Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                  to


Commission file Number: 0-11321



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

New York(State or other jurisdiction of
incorporation or organization)

11-2580136(I.R.S. Employer
Identification No.)


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

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

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

Title of Each Class

Name of Each Exchange On Which RegisteredCommon Stock, par value $.01 per share

New York Stock Exchange, Inc.


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

None



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

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

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

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

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

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

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

DOCUMENTS INCORPORATED BY REFERENCE

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



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Item

Description

PagePART 1

1

Business


41A

Risk Factors


271B

Unresolved Staff Comments


612

Properties


613

Legal Proceedings


614

Submission of Matters to a Vote of Security Holders


61PART II

5

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


626

Selected Financial Data


647

Management's Discussion and Analysis of Financial Condition and Results of
Operations


667A

Quantitative and Qualitative Disclosures about Market Risk


1038

Financial Statements and Supplementary Data


1059

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure


1059A

Controls and Procedures


1059B

Other Information


106PART III

10

Directors and Executive Officers of the Registrant


10711

Executive Compensation


10712

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters


10713

Certain Relationships and Related Transactions


10714

Principal Accountant Fees and Services


107PART IV

15

Exhibits and Financial Statement Schedules


108Signatures


113


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As used in this Annual Report on Form 10-K, "Universal American," "we," "our," and "us" refer to Universal American Corp. and its subsidiaries,
except where the context otherwise requires or as otherwise indicated.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Portions of the information in this annual report on Form 10-K, such as those set forth under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of Operations", may constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. We intend these forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21E of the Exchange Act and the PSLRA. These forward-looking statements are statements relating to:



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



Forward-looking
statements are inherently subject to risks, trends and uncertainties, many of which are beyond our ability to control or predict with accuracy and some of which we might
not even anticipate. Although we believe that the expectations reflected in any forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that we will
achieve our expectations. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. We caution readers not to place
undue reliance on these forward-looking statements.

The
risks and uncertainties set forth in this report in Item 1 "Business," Item 1A "Risk Factors" and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other risks and uncertainties set forth in this report, constitute important factors that may cause actual results to differ materially from forward-looking
statements. We assume no obligation to update or
supplement any forward-looking statements that may become untrue because of subsequent events, whether as a result of new information, future events or otherwise.

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PART I

ITEM 1BUSINESS

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

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

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

Senior Market Opportunity

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

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Our Strategy

The principal components of our business strategy are to:



Our Operating Segments

We manage and report our business as follows:



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



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

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

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

Membership

Annualized PremiumsDecember 31,

December 31,Senior Managed Care

2009

2008

2007

2009

2008

2007(in thousands)PFFS plans


176.2


186.2


190.4

$
1,680,200

$
1,698,800

$
1,567,500HMO plans


61.5


54.3


46.0


700,200


652,200


499,500PPO plans


2.8








33,000





Total


240.5


240.5


236.4

$
2,413,400

$
2,351,000

$
2,067,000


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

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

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

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

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

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

Membership

Annualized PremiumsDecember 31,

December 31,Medicare Part D

2009

2008

2007

2009

2008

2007(in thousands)PRx plans(1)


444.9


264.0


240.0

$
491,500

$
273,350

$
269,600CCRx plans(2)


1,252.1


1,308.0


1,164.0


1,515,200


1,434,700


1,439,300Other plans(3)








25.0








9,000Total


1,697.0


1,572.0


1,429.0

$
2,006,700

$
1,708,050

$
1,717,900


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


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

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

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

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

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

Catastrophic Reinsurance SubsidyCMS reimburses Plans for 80% of the drug costs after a member reaches his or her out of pocket catastrophic threshold
through a catastrophic reinsurance subsidy. Catastrophic reinsurance subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid
submitted by plan sponsors to CMS.

CMS Risk CorridorPremiums from CMS are subject to risk sharing through the Medicare Part D risk corridor provisions. The CMS risk corridor
calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS)
less rebates in the Plan year bid, to actual experience. Variances of more than 5% above the target amount will result in CMS making additional payments to plan sponsors, and variances of more than 5%
below the target amount will require plan sponsors to refund to CMS a portion of the premiums received.

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

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

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

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

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

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

Traditional Insurance

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

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

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

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

Gross

NetDecember 31,

December 31,2009

2008

2007

2009

2008

2007(in thousands)Medicare supplement and Other Senior Health

$
322,500

$
368,000

$
419,300

$
242,800

$
271,000

$
304,500Accident & Sickness and Other Health


41,700


45,300


50,600


40,500


44,000


49,300Long Term Care


29,600


32,600


35,100


19,700


21,800


22,800Total

$
393,800

$
445,900

$
505,000

$
303,000

$
336,800

$
376,600Percentage retained











77
%

76
%

75
%


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

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

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

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



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

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

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

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

Year ended December 31,2009

2008

2007(in thousands)Medicare Supplement and Other Senior Health

$
17,692

$
13,619

$
16,707Accident & Sickness and Other Health


4,564


3,773


5,040Life Insurance


10,691


10,911


11,853Total

$
32,947

$
28,303

$
33,600




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

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



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

Marketing and Distribution

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



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

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



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



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



We distribute our PrescribaRxSM products through our career and independent agents.

