shareholders of the company, none of whom were management, sold 2.2 million
shares at $5.00 per share, less the underwriters' discounts and commissions of
$0.3187 per share.

      On August 13, 2001, the over-allotment option provided in the underwriting
agreement was exercised and, as a result, the Company issued an additional
720,000 shares of common stock at a price of $5.00 per share, less the
underwriters' discounts and commissions of $0.3187 per share, generating
additional net proceeds of $3.4 million. In connection with the over-allotment
option, certain shareholders sold an additional 30,000 shares at $5.00 per
share, less the underwriters' discounts and commissions of $0.3187 per share.

      The net proceeds to the Company of the total offering, including the
over-allotment, was $26.0 million, net of total expenses of $2.6 million.

      Affiliated Obligations of the Parent Company

      In connection with an agreement entered into in 1996 under which American
Pioneer became a direct subsidiary of our holding company rather than an
indirect subsidiary owned through American Progressive, our holding company
issued $7.9 million in debentures to American Progressive. A portion of the
proceeds from our equity offering in July 2001 was used to pay down $5.5 million
of the debentures. A scheduled redemption of $0.4 million was made in December
2002, leaving a balance at December 31,


                                       46
<PAGE>
2002 of $2.0 million, which is due in May 2003. Our holding company pays
interest on the outstanding debentures quarterly at a rate of 8.50%. During 2002
our parent holding company paid $0.1 million in interest on these debentures to
American Progressive, $0.5 million in 2001 and $0.7 million in 2000. The
interest on these debentures is eliminated in consolidation.

      In January 2002, our parent company issued a debenture in the amount of
$18.5 million to Pennsylvania Life in connection with the transfer of the
business of Pennsylvania Life's Canadian Branch to Penncorp Life (Canada). Our
parent company paid $4.4 million in principal during 2002, reducing the
outstanding balance to $14.1 million at December 31, 2002. Principal and
interest payments are made quarterly. The debenture is scheduled to be repaid in
full by the third quarter of 2005. During 2002, our parent holding company paid
$1.5 million in interest on these debentures. The interest on these debentures
is eliminated in consolidation. Dividends from Penncorp Life (Canada) funded the
interest and principal paid on the debenture in 2002 and it is anticipated that
they will fund all future payments made on this debenture.

      Administrative Service Company

      Liquidity for our administrative service company is measured by its
ability to pay operating expenses. The primary source of liquidity is fees
collected from clients. We believe that the sources of cash for our
administrative service company exceed scheduled uses of cash and results in
amounts available to dividend to our parent holding company. We measure the
ability of the administrative service company to pay dividends based on its
earnings before interest, taxes, depreciation and amortization ("EBITDA").
EBITDA for our administrative services segment was $10.5 million for the year
ended December 31, 2002, $9.7 million for the year ended December 31, 2001 and
$7.2 million for the year ended December 31, 2000.

      Insurance Subsidiary - Surplus Note

      Cash generated by our insurance company subsidiaries will be made
available to our holding company, principally through periodic payments of
principal and interest on surplus notes. As of December 31, 2002, the principal
amount of surplus notes owed to our holding company from our American Exchange
subsidiary was $60.0 million. The notes pay interest to our parent holding
company at LIBOR plus 375 basis points. We anticipate that the surplus notes
will be primarily serviced by dividends from Pennsylvania Life, a wholly owned
subsidiary of American Exchange, and by tax-sharing payments among the insurance
companies that are wholly owned by American Exchange and file a consolidated
Federal income tax return. During 2002, the surplus note was reduced by $10.0
million in the form of a capital contribution to American Exchange by our
holding company. No principal payments were made during 2001 or 2000. During
2002, American Exchange paid $3.8 million in interest on the surplus notes to
our parent holding company, $5.7 million in 2001 and $7.2 million in 2000.

      During 2002, Pennsylvania Life paid cash dividends amounting to $3.0
million to American Exchange. Universal American contributed the 100% of the
common stock of American Pioneer and American Progressive to American Exchange
during 2002. American Exchange also received capital contributions from its
parent totaling $4.2 million during the year. American Exchange made capital
contributions of $3.0 million to American Pioneer and $1.2 million to American
Progressive during 2002.

      During 2001, Union Bankers paid cash dividends amounting to $1.7 million
to American Exchange. In addition, the insurance companies included in the tax
allocation agreement with American Exchange paid $6.5 million in tax sharing
payments to American Exchange. In connection with the equity offering discussed
above, American Exchange received $4.3 million in capital contributions from its
parent. During 2001, American Exchange made cash capital contributions of $7.0
million to Pennsylvania Life.

      During 2000, Pennsylvania Life paid $2.9 million and Union Bankers paid
$2.0 million in dividends to American Exchange. In addition, the insurance
companies included in the tax allocation agreement with American Exchange paid
$4.8 million in tax sharing payments to American Exchange.

      Insurance Subsidiaries


                                       47
<PAGE>
      Our insurance subsidiaries are required to maintain minimum amounts of
capital and surplus as determined by statutory accounting practices. As of
December 31, 2002, each insurance company subsidiary's statutory capital and
surplus exceeded its respective minimum requirement. However, substantially more
than these minimum amounts are needed to meet statutory and administrative
requirements of adequate capital and surplus to support the current level of our
insurance subsidiaries' operations. As of December 31, 2002 the statutory
capital and surplus, including asset valuation reserves, of our U.S. domiciled
insurance subsidiaries totaled $106.5 million.

      The National Association of Insurance Commissioners has developed, and
state insurance regulators have adopted, risk-based capital requirements on life
insurance enterprises. As of December 31, 2002 all of our insurance company
subsidiaries maintained ratios of total adjusted capital to risk-based capital
in excess of the minimum trigger point for regulatory action.

      Penncorp Life (Canada) is subject to Canadian capital requirements and
report results to Canadian regulatory authorities based upon Canadian statutory
accounting principles that vary in some respects from U.S. statutory accounting
principles. Canadian net assets based upon Canadian statutory accounting
principles were $38.1 million as of December 31, 2002. Penncorp Life (Canada)
maintained a minimum continuing capital and surplus requirement ratio in excess
of the minimum requirement as of December 31, 2002.

      Dividend payments by our insurance companies to our parent holding company
or to intermediate subsidiaries are limited by, or subject to the approval of
the insurance regulatory authorities of each insurance company's state of
domicile. Such dividend requirements and approval processes vary significantly
from state to state. The maximum amount of dividends which can be paid to
American Exchange from Pennsylvania Life (to assist in servicing the surplus
note held by American Exchange) without the prior approval of the Pennsylvania
Department of Insurance is restricted to the greater of 10% of the Pennsylvania
Life's surplus as regards policyholders as of the preceding December 31 or the
net gain from operations during the preceding year, but such dividends can be
paid only out of unassigned surplus. Thus, future earnings of Pennsylvania Life
would be available for dividends without prior approval, subject to the
restrictions noted above. Based upon the current dividend regulations of
Pennsylvania, Pennsylvania Life would be able to pay ordinary dividends of up to
$10.6 million to American Exchange (its direct parent) without the prior
approval from Pennsylvania Department of Insurance in 2003. Additionally, it is
anticipated that Penncorp Life (Canada) would be able to pay ordinary dividends
of up to $6.6 million to Universal American in 2003. We do not expect that our
remaining regulated insurance subsidiaries will be able to pay ordinary
dividends in 2003.

      Liquidity for our insurance company subsidiaries is measured by their
ability to pay scheduled contractual benefits, pay operating expenses, and fund
investment commitments. Sources of liquidity include scheduled and unscheduled
principal and interest payments on investments, premium payments and deposits
and the sale of liquid investments. We believe that these sources of cash for
our insurance company subsidiaries exceed scheduled uses of cash.

      Liquidity is also affected by unscheduled benefit payments including death
benefits, benefits under accident and health insurance policies and
interest-sensitive policy surrenders and withdrawals. The amount of surrenders
and withdrawals is affected by a variety of factors such as credited interest
rates for similar products, general economic conditions and events in the
industry that affect policyholders' confidence. Although the contractual terms
of substantially all of our in force life insurance policies and annuities give
the holders the right to surrender the policies and annuities, we impose
penalties for early surrenders. As of December 31, 2002 we held reserves that
exceeded the underlying cash surrender values of our in force life insurance and
annuities by $18.3 million. Our insurance subsidiaries, in our view, have not
experienced any material changes in surrender and withdrawal activity in recent
years.

      Changes in interest rates may affect the incidence of policy surrenders
and withdrawals. In addition to the potential impact on liquidity, unanticipated
surrenders and withdrawals in a changed interest rate environment could
adversely affect earnings if we were required to sell investments at reduced
values in order to meet liquidity demands. We manage our asset and liability
portfolios in order to minimize the adverse earnings impact of changing market
rates. We seek to invest in assets that have duration and interest rate
characteristics similar to the liabilities that they support.


                                       48
<PAGE>
      The net yields on our cash and invested assets decreased from 6.78% in
2001 to 6.12% in 2002. A significant portion of these securities are held to
support the liabilities for policyholder account balances, which liabilities are
subject to periodic adjustments to their credited interest rates. The credited
interest rates of the interest-sensitive policyholder account balances are
determined by us based upon factors such as portfolio rates of return and
prevailing market rates and typically follow the pattern of yields on the assets
supporting these liabilities.

      As of December 31, 2002, our insurance company subsidiaries held cash and
cash equivalents totaling $23.5 million, as well as fixed maturity securities
that could readily be converted to cash with carrying values (and fair values)
of $954.5 million. The fair values of these holdings totaled more than $978.0
million as of December 31, 2002.

      Investments

      Our investment policy is to balance the portfolio duration to achieve
investment returns consistent with the preservation of capital and maintenance
of liquidity adequate to meet payment of policy benefits and claims. We invest
in assets permitted under the insurance laws of the various states in which we
operate. Such laws generally prescribe the nature, quality of and limitations on
various types of investments that may be made. However, we do not invest in
partnerships, special purpose entities, real estate, commodity contracts, or
other derivative securities. We currently engage the services of independent
professional insurance investment advisors under the direction of the management
of our insurance company subsidiaries and in accordance with guidelines adopted
by the Investment Committees of their respective boards of directors. Conning
Asset Management Company manages our fixed maturity portfolio in the United
States and MFC Global Investment Management manages our Canadian fixed maturity
portfolio. Our policy is not to invest in derivative programs or other hybrid
securities, except for GNMA's, FNMA's and investment grade corporate
collateralized mortgage obligations. We invest primarily in fixed maturity
securities of the U.S. Government and its agencies and in corporate fixed
maturity securities with investment grade ratings of "Baa3" (Moody's Investor
Service), "BBB-" (Standard & Poor's Corporation) or higher. As of December 31,
2002, 99.4% of our fixed maturity investments had investment grade ratings from
Moody's Investors Service or Standard & Poor's Corporation. However, we do own
some investments that are rated "BB+" or below by Standard & Poor's (together
0.6% of total fixed maturities as of December 31, 2002). There were no
non-income producing fixed maturities for the year ended December 31, 2002.
During the year ended December 31, 2002, we recognized other than temporary
declines in the value of certain fixed maturity securities of $10.6 million,
primarily as a result of the impairment of our WorldCom bonds, which were
disposed of in the third quarter of 2002 at a price approximating their carrying
value after recognition of the other than temporary decline. We recognized other
than temporary declines in the value of fixed maturity securities of $4.2
million and during 2001 and $0.5 million during 2000. In each case these
represent our estimate of the other than temporary declines in value and were
included in net realized gains (losses) on investments in our consolidated
statements of operations.

FEDERAL INCOME TAXATION OF THE COMPANY

      We file a consolidated return for Federal income tax purposes, in which
American Exchange and the companies acquired in 1999 are not currently permitted
to be included. As of December 31, 2002 we (exclusive of American Exchange and
the companies acquired in 1999) had net operating tax loss carryforwards of
approximately $2.7 million that expire in the years 2015 to 2016. As of December
31, 2002, we also had an Alternative Minimum Tax ("AMT") credit carryforward for
Federal income tax purposes of approximately $0.1 million that can be carried
forward indefinitely. As a result of the change in our ownership in July 1999,
use of most of our loss carryforwards is subject to annual limitations.

      American Exchange and the other U. S. companies acquired in 1999 file a
separate consolidated Federal income tax return. As of December 31, 2002, these
companies had net operating loss carryforwards, most of which were incurred
prior to their acquisition by us, of approximately $27.4 million that expire in
the years 2008 to 2017. As a result of the change in the ownership of the
companies acquired in 1999, use of most of these loss carryforwards is subject
to annual limitations.


                                       49
<PAGE>
      As of December 31, 2002 and 2001, we carried valuation allowances of $5.1
million and $6.8 million, respectively, with respect to our tax loss
carryforwards (deferred tax assets). We determine a valuation allowance based
upon an analysis of projected taxable income and our ability to implement
prudent and feasible tax planning strategies. The tax planning strategies
include the expense reductions anticipated from our recent reorganization and
from the income generated by our administrative services companies. As a result
of the increased profitability of the insurance subsidiaries acquired in 1999,
valuation allowances on certain of the life tax loss carryforwards were
considered not necessary at December 31, 2002. The amount of the valuation
allowance released during 2002 was $2.1 million and was recorded as a benefit in
the deferred income tax expense. As a result of the increased profitability of
the Administrative Services segment, valuation allowances on certain of the
non-life tax loss carryforwards were considered not necessary as of December 31,
2002. The amount of the valuation allowance released during 2002 was $0.1
million and was recorded as a benefit in the deferred income tax expense. These
decreases were partially offset by the establishment of a valuation allowance of
$0.5 million for certain capital losses incurred in 2002 by the Company that are
subject to limitation on their use. We believe it is more likely than not that
we will realize the recorded net deferred tax assets.

      Our U.S. insurance company subsidiaries, other than Peninsular Life
Insurance Company, are taxed as life insurance companies as provided in the
Internal Revenue Code. The Omnibus Budget Reconciliation Act of 1990 amended the
Internal Revenue Code to require a portion of the expenses incurred in selling
insurance products to be capitalized and amortized over a period of years, as
opposed to an immediate deduction in the year incurred. Instead of measuring
actual selling expenses, the amount capitalized for tax purposes is based on a
percentage of premiums. In general, the capitalized amounts are subject to
amortization over a ten-year period. Since this change only affects the timing
of the deductions, it does not, assuming stability of rates, affect the
provisions for taxes reflected in our financial statements prepared in
accordance with GAAP. However, by deferring deductions, the change does have the
effect of increasing the current tax expense, thereby reducing statutory
surplus. Because of our insurance company subsidiaries' net operating loss
carryforwards, there was no material increase in our current income tax
provision for any of the three years in the period ended December 31, 2002 due
to this provision.

EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes
an accounting model for long-lived assets to be disposed of by sale that applies
to all long-lived assets, including discontinued operations. SFAS 144 requires
that those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of SFAS 144 did not have a material impact on the Company's consolidated
financial condition or results of operations.

      In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations, requiring all business combinations to be accounted for
under the purchase method. Accordingly, net assets acquired are recorded at fair
value with any excess of cost over net assets assigned to goodwill. SFAS 141
also requires that certain intangible assets acquired in a business combination
be recognized apart from goodwill. The provisions of SFAS 141 apply to all
business combinations initiated after June 30, 2001. Adoption of SFAS 141 did
not have a material impact on the Company's consolidated financial condition or
results of operations.

      In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). Under SFAS 142, effective January 1, 2002 amortization of
goodwill is precluded; however, its recoverability must be periodically (at
least annually) reviewed and tested for impairment. Goodwill must be tested at
the reporting unit level for impairment in the year of adoption, including an
initial test performed within six months of adoption. If the initial test
indicates a potential impairment, then a more detailed analysis to determine the
extent of impairment must be completed within twelve months of adoption. During
the first quarter of 2002, the Company completed the review and analysis of its
goodwill asset in accordance with the provisions of SFAS 142. The result of
these analyses indicated that each


                                       50
<PAGE>
reporting unit's fair value exceeded its carrying amount, including goodwill. As
a result, goodwill for each reporting unit was not considered impaired. SFAS 142
also requires that useful lives for intangibles other than goodwill be
reassessed and remaining amortization periods be adjusted accordingly. Adoption
of SFAS 142 did not have a material impact on the Company's consolidated
financial condition or results of operations. The Company updated its review of
its good will assets during the fourth quarter of 2002 and determined that the
goodwill asset remained unimpaired.

      Effective April 1, 2001, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets"
("EITF 99-20"). Under the consensus, investors in certain securities with
contractual cash flows, primarily asset-backed securities, are required to
periodically update their best estimate of cash flows over the life of the
security. If the fair value of the securitized financial asset is less than its
carrying amount and there has been a decrease in the present value of the
estimated cash flows since the last revised estimate, considering both timing
and amount, an other than temporary impairment charge is recognized. The
estimated cash flows are also used to evaluate whether there have been any
changes in the securitized asset's estimated yield. All yield adjustments are
accounted for on a prospective basis. Adoption of EITF 99-20 did not have a
material impact on the Company's consolidated financial condition or results of
operations.

      Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
SFAS Nos. 137 and 138. The standard requires, among other things, that all
derivatives be carried on the balance sheet at fair value. The standard also
specifies hedge accounting criteria under which a derivative can qualify for
special accounting. In order to receive special accounting, the derivative
instrument must qualify as a hedge of either the fair value or the variability
of the cash flow of a qualified asset or liability, or forecasted transaction.
Special accounting for qualifying hedges provides for matching the timing of
gain or loss recognition on the hedging instrument with the recognition of the
corresponding changes in value of the hedged item. The Company does not
currently have any derivative instruments and therefore adoption of SFAS 133 did
not have a material impact on the Company's consolidated financial condition or
results of operations.

PENDING ACCOUNTING PRONOUNCEMENTS

      In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 requires any gain or loss on extinguishments
of debt to be presented as a component of continuing operations (unless specific
criteria are met) whereas SFAS No. 4 required that such gains and losses be
classified as an extraordinary item in determining net income. The Company will
adopt these provisions on January 1, 2003, as required. The other provisions of
SFAS No. 145 were not relevant to the Company.

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
costs associated with exit or disposal activities (including restructurings) to
be recognized when the costs are incurred, rather than at a date of commitment
to an exit or disposal plan. This standard nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS 146, a liability related to an exit or disposal activity is not
recognized until such liability has actually been incurred whereas under EITF
Issue No. 94-3 a liability was recognized at the time of a commitment to an exit
or disposal plan. The provisions of this standard are effective for exit or
disposal activities initiated after December 31, 2002. The Company will adopt
this standard on January 1, 2003, as required.

      On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"). This standard
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. This standard also
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As permitted by SFAS 123, the
Company measured its stock-based compensation using


                                       51
<PAGE>
the intrinsic value approach under Accounting Principles Board ("APB") Opinion
No. 25. Accordingly, the Company did not recognize compensation expense upon the
issuance of its stock options because the option terms were fixed and the
exercise price equaled the market price of the underlying common stock on the
grant date. The Company complied with the disclosure provisions of SFAS 148 by
providing pro forma disclosures of net income and related per share data giving
consideration to the fair value method provisions of SFAS 123.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      In general, market risk relates to changes in the value of financial
instruments that arise from adverse movements in interest rates, equity prices
and foreign exchange rates. We are exposed principally to changes in interest
rates that affect the market prices of our fixed income securities.

      Interest Rate Sensitivity

      Our profitability could be affected if we were required to liquidate fixed
income securities during periods of rising and/or volatile interest rates.
However, we attempt to mitigate our exposure to adverse interest rate movements
through a combination of active portfolio management and by staggering the
maturities of our fixed income investments to assure sufficient liquidity to
meet our obligations and to address reinvestment risk considerations. Our
insurance liabilities generally arise over relatively long periods of time,
which typically permits ample time to prepare for their settlement. To date, we
have not used various financial risk management tools on our investment
securities, such as interest rate swaps, forwards, futures and options to modify
our exposure to changes in interest rates. However, we may consider using risk
management tools in the future.

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

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

      The sensitivity analysis of interest rate risk assumes an instantaneous
shift in a parallel fashion across the yield curve, with scenarios of interest
rates increasing and decreasing 100 and 200 basis points from their levels as of
December 31, 2002, and with all other variables held constant. A 100 basis point
increase in market interest rates would result in a pre-tax decrease in the
market value of our fixed income investments of $54.1 million and a 200 basis
point increase in market interest rates would result in $104.6 million decrease.
Similarly, a 100 basis point decrease in market interest rates would result in a
pre-tax increase in the market value of our fixed income investments of $54.7
million and a 200 basis point decrease in market interest rates would result in
a $114.7 million increase.