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

Geographical Distribution of Premium

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

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

State/Region

2009

% of
Premium

2008(1)

% of
PremiumTexas

$
958,908


18.8
%
$
850,377


17.8
%New York


492,244


9.7
%

422,418


8.8
%Florida


233,575


4.6
%

203,083


4.3
%Indiana


236,180


4.6
%

235,394


4.9
%Pennsylvania


230,175


4.5
%

235,314


4.9
%North Carolina


221,151


4.3
%

222,161


4.7
%Georgia


217,119


4.3
%

197,827


4.1
%Oklahoma


214,717


4.2
%

173,599


3.6
%Ohio


182,688


3.6
%

147,776


3.1
%Virginia


178,605


3.5
%

189,159


4.0
%Subtotal


3,165,362


62.1
%

2,877,108


60.2
%All other


1,925,132


37.9
%

1,899,980


39.8
%Total

$
5,090,494


100.0
%
$
4,777,088


100.00
%


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


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Total Business in Force

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

Gross Annualized Premium In ForceDecember 31, 2009

December 31, 2008$

%

Members

$

%

Members(Dollars in millions, Members in thousands)Senior Managed CareMedicare AdvantagePrivate Fee-for-Service(1)

$
1,680.2


37.8
%

176.2

$
1,698.8


35.1
%

186.2HMO Plans(1)


700.2


13.8
%

61.5


652.2


13.4
%

54.3PPO Plans(1)


33.0


0.6
%

2.8






%

Sub total


2,413.4


52.2
%

240.5


2,351.0


48.5
%

240.5Medicare Part DPrescriba RxSM Plans(1)(2)


491.5


9.5
%

444.9


546.7


11.3
%

264.0CommunityCCRxSM(1)


1,515.2


29.3
%

1,252.1


1,438.7


29.6
%

1,308.0Sub total


2,006.7


38.8
%

1,697.0


1,985.4


40.9
%

1,572.0Traditional InsuranceMedicare Supplement and Other Senior Health


322.5


6.2
%

130.7


368.0


7.6
%

153.8Accident & Sickness and Other


41.7


0.8
%

128.2


45.3


0.9
%

138.0Long Term Care


29.6


0.6
%

16.9


32.6


0.7
%

18.1Sub total


393.8


7.6
%

275.8


445.9


9.2
%

309.9Life Insurance and Annuity


72.5


1.4
%

160.2


65.8


1.4
%

160.2Total

$
4,886.4


100.0
%

2,373.5

$
4,848.1


100.0
%

2,282.6


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


Investments

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

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

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Reinsurance

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

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

December 31, 2009

December 31, 2008Gross

Ceded

Net

Retained

Gross

Ceded

Net

Retained(in millions)Senior Managed CareMedicare AdvantagePFFS

$
1,680.2

$
2.4

$
1,677.8


99
%
$
1,698.8

$
2.3

$
1,696.5


99
%HMO


700.2


31.5


668.7


95
%

652.2


18.3


633.9


97
%PPO


33.0





33.0


100
%











%Sub total


2,413.4


33.9


2,379.5


99
%

2,351.0


20.6


2,330.4


99
%Medicare Part DPrescriba RxSM


491.5





491.5


100
%

546.7


273.4


273.3


50
%CommunityCCRxSM


1,515.2





1,515.2


100
%

1,438.7





1,438.7


100
%Sub total


2,006.7





2,006.7


100
%

1,985.4


273.4


1,712.0


86
%Traditional Insurance(1)Medicare Supplement and Other Senior Health


322.5


79.7


242.8


75
%

368.0


97.0


271.0


74
%Accident & Sickness and Other


41.7


1.2


40.5


97
%

45.3


1.3


44.0


97
%Long Term Care


29.6


9.9


19.7


66
%

32.6


10.8


21.8


67
%Sub total


393.8


90.8


303.0


77
%

445.9


109.1


336.8


76
%Life Insurance and Annuity


72.5


67.0


5.5


8
%

65.8


23.6


42.2


64
%Total

$
4,886.4

$
191.7

$
4,694.7


96
%
$
4,848.1

$
426.7

$
4,421.4


91
%


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

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

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Table of Contents

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

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

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

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



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

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



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



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

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Table of Contents



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



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



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

Healthy Collaboration® Strategy

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

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

Provider Arrangements

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



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



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



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

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Table of Contents

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

Underwriting Procedures

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

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

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

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

Reserves

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

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

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

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

Competition

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

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

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

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



Regulation



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



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

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

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

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

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

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

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

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



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



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

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



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

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



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



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



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

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

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

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

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

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

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

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

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

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

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



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

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



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

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

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



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

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



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



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

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

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

Outsourcing Arrangements

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

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

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

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

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

Employees

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

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ITEM 1ARisk Factors

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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



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

The competitive bidding process may adversely affect our profitability.

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

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

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

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

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

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

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



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

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

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

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

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

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

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

We calculate and maintain reserves for the estimated future payment of claims to our insurance policyholders using the same actuarial
assumptions that we use to set our premiums. For our traditional accident and health insurance business, we establish active life reserves for expected future policy benefits, plus a liability for due
and unpaid claims, claims in the course of settlement, and incurred but not reported claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation,
hospital and medical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, we necessarily base our reserves and liabilities on extensive estimates, assumptions
and prior years' statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of acquired policy liabilities is subject to similar estimates and
assumptions. Establishing reserves involves inherent uncertainties, and it is possible that actual claims could materially exceed our reserves and have a material adverse effect on our results of
operations and financial condition. Our net income depends significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in setting our reserves and
pricing our policies. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our
liabilities resulting in reduced net income, statutory surplus and shareholders' equity.

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

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



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

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

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

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

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

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

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

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



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

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

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

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



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



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

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

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

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

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

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



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

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

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

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

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



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

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

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

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

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



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

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

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

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



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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

Acquisition risk

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

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



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

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



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

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

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

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

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

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

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

Internal growth and expansion risk

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



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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

ITEM 1BUNRESOLVED STAFF COMMENTS

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

ITEM 2PROPERTIES

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

ITEM 3LEGAL PROCEEDINGS

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

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

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

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PART II



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

Market Information

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

Common StockPeriod

High

LowYear Ended December 31, 2008First Quarter

$
25.59

$
10.35Second Quarter


12.61


9.11Third Quarter


13.69


8.71Fourth Quarter


12.19


6.79Year Ending December 31, 2009First Quarter


10.66


5.41Second Quarter


10.62


7.98Third Quarter


10.26


7.83Fourth Quarter


12.00


8.69Year Ending December 31, 2010First Quarter (through February 24, 2010)


14.75


12.00


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

Stockholders

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

Dividends

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

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Issuer Purchases of Equity Securities

Period

Total Number
of Shares
Purchased

Average
Price Paid
Per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
(in Thousands)October 1, 2009October 31, 2009


404,500

$
9.27


404,500

$
64,826November 1, 2009November 30, 2009


1,732,740

$
9.75


1,732,740


47,929December 1, 2009December 31, 2009


489,020

$
11.49


489,020


42,312Total


2,626,260





2,626,260


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

Recent Sales of Unregistered Securities

None.

Securities Authorized for Issuance Under Equity Compensation Plans

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

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ITEM 6SELECTED FINANCIAL DATA

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

As of or for the Year Ended December 31,2009

2008

2007(1)

2006

2005(2)(in thousands, except per share data)Income Statement Data:Net premium and policyholder fees earned

$
4,918,898

$
4,600,454

$
2,941,419

$
1,197,142

$
771,962Net investment income


49,814


81,270


106,970


75,459


61,448Fee and other income


19,776


37,130


26,412


27,645


18,294Net realized (losses) gains on investments


(24,988
)

(59,681
)

(40,178
)

4,818


5,044Total revenues


4,963,500


4,659,173


3,034,623


1,305,064


856,748Total benefits, claims and expenses


4,749,148


4,580,682


2,958,661


1,257,495


786,385Income from continuing operations before equity in earnings of unconsolidated subsidiary


214,352


78,491


75,962


47,569


70,363Equity in earnings (loss) of unconsolidated subsidiary


280


72,813


56,664


46,187


(3,980
)Income from continuing operations before taxes


214,632


151,304


132,626


93,756


66,383Provision for income taxes


74,328


56,212


48,554


32,610


22,626Income from continuing operations


140,304


95,092


84,072


61,146


43,757Discontinued Operations:Income from discontinued operations, net of taxes











9,788


10,119Gain on Sale of discontinued operations, net of taxes











48,372


Income from discontinued operations











58,160


10,119Net income

$
140,304

$
95,092

$
84,072

$
119,306

$
53,876Earnings per common share:Basic:Continuing operations

$
1.73

$
1.09

$
1.20

$
1.04

$
0.76Discontinued operations











0.99


0.18Net income

$
1.73

$
1.09

$
1.20

$
2.03

$
0.94Diluted:Continuing operations

$
1.73

$
1.08

$
1.18

$
1.02

$
0.74Discontinued operations











0.97


0.17Net income

$
1.73

$
1.08

$
1.18

$
1.99

$
0.91


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


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As of December 31,2009

2008

2007(1)

2006

2005(2)(in thousands, except per share data)Balance Sheet Data:Total cash and investments

$
1,822,787

$
1,567,348

$
1,815,620

$
1,677,973

$
1,272,343Total assets


3,814,856


3,862,163


4,089,256


2,585,042


2,224,344Policyholder related liabilities


1,388,586


1,532,422


1,585,750


1,253,113


1,202,922Outstanding bank debt


313,758


320,625


349,125


90,563


95,813Trust preferred securities


110,000


110,000


110,000


75,000


75,000Shareholders' equity


1,449,464


1,316,084


1,351,066


623,909


531,884Book value per share:Basic

$
18.44

$
15.58

$
14.66

$
10.54

$
9.13Data Reported to Regulators:Statutory capital and surplus

$
800,580

$
611,497

$
545,201

$
282,453

$
180,448Asset valuation reserve


247


590


5,220


4,445


3,182Adjusted capital and surplus

$
800,827

$
612,087

$
550,421

$
286,898

$
183,630


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


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

Introduction

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

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

2009 Highlights:



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Membership

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

Membership by Segment

2009

2008(in thousands)Medicare AdvantagePFFS


177


186Network-based (HMO and PPO)


64


55Total Medicare Advantage


241


241Part DCCRx


1,252


1,308PRx(1)


445


264Total Part D


1,697


1,572Total Membership


1,938


1,813


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


Significant Transactions and Initiatives



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

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



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

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



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

Segment Overview



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

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



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Results of OperationsConsolidated Overview

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

For the year ended December 31,2009

2008

2007(in thousands)Senior Managed CareMedicare Advantage(1)

$
134,810

$
94,625

$
52,726Medicare Part D(1)


178,344


127,444


116,888Traditional Insurance(1)(2)


(20,518
)

4,845


14,106Senior Administrative Services(1)


8,486


22,020


24,124Corporate(1)


(61,502
)

(37,949
)

(35,040
)Net realized losses on investments(1)


(24,988
)

(59,681
)

(40,178
)Income before provision for income taxes(1)


214,632


151,304


132,626Provision for income taxes


74,328


56,212


48,554Net income

$
140,304

$
95,092

$
84,072Earnings per common share (diluted)

$
1.73

$
1.08

$
1.18


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




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

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

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

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

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

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

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



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

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

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

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

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

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

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

Segment ResultsSenior Managed CareMedicare Advantage

For the year ended December 31,2009

2008

2007(in thousands)Net premiums

$
2,616,596

$
2,404,067

$
1,920,309Net investment and other income


26,394


16,626


23,142Total revenue


2,642,990


2,420,693


1,943,451Medical expenses


2,156,603


2,001,163


1,611,824Amortization of intangible assets


4,584


4,056


3,844Restructuring costs


3,500





Commissions and general expenses


343,493


320,849


275,057Total benefits, claims and expenses


2,508,180


2,326,068


1,890,725Segment income before taxes

$
134,810

$
94,625

$
52,726


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

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Our Senior Managed CareMedicare Advantage segment generated income before taxes of $134.8 million for the year
ended December 31, 2009, an increase of $40.2 million compared to the year ended December 31, 2008. These results reflect $21.1 million of favorable CMS reconciliations and
reserve development in 2009 as compared to $42.1 million in 2008. The increase in earnings was driven by higher medical operating income generated by higher premium, an improvement in the
medical benefit ratio of 80 basis points and higher net investment income, partially offset by the $3.5 million restructuring costs incurred during the second quarter and continued investment
in the development of provider networks for our expansion PPO markets. The improvement in the medical benefit ratio is due primarily to higher premium per member related to changes in members' risk
scoring process in 2009 and the $18.9 million in false claims submitted by fictitious providers, in our PFFS business during the fourth quarter of 2008.