      Currency Exchange Rate Sensitivity

      Portions of our operations are transacted using the Canadian dollar as the
functional currency. As of and for the year ended December 31, 2002,
approximately 12.5% of our assets, 16.6% of our revenues, excluding realized
gains, and 22.3% of our operating income before taxes were derived from our
Canadian operations. As of and for the year ended December 31, 2001,
approximately 13.7% of our assets, 19.1% of our revenues, excluding realized
gains, and 36.0% of our operating income before taxes were derived from our
Canadian operations. Accordingly, our earnings and shareholder's equity are
affected by fluctuations in the value of the U.S. dollar as compared to the
Canadian dollar. Although this risk is somewhat mitigated by the fact that both
the assets and liabilities for our foreign operations are denominated in
Canadian dollars, we are still subject to translation losses.


                                       52
<PAGE>
      We periodically conduct various analyses to gauge the financial impact of
changes in the foreign currency exchange rate on our financial condition. The
ranges selected in these analyses reflect our assessment of what is reasonably
possible over the succeeding twelve-month period.

      As of December 31, 2002, a 10% strengthening of the U.S. dollar relative
to the Canadian dollar would result in a decrease in our operating income before
taxes of approximately $1.0 million and a decrease in shareholders' equity of
approximately $3.3 million. A 10% weakening of the U.S. dollar relative to the
Canadian dollar would result in an increase in our operating income before taxes
of approximately $1.2 million and an increase in shareholders' equity of
approximately $4.0 million. Our sensitivity analysis of the effects of changes
in foreign currency exchange rates does not factor in any potential change in
sales levels, local prices or any other variables.

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

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

      None


                                       53
<PAGE>
                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The following table sets forth information regarding our executive
officers and directors:

<TABLE>
<CAPTION>
NAME                                                AGE        POSITION
-----------------------------------------------     ---        -----------------------------------------------------------
<S>                                                 <C>        <C>
Richard A. Barasch (4) ........................     49         Chairman of the Board of Directors, President and Chief
                                                               Executive Officer; Director and President of American
                                                               Progressive; and Chairman of the Board of all our other
                                                               subsidiaries.

Robert A. Waegelein, C.P.A (3).................     42         Executive Vice President and Chief Financial Officer;
                                                               Director of all subsidiaries

Gary W. Bryant ................................     53         Executive Vice President and Chief Operating Officer of the
                                                               Company; President, Chief Executive Officer and Director of
                                                               American Pioneer; Vice Chairman of American Progressive and
                                                               Pennsylvania Life and Director, President and Chief
                                                               Executive Officer of American Exchange, Constitution Life,
                                                               Marquette National Life, Peninsular Life and Union Bankers.

William E. Wehner, C.L.U. .....................     59         President and Director of Pennsylvania Life; and Senior
                                                               Vice President and Chief Marketing Officer of American
                                                               Pioneer and other subsidiaries.

Bradley E. Cooper (3) (4) .....................     36         Director

Susan S. Fleming (2)...........................     32         Director

Mark M. Harmeling (2)..........................     50         Director

Bertram Harnett (3) (4) .......................     79         Director

Patrick J. McLaughlin (1) (3) (4) .............     44         Director

Robert A. Spass (4) ...........................     47         Director

Francis S. Wilson (1) (2)......................     54         Director

Robert F. Wright (1)...........................     77         Director
</TABLE>

----------
(1)   Member of the Audit Committee.
(2)   Member of the Compensation Committee.
(3)   Member of the Investment Committee.
(4)   Member of the Executive Committee.


                                       54
<PAGE>
      RICHARD A. BARASCH. Mr. Barasch has served as a Director since July 1988,
as Chairman since December 1997, as President since April 1991 and as Chief
Executive Officer since June 1995. He has served as a Director and the President
of American Progressive since 1991, and he is Chairman of the Board of all of
our subsidiaries. Mr. Barasch has held positions with our subsidiaries since
their acquisition or organization.

      ROBERT A. WAEGELEIN, C.P.A. Mr. Waegelein has served as our Executive Vice
President and Chief Financial Officer since October 1990 and has been Chief
Financial Officer of each of our subsidiaries since they were acquired or
organized. Prior to that, Mr. Waegelein, a certified public accountant, was
employed by KPMG Peat Marwick LLP, the company's then independent public
accountants, in positions of increasing responsibility, finally serving as
Senior Manager.

      GARY W. BRYANT. Mr. Bryant has served as Executive Vice President since
June 1995 and Chief Operating Officer since June 2000. He has also been a
Director, President and Chief Executive Officer of American Pioneer since April
1983, Vice Chairman of American Progressive and Pennsylvania Life since 2001 and
a Director, President and Chief Executive Officer of American Exchange since
December 1997. In addition, Mr. Bryant has served as a Director and President of
Constitution Life, Marquette, Peninsular Life and Union Bankers since March
2000. Mr. Bryant has also served as the Chairman of the Board of CHCS Services,
Inc. since January 2000.

      WILLIAM E. WEHNER, C.L.U. Mr. Wehner has served as a Director and as
President of Pennsylvania Life since April 2000. Mr. Wehner has also been Senior
Vice President and Chief Marketing Officer of American Pioneer and other
subsidiaries since November 1997. Mr. Wehner was employed for over twenty years
by Mutual Life Insurance Company of New York and its affiliates in positions of
increasing responsibility, finally serving as Vice President for Group
Insurance.

      BRADLEY E. COOPER. Mr. Cooper has served as a Director since July 1999.
Mr. Cooper is a Partner and co-founder of Capital Z Financial Services Fund II
L.P. which owns 47.8% of our outstanding stock. Prior to joining Capital Z, Mr.
Cooper served in similar roles at Insurance Partners, L.P. and International
Insurance Investors, L.P. Prior to that, Mr. Cooper was an investment banker in
the Financial Institutions Group at Salomon Brothers, Inc. Mr. Cooper currently
serves on the board of directors of PXRE Group, Ltd., Highlands Insurance Group
and CERES Group, Inc.

      SUSAN S. FLEMING. Ms. Fleming has served as a Director since July 1999.
She is a Partner of Capital Z Financial Services Fund II L.P. Prior to joining
Capital Z, Ms. Fleming served as Vice President of Insurance Partners, L.P. and
was an investment banker in the Mergers and Acquisitions Financial Institutions
Group at Morgan Stanley & Co. Ms. Fleming currently serves on the Board of
Directors of PXRE Group, Ltd., and CERES Group, Inc.

      MARK M. HARMELING. Mr. Harmeling has served as a Director since July 1990.
He has also served as Director of American Progressive from 1992 to 1999. Mr.
Harmeling is a Managing Director of TA Associates Realty, a pension fund
advisory firm. He was previously President of Bay State Realty Advisors, a real
estate management and development company. Mr. Harmeling is also a Director of
Rochester Shoetree Corporation (since 1988) and Applied Extrusion Technologies,
Inc. (since 1987).

      BERTRAM HARNETT. Mr. Harnett has served as a Director since 1996. Mr.
Harnett has been a practicing lawyer since 1948 and has been President of the
law firm of Harnett Lesnick & Ripps P.A., Boca Raton, Florida and its
predecessors since 1988. He is the author of treatises on insurance law and is a
former Justice of the New York State Supreme Court.

      PATRICK J. MCLAUGHLIN. Mr. McLaughlin has served as a Director since
January 1995. Mr. McLaughlin has been a Managing Director of Emerald Capital
Group, Ltd., an asset management and consulting firm specializing in the
insurance industry, since April 1993. Prior to that he was an Executive Vice
President and Chief Investment Officer of Life Partners Group, Inc., Managing
Director of Conning & Company and Senior Vice President and Chief Investment
Officer of ICH Corporation. Mr. McLaughlin currently serves on the Board of
Directors of UICI.


                                       55
<PAGE>
      ROBERT A. SPASS. Mr. Spass has served as a Director since July 1999. Mr.
Spass is a Partner and co-founder of Capital Z. Prior to founding Capital Z, Mr.
Spass was the Managing Partner and co-founder of Insurance Partners, L.P. Prior
to the formation of Insurance Partners, Mr. Spass was President and CEO of
International Insurance Advisors Inc. Prior to that, Mr. Spass was a Director of
Investment Banking at Salomon Brothers and a Senior Manager for Peat Marwick
Main & Co. Mr. Spass serves on the board of directors of Highlands Insurance
Group, Inc., Lending Tree, Inc., CERES Group, Inc., Endurance Holdings, Inc.,
Aames Financial Corp. and USI Holdings Corporation.

      FRANCIS S. WILSON. Mr. Wilson has served as a Director since October 2001.
Mr. Wilson has been a managing partner of AAM Investment Banking Group, Ltd.
since October 1993. Prior to that, Mr. Wilson was the chairman of Highland
Development Corp. Prior to that, Mr. Wilson held various positions in the field
of investment banking with the firms Prescott Ball & Turben, Inc., Dean Witter
Reynolds, Inc. and Halsey, Stuary & Co., Inc. Mr. Wilson is a director of
INFOCUS Financial Group, Inc. and Wasatch Crest Group, Inc.

      ROBERT F. WRIGHT. Mr. Wright has served as a Director since June 1998. Mr.
Wright has been President of Robert F. Wright Associates, Inc. since 1988. Prior
to that, Mr. Wright was a senior partner of the public accounting firm of Arthur
Andersen LLP. Mr. Wright is Director of Reliance Standard Life Insurance Company
(and its affiliates), GVA Williams, The Navigators Group, Inc., U.S. Timberlands
Company, L.P, CDG Technology and USI Holdings Corporation.

      All of the executive officers listed above devote their full business time
to the Company. All of our officers and directors are elected annually for
one-year terms. All officers and directors hold office until their successors
are duly elected and qualified.

      Our by-laws provide that our Board of Directors shall set the number of
directors. Our Board of Directors currently consists of nine directors.

      Our Board of Directors has an Audit Committee, a Transactions Committee, a
Compensation Committee, an Investment Committee and an Executive Committee. The
Audit Committee is composed of independent directors within the meaning of the
NASDAQ listing rules and has adopted a charter which, among other things,
empowers it to consult with our independent auditors with respect to their audit
plans and to review their audit report and the accompanying management letters,
The Transactions Committee reviews and makes recommendations to our Board on
certain transactions entertained by us. The Compensation Committee reviews and
recommends compensation, including stock-based compensation, for our officers.
The Investment Committee reviews the Company's investment policy and guidelines,
reviews portfolio performance and reviews and approves all investment
transactions. The Executive Committee has the authority to act between Board
meetings on behalf of our Board, on all matters allowed by law.

      Additional information regarding our directors and executive officers is
incorporated by reference to our definitive proxy statement to be filed pursuant
to Regulation 14A under the Securities Exchange Act of 1934 within 120 days
after the end of our fiscal year ended December 31, 2002.

ITEM 11 - EXECUTIVE COMPENSATION

      Information regarding executive compensation is incorporated by reference
to our definitive proxy statement to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 within 120 days after the end of our fiscal
year ended December 31, 2002.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Information regarding beneficial ownership of our voting securities by
directors, officers and persons who, to the best knowledge of us, are known to
be the beneficial owners of more than 5% of our voting securities as of December
31, 2002, is incorporated by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
within 120 days after the end of our fiscal year ended December 31, 2002.


                                       56
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information regarding certain relationships and related transactions is
incorporated by reference to our definitive proxy statement to be filed pursuant
to Regulation 14A under the Securities Exchange Act of 1934 within 120 days
after the end of our fiscal year ended December 31, 2002.

ITEM 14. - DISCLOSURE CONTROLS AND PROCEDURES

      Evaluation of Disclosure

      The Company's principal executive officer and its principal financial
officer, based on their evaluation of the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within 90
days prior to the filing of this Annual Report on Form 10-K, have concluded that
the Company's disclosure controls and procedures are adequate and effective for
the purposes set forth in the definition thereof in Exchange Act Rule 13a-14(c).

      Changes in Internal Controls

      There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation.

                                     PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   DOCUMENTS FILED AS PART OF THIS REPORT:

      1     FINANCIAL STATEMENTS

            See separate index to Financial Statements and Financial Statement
            Schedules on Page F - 1.

      2     FINANCIAL STATEMENT SCHEDULES

            See separate index to Financial Statements and Financial Statement
            Schedules on Page F - 1.

      3     EXHIBITS

            3(a)  Restated Certificate of Incorporation filed March 30, 2000,
                  incorporated by reference to Exhibit A of Form 8-K dated March
                  16, 2001.

            3(b)  By-Laws, as amended, incorporated by reference to Exhibit A to
                  Form 8-K dated August 13, 1999.

            4     Instruments defining rights of securityholders. See Exhibits
                  3(a) and 10(e)

            10(a) Amended and Restated Purchase Agreement among the Company,
                  dated December 31, 1999, as amended and restated on July 2,
                  1999, between Universal American, PennCorp Financial Group,
                  Inc. ("PFG") and several of PFG's subsidiaries, incorporated
                  by reference to Annex B of Proxy Statement dated July 12,
                  1999.


                                       57
<PAGE>
            10(b) Share Purchase Agreement, as of December 31, 1998, between the
                  Company and Capital Z Financial Services Fund II, L.P. as
                  amended by Amendment, dated as of July 2, 1999, incorporated
                  by reference to Annex A of Proxy Statement dated July 12,
                  1999.

            10(c) Shareholders Agreement dated July 30, 1999, among the Company,
                  Capital Z Financial Services Fund II, L.P., UAFC, L.P., AAM
                  Capital Partners, L.P., Chase Equity Associates, L.P., Richard
                  A. Barasch and others, incorporated by reference to Exhibit A
                  of Form 8-K dated August 13, 1999.

            10(d) Registration Rights Agreement, dated July 30, 1999, among the
                  Company, Capital Z Financial Services Fund II, L.P.,
                  Wand/Universal American Investments L.P.I., Wand/Universal
                  American Investments L.P. II, Chase Equity Associates, L.P.,
                  Richard A. Barasch and others, incorporated by reference to
                  Exhibit A to Form 8-K dated August 13, 1999.

            10(e) Credit Agreement dated as of July 30, 1999, among the
                  Registrant and the Chase Manhattan Bank as agent, the lender
                  and signatory thereto, incorporated by reference to Exhibit C
                  to Form 8-KA dated March 16, 2001.

            10(f) Employment Contracts, between Registrant and the following
                  officers:
                  Richard A. Barasch, dated July 30, 1999
                  Robert A. Waegelein, dated July 30, 1999
                  Gary W. Bryant, dated July 30, 1999
                  William E. Wehner, dated July 30, 1999
                  incorporated by reference to Exhibits D and E to Form 8-KA
                  dated March 16, 2001.

            10(g) Agent Equity Plan for Agents of Penn Union Companies
                  incorporated by reference to Amendment 1 to Registration
                  Statement on Form S-2, dated July 13, 2000.

            10(h) Agent Equity Plan for Regional Managers and Sub Managers of
                  Penn Union Companies incorporated by reference to Amendment 1
                  to Registration Statement on Form S-2, dated July 13, 2000.

            10(i) 1998 Incentive Compensation Plan, incorporated by reference to
                  Annex A of Definitive Proxy Statement filed on Form 14A dated
                  April 29, 1998.

            10(j) Purchase Agreement Dated as of December 20, 2002, by and among
                  Universal American Financial Corp., Pennsylvania Life
                  Insurance Company, Ceres Group, Inc. and Continental General
                  Insurance Company incorporated by reference to Form 8-K dated
                  December 20, 2002.

            11    Computation of basic and diluted earnings per share, Statement
                  of Financial Accounting Standards No. 128, Earnings Per Share,
                  incorporated by reference to Note 18 of Notes to Consolidated
                  Financial Statements for 2002, included in this Form 10-K.


                                       58
<PAGE>
            12    List of Subsidiaries:

<TABLE>
<CAPTION>
                                                                               State of              Percentage
            Name                                                               Incorporation         Owned
            ----                                                               -------------         -----
<S>                                                                            <C>                   <C>
            American Exchange Life Insurance Company                           Texas                 100%
            American Pioneer Life Insurance Company                            Florida               100%
            American Progressive Life & Health Insurance Company
               of New York                                                     New York              100%
            CHCS, Inc.                                                         Florida               100%
            CHCS Services, Inc.                                                Florida               100%
            Constitution Life Insurance Company                                Texas                 100%
            Marquette National Life Insurance Company                          Texas                 100%
            Peninsular Life Insurance Company                                  Florida               100%
            Penncorp Life Insurance Company                                    Ontario, Canada       100%
            Pennsylvania Life Insurance Company                                Pennsylvania          100%
            Security Health Providers, Inc.                                    Delaware              100%
            Union Bankers Insurance Company                                    Texas                 100%
            Universal American Financial Corp. Statutory Trust I               Connecticut           100%
            Universal American Services, Inc.                                  Delaware              100%
            WorldNet Services Corp.                                            Florida               100%
</TABLE>

            23(a) Consent of Ernst & Young LLP

            99.1  Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

            99.2  Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)   REPORTS ON FORM 8-K DURING THE FOURTH QUARTER OF 2002

      Form 8-K filed December 23, 2002 (dated December 20, 2002) regarding the
      announcement of the signing of definitive agreement to acquire Pyramid
      Life Insurance Company Incorporated by reference.

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
March 2003.

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                  (Registrant)


                           By: /s/ Richard A. Barasch
                              -----------------------
                               Richard A. Barasch
                 Chairman, President and Chief Executive Officer


                                       59
<PAGE>
      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 28, 2003 by the following persons in the
capacities indicated:

<TABLE>
<CAPTION>
Signatures                               Title
----------                               -----
<S>                                      <C>
/s/ Richard A. Barasch                   Chairman of the Board, President,
------------------------------           Chief Executive Officer and Director
Richard A. Barasch                       (Principal Executive Officer)

/s/ Robert A. Waegelein                  Executive Vice President and Chief
------------------------------           Financial Officer
Robert A. Waegelein                      (Principal Accounting Officer)

/s/ Bradley E. Cooper                    Director
------------------------------
Bradley E. Cooper

/s/ Susan S. Fleming                     Director
------------------------------
Susan S. Fleming

/s/ Mark M. Harmeling                    Director
------------------------------
Mark M. Harmeling

/s/ Bertram Harnett                      Director
------------------------------
Bertram Harnett

/s/ Patrick J. McLaughlin                Director
------------------------------
Patrick J. McLaughlin

/s/ Robert A. Spass                      Director
------------------------------
Robert A. Spass

/s/ Francis S. Wilson                    Director
------------------------------
Francis S. Wilson

/s/ Robert F. Wright                     Director
------------------------------
Robert Wright
</TABLE>


                                       60
<PAGE>
                                  CERTIFICATION

I, Richard A. Barasch, certify that:

      1.    I have reviewed this annual report on Form 10-K of Universal
            American Financial Corp.;

      2.    Based on my knowledge, this annual report does not contain any
            untrue statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this annual report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this annual report, fairly present in all
            material respects the financial condition, results of operations and
            cash flows of the registrant as of, and for, the periods presented
            in this annual report;

      4.    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
            and have:

            a)    designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

            b)    evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

            c)    presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

      5.    The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation to the registrant's auditors and
            the audit committee of registrant's board of directors (or persons
            performing the equivalent functions):

            a)    all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

            b)    any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

      6.    The registrant's other certifying officer and I have indicated in
            this annual report whether there were significant changes in
            internal controls or in other factors that could significantly
            affect internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

Date: March 28, 2003


                                                    /s/ Richard A. Barasch
                                                   ---------------------------
                                                   Richard A. Barasch
                                                   Chief Executive Officer


                                       61
<PAGE>
                                  CERTIFICATION

I, Robert A. Waegelein, certify that:

      1.    I have reviewed this annual report on Form 10-K of Universal
            American Financial Corp.;

      2.    Based on my knowledge, this annual report does not contain any
            untrue statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this annual report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this annual report, fairly present in all
            material respects the financial condition, results of operations and
            cash flows of the registrant as of, and for, the periods presented
            in this annual report;

      4.    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
            and have:

            a)    designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

            b)    evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

            c)    presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

      5.    The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation to the registrant's auditors and
            the audit committee of registrant's board of directors (or persons
            performing the equivalent functions):

            a)    all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

            b)    any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

      6.    The registrant's other certifying officer and I have indicated in
            this annual report whether there were significant changes in
            internal controls or in other factors that could significantly
            affect internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

Date: March 28, 2003


                                                  /s/ Robert A. Waegelein
                                                 ---------------------------
                                                 Robert A. Waegelein
                                                 Chief Financial Officer


                                       62
<PAGE>
               UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES OF THE REGISTRANT:

<TABLE>
<S>                                                                                        <C>
Independent Auditors' Reports                                                              F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001                               F-3

Consolidated Statements of Operations
 for the Three Years Ended December 31, 2002                                               F-4

Consolidated Statements of Stockholders' Equity and Comprehensive Income
 for the Three Years Ended December 31, 2002                                               F-5

Consolidated Statements of Cash Flows
 for the Three Years Ended December 31, 2002                                               F-6

Notes to Consolidated Financial Statements                                                 F-7

Schedule I -- Summary of Investments - other than investments in related parties          F-38

Schedule II -- Condensed Financial Information of Registrant                              F-39

               Notes to Condensed Financial Information                                   F-42

Schedule III -- Supplementary Insurance Information                                       F-43

Schedule IV - Reinsurance
                (incorporated in Note 12 to the Consolidated Financial Statements)

Schedule V - Valuation and Qualifying Accounts
                (incorporated in Note 6 to the Consolidated Financial Statements)

Other schedules were omitted because they were not applicable
</TABLE>
<PAGE>
                          Independent Auditors' Report

The Board of Directors and Stockholders
Universal American Financial Corp.:

We have audited the accompanying consolidated balance sheets of Universal
American Financial Corp. and subsidiaries as of December 31, 2002 and 2001 and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedules listed in the Index at Item 15(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Universal American Financial Corp. and subsidiaries at December 31, 2002 and
2001 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.