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

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



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

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

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

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

Segment ResultsMedicare Part D

For the year ended December 31,2009

2008

2007(in thousands)Direct and assumed premiums

$
2,016,387

$
2,089,226

$
950,986Risk corridor adjustment/government reinsurance


(33,580
)

9,273


(113,545
)Direct and assumed premiums after risk corridor adjustment


1,982,807


2,098,499


837,441Ceded premiums


(1,900
)

(296,372
)

(258,650
)Net premiums


1,980,907


1,802,127


578,791Other Part D incomePDMS


280


72,813


56,664Total Part D revenue


1,981,187


1,874,940


635,455Net investment and other income


3,204


21,130


7,083Total revenue


1,984,391


1,896,070


642,538Pharmacy benefits


1,587,075


1,533,090


427,195Amortization of intangibles


16,046


16,022


4,437Commissions and general expenses


202,926


219,514


94,018Total benefits, claims and expenses


1,806,047


1,768,626


525,650Segment income before taxes

$
178,344

$
127,444

$
116,888


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

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

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

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



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

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

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

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

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

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



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

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

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

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

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

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

Segment ResultsTraditional Insurance

For the year ended December 31,2009

2008

2007(in thousands)Net premiums

$
321,423

$
394,275

$
442,163Net investment income


23,062


60,189


71,189Other income


1,959


1,120


1,311Total revenue


346,444


455,584


514,663Policyholder Benefits


250,707


302,608


332,971Interest credited to policyholders


4,284


14,736


17,819Change in deferred acquisition costs


7,786


14,273


15,389Amortization of intangible assets


2,721


3,319


3,530Goodwill Impairment





3,893


Loss on reinsurance and other related costs


7,624





Restructuring costs


1,404





Commissions and general expenses, net of allowances


92,436


111,910


130,848Total benefits, claims and expenses


366,962


450,739


500,557Segment income (loss) before taxes

$
(20,518
)
$
4,845

$
14,106




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

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

Premium

Year ended December 31,2009

2008Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
324,347

$
(82,861
)
$
241,486

$
373,990

$
(99,539
)
$
274,451Specialty health


72,447


(11,169
)

61,278


251,217


(184,209
)

67,008Life insurance and annuity


74,182


(55,523
)

18,659


76,556


(23,740
)

52,816Total premium

$
470,976

$
(149,553
)
$
321,423

$
701,763

$
(307,488
)
$
394,275


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

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

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

Year ended
December 31,2009

2008(in thousands)Commissions

$
53,321

$
63,752Other operating costs


69,787


80,200Reinsurance allowances


(30,672
)

(32,042
)Commissions and general expenses, net of allowances

$
92,436

$
111,910


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

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



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

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

Year ended December 31,2008

2007Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
373,990

$
(99,539
)
$
274,451

$
429,041

$
(117,924
)
$
311,117Specialty health


251,217


(184,209
)

67,008


414,256


(340,848
)

73,408Life insurance and annuity


76,556


(23,740
)

52,816


77,978


(20,340
)

57,638Total premium

$
701,763

$
(307,488
)
$
394,275

$
921,275

$
(479,112
)
$
442,163


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

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

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

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

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

Year ended
December 31,2008

2007(in thousands)Commissions

$
63,752

$
86,483Other operating costs


80,200


84,561Reinsurance allowances


(32,042
)

(40,196
)Commissions and general expenses, net of allowances

$
111,910

$
130,848


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

Segment ResultsSenior Administrative Services

For the year ended December 31,2009

2008

2007(in thousands)Affiliated fee revenueMedicare supplement

$
12,516

$
19,560

$
23,342Part D





27,873


25,057PFFS








18,382Long term care


4,160


2,460


2,234Life insurance


4,880


4,307


2,169Other


6,593


6,479


8,440Total affiliated revenue


28,149


60,679


79,624Unaffiliated fee revenueMedicare Advantage


3,725


11,795


11,528Medicare supplement


4,971


5,462


5,848Long term care


4,712


5,777


7,020Non-insurance products


588


830


1,426Part D





200


1,345Other


76


145


163Total unaffiliated revenue


14,072


24,209


27,330Total revenue


42,221


84,888


106,954Amortization of present value of future profits


208


367


441General expenses


33,527


62,501


82,389Total expenses


33,735


62,868


82,830Segment income before taxes

$
8,486

$
22,020

$
24,124


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



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

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



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

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

Segment ResultsCorporate

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

For the year ended December 31,2009

2008

2007(in thousands)Interest expense

$
19,937

$
23,694

$
20,480Early extinguishment of debt








1,343Amortization of capitalized loan origination fees


1,325


1,048


1,128Stock-based compensation expense


7,127


6,367


4,573Other parent company expenses, net revenues


33,113


6,840


7,516Segment loss before taxes

$
61,502

$
37,949

$
35,040


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

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

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

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



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

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

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

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

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Contractual Obligations and Commercial Commitments

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

Payments Due by PeriodContractual Obligations

Total

Less than
1 Year

13
Years

35
Years

More than
5 Years(in thousands)Long Term Debt Obligations(1):Trust preferred securities(2)

$
217,986

$
6,436

$
11,128

$
8,221

$
192,201Loan payable(3)


350,724


16,824


333,900





Operating Lease Obligations


32,284


6,461


15,598


3,945


6,280Purchase Obligations(4)


25,400


4,600


10,200


7,600


3,000Policy Related Liabilities(5):Reserves and other policy liabilitieslife


5,866


796


601


500


3,969Reserve for future policy benefitshealth


428,476


23,372


43,936


40,441


320,727Policy and contract claimshealth


363,105


326,336


36,769





Total

$
1,423,841

$
384,825

$
452,132

$
60,707

$
526,177


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


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


Liquidity and Capital Resources

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

Investments

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

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

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

Critical Accounting Policies

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





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

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future
claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, resulting in reduced net income and
shareholders' equity.

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

Direct & Assumed

Net of Reserve
Ceded to ReinsurersLiability Type

2009

% of
Total
Policy
Liabilities

2008

% of
Total
Policy
Liabilities

2009

2008Reserves and other policy liabilitieslife

$
599,442


43
%
$
616,819


40
%
$
4,295

$
556,074Reserves for future policy benefitshealth


408,625


30
%

415,026


27
%

301,579


304,447Policy and contract claimshealth


380,519


27
%

500,577


33
%

362,596


469,656Total policy liabilities

$
1,388,586


100
%
$
1,532,422


100
%
$
668,470

$
1,330,177




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

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

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



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

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

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



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

Carrying Value at December 31,Direct and Assumed

Net of Reserves Ceded
to ReinsurersPolicy and contract claimshealth

2009

% of
Total
Policy
Liabilities

2008

% of
Total
Policy
Liabilities

2009

2008($ in thousands)Medicare Part D

$
91,027


6
%
$
180,309


12
%
$
86,086

$
167,712Medicare AdvantagePFFS & PPO


174,227


13
%

197,942


13
%

174,197


197,075Medicare AdvantageHMO


64,693


5
%

59,366


4
%

61,663


56,367Medicare supplement


30,763


2
%

43,590


3
%

23,517


31,715Otherspecialty


19,809


1
%

19,370


1
%

17,133


16,787Total policy and contract claimshealth

$
380,519


27
%
$
500,577


33
%
$
362,596

$
469,656


The
following factors can affect these reserves and liabilities:



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

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

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

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

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



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



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



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

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

2009

2008(in thousands)Balance at beginning of year

$
500,577

$
522,228Less reinsurance recoverable


(33,086
)

(56,580
)Net balance at beginning of year


467,491


465,648Incurred related to:Current year


3,979,830


3,846,808Prior year development


3,603


(44,803
)Total incurred


3,983,433


3,802,005Paid related to:Current year


3,640,970


3,210,310Prior year


447,358


589,852Total paid


4,088,328


3,800,162Net balance at end of period


362,596


467,491Plus reinsurance recoverable


17,923


33,086Balance at end of period

$
380,519

$
500,577


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

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

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

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



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

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

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

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



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

Completion Factor(1):

Claims Trend Factor(2):(Decrease)
Increase
in Factor

Increase
(Decrease) in
Net
Health
IBNR

(Decrease)
Increase
in Factor

(Decrease)
Increase in
Net
Health
IBNR($ in thousands)(3
)%
$
1,282


(3
)%
$
(12,976
)(2
)%
$
854


(2
)%
$
(8,651
)(1
)%
$
427


(1
)%
$
(4,325
)1
%
$
(427
)

1
%
$
4,3252
%
$
(854
)

2
%
$
8,6513
%
$
(1,281
)

3
%
$
12,976


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




We defer the following costs of acquiring new business:



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

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

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

Goodwill and other intangible assets



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



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

Description

Weighted
Average Life
At Acquisition

Amortization BasisInsurance policies acquired


79

The pattern of projected future cash flows for the policies acquired over the estimated weighted average life of the policies acquiredDistribution channel acquired


330

Straight line over the estimated life of the assetMembership base acquired


710

Straight line over the estimated weighed average life of the membership baseTrademarks/tradenames


9

Straight line over the estimated weighted average life of the trademarks/tradenamesLicenses


15

Straight line over the estimated weighed average life of the licensesProvider contracts


10

Straight line over the estimated weighted average life of the contractsNon-compete


7

Straight line over the length of the agreementAdministrative service contracts


6

The pattern of projected future cash flows for the customer contracts acquired over the estimated weighted average life of the contractsHospital network contracts


10

The pattern of projected future cash flows for the hospital network contracts acquired over the estimated weighted average life of the contracts


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

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

December 31,2009

2008Senior Managed CareMedicare Advantage

$
77,459

$
77,459Medicare Part D


448,215


448,215Traditional Insurance(1)





Senior Administrative Services


4,357


4,357Total Goodwill

$
530,031

$
530,031


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


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

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

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

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

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

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

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

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

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

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

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



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



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

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

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

Fair Value

% of Total
Fair ValueLevel 1

$



Level 2


962,990


99.8
%Level 3


1,572


0.2
%$
964,562


100.0
%


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

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

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

December 31, 2009

December 31, 2008Fair
Value

% of Total
Fair Value

Fair
Value

% of Total
Fair Value(in thousands)Mortgage and asset-backed securities

$
50


3.2
%
$
1,862


42.0
%Corporate debt securities


1,513


96.2
%

2,082


47.0
%Equity securities


9


0.6
%

490


11.0
%Total Level 3 securities

$
1,572


100.0
%
$
4,434


100.0
%


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

We
regularly evaluate the amortized cost of our investments compared to the fair value of those investments. We generally recognize impairments of securities when we consider a decline
in fair value below the amortized cost basis to be other-than-temporary. The evaluation includes the intent and ability to hold the security to recovery, and we consider it on
an individual security basis, not on a portfolio basis. We generally recognize impairment losses for mortgage-backed and asset-backed securities when an adverse change in the amount or timing of
estimated cash flows occurs, unless the adverse change is solely a result of changes in estimated market interest rates. We also recognized impairment losses when we determine declines in fair values
based on quoted prices to be other than temporary.

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



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



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

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



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



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

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

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

Vintage Year

Amortized
Cost

Fair
Value

Unrealized
Loss(in thousands)2003

$
4,229

$
3,389

$
(840
)2004


2,102


1,614


(488
)2005


23,384


14,914


(8,470
)2006


17,478


4,298


(13,180
)2007


5,427


1,730


(3,697
)Totals

$
52,620

$
25,945

$
(26,675
)


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

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

2009 Quarter EndedCumulative

2009

December 31

September 30

June 30

March 31

2008

2007(in thousands)Subprime

$
99,458

$
10,497

$
3,841

$
146

$
2,135

$
4,375

$
47,964

$
40,997Other structured


11,043


6,398


201


108


2,388


3,701


4,645


Corporate


7,177

















7,177


$
117,678

$
16,895

$
4,042

$
254

$
4,523

$
8,076

$
59,786

$
40,997


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

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



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



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

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

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

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



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



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

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

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

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

Low-Income Premium SubsidyFor qualifying low-income status, or LIS, members of our Medicare Advantage Health Benefit Plans
with Part D benefits, CMS pays us for some or all of the LIS member's monthly premium. The CMS payment is dependent upon a member's income level which is

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

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

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

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

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

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

Medicare Part D Plans

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

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

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

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

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

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

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

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

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

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

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We use the liability method to account for deferred income taxes. Under the liability method, we recognize deferred tax assets and
liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure
deferred tax assets and liabilities using enacted tax rates that we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize in
income the effect on deferred tax assets and liabilities of a change in tax rates in the period that reflects the enactment date of a change in tax rates.