                                                           /s/ Ernst & Young LLP
New York, New York
February 20, 2003


                                      F-2
<PAGE>
               UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
ASSETS                                                                                   2002             2001
                                                                                      -----------      -----------
<S>                                                                                   <C>              <C>
Investments (Notes 2 and 5):
  Fixed maturities available for sale, at fair value
    (amortized cost: 2002, $884,054; 2001, $786,844)                                  $   934,950      $   799,218
  Equity securities, at fair value (cost: 2002, $1,661; 2001, $4,339)                       1,645            4,199
  Policy loans                                                                             23,745           24,043
  Other invested assets                                                                     2,808            3,773
                                                                                      -----------      -----------
    Total investments                                                                     963,148          831,233

Cash and cash equivalents                                                                  36,754           47,990
Accrued investment income                                                                  11,885           12,663
Deferred policy acquisition costs (Notes 2 and 10)                                         92,093           66,025
Amounts due from reinsurers (Note 12)                                                     220,100          212,532
Due and unpaid premiums                                                                     6,066            3,385
Deferred income tax asset (Note 6)                                                         35,842           59,952
Present value of future profits and goodwill (Notes 2 and 3)                               10,960           11,921
Other assets                                                                               24,820           24,515
                                                                                      -----------      -----------
    Total assets                                                                        1,401,668        1,270,216
                                                                                      ===========      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Policyholder account balances (Note 2)                                                    271,578          236,742
Reserves for future policy benefits                                                       627,174          591,453
Policy and contract claims - life                                                           6,718            6,282
Policy and contract claims - health (Note 11)                                              88,216           79,596
Loan payable (Note 13)                                                                     50,775           61,475
Company obligated mandatorily redeemable preferred securities of subsidiary trust
   holding solely junior subordinated debentures (Note 14)                                 15,000               --
Amounts due to reinsurers                                                                   7,285            6,680
Other liabilities                                                                          48,153           57,218
                                                                                      -----------      -----------
    Total liabilities                                                                   1,114,899        1,039,446
                                                                                      -----------      -----------

Commitments and contingencies (Note 15)

STOCKHOLDERS' EQUITY (Notes 7 and 8)
Common stock (Authorized: 80 million shares, issued and outstanding:
   2002, 53.2 million shares; 2001, 52.8 million shares)                                      532              528
Additional paid-in capital                                                                158,264          155,746
Accumulated other comprehensive income (Notes 7 and 19)                                    29,887            5,603
Retained earnings                                                                          99,406           69,279
Less: Treasury stock (2002, 0.2 million shares; 2001, 0.1 million shares)                  (1,320)            (386)
                                                                                      -----------      -----------
    Total stockholders' equity                                                            286,769          230,770
                                                                                      -----------      -----------
    Total liabilities and stockholders' equity                                        $ 1,401,668      $ 1,270,216
                                                                                      ===========      ===========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-3
<PAGE>
               UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2002
                  (IN THOUSANDS, PER SHARE AMOUNTS IN DOLLARS)

<TABLE>
<CAPTION>
                                                            2002           2001          2000
                                                         ---------      ---------      ---------
<S>                                                      <C>            <C>            <C>
REVENUE:
Direct premiums and policyholder fees earned             $ 586,686      $ 513,575      $ 451,323
Reinsurance premiums assumed                                 5,075          2,549          3,055
Reinsurance premiums ceded                                (325,184)      (286,918)      (234,625)
                                                         ---------      ---------      ---------
Net premiums and policyholder fees earned (Note 12)        266,577        229,206        219,753
Net investment income (Note 5)                              57,716         57,812         56,945
Realized gains (losses) on investments (Note 5)             (5,083)         3,078            146
Fee and other income                                        12,313         10,847          7,247
                                                         ---------      ---------      ---------
              Total revenues                               331,523        300,943        284,091
                                                         ---------      ---------      ---------

BENEFITS, CLAIMS AND EXPENSES:
Net increase in future policy benefits                      12,880         10,450          6,968
Net claims and other benefits                              168,526        154,570        146,951
Interest credited to policyholders                          10,963         10,271         10,130
Net increase in deferred acquisition costs (Note 10)       (27,850)       (19,186)       (15,925)
Amortization of present value of future profits
 and goodwill (Note 3)                                       1,642          2,637          2,749
Commissions                                                115,074         99,026         82,903
Commission and expense allowances
  on reinsurance ceded                                     (94,689)       (87,122)       (69,757)
Interest expense                                             3,095          5,152          7,097
Other operating costs and expenses                          97,852         81,782         79,909
                                                         ---------      ---------      ---------
               Total benefits, claims and expenses         287,493        257,580        251,025
                                                         ---------      ---------      ---------

Income before taxes                                         44,030         43,363         33,066
Income tax expense (Note 6)                                 13,903         14,438         10,181
                                                         ---------      ---------      ---------

Net income applicable to common shareholders             $  30,127      $  28,925      $  22,885
                                                         =========      =========      =========
Earnings per common share (Notes 2 and 18):
  Basic                                                  $    0.57      $    0.58      $    0.49
                                                         =========      =========      =========
  Diluted                                                $    0.56      $    0.57      $    0.49
                                                         =========      =========      =========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-4
<PAGE>
               UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2002
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         Accumulated
                                                          Additional         Other
                                              Common       Paid-In       Comprehensive      Retained     Treasury
                                              Stock        Capital      Income / (Loss)     Earnings       Stock          Total
                                             -------     ------------   ---------------     --------     --------       ---------
<S>                                          <C>         <C>            <C>                 <C>          <C>            <C>
Balance, January 1, 2000                     $   459      $122,924         $ (6,887)         $17,469      $    --       $ 133,965

Net income                                        --            --               --           22,885           --          22,885
Other comprehensive income
  (Note 19)                                       --            --           11,762               --           --          11,762

Comprehensive income                                                                                                       34,647

Issuance of common stock (Note 7)                  9         3,289               --               --           --           3,298
Stock-based compensation (Note 8)                 --         2,388               --               --           --           2,388
Loans to officers (Note 7)                        --            13               --               --           --              13
Treasury shares purchased, at
   cost (Note 7)                                  --            --               --               --         (711)           (711)
Treasury shares reissued (Note 7)                 --            11               --               --          338             349
                                             -------      --------         --------          -------      -------       ---------
Balance, December 31, 2000                       468       128,625            4,875           40,354         (373)        173,949

Net income                                        --            --               --           28,925           --          28,925
Other comprehensive income
  (Note 19)                                       --            --              728               --           --             728

Comprehensive income                                                                                                       29,653

Issuance of common stock (Note 7)                 60        26,168               --               --           --          26,228
Stock-based compensation (Note 8)                 --           863               --               --           --             863
Loans to officers (Note 7)                        --            68               --               --           --              68
Treasury shares purchased, at
  cost (Note 7)                                   --            --               --               --         (764)           (764)
Treasury shares reissued (Note 7)                 --            22               --               --          751             773
                                             -------      --------         --------          -------      -------       ---------
Balance, December 31, 2001                       528       155,746            5,603           69,279         (386)        230,770

Net income                                        --            --               --           30,127           --          30,127
Other comprehensive income
  (Note 19)                                       --            --           24,284               --           --          24,284

Comprehensive income                                                                                                       54,411

Issuance of common stock (Note 7)                  4         1,016               --               --           --           1,020
Stock-based compensation (Note 8)                 --         1,412               --               --           --           1,412
Loans to officers (Note 7)                        --            10               --               --           --              10
Treasury shares purchased, at
  cost (Note 7)                                   --            --               --               --       (1,520)         (1,520)
Treasury shares reissued (Note 7)                 --            80               --               --          586             666
                                             -------      --------         --------          -------      -------       ---------
Balance, December 31, 2002                   $   532      $158,264         $ 29,887          $99,406      $(1,320)      $ 286,769
                                             =======      ========         ========          =======      =======       =========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-5
<PAGE>
               UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2002
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       2002              2001                2000
                                                                                    ---------          ---------          ---------
<S>                                                                                 <C>                <C>                <C>
Cash flows from operating activities:
Net income                                                                          $  30,127          $  28,925          $  22,885
Adjustments to reconcile net income to net cash
  provided by operating activities:
Deferred income taxes                                                                   9,404              8,695              7,011
Change in reserves for future policy benefits                                          33,780             22,885              3,142
Change in policy and contract claims                                                    9,055                788              7,185
Change in deferred policy acquisition costs                                           (27,850)           (19,186)           (15,925)
Amortization of present value of future profits and goodwill                            1,642              2,637              2,749
Amortization of bond premium, net                                                      (3,716)            (3,770)            (2,748)
Change in policy loans                                                                    298              1,035                563
Change in accrued investment income                                                       778             (1,203)              (410)
Change in reinsurance balances                                                         (7,983)            (4,844)             1,155
Realized loss (gain) on investments                                                     5,083             (3,078)              (146)
Change in restructuring liability                                                          --             (2,776)            (7,025)
Change in income taxes payable                                                         (1,143)             1,452              1,711
Other, net                                                                               (810)               116               (564)
                                                                                    ---------          ---------          ---------
Net cash provided by operating activities                                              48,665             31,676             19,583
                                                                                    ---------          ---------          ---------

Cash flows from investing activities:
Proceeds from sale or redemption of fixed maturities                                  266,541            323,608            113,177
Cost of fixed maturities purchased                                                   (362,141)          (364,699)          (127,255)
Proceeds from sale of equity securities                                                 2,842                612              1,896
Cost of equity securities purchased                                                      (640)            (1,480)              (534)
Change in other invested assets                                                           965                160              1,158
Change in due from/to broker                                                           (4,362)                --                 --
Other investing activities                                                             (2,539)            (1,687)            (3,105)
Purchase of business, net of cash acquired                                                 --             (1,544)            (6,365)
                                                                                    ---------          ---------          ---------
Net cash used by investing activities                                                 (99,334)           (45,030)           (21,028)
                                                                                    ---------          ---------          ---------

Cash flows from financing activities:
Net proceeds from issuance of common stock                                              1,020             26,242                213
Cost of treasury stock purchases                                                       (1,520)              (764)              (711)
Change in policyholder account balances                                                34,835              3,791            (16,210)
Change in reinsurance balances on policyholder account balances                           798                 --                 --
Increase in loan payable                                                                   --                 --              3,000
Principal repayment on loan payable                                                   (10,700)            (8,175)            (3,350)
Issuance of trust preferred securities                                                 15,000                 --                 --
                                                                                    ---------          ---------          ---------
Net cash provided from financing activities                                            39,433             21,094            (17,058)
                                                                                    ---------          ---------          ---------
Net increase (decrease) in cash and cash equivalents                                  (11,236)             7,740            (18,503)

Cash and cash equivalents at beginning of year                                         47,990             40,250             58,753
                                                                                    ---------          ---------          ---------
Cash and cash equivalents at end of year                                            $  36,754          $  47,990          $  40,250
                                                                                    =========          =========          =========

Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
  Interest                                                                          $   2,574          $   5,195          $   7,097
                                                                                    =========          =========          =========
  Income taxes                                                                      $   3,707          $   1,818          $  (3,375)
                                                                                    =========          =========          =========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-6
<PAGE>
               UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    ORGANIZATION AND COMPANY BACKGROUND:

      Universal American Financial Corp. ("the Company" or "Universal American")
was incorporated in the State of New York in 1981 as a life and accident &
health insurance holding company. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") and consolidate the accounts of Universal American
Financial Corp. ("Universal American" or the "Parent Company") and its
subsidiaries (collectively the "Company"), American Progressive Life & Health
Insurance Company of New York ("American Progressive"), American Pioneer Life
Insurance Company ("American Pioneer"), American Exchange Life Insurance Company
("American Exchange"), Pennsylvania Life Insurance Company ("Pennsylvania
Life"), Peninsular Life Insurance Company ("Peninsular"), Union Bankers
Insurance Company ("Union Bankers"), Constitution Life Insurance Company
("Constitution"), Marquette National Life Insurance Company ("Marquette"),
Penncorp Life Insurance Company, a Canadian company ("Penncorp Life (Canada)"),
and CHCS Services, Inc.

      Collectively the insurance company subsidiaries are licensed to sell life
and accident & health insurance and annuities in all fifty states, the District
of Columbia and all the provinces of Canada. The principal insurance products
are Medicare supplement, fixed benefit accident and sickness disability
insurance, long term care, home health care, senior life insurance and fixed
annuities. The Company distributes these products through an independent general
agency system and a career agency system. The career agents focus on sales for
Pennsylvania Life and Penncorp Life (Canada) while the independent general
agents sell for American Pioneer, American Progressive and Constitution. CHCS
Services, Inc., the Company's administrative services company, acts as a service
provider for both affiliated and unaffiliated insurance companies for senior
market insurance and non-insurance programs.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

      a.    BASIS OF PRESENTATION: The accompanying consolidated financial
            statements have been prepared in accordance with accounting
            principles generally accepted in the United States ("GAAP"). For the
            insurance subsidiaries, GAAP differs from statutory accounting
            practices prescribed or permitted by regulatory authorities. The
            accompanying consolidated financial statements include the accounts
            of Universal American and its wholly-owned subsidiaries, including
            the operations of acquired companies from the date of their
            acquisition. All material intercompany transactions and balances
            have been eliminated. The significant accounting policies followed
            by Universal American and subsidiaries that materially affect
            financial reporting are summarized below.

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

      c.    INVESTMENTS: The Company follows Statement of Financial Accounting
            Standards ("SFAS") No. 115, "Accounting for Certain Debt and Equity
            Securities." SFAS 115 requires that debt and equity securities be
            classified into one of three categories and accounted for as
            follows: Debt securities that the Company has the positive intent
            and the ability to hold to maturity are classified as "held to
            maturity" and reported at amortized


                                      F-7
<PAGE>
            cost. Debt and equity securities that are held for current resale
            are classified as "trading securities" and reported at fair value,
            with unrealized gains and losses included in earnings. Debt and
            equity securities not classified as held to maturity or as trading
            securities are classified as "available for sale" and reported at
            fair value. Unrealized gains and losses on available for sale
            securities are excluded from earnings and reported as accumulated
            other comprehensive income, net of tax and deferred policy
            acquisition cost adjustments.

            As of December 31, 2002 and 2001, all fixed maturity securities were
            classified as available for sale and were carried at fair value,
            with the unrealized gain or loss, net of tax and other adjustments
            (deferred policy acquisition costs), included in accumulated other
            comprehensive income. Equity securities are carried at current fair
            value. Policy loans are stated at the unpaid principal balance.
            Short-term investments are carried at cost, which approximates fair
            value. Other invested assets include mortgage loans and collateral
            loans. The collateral loans are carried at cost which is equal to
            the fair value of their estimated future cash flows at the date of
            acquisition. Mortgage loans are carried at the unpaid principal
            balance.

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

            The Company regularly evaluates the amortized cost of its
            investments compared to the fair value of those investments.
            Impairments of securities are generally recognized when a decline in
            fair value below the amortized cost basis is considered to be
            other-than-temporary. Impairment losses for certain mortgage and
            asset-backed securities are recognized when an adverse change in the
            amount or timing of estimated cash flows occurs, unless the adverse
            change is solely a result of changes in estimated market interest
            rates. The cost basis for securities determined to be impaired are
            reduced to their fair value, with the excess of the cost basis over
            the fair value recognized as a realized investment loss.

            Realized investment gains and losses on the sale of securities are
            based on the specific identification method.

            Investment income is generally recorded when earned. Premiums and
            discounts arising from the purchase of certain mortgage and
            asset-backed securities are amortized into investment income over
            the estimated remaining term of the securities, adjusted for
            anticipated prepayments. The prospective method is used to account
            for the impact on investment income of changes in the estimated
            future cash for these securities. Premiums and discounts on other
            fixed maturity securities are amortized using the interest method
            over the remaining term of the security.

      d.    DEFERRED POLICY ACQUISITION COSTS: The cost of acquiring new
            business, principally commissions and certain expenses of the
            agency, policy issuance and underwriting departments, all of which
            vary with, and are primarily related to the production of new and
            renewal business, have been deferred. These costs are being
            amortized in relation to the present value of expected gross profits
            on the policies arising principally from investment, mortality and
            expense margins in accordance with SFAS No. 97, "Accounting and
            Reporting by Insurance Enterprises for Certain Long-Duration
            Contracts and for Realized Gains and Losses from the Sale of
            Investments", ("SFAS 97") for interest sensitive life and annuity
            products and in proportion to premium revenue using the same
            assumptions used in estimating the liabilities for future policy
            benefits in accordance with SFAS No. 60, "Accounting and Reporting
            by Insurance Enterprises", ("SFAS 60") for non-interest sensitive
            life and all accident & health products. Deferred policy acquisition
            costs are


                                      F-8
<PAGE>
            written off to the extent that it is determined that future policy
            premiums and investment income or gross profits would not be
            adequate to cover related losses and expenses.

            The Company has several reinsurance arrangements in place on its
            life and accident & health insurance risks (see Note 12). In the
            accompanying statement of operations, the Company reports
            commissions incurred on direct premium written and commission and
            expense allowances on reinsurance ceded on separate lines to
            correspond to the presentation of the premiums earned by the
            Company. In determining the amounts capitalized for deferred
            acquisition costs, the Company includes an amount for gross
            commissions and direct issue expenses, net of the related allowances
            received from the reinsurer on these costs.

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

            Amortization of present value of future profits is based upon the
            pattern of the projected cash flows of the in-force business
            acquired, over periods ranging from ten to forty years. Other
            identified intangibles are amortized over their estimated lives.
            Prior to December 31, 2001, goodwill was amortized on a
            straight-line basis over periods ranging from twenty to thirty
            years. Subsequent to December 31, 2001, goodwill is no longer
            amortized; see "Adoption of New Accounting Pronouncements" below.

            On a periodic basis, management reviews the unamortized balances of
            present value of future profits, goodwill and other identified
            intangibles to determine whether events or circumstances indicate
            the carrying value of such assets is not recoverable, in which case
            an impairment charge would be recognized. Management believes that
            no impairments of present value of future profits, goodwill or other
            identified intangibles existed as of December 31, 2002.

      f.    RECOGNITION OF REVENUES, CONTRACT BENEFITS AND EXPENSES FOR
            INVESTMENT AND UNIVERSAL LIFE TYPE POLICIES: Revenues for universal
            life-type policies and investment products consist of mortality
            charges for the cost of insurance and surrender charges assessed
            against policyholder account balances during the period. Amounts
            received for investment and universal life type products are not
            reflected as premium revenue; rather such amounts are accounted for
            as deposits, with the related liability included in policyholder
            account balances. Benefit claims incurred in excess of policyholder
            account balances are expensed. The liability for policyholder
            account balances for universal life-type policies and investment
            products under SFAS 97 are determined following a "retrospective
            deposit" method. The retrospective deposit method establishes a
            liability for policy benefits at an amount determined by the account
            or contract balance that accrues to the benefit of the policyholder,
            which consists principally of policy account values before any
            applicable surrender charges. These products have a minimum
            guaranteed interest rates of 3%, except for New York which is 4%.
            Current credited interest rates for these products range from 3.75%
            to 8.05%.