We
establish valuation allowances on our deferred tax assets for amounts that we determine will not be recoverable based upon our analysis of projected taxable income and our ability to
implement prudent and feasible tax planning strategies. We recognize increases in these valuation allowances as deferred tax expense. We reflect portions of the valuation allowances subsequently
determined to be no longer necessary as deferred tax benefits. To the extent that valuation allowances were established in conjunction with acquisitions, we first apply changes in those allowances to
increasing or decreasing the goodwill, but not below zero, or other intangibles related to the acquisition, for acquisitions occurring before January 1, 2009, and then apply those changes as an
increase or decrease in income tax expense.

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

Federal Income Taxation of the Company

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

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

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

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

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

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

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

Effects of Recently Issued and Pending Accounting Pronouncements

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

ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Investment Interest Rate Sensitivity

Our profitability could be affected if we were required to liquidate fixed income securities during periods of rising and/or volatile
interest rates. However, we attempt to mitigate our exposure to adverse interest rate movements through a combination of active portfolio management and by staggering the maturities of our fixed
income investments to assure sufficient liquidity to meet our obligations and to address reinvestment risk considerations. Our investment policy is to attempt to balance our portfolio duration to
achieve investment returns consistent with the preservation of capital and to meet payment obligations of policy benefits and claims.

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

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

The
sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100
and 200 basis points from their levels as of December 31, 2009, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest
rates.

December 31, 2009

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

200 Basis
Point
Decrease

100 Basis
Point
Decrease

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)$964.6

$
37.3

$
21.1

$
(31.8
)
$
(65.0
)


Debt

We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate, known as
LIBOR, over one, two, three or six month interest periods. Due to the variable interest rate, we would be subject to higher interest costs if short-term interest rates rise. We have
attempted to mitigate our exposure to adverse interest rate movements by fixing the rate on a portion of our loan payable through the use of cash flow swaps and our trust preferred securities through
the contractual terms of the security at inception. At December 31, 2009, we have fixed the rate on a total of $300 million of our debt, including $250 million of our loan payable
and $50 million of our trust preferred securities.

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

The
sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the year ended
December 31, 2009, and with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

Effect of Change in LIBOR on Pre-tax Income
for the year ended December 31, 2009Weighted
Average
Interest
Rate

Weighted
Average
Balance
OutstandingDescription of Floating
Rate Debt

200 Basis
Point
Decrease(1)

100 Basis
Point
Decrease(1)

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)Loan payable


1.24
%
$
69.1

$
0.3

$
0.3

$
(0.7
)
$
(1.4
)Other long tern debt


5.20
%
$
60.0


0.6


0.4


(0.6
)

(1.2
)Total







$
0.9

$
0.7

$
(1.3
)
$
(2.6
)


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


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


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

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

ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9ACONTROLS AND PROCEDURES



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



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

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



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

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

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

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



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

ITEM 9BOTHER INFORMATION

None

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PART III

ITEM 10DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11EXECUTIVE COMPENSATION

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

ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated into Part III of this Annual Report on Form 10-K
by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated into Part III of this Annual Report on Form 10-K
by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated into Part III of this Annual Report on Form 10-K
by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 27, 2010.

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PART IV

ITEM 15(a)EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





All references below to our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K share the Securities and Exchange Commission File No. 0-11321. These reports and our other Securities and Exchange Commission filings are available on
the Commission's EDGAR web site athttp://www.sec.gov/edgar/searchedgar/companysearch.html.

2.1

Agreement and Plan of Merger and Reorganization dated as of May 7, 2007 among Universal American Financial Corp., MH Acquisition I Corp., MH Acquisition II LLC, MHRx LLC, MemberHealth,
 Inc. and the shareholder representative named therein (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed May 11, 2007, and incorporated by reference herein).2.2

Settlement Agreement and Amendment to Merger Agreement, dated as of March 5, 2008 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 10, 2008, and
incorporated by reference herein).3.1

Restated Certificate of Incorporation of Universal American Financial Corp. (filed as Exhibit 3.1 to the Registrant's Amendment No. 2 to the Registration Statement on Form S-3 (File
No. 333-62036) filed on July 11, 2001, and incorporated by herein reference herein).3.2

Certificate of Amendment of the Certificate of Incorporation of Universal American Financial Corp. (filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-11321)
 for the quarter ended June 30, 2004, and incorporated by reference herein).3.3

Certificate of Amendment to Universal American's Certificate of Incorporation for the Series A Preferred Stock (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated
May 7, 2007, and incorporated by reference herein).3.4

Certificate of Amendment to Universal American's Certificate of Incorporation for the Series B Preferred Stock (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated
May 7, 2007, and incorporated by reference herein).


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3.5

Certificate of Amendment to Universal American's Certificate of Incorporation dated August 24, 2007 (filed as Exhibit 3(i).1 to the Registrant's Current Report on Form 8-K dated
August 24, 2007, and incorporated by reference herein).3.6

Certificate of Amendment to Universal American's Certificate of Incorporation changing the name of the Company from Universal American Financial Corp. to Universal American Corp. dated November 30,
 2007 (filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated December 3, 2007, and incorporated by reference herein).3.7

Amended and Restated By-Laws of Universal American Corp. (filed as Exhibit 3.7 to the Registrant's Annual Report on Form 10-K filed on March 10, 2009, and incorporated by reference
herein).4.1

Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee (filed as Exhibit 4.01 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004, and incorporated by reference herein).4.2

Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee (filed as Exhibit 4.02 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-3 (File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004, and incorporated by reference herein).4.3

Registration Rights Agreement, dated July 30, 1999, among the Company, Capital Z Financial Services Fund II, L.P., Wand/Universal American Investments L.P.I., Wand/Universal American
Investments L.P. II, Chase Equity Associates, L.P., Richard A. Barasch and others (filed as Exhibit A to the Registrant's Current Report on Form 8-K dated August 13, 1999, and incorporated by reference herein).4.4

Guarantee Agreement, dated as of March 22, 2007, by Universal American Financial Corp., as Guarantor, and Wilmington Trust Company, as Trustee (filed as Exhibit 4.3 to the Registrant's
Current Report on Form 8-K dated March 22, 2007, and incorporated by reference herein).4.5

Indenture, dated as of March 22, 2007, between Universal American Financial Corp. and Wilmington Trust Company, as Trustee, relating to Fixed/Floating Rate Junior Subordinated Debentures Due 2037
(filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 22, 2007, and incorporated by reference herein).4.6

Stockholders' Agreement, dated as of September 21, 2007, among Universal American Financial Corp. and the security holders listed on the signature pages thereto (filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated September 24, 2007, and incorporated by reference herein).10.1

Employment Agreement dated July 30, 1999, between Registrant and Richard A. Barasch (filed as Exhibit D to the Registrant's Current Report on Form 8-K/A dated March 14, 2001 and
incorporated by reference herein).10.2

Employment Agreement dated July 30, 1999, between Registrant and Gary Bryant (filed as Exhibit E to the Registrant's Current Report on Form 8-K/A dated March 14, 2001 and
incorporated by reference herein).10.3

Employment Agreement dated July 30, 1999, between Registrant and Robert Waegelein (filed as Exhibit E to the Registrant's Current Report on Form 8-K/A dated March 14, 2001 and
incorporated by reference herein).


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10.4

Employment Agreement dated March 9, 2004, by and among the Company, Heritage Health Systems, Inc. and Theodore M. Carpenter, Jr. (filed as Exhibit 10.18 to the Registrant's Current Report on
Form 8-K dated January 18, 2007, and incorporated by reference herein).10.5

Employment Letter dated March 7, 2008, between Registrant and John Wardle (filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed on March 10, 2009, and
incorporated by reference herein).10.6

1998 Incentive Compensation Plan (filed as Annex A to the Registrant's Definitive Proxy Statement filed on Form 14A dated April 29, 1998, and incorporated by reference
herein).10.7

Amendment No. 1 to Universal American Financial Corp. 1998 Incentive Compensation Plan (filed as Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (Registration
No. 333-120190) filed on December 10, 2004, and incorporated by reference herein).10.8

Agent Equity Plan for Agents of Penn Union Companies (filed as Amendment 1 to the Registrant's Registration Statement on Form S-2, dated July 13, 2000, and incorporated by reference
herein).10.9

Agent Equity Plan for Regional Managers and Sub Managers of Penn Union Companies (filed as Amendment 1 to the Registrant's Registration Statement on Form S-2, dated July 13, 2000, and
incorporated by reference herein).10.10

Agreement dated as of July 6, 2000, between ALICOMP, a division of ALICARE, Inc. and Universal American Financial Corp., as amended (filed as Exhibit 10.1 to the Registrant's
Form 10-Q/A (Amendment No. 1) for the period ended September 30, 2003, dated December 23, 2003, and incorporated by reference herein).10.11

Quota Share Reinsurance Agreement, dated June 30, 2005, among the Company and PharmaCare Captive Re, Ltd. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005, and incorporated by reference herein).10.12

Stage 1 securities purchase agreement dated May 7, 2007 among Lee-Universal Holdings, LLC, Welsh, Carson, Anderson & Stowe X, L.P., Union Square Universal Partners,
 L.P., Perry Partners, L.P., Perry Partners International, Inc., Perry Commitment Fund, L.P. and Perry Commitment Master Fund, L.P. (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
May 7, 2007, and incorporated by reference herein).10.13

Stage 2 securities purchase agreement dated May 7, 2007 among Lee-Universal Holdings, LLC, Welsh, Carson, Anderson & Stowe X, L.P., Union Square Universal Partners,
 L.P., Perry Partners, L.P., Perry Partners International, Inc., Perry Commitment Fund, L.P. and Perry Commitment Master Fund, L.P. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated
May 7, 2007, and incorporated by reference herein).10.14

Credit Agreement dated as of September 18, 2007, among Universal American Financial Corp., each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing
Line Lender and L/C Issuer (filed as Exhibit 10.26 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, and incorporated by reference herein).10.15

Settlement Agreement and Amendment to Merger Agreement, dated as of March 5, 2008 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 10, 2008, and
incorporated by reference herein).


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10.16

Amendment to Agreement and Plan of Merger and Reorganization, dated as of December 31, 2008 (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K filed on March 10,
2009, and incorporated by reference herein).10.17

Indemnity Reinsurance Agreement between Constitution Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein)..10.18

Indemnity Reinsurance Agreement between American Exchange Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009
(filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).10.19

Indemnity Reinsurance Agreement between Marquette National Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009
(filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein)..10.20

Indemnity Reinsurance Agreement between Pennsylvania Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).10.21

Indemnity Reinsurance Agreement between American Pioneer Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009
(filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).10.22

Indemnity Reinsurance Agreement between American Progressive Life and Health Insurance Company of New York (Ceding Company) and First Allmerica Financial Life Insurance Company (Reinsurer) effective as
of April 1, 2009 (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).10.23

Indemnity Reinsurance Agreement between The Pyramid Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as
Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).10.24

Indemnity Reinsurance Agreement between Union Bankers Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009 (filed as
Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2009, and incorporated by reference herein).10.25

Subcontract Agreement dated as of October 21, 2005 by and between MemberHealth, Inc. and Community Care Rx, L.L.C. (filed as Exhibit 10.9 to the Registrant's Quarterly Report on
Form 10-Q/A filed on November 12, 2009 in redacted form pursuant to a request for confidential treatment for certain provisions thereof pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended).