                                      F-9
<PAGE>
      g.    RECOGNITION OF PREMIUM REVENUES AND POLICY BENEFITS FOR ACCIDENT &
            HEALTH INSURANCE PRODUCTS: Premiums are recorded when due and
            recognized as revenue over the period to which the premiums relate.
            Benefits and expenses associated with earned premiums are recognized
            as the related premiums are earned so as to result in recognition of
            profits over the life of the policies. This association is
            accomplished by recording a provision for future policy benefits and
            amortizing deferred policy acquisition costs. The liability for
            future policy benefits for accident & health policies consists of
            active life reserves and the estimated present value of the
            remaining ultimate net cost of incurred claims. Active life reserves
            include unearned premiums and additional reserves. The additional
            reserves are computed on the net level premium method using
            assumptions for future investment yield, mortality and morbidity
            experience. The assumptions are based on past experience. Claim
            reserves are established for future payments not yet due on incurred
            claims, primarily relating to individual disability and long term
            care insurance and group long-term disability insurance products.
            These reserves are initially established based on past experience,
            continuously reviewed and updated with any related adjustments
            recorded to current operations. Claim liabilities represent policy
            benefits due but unpaid at year-end and primarily relates to
            individual health insurance products.

      h.    RECOGNITION OF PREMIUM REVENUES AND POLICY BENEFITS FOR TRADITIONAL
            LIFE AND ANNUITY PRODUCTS: Premiums from traditional life and
            annuity policies with life contingencies generally are recognized as
            income when due. Benefits and expenses are matched with such income
            so as to result in the recognition of profits over the life of the
            contracts. This match is accomplished by means of the provision for
            liabilities for future policy benefits and the deferral and
            subsequent amortization of policy acquisition costs.

      i.    RECOGNITION OF ADMINISTRATIVE SERVICE REVENUE: Fees for
            administrative services generally are recognized over the period for
            which the Company is obligated to provide service.

      j.    INCOME TAXES: The Company's method of accounting for income taxes is
            the asset and liability method. Under the asset and liability
            method, deferred tax assets and liabilities are recognized for the
            future tax consequences attributable to differences between the
            financial statement carrying amounts of existing assets and
            liabilities and their respective tax bases. Deferred tax assets and
            liabilities are measured using enacted tax rates expected to apply
            to taxable income in the years in which those temporary differences
            are expected to be recovered or settled. The effect on deferred tax
            assets and liabilities of a change in tax rates is recognized in
            income in the period that includes the enactment date of a change in
            tax rates. The Company establishes valuation allowances on its
            deferred tax assets for amounts that it determines will not be
            recoverable based upon an analysis of projected taxable income and
            its ability to implement prudent and feasible tax planning
            strategies. Increases in the valuation allowances are recognized as
            deferred tax expense. Subsequent determinations that portions of the
            valuation allowances are no longer necessary are reflected as
            deferred tax benefits. To the extent that valuation allowances were
            established in conjunction with acquisitions, changes in those
            allowances are first applied to increasing or decreasing the
            goodwill (but not below zero) or other intangibles related to the
            acquisition and then applied as an increase or decrease in income
            tax expense.

      k.    REINSURANCE: Amounts recoverable under reinsurance contracts are
            included in total assets as amounts due from reinsurers rather than
            net against the related policy asset or liability. The cost of
            reinsurance related to long-duration contracts is accounted for over
            the life of the underlying reinsured policies using assumptions
            consistent with those used to account for the underlying policies.


                                      F-10
<PAGE>
      l.    FOREIGN CURRENCY TRANSLATION: The financial statement accounts of
            the Company's Canadian operations, which are denominated in Canadian
            dollars, are translated into U.S. dollars as follows: (i) Canadian
            currency assets and liabilities are translated at the rates of
            exchange as of the balance sheet dates and the related unrealized
            translation adjustments are included as a component of accumulated
            other comprehensive income, and (ii) revenues, expenses and cash
            flows, expressed in Canadian dollars, are translated using a
            weighted average of exchange rates for each period presented.

      m.    EARNINGS PER COMMON SHARE: Basic EPS excludes dilution and is
            computed by dividing net income by the weighted average number of
            shares outstanding for the period. Diluted EPS gives the dilutive
            effect of the stock options outstanding during the year. At December
            31, 2002, there were 960,519 stock options excluded from the
            computation of diluted EPS because they were antidilutive. As of
            December 31, 2001, there were no stock options excluded from the
            computation of diluted EPS because they were antidilutive.

      n.    STOCK BASED COMPENSATION: The Company has elected to follow
            Accounting Principles Board ("APB") Opinion No. 25. "Accounting for
            Stock Issued to Employees" ("APB 25") and related interpretations in
            accounting for its employee and director stock options. Accordingly,
            no expense is recognized for those options issued with an exercise
            price at or above market on the date of the award. For options
            issued to employees with an exercise price that is less than market
            on the date of grant the Company recognizes an expense for the
            difference between the exercise price and the value of the options
            on the date of grant. For options issued to agents and others, the
            Company follows SFAS No. 123 "Accounting for Stock Based
            Compensation," ("SFAS 123"). Under SFAS 123, the fair value of
            options awarded to agents and others are expensed over the vesting
            period of each award.

      o.    CASH FLOW INFORMATION: Included in cash and cash equivalents are
            cash on deposit, money market funds, and short term investments that
            had an original maturity of three months or less from the time of
            purchase.

      p.    ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the FASB
            issued SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141
            eliminates the pooling-of-interests method of accounting for
            business combinations, requiring all business combinations to be
            accounted for under the purchase method. Accordingly, net assets
            acquired are recorded at fair value with any excess of cost over net
            assets assigned to goodwill. SFAS 141 also requires that certain
            intangible assets acquired in a business combination be recognized
            apart from goodwill. The provisions of SFAS 141 apply to all
            business combinations initiated after June 30, 2001. Adoption of
            SFAS 141 did not have a material impact on the Company's
            consolidated financial condition or results of operations.

            In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
            Intangible Assets" ("SFAS 142"). Under SFAS 142, effective January
            1, 2002 amortization of goodwill is precluded; however, its
            recoverability must be periodically (at least annually) reviewed and
            tested for impairment.

            Goodwill must be tested at the reporting unit level for impairment
            in the year of adoption, including an initial test performed within
            six months of adoption. If the initial test indicates a potential
            impairment, then a more detailed analysis to determine the extent of
            impairment must be completed within twelve months of adoption.
            During the first quarter of 2002, the Company completed the review
            and analysis of its goodwill asset in accordance with the provisions
            of SFAS 142. The result of the analysis indicated that each
            reporting unit's fair value exceeded its carrying amount, including
            goodwill. As a result, goodwill for each reporting unit was not
            considered impaired. SFAS 142 also


                                      F-11
<PAGE>
            requires that useful lives for intangibles other than goodwill be
            reassessed and remaining amortization periods be adjusted
            accordingly.

            Effective April 1, 2001, the Company adopted Emerging Issues Task
            Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and
            Impairment on Purchased and Retained Beneficial Interests in
            Securitized Financial Assets" ("EITF 99-20"). Under the consensus,
            investors in certain securities with contractual cash flows,
            primarily asset-backed securities, are required to periodically
            update their best estimate of cash flows over the life of the
            security. If the fair value of the securitized financial asset is
            less than its carrying amount and there has been a decrease in the
            present value of the estimated cash flows since the last revised
            estimate, considering both timing and amount, an other than
            temporary impairment charge is recognized. The estimated cash flows
            are also used to evaluate whether there have been any changes in the
            securitized asset's estimated yield. All yield adjustments are
            accounted for on a prospective basis. Adoption of EITF 99-20 did not
            have a material impact on the Company's consolidated financial
            condition or results of operations.

            Effective January 1, 2001, the Company adopted SFAS No. 133,
            "Accounting for Derivative Instruments and Hedging Activities"
            ("SFAS 133"), as amended by SFAS Nos. 137 and 138. The standard
            requires, among other things, that all derivatives be carried on the
            balance sheet at fair value. The standard also specifies hedge
            accounting criteria under which a derivative can qualify for special
            accounting. In order to receive special accounting, the derivative
            instrument must qualify as a hedge of either the fair value or the
            variability of the cash flow of a qualified asset or liability, or
            forecasted transaction. Special accounting for qualifying hedges
            provides for matching the timing of gain or loss recognition on the
            hedging instrument with the recognition of the corresponding changes
            in value of the hedged item. The Company does not currently have any
            derivative instruments and therefore adoption of SFAS 133 did not
            have a material impact on the Company's consolidated financial
            condition or results of operations.

      q.    PENDING ACCOUNTING PRONOUNCEMENTS: In April 2002, the FASB issued
            SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
            Amendment of FASB Statement No. 13, and Technical Corrections"
            ("SFAS 145"). SFAS 145 requires any gain or loss on extinguishments
            of debt to be presented as a component of continuing operations
            (unless specific criteria are met) whereas SFAS No. 4 required that
            such gains and losses be classified as an extraordinary item in
            determining net income. The Company will adopt these provisions on
            January 1, 2003, as required. The other provisions of SFAS No. 145
            were not relevant to the Company.

            In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
            Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
            requires costs associated with exit or disposal activities
            (including restructurings) to be recognized when the costs are
            incurred, rather than at a date of commitment to an exit or disposal
            plan. This standard nullifies EITF Issue No. 94-3, "Liability
            Recognition for Certain Employee Termination Benefits and Other
            Costs to Exit an Activity (including Certain Costs Incurred in a
            Restructuring)." Under SFAS 146, a liability related to an exit or
            disposal activity is not recognized until such liability has
            actually been incurred whereas under EITF Issue No. 94-3 a liability
            was recognized at the time of a commitment to an exit or disposal
            plan. The provisions of this standard are effective for exit or
            disposal activities initiated after December 31, 2002. The Company
            will adopt this standard on January 1, 2003, as required.

            On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
            Stock-Based Compensation--Transition and Disclosure" ("SFAS 148").
            This standard amends SFAS 123 to provide alternative methods of
            transition for a voluntary change to the fair value based method of
            accounting for stock-based employee compensation. This standard also
            requires prominent disclosures in both annual and interim financial
            statements about the method of accounting for stock-based employee
            compensation and


                                      F-12
<PAGE>
            the effect of the method used on reported results. The Company has
            applied the disclosure provisions of SFAS 148 as of December 31,
            2002, as required and presented below.

            As permitted by SFAS 123, the Company measured its stock-based
            compensation for employees and directors using the intrinsic value
            approach under APB 25. Accordingly, the Company did not recognize
            compensation expense upon the issuance of its stock options because
            the option terms were fixed and the exercise price equaled the
            market price of the underlying common stock on the grant date. The
            Company complied with the provisions of SFAS 123 by providing pro
            forma disclosures of net income and related per share data giving
            consideration to the fair value method provisions of SFAS 123.

            The Company does not intend to adopt the fair value method of
            accounting for stock-based compensation provisions of SFAS 123 until
            January 1, 2004, as required by SFAS 148. Therefore, the transition
            provisions of SFAS No. 148 will be adopted concurrently with the
            fair value based recognition provisions of SFAS No. 123 on January
            1, 2004. Subsequently, the Company will expense all future employee
            stock awards over the vesting period based on the fair value of the
            award on the date of grant in accordance with the prospective
            transition method. For purposes of pro forma disclosures, the
            estimated fair value of the options is amortized to expense over the
            options' vesting period. The following table illustrates the effect
            on net income and earnings per share if the fair value based method
            had been applied during each period presented.

<TABLE>
<CAPTION>
                                                                                  For the years ended December 31,
                                                                            2002             2001               2000
                                                                         ----------        ----------        ----------
                                                                             (in thousands, except per share amounts)
<S>                                                                      <C>               <C>               <C>
            Reported net income                                          $   30,127        $   28,925        $   22,885
            Add back: Stock-based compensation expense
               included in reported net income, net of tax                    1,536             1,044             1,262

            Less: Stock based compensation expense
               determined under fair value based method
               for all awards, net of tax                                    (2,623)           (1,804)           (1,787)
                                                                         ----------        ----------        ----------
            Pro forma net income                                         $   29,040        $   28,165        $   22,360
                                                                         ==========        ==========        ==========

            Net income per share:
              Basic, as reported                                         $     0.57        $     0.58        $     0.49
              Basic, pro forma                                           $     0.55        $     0.57        $     0.48

              Diluted, as reported                                       $     0.56        $     0.57        $     0.49
              Diluted, pro forma                                         $     0.54        $     0.56        $     0.47
</TABLE>

            Pro forma compensation expense reflected for prior periods is not
            indicative of future compensation expense that would be recorded by
            the Company upon its adoption of the fair value based recognition
            provisions of SFAS 123 on January 1, 2004. Future expense may vary
            based upon factors such as the number of awards granted by the
            Company and the then-current fair market value of such awards.

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

<TABLE>
<CAPTION>
                                                                     2002                   2001                    2000
                                                                ---------------        ---------------         ---------------
<S>                                                             <C>                    <C>                     <C>
            Risk free interest rates                              3.74%-5.44%            4.92%-5.52%                5.11%
            Dividend yields                                           0.0%                   0.0%                    0.0%
            Expected volatility                                 37.09% - 40.84%        40.81% - 48.41%         21.75% - 43.74%
            Expected lives of options (in years)                   2.0 - 9.0              2.0 - 9.0               1.0 - 4.5
</TABLE>


                                      F-13
<PAGE>
            The Black-Scholes option valuation model was developed for use in
            estimating the fair value of traded options that have no vesting
            restrictions and are fully transferable. In addition, option
            valuation models require the input of highly subjective assumptions
            including the expected stock price volatility. Because the Company's
            employee stock options have characteristics significantly different
            from those of traded options, and because changes in the subjective
            input assumptions can materially affect the fair value estimate, in
            management's opinion, the existing models do not necessarily provide
            a reliable single measure of the fair value of its employee stock
            options.

            Detailed information for activity in the Company's stock plans can
            be found in Note 8 - Stock-Based Compensation.

r.    RECLASSIFICATIONS: Certain reclassifications have been made to prior
      years' financial statements to conform to current period classifications.

3.    BUSINESS COMBINATIONS:

      Acquisition of CHCS, Services, Inc. (formerly American Insurance
Administration Group, Inc. ("AIAG"))

      In January 2000, Universal American acquired all of the outstanding shares
of AIAG, a privately held third party administrator located in Clearwater,
Florida, for $5.8 million, including $2.9 million in cash and 809,860 shares of
Universal American common stock. AIAG is a third party administrator of senior
supplemental health insurance. This acquisition has generated increased cash
flow and strengthened the Company's administrative capabilities while it expands
its presence in the senior market and initiates cross-selling opportunities
between the Company's Senior Market Brokerage and Career Agency Segments.

      The fair value of the net assets acquired was $(0.9) million. The present
value of future profits ("PVFP") acquired was $7.7 million and was offset by
related deferred taxes of $1.0 million. The PVFP was determined using a discount
rate of 15%. It is being amortized in proportion to the expected profits from
the contracts in force on the date of acquisition. Amortization of the PVFP was
$1.5 million during 2002, $2.1 million during 2001 and $2.8 million during 2000.
As of December 31, 2002 $1.3 million, or 17%, of the original amount remains
unamortized.

      Acquisition of CHCS, Inc. ("CHCS")

      In August 2000, Universal American acquired all of the outstanding shares
of CHCS, a privately held third party administrator located in Weston, Florida,
for $4.6 million, including $3.3 million in cash, 64,820 shares on Universal
American common stock and future cash payments totaling $1.0 million over 18
months. CHCS is a third party administrator of long term care and home health
care insurance products for unaffiliated insurance companies, as well as the
Company's insurance subsidiaries. The fair value of the net assets acquired was
$1.9 million. The excess of the purchase price over the fair value of the net
assets acquired was assigned to goodwill.

4.    PENDING ACQUISITION:

      In December 2002, Pennsylvania Life entered into a definitive contract to
acquire Pyramid Life Insurance Company ("Pyramid Life") from Ceres Group, Inc.
for $56.0 million in cash. The closing of the transaction, which is subject to
regulatory approvals and other customary conditions, is scheduled to close
by the end of the first quarter of 2003.

      Pyramid Life specializes in providing health and life insurance products
to the senior market. These products include Medicare supplement, long term
care, life insurance, and annuities. Pyramid Life markets its products in 26
states through a career agency sales force of over 1,100 career agents operating
out of 29 Senior Solutions Sales Centers. As of the end of 2002, Pyramid Life
had approximately $110.0 million of annualized premium in force and in excess of
$114.0 million of assets.


                                      F-14
<PAGE>
5.    INVESTMENTS:

      The amortized cost and fair value of fixed maturities as of December 31,
2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                                          December 31, 2002
                                                             -----------------------------------------------------------------------
                                                                                   Gross               Gross
                                                             Amortized          Unrealized           Unrealized               Fair
Classification                                                  Cost               Gains               Losses                 Value
---------------------------------                            --------           ----------           ----------             --------
                                                                                         (In thousands)
<S>                                                          <C>                <C>                  <C>                    <C>
U.S. Treasury securities and
  obligations of U.S. government                             $ 90,189            $  1,670             $      (9)            $ 91,850
Corporate debt securities                                     374,087              30,323                (1,667)             402,743
Foreign debt securities (1)                                   166,689              10,072                  (216)             176,545
Mortgage and asset-
  backed securities                                           253,089              12,621                (1,898)             263,812
                                                             --------            --------             ---------             --------
                                                             $884,054            $ 54,686             $  (3,790)            $934,950
                                                             ========            ========             =========             ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                          December 31, 2001
                                                             -----------------------------------------------------------------------
                                                                                   Gross               Gross
                                                             Amortized          Unrealized           Unrealized               Fair
Classification                                                  Cost               Gains               Losses                 Value
---------------------------------                            --------           ----------           ----------             --------
                                                                                         (In thousands)
<S>                                                          <C>                <C>                  <C>                    <C>
U.S. Treasury securities and
  obligations of U.S. government                             $ 35,719            $  1,262             $     (11)            $ 36,970
Corporate debt securities                                     357,431               8,990                (1,805)             364,616
Foreign debt securities (1)                                   157,077               2,225                (1,640)             157,662
Mortgage and asset-
 backed securities                                            236,617               5,700                (2,347)             239,970
                                                             --------            --------             ---------             --------
                                                             $786,844            $ 18,177             $  (5,803)            $799,218
                                                             ========            ========             =========             ========
</TABLE>

(1)   Primarily Canadian dollar denominated bonds supporting our Canadian
      insurance reserves.

      The amortized cost and fair value of fixed maturities at December 31, 2002
by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                      Amortized        Fair
                                                        Cost           Value
                                                      ---------      --------
                                                          (In thousands)
<S>                                                   <C>            <C>
      Due in 1 year or less                           $ 44,775       $ 45,693
      Due after 1 year through 5 years                 133,904        139,343
      Due after 5 years through 10 years               305,472        330,086
      Due after 10 years                               146,655        156,016
      Mortgage and asset-backed securities             253,248        263,812
                                                      --------       --------
                                                      $884,054       $934,950
                                                      ========       ========
</TABLE>

      Included in fixed maturities at December 31, 2002 and 2001 were securities
with carrying values of $35.3 million and $32.4 million, respectively, held by
various states as security for the policyholders of the Company within such
states.

      Gross unrealized gains and gross unrealized losses of equity securities as
of December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                   2002               2001
                                                ----------         ----------
                                                       (In thousands)
<S>                                             <C>                <C>
            Gross unrealized gains              $      117         $      199
            Gross unrealized losses                   (133)              (339)
                                                ----------         ----------
            Net unrealized losses               $      (16)        $     (140)
                                                ==========         ==========
</TABLE>


                                      F-15
<PAGE>
      The components of the change in unrealized gains and losses included in
the consolidated statements of stockholders' equity for the three years ended
December 31, 2002 are as follows:

<TABLE>
<CAPTION>
                                                              2002             2001            2000
                                                            --------         -------         --------
                                                                          (In thousands)
<S>                                                         <C>              <C>             <C>
      Change in net unrealized gains (losses):
        Fixed maturities                                    $ 38,522         $ 6,695         $ 22,584
        Equity securities                                        124             132               10
        Foreign currency                                         679          (3,996)          (1,434)
        Adjustment relating to deferred
          policy acquisition costs                            (1,958)         (1,333)          (2,209)
                                                            --------         -------         --------
      Change in net unrealized gains
        (losses) before income tax                            37,367           1,498           18,951
      Income tax (expense) benefit                           (13,083)           (770)          (7,189)
                                                            --------         -------         --------
      Change in net unrealized gains (losses)               $ 24,284         $   728         $ 11,762
                                                            ========         =======         ========
</TABLE>

      The details of net investment income for the three years ended December
31, 2002 are as follows:

<TABLE>
<CAPTION>
                                                              2002             2001            2000
                                                            --------         -------         --------
                                                                          (In thousands)
<S>                                                         <C>              <C>             <C>
      Investment Income:
        Fixed maturities                                    $ 54,553         $54,100         $ 52,478
        Cash and cash equivalents                              1,044           1,749            1,939
        Equity securities                                        197             238              330
        Other                                                  1,279           1,181            1,380
        Policy loans                                           1,697           1,529            1,617
        Mortgage loans                                           134             205              214
                                                            --------         -------         --------
      Gross investment income                                 58,904          59,002           57,958
      Investment expenses                                     (1,188)         (1,190)          (1,013)
                                                            --------         -------         --------
      Net investment income                                 $ 57,716         $57,812         $ 56,945
                                                            ========         =======         ========
</TABLE>

      There were no non-income producing fixed maturities for the year ended
December 31, 2002. Fixed maturities with a carrying value of $0.1 million and
$0.7 million were non-income producing for the years ended December 31, 2001 and
2000, respectively.

      Gross realized gains and gross realized losses included in the
consolidated statements of operations for the three years ended December 31,
2002 are as follows:

<TABLE>
<CAPTION>
                                                              2002             2001            2000
                                                            --------         -------         --------
                                                                         (In thousands)
<S>                                                         <C>              <C>             <C>
      Realized gains:
        Fixed maturities                                    $ 10,435         $ 9,301         $  1,022
        Equity securities and other invested assets               72              14              192
                                                            --------         -------         --------
      Total realized gains                                    10,507           9,315            1,214
                                                            --------         -------         --------

      Realized losses:
        Fixed maturities                                     (14,914)         (6,237)          (1,019)
        Equity securities                                       (676)             --              (49)
                                                            --------         -------         --------
      Total realized losses                                  (15,590)         (6,237)          (1,068)
                                                            --------         -------         --------

      Net realized gains (losses)                           $ (5,083)        $ 3,078         $    146
                                                            ========         =======         ========
</TABLE>

      The Company wrote down the value of certain fixed maturity securities by
$10.6 million during 2002, primarily as a result of the impairment of our
WorldCom bonds. The WorldCom bonds were disposed of in the third quarter of 2002
at a price approximating their carrying value after the other-than-temporary
decline was recognized. The Company wrote down the value of certain fixed
maturity securities by $4.2 million during 2001 and by $0.5 million during 2000.
These write downs represent management's estimate of other-than-temporary
declines in value and were included in net realized gains (losses) on
investments.


                                      F-16
<PAGE>
      For the years ended December 31, 2002 and 2001, the Company held unrated
or less-than-investment grade corporate debt securities with carrying and
estimated fair values as follows:

<TABLE>
                                          2002              2001
                                        ---------         ------
                                              (In thousands)
<S>                                     <C>               <C>
      Carrying value                    $   5,266         $7,750
                                        =========         ======
      Estimated fair value              $   5,266         $7,750
                                        =========         ======
      Percentage of total assets              0.4%           0.6%
                                        =========         ======
</TABLE>

      The holdings of less-than-investment grade securities are widely
diversified and the investment in any one such security is currently less than
$2.4 million, which is approximately 0.2% of total assets.

6.    INCOME TAXES:

      The parent holding company files a consolidated return for federal income
tax purposes, which includes all of the non-insurance company subsidiaries as
well as American Progressive through March 31, 2002 and American Pioneer through
June 30, 2002. American Exchange and its subsidiaries and Penncorp Life (Canada)
are not currently included. American Exchange and its subsidiaries, including
American Progressive as of April 1, 2002 and American Pioneer as of July 1,
2002, file a separate consolidated federal income tax return. Penncorp Life
(Canada) files a separate return with Revenue Canada.

      Income before taxes by geographic distribution for the three years ended
December 31, 2002 is as follows:

<TABLE>
<CAPTION>
                                          2002           2001           2000
                                        -------        -------        --------
                                                    (In thousands)
<S>                                     <C>            <C>            <C>
       United States                    $30,290        $27,606        $ 21,303
       Canada                            13,740         15,757          11,763
                                        -------        -------        --------

       Total income before taxes        $44,030        $43,363        $ 33,066
                                        =======        =======        ========
</TABLE>

      The Company's federal and state income tax expense (benefit) for the three
years ended December 31, 2002 is as follows:

<TABLE>
<CAPTION>
                                          2002           2001           2000
                                        -------        -------        --------
                                                   (In thousands)
<S>                                     <C>            <C>            <C>
      Current - United States           $   208        $   449        $   (126)
      Current - Canada                    4,291          5,451           3,296
                                        -------        -------        --------
         Sub total current                4,499          5,900           3,170

      Deferred - United States            8,268          8,409           7,281
      Deferred - Canada                   1,136            129            (270)
                                        -------        -------        --------
         Sub total deferred               9,404          8,538           7,011

                                        -------        -------        --------
      Total tax expense                 $13,903        $14,438        $ 10,181
                                        =======        =======        ========
</TABLE>

      A reconciliation of the "expected" tax expense at 35% with the Company's
actual tax expense applicable to operating income before taxes reported in the
Consolidated Statements of Operations is as follows:

<TABLE>
<CAPTION>
                                          2002           2001           2000
                                        --------       --------       --------
                                                   (In thousands)
<S>                                     <C>            <C>            <C>
      Expected tax expense              $ 15,410       $ 15,177       $ 11,573
      Change in valuation allowance       (1,694)          (737)        (1,343)
      Canadian taxes                          51           (208)          (390)
      Other                                  136            206            341
                                        --------       --------       --------
      Actual tax expense                $ 13,903       $ 14,438       $ 10,181
                                        ========       ========       ========
</TABLE>


                                      F-17
<PAGE>
      In addition to federal and state income tax, the Company is subject to
state premium taxes, which taxes are included in other operating costs and
expenses in the accompanying statements of operations.

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2002 and 2001 are as
follows:

<TABLE>
                                                      2002              2001
                                                    --------         --------
                                                         (In thousands)
<S>                                                 <C>              <C>
      Deferred tax assets:
      Reserves for future policy benefits           $ 19,484         $ 23,140
      Deferred policy acquisition costs                9,970           16,786
      Net operating loss carryforward                 11,400           16,659
      Asset valuation differences                     11,845           10,745
      Deferred revenues                                1,165            1,214
      AMT credit carryforward                            197               68
      Other                                            2,666            1,394
                                                    --------         --------
        Total gross deferred tax assets               56,727           70,006
        Less valuation allowance                      (5,100)          (6,794)
                                                    --------         --------
        Net deferred tax assets                       51,627           63,212
                                                    --------         --------

      Present value of future profits                    314             (244)
      Unrealized gains on investments                (16,099)          (3,016)
                                                    --------         --------
        Total gross deferred tax liabilities         (15,785)          (3,260)
                                                    --------         --------
        Net deferred tax asset                      $ 35,842         $ 59,952
                                                    ========         ========
</TABLE>

      At December 31, 2002, the Company (exclusive of American Exchange and its
subsidiaries and PennCorp Life) had tax loss carryforwards of approximately $2.7
million that expire in the years 2015 to 2016. At December 31, 2002, the Company
also had an Alternative Minimum Tax (AMT) credit carryforward for federal income
tax purposes of approximately $0.1 million that can be carried forward
indefinitely. At December 31, 2002, American Exchange and its subsidiaries had
tax loss carryforwards, most of which relate to the companies acquired in 1999
(and were incurred prior to their acquisition), of approximately $27.4 million
that expire in the years 2008 to 2017. As a result of changes in ownership of
the Company in July 1999, the use of most of the loss carryforwards of the
Company are subject to annual limitations.

      At December 31, 2002 and 2001, the Company carried valuation allowances of
$5.1 million and $6.8 million, respectively, with respect to its deferred tax
assets. The Company establishes a valuation allowance based upon an analysis of
projected taxable income and its ability to implement prudent and feasible tax
planning strategies. As a result of the increased profitability of the insurance
subsidiaries acquired in 1999, a portion of the valuation allowance on certain
of the life tax loss carryforwards were no longer considered necessary at
December 31, 2002. The amount of the valuation allowance released during 2002
was $2.1 million and was recorded as a deferred income tax benefit. As a result
of the increased profitability of the Administrative Services segment, valuation
allowances on certain of the non-life tax loss carryforwards no longer were
considered necessary as of December 31, 2002. The amount of the valuation
allowance released during 2002 was $0.1 million and was also recorded as a
deferred income tax benefit. This decrease was partially offset by the
establishment of a valuation allowance of $0.5 million for certain capital
losses incurred in 2002 by the Company that are subject to limitation in their
use. Management believes it is more likely than not that the Company will
realize the recorded net deferred tax assets.


                                      F-18
<PAGE>
7.    STOCKHOLDERS' EQUITY

      Preferred Stock

      The Company has 2.0 million authorized shares of preferred stock with no
such shares issued and outstanding at December 31, 2002 or 2001.

      Common Stock

      The par value of common stock is $.01 per share with 80.0 million shares
authorized for issuance. The shares issued and outstanding at December 31, 2002
and 2001 were 53.2 million and 52.8 million, respectively. During the years
ended December 31, 2002, 2001 and 2000, the Company issued 0.4 million shares,
6.0 million shares (primarily as a result of the equity offering noted below)
and 0.9 million shares, respectively, of its common stock.

      Equity Offering

      On July 12, 2001, the Company entered into an Underwriting Agreement with
Banc of America Securities LLC and Raymond James & Associates, Inc., as
representatives of the underwriters named therein, and certain shareholders of
the Company, with respect to the sale of up to 7,950,000 shares of the Company's
common stock (including 750,000 shares of Common Stock subject to an
over-allotment option granted to the Underwriters by the Company and some of the
selling shareholders). As a result, on July 12, 2001, the Company issued five
million shares of common stock at a price of $5.00 per share, generating
proceeds of $25 million. Expenses for this transaction, including the
underwriters' discounts and commissions, amounted to $2.4 million, resulting in
net proceeds of $22.6 million to the Company. The proceeds from this offering
were used to enhance the capital and surplus of certain of our insurance
subsidiaries ($9.3 million), reduce intercompany obligations ($5.5 million) and
the balance to hold at the parent company for general corporate purposes. In
connection with this offering, certain shareholders of the company, none of whom
were management, sold 2.2 million shares at $5.00 per share, less the
underwriters' discounts and commissions of $0.3187 per share.

      On August 13, 2001, the over-allotment option provided in the underwriting
agreement was exercised and, as a result, the Company issued an additional
720,000 shares of common stock at a price of $5.00 per share, less the
underwriters' discounts and commissions of $0.3187 per share, generating
additional net proceeds of $3.4 million. In connection with the over-allotment
option, certain shareholders sold an additional 30,000 shares at $5.00 per
share, less the underwriters' discounts and commissions of $0.3187 per share.

      The net proceeds to the Company of the total offering, including the
over-allotment, was $26.2 million, net of total expenses of $2.6 million.

      Shareholders' Agreement

      Universal American, Capital Z, Richard Barasch (the Chairman and Chief
Executive Officer of the Company) and several other shareholders of Universal
American entered into a shareholders' agreement on July 30, 1999 (the
"Shareholders' Agreement"). The Shareholders' Agreement requires that all
proposed sales/transfers by the other shareholders who are party to the
Shareholders' Agreement must first be offered to Richard Barasch and Capital Z,
including its affiliates. However, pledges and some other transfers by any party
to the Shareholders' Agreement of less than 1% of Universal American's
outstanding common stock at any one time, or 2.5% when aggregated with the other
transfers by the shareholder and his, her or its permitted transferees of
Universal American's outstanding common stock, are permitted. In addition,
Richard Barasch was not permitted to sell more than 3% of his holdings for a
three-year period beginning July 30, 1999. The Shareholders' Agreement provides
for tag-along and drag-along rights under some circumstances. "Tag-along rights"
allow the holder of stock to include his, her or its stock in a sale of common
stock initiated by another party to the Shareholders' Agreement. "Drag-along
rights" permit a selling party to the Shareholders' Agreement to force the other
parties to the Shareholders'


                                      F-19
<PAGE>
Agreement to sell a proportion of the other holder's shares in a sale arranged
by the selling shareholder.

      Under the terms of the Shareholders' Agreement, of the nine members of
Universal American's board of directors, certain shareholders are permitted to
nominate directors as follows: Capital Z: four, Richard Barasch: two and
Universal American: two. Capital Z and Richard Barasch are each required to vote
for the director(s) nominated by the other. The right of Richard Barasch to
nominate directors is conditioned upon his continued employment with Universal
American. In addition, the right to nominate directors is not transferable,
except that Capital Z may transfer its right to a third-party buyer who acquires
10% or more of the outstanding common stock of Universal American from Capital
Z.

      Treasury Stock

      During 2000, the Board of Directors approved a plan to re-purchase up to
0.5 million shares of Company stock in the open market. In March 2002, the Board
of Directors approved an amendment of the plan to increase the amount of shares
available for repurchase from 0.5 million to 1.0 million shares. The purpose of
this plan is to fund employee stock bonuses.

      During the year ended December 31, 2002, the Company acquired 0.3 million
shares at a cost of $1.5 million during the year at market prices ranging from
$4.06 to $7.54 per share. The Company distributed 0.1 million shares in the form
of officer and employee bonuses at market prices ranging from $6.45 to $6.81 per
share at the date of distribution, amounting to $0.6 million.

      During the year ended December 31, 2001, the Company acquired 0.2 million
shares at a cost of $0.8 million during the year at market prices ranging from
$3.75 to $6.87 per share. The Company distributed 0.2 million shares in the form
of officer and employee bonuses at market prices ranging from $3.88 to $6.81 per
share at the date of distribution, amounting to $0.8 million.

      Additional Paid In Capital

      The Company provided loans to certain members of management to purchase
shares of common stock in connection with the 1999 acquisition. The loans
totaled $1.0 million at inception and were accounted for as a reduction of
additional paid in capital in the financial statements. Repayments of these
loans increase additional paid in capital. As of December 31, 2002, the
outstanding balance of these loans was $0.9 million. The terms of these loans
include a provision whereby they will be forgiven should the closing price of
the Company's common stock reach a level of $9.50 for each and every day during
any period of 60 consecutive calendar days prior to August 1, 2003.

      Accumulated Other Comprehensive Income

      The components of accumulated other comprehensive income are as follows:

<TABLE>
<CAPTION>
                                                                         December 31,
                                                           2002              2001            2000
                                                         --------        ------------      -------
                                                                      (In thousands)
<S>                                                      <C>             <C>               <C>
      Net unrealized appreciation
        on investments                                   $ 50,880         $ 12,234         $ 5,406
      Deferred acquisition cost adjustment                 (2,320)            (361)            972
      Foreign currency translation gains (losses)          (2,574)          (3,253)            743
      Deferred tax on the above                           (16,099)          (3,017)         (2,246)
                                                         --------         --------         -------
           Accumulated other comprehensive income        $ 29,887         $  5,603         $ 4,875
                                                         ========         ========         =======
</TABLE>


                                      F-20
<PAGE>
8.    STOCK BASED COMPENSATION

      1998 Incentive Compensation Plan

      On May 28, 1998, the Company's shareholders approved the 1998 Incentive
Compensation Plan (the "1998 ICP"). The 1998 ICP superceded the Company's 1993
Incentive Stock Option Plan. Options previously granted under the Company's
Incentive Stock Option Plan will remain outstanding in accordance with their
terms and the terms of the respective plans. The 1998 ICP provides for grants of
stock options, stock appreciation rights ("SARs"), restricted stock, deferred
stock, other stock-related awards, and performance or annual incentive awards
that may be settled in cash, stock, or other property ("Awards").

      The total number of shares of the Company's Common Stock reserved and
available for delivery to participants in connection with Awards under the 1998
ICP is (i) 1.5 million, plus (ii) the number of shares of Common Stock subject
to awards under Preexisting Plans that become available (generally due to
cancellation or forfeiture) after the effective date of the 1998 ICP, plus (iii)
13% of the number of shares of Common Stock issued or delivered by the
Corporation during the term of the 1998 ICP (excluding any issuance or delivery
in connection with Awards, or any other compensation or benefit plan of the
Corporation), provided, however, that the total number of shares of Common Stock
with respect to which incentive stock options ("ISOs") may be granted shall not
exceed 1.5 million. As of December 31, 2002, a total of 7.3 million shares were
eligible for grant under the plan. There were 4.6 million shares reserved for
outstanding options awarded under the 1998 ICP, 1.4 million shares issued
pursuant to previous awards and 1.3 million shares reserved for issuance under
future Awards at December 31, 2002.

      Executive officers, directors, and other officers and employees of the
Corporation or any subsidiary, as well as other persons who provide services to
the Company or any subsidiary, are eligible to be granted Awards under the 1998
ICP, which is administered by the Board or a Committee established pursuant to
the Plan.

      The Committee, may, in its discretion, accelerate the exercisability, the
lapsing of restrictions, or the expiration of deferral or vesting periods of any
Award, and such accelerated exercisability, lapse, expiration and vesting shall
occur automatically in the case of a "change in control" of the Company, except
to the extent otherwise determined by the Committee at the date of grant or
thereafter. The Committee has not yet exercised any of its discretions noted
above.

      Stock Awards

      In accordance with the 1998 ICP, the Company grants restricted stock to
its officers and non-officer employees. These grants vest upon issue. The
non-officer grants are expensed and awarded in the same year. The Company
granted awards to non-officer employees of 7,721 shares with a fair value of
$5.92 per share during 2002, 11,386 shares with a fair value of $6.81 per share
during 2001 and 32,290 shares with a fair value of $4.00 per share during 2000.
Officer grants are accrued for during the year for which they are earned and
awarded the following year. The Company granted awards to officers of 182,000
shares with a fair value of $5.57 per share for 2002 performance, 103,216 shares
with a fair value of $6.45 per share for 2001 performance and 176,614 shares
with a fair value of $3.94 per share for 2000 performance. The Company
recognized compensation expense of $1.1 million for the year ended December 31,
2002, $0.7 million for 2001 and $0.8 million for 2000.

      Agent's Stock Purchase Plan

      The Company offers shares of its common stock for sale to qualifying
agents of the Insurance Subsidiaries pursuant to the Company's Agents Stock
Purchase Plan ("ASPP"). Shares are sold at market price and, accordingly, no
expense is recognized. Pursuant to the ASPP, agents purchased 30,250 shares at a
weighted average price of $6.30 per share in 2002, 13,100 shares at a weighted
average price of $4.89 per share in 2001, and 16,050 shares at a weighted
average price of $4.00 per share in 2000.


                                      F-21
<PAGE>
      Agent's Deferred Compensation Plan

      The Company also offers shares of Common Stock for sale to its agents
pursuant to the Company's Deferred Compensation Plan for Agents ("DCP"). Under
the DCP, agents may elect to defer receipt between 5% and 100% of their first
year commission, which deferral will be matched by a contribution by the
Company, initially set at 25% of the amount of the deferral, up to a maximum of
5% of the agent's commissions. Both the agent's participation in the DCP and the
Company's obligation to match the agent's deferral are subject to the agent
satisfying and continuing to satisfy minimum earning, production and persistency
standards. Shares are sold under the plan at market price and, accordingly, no
expense is recognized, except for the fair value of the shares representing the
Company match on the date of the contribution to the DCP. Agents deferred
commissions amounting to $0.3 million in 2002, $0.2 million in 2001 and $0.1
million in 2000.

      Option Awards

      A summary of the status of the Company's stock option plans during the
three years ended December 31, 2002 and changes during the years ending on those
dates is presented below:

<TABLE>
<CAPTION>
                                                       2002                           2001                           2000
                                               ----------------------        ------------------------      -------------------------
                                                            Weighted-                       Weighted-                      Weighted-
                                                             Average                         Average                        Average
Fixed                                                       Exercise                        Exercise                       Exercise
Options                                        Options        Price          Options          Price        Options           Price
-------                                        -------      ---------        -------        ---------      -------         ---------
                                           (In thousands)                   (In thousands)                 (In thousands)
<S>                                        <C>              <C>             <C>                <C>         <C>                <C>
Outstanding-beginning of year                   4,916         $3.31           4,643           $3.22          4,388           $3.09
Granted                                           940          6.64             485            4.14            682            4.30
Exercised                                        (284)         3.30            (168)           2.95            (17)           2.60
Terminated                                        (59)         4.21             (44)           3.60           (410)           3.18
                                                -----                         -----                          -----

Outstanding-end of year                         5,513         $3.87           4,916           $3.31          4,643           $3.22
                                                =====                         =====                          =====
Options exercisable at end of
    Year                                        3,601         $3.51           2,911           $3.16          2,157           $2.90
                                                =====                         =====                          =====
</TABLE>

      A summary of the weighted average fair value of options granted during the
three years ended December 31, 2002 is presented below:

<TABLE>
<CAPTION>
                                               2002                           2001                              2000
                                     ------------------------        -------------------------        --------------------------
                                                    Weighted-                        Weighted-                         Weighted-
                                                    Average                          Average                            Average
                                     Options       Fair Value        Options        Fair Value        Options         Fair Value
                                     -------       ----------        -------        ----------        -------         ----------
                                  (In thousands)                  (In thousands)                   (In thousands)
<S>                                  <C>           <C>               <C>            <C>               <C>             <C>
Above market                             176          $2.11             93             $1.13            160              $1.34
At market                                629           4.08            382              2.60            286               1.72
Below market                             135           3.01             10              2.16            236               1.86
                                         ---                           ---                              ---

Total granted                            940          $3.55            485             $2.31            682              $1.68
                                         ===                           ===                              ===
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 2002:

<TABLE>
<CAPTION>
                              Number                 Weighted-                                    Number
                           Outstanding                Average               Weighted-           Exercisable            Weighted-
    Range of                    at                   Remaining               Average                at                  Average
 Exercise Prices        December 31, 2002         Contractual Life       Exercise Price     December 31, 2002       Exercise Price
 ---------------        -----------------         ----------------       --------------     -----------------       --------------
                          (In thousands)                                                     (In thousands)
<S>                     <C>                       <C>                    <C>                <C>                     <C>
  $1.88 - 3.12                  994                    4.6 years              $2.49                   994               $2.49
          3.15                2,360                    5.9 years               3.15                 1,456                3.15
   3.25 - 4.79                1,045                    5.4 years               4.01                   683                3.92
   5.00 - 8.55                1,114                    6.7 years               6.50                   468                6.18
                              -----                                                                 -----
  $1.88 - 8.55                5,513                    5.7 years              $3.87                 3,601               $3.51
                              =====                                                                 =====
</TABLE>


                                      F-22
<PAGE>
      A summary of the activity relating to the options awarded by the Company
for employees, directors and agents for the three years ended December 31, 2002,
is as follows:

<TABLE>
<CAPTION>
                                                                                         Agents &         Range of Exercise
                                    Employees        Directors          Others             Total                Prices
                                    ---------        ---------          ------           --------         -----------------
                                                           (In thousands)
<S>                                 <C>              <C>                <C>             <C>               <C>
Balance, January 1, 2000               3,286             129               973             4,388
       Granted                           471              51               160               682            $3.15 - $5.06
       Exercised                         (12)             (5)               --               (17)           $2.25 - $3.15
       Terminated                       (375)             --               (35)             (410)           $2.25 - $4.25
                                       -----             ---             -----             -----
Balance, December 31, 2000             3,370             175             1,098             4,643
       Granted                           334              48               103               485            $3.15 - $6.00
       Exercised                         (83)            (10)              (75)             (168)           $2.20 - $4.06
       Terminated                        (23)             (3)              (18)              (44)           $3.15 - $4.25
                                       -----             ---             -----             -----
Balance, December 31, 2001             3,598             210             1,108             4,916
       Granted                           571              53               316               940            $4.75 - $8.55
       Exercised                        (131)            (10)             (143)             (284)           $2.00 - $5.31
       Terminated                        (34)            (11)              (14)              (59)           $2.25 - $6.45
                                       -----             ---             -----             -----
Balance, December 31, 2002             4,004             242             1,267             5,513
                                       =====             ===             =====             =====
</TABLE>

      At December 31, 2002, approximately 2.3 million, 0.2 million and 1.1
million options were exercisable by employees, directors and agents,
respectively.

      Options Granted to Employees

      Options are generally granted to eligible employees at a price not less
than the market price of the Company's common stock on the date of the grant.
Option shares may be exercised subject to the terms prescribed by the individual
grant agreement, however, options generally vest 50% after the first year and
50% after the second year. Vested options must be exercised not later than ten
years after the date of the grant or following earlier termination of
employment. Because these awards are made at a price equal to or greater than
market on the date of grant, no compensation cost is recognized for such awards.
The Company issued 2.3 million below market stock options with an exercise price
of $3.15 per share to certain employees and members of management on August 1,
1999. During 2000, the Company issued an additional 0.2 million below market
stock options with an exercise price of $3.15 per share to certain relocated
employees and members of management on July 31, 2000. As of December 31, 2002,
the number of these options outstanding decreased to 2.0 million, primarily
through employee terminations. These options generally vest 20% upon grant and
20% each subsequent year. However, 0.6 million vest after seven years, subject
to certain criteria, which could accelerate vesting to five years. These options
must be exercised not later than ten years after the date of the grant or
following earlier termination of employment. In accordance with APB 25, the
Company recorded an expense for the difference between the exercise price of
$3.15 per share and the value of the options on the date of grant of $0.6
million for the year ended December 31, 2002, $0.6 million for 2001 and $0.8
million for 2000.

      Stock Options Issued to Directors

      Directors of the Company are eligible for options under the 1998 ICP. The
1998 ICP provides that unless otherwise determined by the Board, each
non-employee director would be granted an option to purchase 4,500 shares of
Common Stock upon approval of the 1998 ICP by shareholders or, as to directors
thereafter elected, his or her initial election to the Board, and at each annual
meeting of shareholders starting in 1999 at which he or she qualifies as a
non-employee director. The 1998 ICP also provides that the non-employee
directors for American Progressive would be granted an option to purchase 1,500
shares of Common Stock at each annual meeting. Unless otherwise determined by
the Board, such options will have an exercise price equal to 100% of the fair
market value per share on the date of grant and will become exercisable in three
equal installments after each of the first, second and third anniversaries of
the date of grant based on continued service as a director. Because these are
made at a price equal to market, no compensation expense is recognized for such
awards.


                                      F-23
<PAGE>
      Stock Option Plan for Agents and Others

      On December 15, 1995, the Board of Directors approved a plan under which
up to 200,000 options could be granted to agents of the Company's subsidiaries
(subject to insurance law restrictions) and to other persons as to whom the
board of directors believes the grant of such options will serve the best
interests of the Corporation, provided that no options may be granted under this
plan to officers, directors or employees of the Company or of any subsidiary,
while they are serving as such. Such options expire ten years from the date of
the grant. Options outstanding under this plan total 102,786, all of which are
exercisable. In 1998, agents and other persons became eligible for options under
the 1998 ICP. Agents were issued a total of 166,200 options with an exercise
price of $8.42 per share in 2002 for 2001 sales performance 159,600 options with
an exercise price of $5.00 per share in 2001 for 2000 sales performance and
142,000 options with an exercise price of $5.31 per share in 2000 for 1999 sales
performance. These options vest in equal installments over a three year period
and expire five years from the date of grant.

      In connection with the acquisition of the Pennsylvania Life, the Company
adopted additional stock option plans for agents and regional managers of the
Career segment. The Career agents and managers were eligible to earn stock and
stock options based on new premium production at predetermined exercise prices.
A total of 1,486,730 shares were eligible for award under this plan, which ended
at December 31, 2001. Options and stock awarded to agents under this plan cliff
vest 24 months after the end of the year of option grant and expire at the
earliest of the termination date as an agent or 30 days after the option becomes
exercisable. The Career agents were awarded, net of terminations, 67,173 options
with an exercise price of $4.79 related to 2001 sales performance, 59,768
options with an exercise price of $4.17 related to 2000 sales performance and
68,077 options with an exercise price of $3.62 related to 1999 sales
performance. The Career agents were also awarded stock grants, net of
terminations of 71,429 shares based on $4.79 per share for 2001 sales
performance, 63,097 shares based on $4.17 per share for 2000 sales performance
and 68,077 shares based on $3.62 per share for 1999 sales performance. Regional
managers of the Career segment were awarded 64,242 options with an exercise
price of $4.79 for 2001 sales performance, 19,904 options with an exercise price
of $4.17 per share for 2000 performance and 37,762 options with an exercise
price of $3.62 for 1999 sales performance. In accordance with SFAS 123, the fair
values of these options are expensed over the vesting period of each award.
Total expense relating to the above plans was $0.7 million for the year ended
December 31, 2002, $0.2 million for 2001 and $0.5 million for 2000.

9.    STATUTORY CAPITAL AND SURPLUS REQUIREMENTS AND DIVIDEND RESTRICTIONS:

      Statutory Capital and Surplus Requirements

      The Insurance Subsidiaries' statutory basis financial statements are
prepared in accordance with accounting practices prescribed or permitted by
their respective domiciliary states. "Prescribed" statutory accounting practices
include state laws, regulations and general administrative rules, as well as
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed but are authorized by the
relevant insurance departments; such practices may differ from state to state,
may differ from company to company within a state and may change in the future.

      The Insurance Subsidiaries are required to maintain minimum amounts of
capital and surplus as required by regulatory authorities. Each of the Insurance
Subsidiaries' statutory capital and surplus exceeds its respective minimum
requirement. However, substantially more than such minimum amounts are needed to
meet statutory and administrative requirements of adequate capital and surplus
to support the current level of the Insurance Subsidiaries' operations. At
December 31, 2002 and 2001 the statutory capital and surplus, including asset
valuation reserve, of the U.S. insurance subsidiaries totaled $106.5 million and
$107.0 million, respectively. The net statutory loss for the year ended December
31, 2002 was $9.1 million, which included net realized losses of $16.8 million.
Statutory net income for the year ended December 31, 2001 was $14.6 million,
which included net realized gains of $1.3 million.


                                      F-24
<PAGE>
      The National Association of Insurance Commissioners ("NAIC") imposes
regulatory risk-based capital ("RBC") requirements on life insurance
enterprises. At December 31, 2002 all of the Insurance Subsidiaries maintained
ratios of total adjusted capital to RBC in excess of the Authorized Control
Level.

      Penncorp Life (Canada) reports to Canadian regulatory authorities based
upon Canadian statutory accounting principles that vary in some respects from
U.S. statutory accounting principles. Canadian net assets based upon Canadian
statutory accounting principles were $38.1 million and $58.6 million as of
December 31, 2002 and 2001, respectively. Penncorp Life (Canada) maintained a
Minimum Continuing Capital and Surplus Requirement Ratio ("MCCSR") in excess of
the minimum requirement at December 31, 2002.

      Dividend Restrictions

      American Progressive is a New York insurance company. New York State
Insurance Law provides that the declaration or payment of a dividend by American
Progressive requires the approval of the New York Superintendent of Insurance.
Management expects that no dividend would be approved until American Progressive
had generated sufficient statutory profits to offset its negative unassigned
surplus.

      Pennsylvania Life is a Pennsylvania insurance company and American
Exchange, Constitution, Marquette and Union Bankers are Texas insurance
companies. Pennsylvania and Texas insurance law provides that a life insurer may
pay dividends or make distributions from accumulated earning without the prior
approval of the Insurance Department, provided they do not exceed the greater of
(i) 10% of the insurer's surplus as to policyholders as of the preceding
December 31st; or (ii) the insurer's net gain from operations for the
immediately preceding calendar year with 30 days advance notification to the
insurance department. Accordingly, Pennsylvania Life would be able to pay
ordinary dividends of up to $10.6 million to American Exchange (its direct
parent) without the prior approval from the Pennsylvania Insurance Department in
2003. American Exchange, Constitution, Marquette and Union Bankers had negative
earned surplus at December 31, 2002 and would not be able to pay dividends in
2003 without special approval.

      American Pioneer and Peninsular are Florida insurance companies. Florida
State insurance law provides that a life insurer may pay a dividend or make a
distribution without the prior written approval of the department when: a) the
dividend is paid from that portion of the accumulated and available surplus of
the Company as is derived from the net operating profits of its business and its
net realized capital gains; b) the dividend is no more than the greater of (i)
10% of the insurer's surplus as to policyholders derived from net operating
profits on its business and net realized capital gains; or (ii) the insurer's
entire net operating profits and realized net capital gains derived during the
immediately preceding calendar year; c) the insurer will have surplus as to
policyholders equal to or exceeding 115% of the minimum required statutory
surplus as to policyholders after the dividend or distribution is made; and d)
the insurer has filed notice with the department at least 10 business days prior
to the dividend payment or distribution. American Pioneer and Peninsular had
negative unassigned surplus and would not be able to pay dividends in 2003
without special approval.

      Penncorp Life (Canada) is a Canadian insurance company. Canadian law
provides that a life insurer may pay a dividend after such dividend declaration
has been approved by its board of directors and upon at least 10 days prior
notification to the Superintendent of Financial Institutions. In considering
approval of a dividend, the board of directors must consider whether the payment
of such dividend would be in contravention of the Insurance Companies Act of
Canada. Accordingly, we anticipate that Penncorp lLife (Canada) be able to pay
dividends of up to $6.6 million to Universal American in 2003.

      Dividends Paid

      During the year ended December 31, 2002, Pennsylvania Life paid ordinary
dividends to American Exchange totaling $3.0 million. Penncorp Life (Canada)
paid dividends to Universal American totaling $5.9 million during 2002. CHCS
Services, Inc. also paid dividends to Universal American totaling $9.1 million
in 2002.


                                      F-25
<PAGE>
      During the year ended December 31, 2001, Union Bankers paid an ordinary
dividend to American Exchange of $1.7 million. Union Bankers also distributed
its investment in the common stock of Marquette to American Exchange in the form
of an extraordinary dividend. Additionally, Peninsular paid an extraordinary
dividend of $1.9 million to American Pioneer in 2001. CHCS Services, Inc. also
paid dividends to Universal American totaling $9.3 million in 2001.

      During the year ended December 31, 2000, Pennsylvania Life and Union
Bankers paid ordinary dividends to American Exchange of $2.9 million and $2.0
million, respectively. Additionally, Peninsular Life paid an extraordinary
dividend of $1.5 million to Universal American in 2000.

10.   DEFERRED POLICY ACQUISTION COSTS:

      Details with respect to deferred policy acquisition costs (in thousands)
for the three years ended December 31, 2002 are as follows:

<TABLE>
<S>                                                                                                     <C>
      Balance at January 1, 2000                                                                        $     34,943

                Capitalized costs                                                                             24,200
                Adjustment relating to unrealized loss on fixed maturities                                    (2,209)
                Foreign currency adjustment                                                                       (8)
                Amortization                                                                                  (6,866)
                Adjustment relating to the decision to exit the major medical line of business                (1,409)
                                                                                                        ------------
      Balance at December 31, 2000                                                                            48,651

                Capitalized costs                                                                             29,550
                Adjustment relating to unrealized loss on fixed maturities                                    (1,334)
                Foreign currency adjustment                                                                     (478)
                Amortization                                                                                 (10,364)
                                                                                                        ------------
      Balance at December 31, 2001                                                                            66,025

                Capitalized costs                                                                             40,550
                Adjustment relating to unrealized loss on fixed maturities                                    (1,958)
                Foreign currency adjustment                                                                      176
                Amortization                                                                                 (12,700)
                                                                                                        ------------
      Balance at December 31, 2002                                                                      $     92,093
                                                                                                        ============
</TABLE>

      During the year ended December 31, 2000, the Company decided to exit the
major medical line of business. This resulted in a reduction in the projected
gross profits for that line of business and accordingly, deferred policy
acquisition costs of $1.4 million were written off as of December 31, 2000. No
deferred policy acquisition costs were written off for the years ended December
31, 2002 or 2001.


                                      F-26
<PAGE>
11.   ACCIDENT AND HEALTH POLICY AND CONTRACT CLAIM LIABILITIES:

Activity in the accident & health policy and contract claim liability is as
follows:

<TABLE>
<CAPTION>
                                                 2002            2001            2000
                                               --------        --------        --------
                                                            (In thousands)
<S>                                            <C>             <C>             <C>
      Balance at beginning of year             $ 79,596        $ 77,884        $ 72,261
           Less reinsurance recoverables        (44,685)        (43,502)        (36,231)
                                               --------        --------        --------

      Net balance at beginning of year           34,911          34,382          36,030
                                               --------        --------        --------

      Balances acquired                           3,198              --              --

      Incurred related to:
           Current year                          99,491          74,204          59,700
           Prior years                           (1,506)           (613)            299
                                               --------        --------        --------
      Total incurred                             97,985          73,591          59,999
                                               --------        --------        --------

      Paid related to:
           Current year                          68,329          51,627          43,843
           Prior years                           28,576          21,094          17,631
                                               --------        --------        --------
      Total paid                                 96,905          72,721          61,474
                                               --------        --------        --------

      Foreign currency adjustment                   102            (341)           (173)
                                               --------        --------        --------

      Net balance at end of year                 39,291          34,911          34,382
      Plus reinsurance recoverables              48,925          44,685          43,502
                                               --------        --------        --------

      Balance at end of year                   $ 88,216        $ 79,596        $ 77,884
                                               ========        ========        ========
</TABLE>

      In 2002, the Company acquired, through a 100% quota share reinsurance
agreement, a block on Medicare supplement business representing approximately
$20.0 million of annualized premium in force. The balances acquired represent
the accident & health claim liabilities acquired in this transaction.

      During 2002, the favorable development on the accident and health claims
reserves resulted from the improvement in claims management processes in the
Career Agency segment. For each of the years ended December 31, 2001 and 2000,
the favorable or unfavorable development on accident and health claim reserves
was less than two percent of the prior year net balance.

12. REINSURANCE:

      In the normal course of business, the Company reinsures portions of
certain policies that it underwrites. Accordingly, the Company is party to
several reinsurance agreements on its life and accident & health insurance
risks. The Company's senior market accident & health insurance products are
reinsured under coinsurance treaties with unaffiliated insurers, while the life
insurance risks are reinsured under either coinsurance or yearly-renewable term
treaties with unaffiliated insurers. Under coinsurance treaties, the reinsurer
receives an agreed upon percentage of all premiums and reimburses the Company
that same percentage of any losses. In addition, the Company receives certain
allowances from the reinsurers to cover commissions, expenses and premium taxes.
Under yearly-renewable term treaties, the reinsuring company receives premiums
at an agreed upon rate and holds the required reserves for its share of the risk
on a yearly-renewable term basis. The Company is also party to certain
reinsurance agreements whereby the Company limits its loss in excess of certain
thresholds. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk to minimize its exposure to significant
losses from reinsurer insolvencies. A contingent liability exists with respect
to reinsurance that may become a liability of the Company in the event that the
reinsurers should be unable to meet the obligations that they assumed.

      The Company has several quota share reinsurance agreements in place with
Hannover Life Re of America ("Hannover"), General & Cologne Life Re of America
("General & Cologne") and Transamerica Occidental Life ("Transamerica"),
(collectively, the "Reinsurers"), which Reinsurers are rated A or better by A.M.
Best. These agreements cover various accident & health insurance products
written or acquired by the Company and contain ceding percentages ranging
between 50% and 100%.


                                      F-27
<PAGE>
      At December 31, 2002 and 2001 amounts recoverable from all our reinsurers
were as follows:

<TABLE>
<CAPTION>
                                                  2002              2001
                                                --------          --------
               Reinsurer                              (In thousands)
<S>                                             <C>               <C>
               General & Cologne                $ 99,412          $ 94,296
               Hannover                           74,302            67,849
               Transamerica                       15,680            19,430
               Other                              30,706            30,957
                                                --------          --------
                    Total                       $220,100          $212,532
                                                ========          ========
</TABLE>

      At December 31, 2002, the total amount recoverable from reinsurers
included $216.4 million recoverable on future policy benefits and unpaid claims
and $3.7 million for amounts due from reinsurers on paid claims, commissions and
expense allowances net of premiums reinsured. At December 31, 2001, the total
amount recoverable from reinsurers included $207.4 million recoverable on future
policy benefits and unpaid claims and $5.1 million for amounts due from
reinsurers on paid claims, commissions and expense allowances net of premiums
reinsured.

      A summary of reinsurance activity for the three years ended December 31,
2002 is presented below:

<TABLE>
<CAPTION>
                                                            As of December 31,
                                           ---------------------------------------------------
                                               2002                2001                 2000
                                           -----------         -----------         -----------
                                                             (In thousands)
<S>                                        <C>                 <C>                 <C>
      Life insurance in force
        Gross amount                       $ 3,105,477         $ 3,266,564         $ 3,651,778
        Ceded to other companies              (692,132)           (687,615)           (916,669)
        Assumed from other companies            62,423              48,747              51,175
                                           -----------         -----------         -----------
        Net amount                         $ 2,475,768         $ 2,627,696         $ 2,786,284
                                           ===========         ===========         ===========
      Percentage of assumed to net                   3%                  2%                  2%

</TABLE>

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                           ---------------------------------------------------
      Premiums                                 2002                2001               2000
                                           -----------         -----------         -----------
                                                              (In thousands)
<S>                                        <C>                 <C>                 <C>
        Life insurance                     $    37,682         $    36,411         $    41,371
        Accident & health                      549,004             477,164             409,952
                                           -----------         -----------         -----------
          Total gross premiums                 586,686             513,575             451,323
                                           -----------         -----------         -----------

      Ceded to other companies
        Life insurance                          (7,656)             (7,875)            (10,210)
        Accident & health                     (317,528)           (279,043)           (224,415)
                                           -----------         -----------         -----------
          Total ceded premiums                (325,184)           (286,918)           (234,625)
                                           -----------         -----------         -----------

      Assumed from other companies
        Life insurance                           1,044               2,071               2,538
        Accident & health                        4,031                 478                 517
                                           -----------         -----------         -----------
         Total assumed premium                   5,075               2,549               3,055
                                           -----------         -----------         -----------

      Net amount
        Life insurance                          31,070              30,607              33,699
        Accident & health                      235,507             198,599             186,054
                                           -----------         -----------         -----------
          Total net premium                $   266,577         $   229,206         $   219,753
                                           ===========         ===========         ===========

      Percentage of assumed to net
        Life insurance                               3%                  7%                  8%
        Accident & health                            2%                  -%                  -%
                                           -----------         -----------         -----------
                                           -----------         -----------         -----------
        Total assumed to total net                   2%                  1%                  1%
                                           ===========         ===========         ===========
                                           ===========         ===========         ===========

      Claims recovered                     $   224,676         $   201,121         $   175,700
                                           ===========         ===========         ===========
</TABLE>


                                      F-28
<PAGE>
13.   LOAN AGREEMENTS:

      The Company entered into an $80 million credit facility consisting of a
$70 million term loan and a $10 million revolving loan facility in connection
with the 1999 Acquisition on July 30, 1999. The term loan calls for interest at
the London Interbank Offering Rate for one, two, three or six months ("LIBOR")
plus 350 basis points with principal repayment over a seven-year period and a
final maturity date of July 31, 2006. The Company incurred loan origination fees
of $3.5 million, which were capitalized and are amortized on a straight-line
basis over the life of the loan. At December 31, 2002, the unamortized balance
was $1.9 million. The term loan is secured by a first priority interest in 100%
of the outstanding common stock of American Exchange, American Progressive,
WorldNet and 65% of the outstanding common stock of UAFC (Canada) Inc. (the 100%
parent of Penncorp Life (Canada)) and a subordinate interest in 100% of the
outstanding common stock of American Pioneer. In August 2000, to fund our
acquisition of CHCS, the Company drew down $3.0 million of the revolving loan
facility, which amount currently incurs interest at a rate consistent with the
term loan and is due to mature on July 31, 2004. The Company pays an annual
commitment fee of 50 basis points on the unutilized facility, which is currently
$7.0 million. For the year ended December 31, 2002, 2001 and 2000, the Company
paid $2.6 million, $5.2 million and $7.1 million, respectively in interest and
fees in connection with the credit facility.

      The following table shows the schedule of remaining principal payments (in
thousands) on the Company's outstanding term loan, with the final payment in
July 2006:

<TABLE>
<S>                                 <C>
              2003                  $   11,525
              2004                      12,400
              2005                      13,275
              2006                      10,575
                                    ----------
                Total               $   47,775
                                    ==========
</TABLE>

      The following table sets forth certain summary information with respect to
total borrowings of the Company for the three years ended December 31, 2002:

<TABLE>
<CAPTION>
                                As of December 31,                             Year Ended December 31,
                       ------------------------------          ----------------------------------------------------
                                                                                   Weighted
                                                                 Maximum           Average(a)               Average
                          Amount             Interest             Amount             Amount                Interest
                       Outstanding             Rate            Outstanding        Outstanding              Rate (b)
                       -----------           --------          -----------        -----------              --------
                      (In thousands)                         (In thousands)     (In thousands)
<S>                   <C>                    <C>             <C>                <C>                        <C>
      2002               $ 50,775               5.33%           $ 61,475            $ 55,731                 5.44%
                         ========              =====            ========            ========                =====
      2001               $ 61,475               5.43%           $ 69,650            $ 65,490                 7.84%
                         ========              =====            ========            ========                =====
      2000               $ 69,650              10.22%           $ 71,500            $ 70,056                10.05%
                         ========              =====            ========            ========                =====
</TABLE>

      ----------
      (a)   The average amounts of borrowings outstanding were computed by
            determining the arithmetic average of the months' average
            outstanding in borrowings.

      (b)   The weighted-average interest rates were determined by dividing
            interest expense related to total borrowings by the average amounts
            outstanding of such borrowings.

      In connection with the pending acquisition, the Company intends to
refinance the above term loan. It is anticipated that the new credit facility
will total $85 million, consisting of a $70 million five year term loan with a
$15 million revolver. The Company intends to use the proceeds from the term
loan, along with existing cash, to repay the existing term loan and finance the
acquisition of Pyramid Life. The refinancing, if consumated, would trigger the
immediate amortization of the capitalized loan origination fees from the
existing term loan resulting in an pre-tax expense of approximately $1.9
million.


                                      F-29
<PAGE>
14. TRUST PREFERRED SECURITIES:

      In December 2002, the Company formed Universal American Statutory Trust I,
a Connecticut statutory business trust (the "Trust"), and issued, through a
private placement, $15.0 million, thirty year floating rate trust preferred
securities (the "Capital Securities"). The Trust will have the right to call the
Capital Securities at par after five years from the date of issuance. The
proceeds from the sale of the Capital Securities, together with proceeds from
the sale by the Trust of its common securities to the Company, were invested in
floating rate junior subordinated deferrable interest debentures of the Company
due 2032 (the "Junior Subordinated Debt"). The proceeds were used to support the
growth of the Company's insurance subsidiaries and retained at the parent
company in anticipation of funding the acquisition of Pyramid Life (see Note 4 -
Pending Acquisition).

      The Capital Securities represent an undivided beneficial interest in the
Trust's assets, which consist solely of the Junior Subordinated Debt. Holders of
Capital Securities generally have no voting rights. The Company owns all of the
common securities of the Trust. Holders of both the Capital Securities and the
Junior Subordinated Debt are entitled to receive cumulative cash distributions
accruing from December 4, 2002, the date of issuance, and payable quarterly in
arrears commencing March 4, 2003 at a floating rate equal to the three-month
LIBOR plus 4.0% (currently 5.4%) of the stated liquidation amount of $1,000 per
Capital Security. The floating rate resets quarterly and is limited to a maximum
of 12.5% through December 4, 2007. The Capital Securities are subject to
mandatory redemption upon repayment of the Junior Subordinated Debt at maturity
or upon earlier redemption. The Junior Subordinated Debt is unsecured and ranks
junior and subordinate in right of payment to all present and future senior debt
of the Company and is effectively subordinated to all existing and future
obligations of the Company's subsidiaries. The Company has the right to redeem
the Junior Subordinated Debt on or after December 4, 2007.

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

      The Capital Securities have not been and will not be registered under the
Securities Act of 1933, as amended (the "Securities Act"), and will only be
offered and sold under an applicable exemption from registration requirements
under the Securities Act.

15.   COMMITMENTS AND CONTINGENCIES:

      The Company is obligated under certain lease arrangements for its
executive and administrative offices in New York, Florida, Texas, and Ontario,
Canada. Rent expense for the three years ended December 2002, 2001 and 2000 was
$1.7 million, $1.8 million, and $2.9 million, respectively. The minimum rental
commitments, subject to escalation clauses, at December 31, 2002 under
non-cancelable operating leases (in thousands) are as follows:

            2003                             $   2,005
            2004                                 1,807
            2005                                 1,279
            2006                                 1,145
            2007 and thereafter                  3,764
                                             ---------
                 Totals                      $  10,000
                                             =========


                                      F-30
<PAGE>
      In addition to the above, Pennsylvania Life is the named lessee on
approximately 40 properties occupied by our Career Agents for uses as field
offices. Rent for these field offices is reimbursed by the agents. Total annual
rent obligation for these field offices is approximately $633,000.

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

      A lawsuit has been commenced against Universal American, its subsidiary
American Progressive Life & Health Insurance Company, and Richard Barasch, by
Marvin Barasch, the former Chairman of American Progressive. The suit primarily
arises out of Marvin Barasch's employment with American Progressive and includes
unrelated personal claims against Richard Barasch. The Company and Richard
Barasch believe that the allegations are totally without merit and that the
likelihood of material recovery by the plaintiff is remote.

16.   UNIVERSAL AMERICAN FINANCIAL CORP. 401(K) SAVINGS PLAN:

      Effective April 1, 1992, the Company adopted the Universal American
Financial Corp. 401(k) Savings Plan ("Savings Plan"). The Savings Plan is a
voluntary contributory plan under which employees may elect to defer
compensation for federal income tax purposes under Section 401(k) of the
Internal Revenue Code of 1986. The employee is entitled to participate in the
Savings Plan by contributing through payroll deductions up to 100% of the
employee's compensation. The participating employee is not taxed on these
contributions until they are distributed. Moreover, the employer's contributions
vest at the rate of 25% per plan year, starting at the end of the second year.
Currently, the Company matches 50% of the employee's first 4% of contributions
to 2% of the employee's eligible compensation with Company common stock. The
Company made matching contributions under the Savings Plan of $0.3 million in
2002, $0.3 million in 2001 and, $0.3 million in 2000. Employees are required to
hold the employer contribution in Company common stock until vested, at which
point the employee has the option to transfer the amount to any of the other
investments available under the Savings Plan. Amounts credited to employee's
accounts under the Savings Plan are invested by the employer-appointed
investment committee. At December 31, 2002 and 2001, the Savings Plan held
533,732 and 468,943 shares, respectively of the Company's common stock, which
represents 37.5% of total plan assets as of December 31, 2002 and 34.4% of total
plan assets as of December 31, 2001. Generally, a participating employee is
entitled to distributions from the Savings Plan upon termination of employment,
retirement, death or disability. Savings Plan participants who qualify for
distributions may receive a single lump sum, have the assets transferred to
another qualified plan or individual retirement account, or receive a series of
specified installment payments.

17.   DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:

      The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

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

      b.    Equity securities: For equity securities carried at fair value, fair
            value equals quoted market price.

      c.    Cash and cash equivalents and policy loans: For cash and cash
            equivalents and policy loans, the carrying amount is a reasonable
            estimate of fair value.


                                      F-31
<PAGE>
      d.    Investment contract liabilities: For annuity and universal life type
            contracts, the carrying amount is the policyholder account value
            (see Note 2); estimated fair value equals the policyholder account
            value less surrender charges.

      e.    Loan payable and trust preferred securities: Fair value for the loan
            payable and trust preferred securities is equal to the carrying
            amount.

      f.    Accounts receivable and uncollected premiums: Accounts receivable
            and uncollected premiums are primarily insurance contract related
            receivables, which are determined based upon the underlying
            insurance liabilities and added reinsurance amounts.

      The estimated fair values of the Company's financial instruments as of
December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                           2002                          2001
                                                ------------------------      ------------------------
                                                 Carrying                     Carrying
                                                  Amount      Fair Value        Amount      Fair Value
                                                --------      ----------      ---------     ----------
                                                     (In thousands)              (In thousands)
<S>                                             <C>           <C>             <C>           <C>
      Financial assets:
      Fixed maturities available for sale       $934,950       $934,950       $799,218       $799,218
      Equity securities                            1,645          1,645          4,199          4,199
      Policy loans                                23,745         23,745         24,043         24,043
      Other invested assets (a)                    1,305             --          1,362             --
      Mortgage loans (a)                           1,503             --          2,411             --
      Cash and cash equivalents                   36,754         36,754         47,990         47,990

      Financial liabilities:
        Investment contract liabilities          271,578        253,288        236,742        219,330
        Loan payable                              50,775         50,775         61,475         61,475
        Trust preferred securities                15,000         15,000             --             --
</TABLE>

      ----------
      (a)   Mortgage loans are carried at the aggregate unpaid balances and the
            fair market value was not determined as the amount involved was
            considered to be immaterial. Other invested assets consists mainly
            of collateralized loans which are carried at cost. The determination
            of fair value for these invested assets is not practical because
            there is no active trading market for such invested assets.

18.   EARNINGS PER SHARE:

      The reconciliation of the numerators and the denominators for the
      computation of basic and diluted EPS for the years ended December 31,
      2002, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                             For the Year Ended December 31, 2002
                                                        ----------------------------------------------
                                                           Income            Shares          Per Share
                                                        (Numerator)      (Denominator)        Amount
                                                        -----------      -------------       ---------
                                                         (In thousands, per share amounts in dollars)
<S>                                                     <C>              <C>                 <C>
      Weighted average common stock outstanding                              53,071
      Less: Weighted average treasury shares                                   (132)
                                                                             ------

      Basic EPS
      Net income applicable to common shareholders       $ 30,127            52,939           $   0.57
                                                         ========            ======           ========

      Effect of Dilutive Securities
      Stock options                                                           4,853
      Treasury stock purchased from proceeds of
        exercise of options                                                  (3,534)
                                                                             ------

      Diluted EPS
      Net income applicable to common
        Shareholders plus assumed conversions            $ 30,127            54,258           $   0.56
                                                         ========            ======           ========
</TABLE>


                                      F-32
<PAGE>
<TABLE>
<CAPTION>
                                                                  For the Year Ended December 31, 2001
                                                           --------------------------------------------------
                                                             Income               Shares            Per Share
                                                           (Numerator)         (Denominator)          Amount
                                                           -----------         -------------        ---------
                                                               (In thousands, per share amounts in dollars)
<S>                                                        <C>                 <C>                  <C>
      Weighted average common stock outstanding                                   49,591
      Less: Weighted average treasury shares                                         (66)
                                                                                  ------

      Basic EPS
      Net income applicable to common shareholders           $ 28,925             49,525             $   0.58
                                                             ========             ======             ========

      Effect of Dilutive Securities
      Stock options                                                                4,113
      Treasury stock purchased from proceeds of
        exercise of options                                                       (3,181)
                                                                                  ------
      Diluted EPS
      Net income applicable to common
        Shareholders plus assumed conversions                $ 28,925             50,457             $   0.57
                                                             ========             ======             ========
</TABLE>

<TABLE>
<CAPTION>
                                                                  For the Year Ended December 31, 2000
                                                           --------------------------------------------------
                                                             Income               Shares            Per Share
                                                           (Numerator)         (Denominator)          Amount
                                                           -----------         -------------        ---------
                                                               (In thousands, per share amounts in dollars)
<S>                                                        <C>                 <C>                  <C>
      Weighted average common stock outstanding                                   46,761
      Less: Weighted average treasury shares                                         (31)
                                                                                  ------
      Basic EPS
      Net income applicable to common shareholders           $ 22,885             46,730             $   0.49
                                                             ========             ======             ========
      Effect of Dilutive Securities
      Stock options                                                                1,881
      Treasury stock purchased from proceeds of
        exercise of options                                                       (1,496)
                                                                                  ------
      Diluted EPS
      Net income applicable to common
        Shareholders plus assumed conversions                $ 22,885             47,115             $   0.49
                                                             ========             ======             ========
</TABLE>

19.   OTHER COMPREHENSIVE INCOME

The components of other comprehensive income, and the related tax effects for
each component, for the years ended December 31, 2002, 2001 and 2000 are as
follows:

<TABLE>
<CAPTION>
                                                         Before Tax    Tax Expense     Net of Tax
                                                           Amount       (Benefit)        Amount
                                                         ----------    -----------     ----------
                                                                     (In thousands)
<S>                                                      <C>           <C>             <C>
      Year ended December 31, 2002

      Net unrealized gain arising during
        the year (net of deferred acquisition costs)       $31,605       $11,066         $20,539
      Reclassification adjustment for gains
        included in net income                               5,083         1,779           3,304
                                                           -------       -------         -------
         Net unrealized gains                               36,688        12,845          23,843
      Foreign currency translation adjustment                  679           238             441
                                                           -------       -------         -------

      Other comprehensive income                           $37,367       $13,083         $24,284
                                                           =======       =======         =======
</TABLE>


                                      F-33
<PAGE>
<TABLE>
<CAPTION>
                                                              Before Tax         Tax Expense          Net of Tax
                                                                Amount            (Benefit)             Amount
                                                              ----------         -----------          ----------
                                                                              (In thousands)
<S>                                                           <C>                <C>                  <C>
      Year ended December 31, 2001

      Net unrealized gain arising during
        the year (net of deferred acquisition costs)           $  8,572            $ 3,001            $  5,571
      Reclassification adjustment for gains
        included in net income                                   (3,078)            (1,078)             (2,000)
                                                               --------            -------            --------
         Net unrealized gains                                     5,494              1,923               3,571
      Foreign currency translation adjustment                    (3,996)            (1,153)             (2,843)
                                                               --------            -------            --------

      Other comprehensive income                               $  1,498            $   770            $    728
                                                               ========            =======            ========
</TABLE>

<TABLE>
<CAPTION>
                                                              Before Tax         Tax Expense          Net of Tax
                                                                Amount            (Benefit)             Amount
                                                              ----------         -----------          ----------
                                                                              (In thousands)
<S>                                                           <C>                <C>                  <C>
      Year ended December 31, 2000
      Net unrealized gain arising during
        the year (net of deferred acquisition costs)           $ 20,531            $ 7,498            $ 13,033
      Reclassification adjustment for gains included
        in net income                                              (146)               (51)                (95)
                                                               --------            -------            --------
         Net unrealized gains                                    20,385              7,447              12,938
      Foreign currency translation adjustment                    (1,434)              (258)             (1,176)
                                                               --------            -------            --------

      Other comprehensive income                               $ 18,951            $ 7,189            $ 11,762
                                                               ========            =======            ========
</TABLE>

20.   CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

      The quarterly results of operations for the three years ended December 31,
2002 are presented below. Due to the use of weighted average shares outstanding
when determining the denominator for earnings per share, the sum of the
quarterly per common share amounts may not equal the per common share amounts.

<TABLE>
<CAPTION>
                   2002                                                    Three Months Ended
--------------------------------------------           --------------------------------------------------------------
                                                       March 31,      June 30,       September 30,       December 31,
                                                       ---------      --------       -------------       ------------
                                                                            (In thousands)
<S>                                                    <C>            <C>            <C>                 <C>
Total revenue                                           $82,166       $76,690            $83,956            $88,711
Total benefits, claims & other expenses                  70,541        72,217             71,079             73,656
                                                        -------       -------            -------            -------

Income before income taxes                               11,625         4,473             12,877             15,055
Income tax expense                                        4,127         1,155              4,558              4,063
                                                        -------       -------            -------            -------

Net income applicable to common shareholders            $ 7,498       $ 3,318            $ 8,319            $10,992
                                                        =======       =======            =======            =======
Basic earnings per share                                $  0.14       $  0.06            $  0.16            $  0.21
                                                        =======       =======            =======            =======
Diluted earnings per share                              $  0.14       $  0.06            $  0.15            $  0.20
                                                        =======       =======            =======            =======
</TABLE>

<TABLE>
<CAPTION>
                   2001                                                   Three Months Ended
--------------------------------------------           --------------------------------------------------------------
                                                       March 31,      June 30,       September 30,       December 31,
                                                       ---------      --------       -------------       ------------
                                                                            (In thousands)
<S>                                                    <C>            <C>            <C>                 <C>
Total revenue                                           $76,671       $74,764            $73,851            $75,657
Total benefits, claims & other expenses                  65,750        65,298             63,132             63,401
                                                        -------       -------            -------            -------

Income before income taxes                               10,921         9,466             10,719             12,256
Income tax expense                                        3,885         3,392              3,797              3,364
                                                        -------       -------            -------            -------

Net income applicable to common shareholders            $ 7,036       $ 6,074            $ 6,922            $ 8,892
                                                        =======       =======            =======            =======
Basic earnings per share                                $  0.15       $  0.13            $  0.13            $  0.17
                                                        =======       =======            =======            =======
Diluted earnings per share                              $  0.15       $  0.13            $  0.13            $  0.16
                                                        =======       =======            =======            =======
</TABLE>


                                      F-34
<PAGE>
<TABLE>
<CAPTION>
                  2000                                                            Three Months Ended
-------------------------------------------             ------------------------------------------------------------------

                                                        March 31,          June 30,       September 30,       December 31,
                                                        ---------          --------       -------------       ------------
                                                                                (In thousands)
<S>                                                     <C>                <C>            <C>                 <C>
Total revenue                                           $70,770            $71,826            $71,469            $70,026
Total benefits, claims & other expenses                  61,956             62,990             63,203             62,876
                                                        -------            -------            -------            -------

Income before income taxes                                8,814              8,836              8,266              7,150
Income tax expense                                        3,155              3,207              2,853                966
                                                        -------            -------            -------            -------

Net income applicable to common shareholders            $ 5,659            $ 5,629            $ 5,413            $ 6,184
                                                        =======            =======            =======            =======

Basic earnings per share                                $  0.12            $  0.12            $  0.12            $  0.13
                                                        =======            =======            =======            =======
Diluted earnings per share                              $  0.12            $  0.12            $  0.12            $  0.13
                                                        =======            =======            =======            =======
</TABLE>

      Significant Fourth Quarter Adjustments

      During the fourth quarter, the Company performs an annual evaluation of
the recoverability of its tax net operating loss carryforwards, based on a
projection of future taxable income. As a result of the continued profitability
of the Company's operating segments, valuation allowances on certain of the
Company's tax loss carryforwards were no longer considered necessary. The tax
valuation allowance released through deferred tax expense was $1.6 million, or
$0.03 per diluted share, during the fourth quarter of 2002, $0.7 million, or
$0.01 per diluted share, during 2001 and $1.3 million, or $0.03 per diluted
share, during 2000. During the fourth quarter of 2000, management decided to
exit the individual major medical business to the extent possible. Based on this
decision the deferred acquisition costs for that line of business were written
off, resulting in a pre tax charge of $1.4 million ($0.02 per diluted share
after tax) in the fourth quarter of 2000.

21.   BUSINESS SEGMENT INFORMATION:

      The Company's principal business segments are: Career Agency, Senior
Market Brokerage and Administrative Services. The Company also reports the
corporate activities of our holding company in a separate segment. During 2002
we modified the way we report segment information by combining our previously
defined Senior Market Brokerage and Special Markets segments into one segment,
Senior Market Brokerage. Our decision to combine the two segments was based on
the significant reduction in the insurance in force in the Special Markets
segment as a result of our exit from the major medical line of business.
Reclassifications have been made to conform prior year amounts to the current
year presentation. A description of these segments follows:

      CAREER AGENCY -- The Career Agency segment is comprised of the operations
      of Pennsylvania Life and Penncorp Life (Canada), both of which we acquired
      in 1999. Penncorp Life (Canada) operates exclusively in Canada, while
      Pennsylvania Life operates in the United States. The Career Agency segment
      includes the operations of a career agency field force, which distributes
      fixed benefit accident and sickness disability insurance, life insurance,
      supplemental senior health insurance and annuities in the United States
      and Canada. The career agents are under exclusive contract with either
      Pennsylvania Life or Penncorp Life (Canada).

      SENIOR MARKET BROKERAGE -- This segment includes the operations of our
      other insurance subsidiaries, primarily American Pioneer, American
      Progressive and Constitution, which distribute senior market products
      through general agency and brokerage distribution systems. The products
      include Medicare supplement/select, long term care, senior life insurance
      and annuities. In 2002, we combined our Special Markets segment with our
      Senior Market Brokerage segment.

      ADMINISTRATIVE SERVICES -- CHCS Services, Inc. acts as a third party
      administrator and service provider for both affiliated and unaffiliated
      insurance companies, primarily with respect to senior market insurance
      products and non-insurance products. The services that we perform include
      policy underwriting and issuance, telephone and face-to-face verification,
      policyholder services, claims adjudication, case management, care
      assessment and referral to health care facilities.


                                      F-35
<PAGE>
      CORPORATE -- This segment reflects the activities of our holding company,
      including the payment of interest on our debt, certain senior executive
      compensation, and the expense of being a public company.

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

      Financial data by segment for the three years ended December 31, 2002 is
as follows:

<TABLE>
<CAPTION>
                                           December 31, 2002               December, 31, 2001              December 31, 2000
                                     --------------------------        -------------------------       ------------------------
                                                                             (in thousands)
                                                       Segment                           Segment                        Segment
                                                       Income                            Income                         Income
                                                       (Loss)                            (Loss)                         (Loss)
                                                       Before                            Before                         Before
                                      Segment          Income           Segment          Income         Segment         Income
                                      Revenue           Taxes           Revenue           Taxes         Revenue          Taxes
                                     ---------        ---------        ---------        --------       ---------        -------
<S>                                  <C>              <C>              <C>              <C>            <C>              <C>
Career Agency                        $ 159,215        $  33,470        $ 160,295        $ 28,427       $ 161,719        $28,814
Senior Market Brokerage                165,498           14,904          128,441          13,716         116,825         10,281
Administrative Services                 43,218            7,632           33,153           6,625          24,207          3,844
                                     ---------        ---------        ---------        --------       ---------        -------
   Subtotal                            367,931           56,006          321,889          48,768         302,751         42,939
Corporate                                                (6,893)             360          (8,483)            358        (10,019)
Intersegment revenues                  (31,325)              --          (24,384)             --         (19,164)            --
                                     ---------        ---------        ---------        --------       ---------        -------
  Segment operating total(1)           336,606           49,113          297,865          40,285         283,945         32,920
Adjustments to segment total
   Net realized (losses) gains(1)       (5,083)          (5,083)           3,078           3,078             146            146
                                     ---------        ---------        ---------        --------       ---------        -------

                                     $ 331,523        $  44,030        $ 300,943        $ 43,363       $ 284,091        $33,066
                                     =========        =========        =========        ========       =========        =======
</TABLE>

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

      Identifiable assets by segment as of December 31, 2002 and 2001 are as
follows:

<TABLE>
<CAPTION>
                                       December 31, 2002      December 31, 2001
                                       -----------------      -----------------
<S>                                    <C>                    <C>
      Career Agency                       $   683,720           $   605,758
      Senior Market Brokerage                 707,967               663,069
      Administrative Services                  19,332                30,930
                                          -----------           -----------
         Subtotal                           1,411,019             1,299,757
      Corporate                               375,219               304,434
      Intersegment assets(1)                 (384,570)             (333,975)
                                          -----------           -----------

                                          $ 1,401,668           $ 1,270,216
                                          ===========           ===========
</TABLE>

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


                                      F-36
<PAGE>
22.   FOREIGN OPERATIONS:

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

<TABLE>
<CAPTION>
                              2002           2001           2000
                            --------       --------       --------
      Revenues                         (In thousands)
<S>                         <C>            <C>            <C>
        United States       $103,480       $103,432       $104,848
        Canada                55,735         56,863         56,871
                            --------       --------       --------
          Total             $159,215       $160,295       $161,719
                            ========       ========       ========
</TABLE>

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

<TABLE>
<CAPTION>
                              2002           2001
                            --------       --------
                                 (In thousands)
<S>                         <C>            <C>
      Assets                $175,365       $173,911
                            ========       ========
      Liabilities           $124,843       $111,211
                            ========       ========
</TABLE>


                                      F-37
<PAGE>
  SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                           DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                               December 31, 2002
                                             -----------------------------------------------------
                                              Face         Amortized        Fair          Carrying
Classification                                Value           Cost          Value           Value
--------------                               --------      ---------       --------       --------
                                                              (In thousands)
<S>                                          <C>           <C>             <C>            <C>
US Treasury securities and obligations
  of US Government                           $ 89,389       $ 90,189       $ 91,850       $ 91,850
Corporate bonds                               374,294        374,087        402,743        402,743
Foreign bonds (1)                             315,241        166,689        176,545        176,545
Asset and mortgage-backed securities          253,077        253,089        263,812        263,812
Equity securities                                              1,661          1,645          1,645
                                                            --------       --------       --------
  Sub-total                                                  885,715       $936,595        936,595
                                                                           ========
Policy loans                                                  23,745                        23,745
Other invested assets                                          2,808                         2,808
                                                            --------                      --------
  Total investments                                         $912,268                      $963,148
                                                            ========                      ========
</TABLE>

<TABLE>
<CAPTION>
                                                            December 31, 2001
                                             -----------------------------------------------------
                                              Face         Amortized        Fair          Carrying
Classification                                Value           Cost          Value           Value
--------------                               --------      ---------       --------       --------
                                                              (In thousands)
<S>                                          <C>           <C>             <C>            <C>
US Treasury securities and obligations
  of US Government                           $ 35,263       $ 35,719       $ 36,970       $ 36,970
Corporate bonds                               357,336        357,431        364,616        364,616
Foreign bonds (1)                             241,925        157,077        157,662        157,662
Asset and mortgage-backed securities          245,406        236,617        239,970        239,970
Equity securities                                              4,339          4,199          4,199
                                                            --------       --------       --------
  Sub-total                                                  791,183       $803,417        803,417
                                                                           ========
Policy loans                                                  24,043                        24,043
Other invested assets                                          3,773                         3,773
                                                            --------                      --------
  Total investments                                         $818,999                      $831,233
                                                            ========                      ========
</TABLE>

      (1)   Primarily Canadian dollar denominated bonds supporting our Canadian
            insurance reserves.

                  See accompanying independent auditor's report


                                      F-38
<PAGE>
           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                (PARENT COMPANY)
                            CONDENSED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                    2002           2001
                                                                                  --------       --------
ASSETS                                                                                 (In thousands)
<S>                                                                               <C>            <C>
Cash and cash equivalents                                                         $ 12,862       $  2,660
Fixed maturities, available for sale                                                    --          3,028
Investments in subsidiaries at equity                                              297,147        220,418
Note receivable from affiliate                                                      60,000         70,000
Capitalized loan origination fees                                                    1,899          2,428
Deferred tax asset                                                                     169            781
Other assets                                                                         3,142          5,119
                                                                                  --------       --------

Total assets                                                                       375,219        304,434
                                                                                  ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Loan payable                                                                        50,775         61,475
Company obligated mandatorily redeemable preferred securities of subsidiary
    trust holding solely junior subordinated debentures                             15,000             --
Note payable to affiliates                                                          16,036          2,400
Due to subsidiary                                                                    4,653          6,468
Amounts payable and other liabilities                                                1,986          3,321
                                                                                  --------       --------

Total liabilities                                                                   88,450         73,664
                                                                                  --------       --------

Total stockholders' equity                                                         286,769        230,770
                                                                                  --------       --------

Total liabilities and stockholders' equity                                        $375,219       $304,434
                                                                                  ========       ========
</TABLE>

                  See notes to condensed financial statements.


                                      F-39
<PAGE>
Schedule II - continued

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                (PARENT COMPANY)
                       CONDENSED STATEMENTS OF OPERATIONS
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>
                                                             2002            2001            2000
                                                           --------        --------        --------
                                                                        (In thousands)
<S>                                                        <C>             <C>             <C>
REVENUES:

Net investment income                                      $  4,054        $  6,060        $  7,258
Realized losses                                              (1,307)             --              --
Other income                                                     88             100             107
                                                           --------        --------        --------

Total revenues                                                2,835           6,160           7,365
                                                           --------        --------        --------

EXPENSES:

Selling, general and administrative expenses                  5,708           3,990           3,833
Interest expense                                              3,095           5,152           7,097
                                                           --------        --------        --------

Total expenses                                                8,803           9,142          10,930
                                                           --------        --------        --------

Operating loss before provision for income taxes and
  equity income                                              (5,968)         (2,982)         (3,565)
Income tax expense                                           (2,085)            166           1,659
                                                           --------        --------        --------

Net loss before equity income of subsidiaries                (3,883)         (3,148)         (5,224)

Equity in undistributed income                               34,010          32,073          28,109
                                                           --------        --------        --------

Net income applicable to common shareholders               $ 30,127        $ 28,925        $ 22,885
                                                           ========        ========        ========
</TABLE>

                  See notes to condensed financial statements.


                                      F-40
<PAGE>
Schedule II - continued

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                (PARENT COMPANY)
                       CONDENSED STATEMENTS OF CASH FLOWS
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>
                                                                      2002            2001            2000
                                                                    --------        --------        --------
                                                                                (In thousands)
<S>                                                                 <C>             <C>             <C>
Cash flows from operating activities:
Net income                                                          $ 30,127        $ 28,925        $ 22,885
Adjustments to reconcile net income to
  net cash used by operating activities:
  Realized losses                                                      1,307              --              --
  Stock based compensation                                               863             863             830
  Equity earnings of subsidiaries                                    (34,010)        (32,073)        (28,109)
  Change in surplus note interest receivable                             583              --           2,721
  Change in amounts due to/from subsidiaries                          (1,815)         (3,212)          5,917
  Change in loan origination fees                                        529             530             558
  Change in deferred income taxes                                      1,251              94            (817)
  Change in other assets and liabilities                                (375)         (1,718)         (2,158)
                                                                    --------        --------        --------

Net cash provided (used) by operating activities                      (1,540)         (6,591)          1,827
                                                                    --------        --------        --------

Cash flows from investing activities:
Proceeds from sale of fixed maturities                                 1,721              --              --
Purchase of fixed maturities                                              --          (3,028)             --
Redemption of surplus note due from affiliate                         10,000              --              --
Capital contribution to insurance subsidiaries                       (14,872)        (11,362)         (1,400)
Purchase of additional common stock of Penncorp Life (Canada)        (18,121)             --              --
Purchase of business, net of cash acquired                                --            (650)         (6,189)
Investment in UAFC Statutory Trust I                                    (464)             --              --
                                                                    --------        --------        --------

Net cash used by investing activities                                (21,736)        (15,040)         (7,589)
                                                                    --------        --------        --------

Cash flows from financing activities:
Net proceeds from issuance of common stock                             1,042          26,242             213
Purchase of Treasury Stock                                            (1,271)           (764)           (711)
Issuance of note to subsidiary                                        18,511              --              --
Redemption of notes to subsidiaries                                   (4,105)         (5,500)             --
Issuance of trust preferred securities                                15,000              --              --
Increase in loan payable                                                  --              --           3,000
Principal repayment on debt                                          (10,700)         (8,175)         (3,350)
Dividends received from subsidiaries                                  15,001           9,276           3,409
                                                                    --------        --------        --------

 Net cash provided from financing activities                          33,478          21,079           2,561
                                                                    --------        --------        --------
 Net increase (decrease) in cash and cash equivalents                 10,202            (552)         (3,201)
 Cash and cash equivalents:
    At beginning of year                                               2,660           3,212           6,413
                                                                    --------        --------        --------
    At end of year                                                  $ 12,862        $  2,660        $  3,212
                                                                    ========        ========        ========

Supplemental disclosure of cash flow information:
   Cash paid during the year for:
   Interest                                                         $  2,574        $  5,195        $  7,097
                                                                    ========        ========        ========
   Income taxes                                                     $     15        $    209        $     39
                                                                    ========        ========        ========
</TABLE>

                   See notes to condensed financial statements


                                      F-41
<PAGE>
                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                (PARENT COMPANY)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

1.    BASIS OF PRESENTATION:

      In the parent-company-only financial statements, the parent company's
investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries since date of acquisition. The parent company's share
of net income of its wholly owned unconsolidated subsidiaries is included in its
net income using the equity method. Parent-company-only financial statements
should be read in conjunction with the Company's consolidated financial
statements.


                                      F-42
<PAGE>
                SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION
                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                 (In thousands)

<TABLE>
<CAPTION>
                               Deferred      Reserves for                   Policy and
                             Acquisition    Future Policy      Unearned      Contract     Net Premium
            2002                Costs          Benefits        Premiums       Claims         Earned
            ----             -----------    -------------    -----------    ----------    -----------
<S>                          <C>            <C>              <C>            <C>           <C>
Career Agency                  $42,527        $431,857       $        --     $20,426        $125,350
Senior Market Brokerage         49,566         466,895                --      74,508         141,227
Administrative Services             --              --                --          --              --
                               -------        --------       -----------     -------        --------
   Subtotal                     92,093         898,752                --      94,934         266,577
Corporate                           --              --                --          --              --
Intersegment                        --              --                --          --              --
                               -------        --------       -----------     -------        --------
   Segment Total               $92,093        $898,752       $        --     $94,934        $266,577
                               =======        ========       ===========     =======        ========

            2001
            ----
Career Agency                  $27,043        $387,860       $        --     $22,013        $126,144
Senior Market Brokerage         38,982         440,335                --      63,865         103,062
Administrative Services             --              --                --          --              --
                               -------        --------       -----------     -------        --------
   Subtotal                     66,025         828,195                --      85,878         229,206
Corporate                           --              --                --          --              --
Intersegment                        --              --                --          --              --
                               -------        --------       -----------     -------        --------
   Segment Total               $66,025        $828,195       $        --     $85,878        $229,206
                               =======        ========       ===========     =======        ========

            2000
            ----
Career Agency                  $15,335        $361,415       $        --     $21,235        $129,358
Senior Market Brokerage         33,316         437,505                --      63,856          90,395
Administrative Services             --              --                --          --              --
                               -------        --------       -----------     -------        --------
   Subtotal                     48,651         798,920                --      85,091         219,753
Corporate                           --              --                --          --              --
Intersegment                        --              --                --          --              --
                               -------        --------       -----------     -------        --------
   Segment Total               $48,651        $798,920       $        --     $85,091        $219,753
                               =======        ========       ===========     =======        ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Other
                               Net Investment     Policyholder     Net Change     Operating
            2002                    Income          Benefits          in DAC       Expense
            ----               --------------     ------------     ----------     ---------
<S>                            <C>                <C>              <C>            <C>
Career Agency                      $ 33,537         $ 78,429        $(15,308)     $  62,624
Senior Market Brokerage              23,946          113,940         (12,542)        49,101
Administrative Services                 470               --              --         34,072
                                   --------         --------        --------      ---------
   Subtotal                          57,953          192,369         (27,850)       145,797
Corporate                               229               --              --          8,803
Intersegment                           (466)              --              --        (33,268)
                                   --------         --------        --------      ---------
   Segment Total                   $ 57,716         $192,369        $(27,850)     $ 121,332
                                   ========         ========        ========      =========

            2001
            ----
Career Agency                      $ 32,768         $ 85,928        $(12,178)     $  58,111
Senior Market Brokerage              25,174           89,363          (7,008)        31,979
Administrative Services                 322               --              --         24,322
                                   --------         --------        --------      ---------
   Subtotal                          58,264          175,291         (19,186)       114,412
Corporate                               331               --              --          8,814
Intersegment                           (783)              --              --        (24,388)
                                   --------         --------        --------      ---------
   Segment Total                   $ 57,812         $175,291        $(19,186)     $  98,838
                                   ========         ========        ========      =========


            2000
            ----
Career Agency                      $ 31,714         $ 83,089        $(12,476)     $  62,264
Senior Market Brokerage              26,095           80,960          (3,449)        28,620
Administrative Services                  77               --              --         17,443
                                   --------         --------        --------      ---------
   Subtotal                          57,886          164,049         (15,925)       108,327
Corporate                               116               --              --         11,033
Intersegment                         (1,057)              --              --        (19,208)
                                   --------         --------        --------      ---------
   Segment Total                   $ 56,945         $164,049        $(15,925)     $ 100,152
                                   ========         ========        ========      =========
</TABLE>

                  See accompanying independent auditor's report


                                      F-43