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10.26

Letter Agreement dated as of May 3, 2007 by and among Universal American Corp., the National Community Pharmacists Association, Community Pharmacy Ventures, Inc. and Community MTM Services,
 Inc. (filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q/A filed on November 12, 2009 in redacted form pursuant to a request for confidential treatment for certain provisions thereof pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended).10.27

First Amendment to Credit Agreement, dated as of November 9, 2009, by and among Universal American Corp., the Lenders party thereto and Bank of America, N.A. as administrative agent for the
Lenders (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on November 12, 2009, and incorporated by reference herein).12.1*

Statement re Computation of Ratio of Earnings to Fixed Charges.21.1*

List of Subsidiaries.23.1*

Consent of Ernst & Young LLP31.1*

Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.31.2*

Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.32.1*

Certification of the Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.


*Filed
or furnished herewith.


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SIGNATURES

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

UNIVERSAL AMERICAN CORP.March 1, 2010

/s/ RICHARD A. BARASCH Richard A. Barasch Chairman of the Board, President and
    Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the following
capacities and on the dates indicated.

Signature and Title

Date/s/ RICHARD A. BARASCH Richard A. Barasch Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer)

March 1, 2010/s/ ROBERT A. WAEGELEIN Robert A. Waegelein Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

March 1, 2010/s/ BARRY W. AVERILL Barry W. Averill Director

March 1, 2010/s/ SALLY CRAWFORD Sally Crawford Director

March 1, 2010/s/ MATTHEW ETHERIDGE Matthew Etheridge Director

March 1, 2010/s/ MARK GORMLEY Mark Gormley Director

March 1, 2010


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Signature and Title

Date/s/ MARK M. HARMELING Mark M. Harmeling Director

March 1, 2010/s/ LINDA LAMEL Linda Lamel Director

March 1, 2010/s/ PATRICK J. MCLAUGHLIN Patrick J. McLaughlin Director

March 1, 2010/s/ RICHARD PERRY Richard Perry Director

March 1, 2010/s/ THOMAS A. SCULLY Thomas A. Scully Director

March 1, 2010/s/ ROBERT A. SPASS Robert A. Spass Director

March 1, 2010/s/ SEAN M. TRAYNOR Sean M. Traynor Director

March 1, 2010/s/ CHRIS WOLFE Chris Wolfe Director

March 1, 2010/s/ ROBERT F. WRIGHT Robert F. Wright Director

March 1, 2010


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES OF THE REGISTRANT:Report of Independent Registered Public Accounting Firm

F-2Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting

F-3Consolidated Balance Sheets as of December 31, 2009 and 2008

F-4Consolidated Statements of Operations for the Three Years Ended December 31,
 2009

F-5Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
Three Years Ended December 31, 2009

F-6Consolidated Statements of Cash Flows for the Three Years Ended December 31,
 2009

F-7Notes to Consolidated Financial Statements

F-8Schedule ISummary of Investments Other Than Investments in Related
Parties

F-75Schedule IICondensed Financial Information of
Registrant

F-76Schedule IIISupplementary Insurance Information

F-81Schedule IVReinsurance (incorporated in Note 11 to the Consolidated Financial Statements)Schedule VValuation and Qualifying Accounts

F-82


Other
schedules were omitted because they were not applicable

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of
Universal American Corp.

We
have audited the accompanying consolidated balance sheets of Universal American Corp. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements
of operations, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement
schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal American Corp. and
subsidiaries at December 31, 2009 and 2008 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth therein.

As
discussed in Note 4 to the consolidated financial statements, Universal American Corp. changed its method of accounting for impairment of debt securities with the adoption of
the guidance originally issued in FASB Staff Position 115-2 and 124-2Recognition and Presentation of Other-Than-Temporary Impairments(codified
in FASB ASC Topic 320Investments  Debt and Equity Securities) effective April 1, 2009.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal American Corp.'s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2010 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP


New
York, New York
March 1, 2010

F-2

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of
Universal American Corp.

We
have audited Universal American Corp.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Universal American Corp.'s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the company's internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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

In
our opinion, Universal American Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Universal American Corp. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 2009, and our report dated March 1, 2010 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP


New
York, New York
March 1, 2010

F-3

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        December 31, 2009 and 2008        (in thousands)

December 31,
2009

December 31,
2008ASSETSInvestments:Fixed maturities available for sale, at fair value (amortized cost: 2009, $961,265; 2008, $1,075,078)

$
964,553

$
1,032,393Other invested assets


1,276


23,923Total investments


965,829


1,056,316Cash and cash equivalents


856,958


511,032Accrued investment income


9,005


13,214Deferred policy acquisition costs


150,398


237,630Reinsurance recoverableslife


622,547


75,290Reinsurance recoverableshealth


126,524


145,696Due and unpaid premiums


35,466


97,320Present value of future profits and other amortizing intangible assets


167,545


192,742Goodwill and other indefinite lived intangible assets


530,031


530,031Income taxes receivable


3,441


38,032CMS contract deposit receivables





609,293Other Part D receivables


168,159


154,049Advances to agents


66,418


60,017Other assets


112,535


141,501Total assets

$
3,814,856

$
3,862,163LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESReserves and other policy liabilitieslife

$
599,442

$
616,819Reserves for future policy benefitshealth


408,625


415,026Policy and contract claimshealth


380,519


500,577Premiums received in advance


12,535


7,183Loan payable


313,758


320,625Other long term debt


110,000


110,000Amounts due to reinsurers


7,078


22,091Deferred income tax liability


31,564


6,877CMS contract deposit liabilities


169,169


Other Part D liabilities


163,332


378,016Other liabilities


169,370


168,865Total liabilities


2,365,392


2,546,079STOCKHOLDERS' EQUITYPreferred Stock (Authorized: 3 million shares):Series A Preferred Stock (Authorized: 300,000 shares, issued and outstanding: 42,105 shares, liquidation value: $49,263; 2008, 37,137)


42


42Series B Preferred Stock (Authorized: 300,000 shares)





Common stockvoting (Authorized: 200 million shares, issued and outstanding: 2009, 87.9 million shares; 2008, 87.4 million
shares)


879


874Common stocknon-voting (Authorized 30 million shares)





Additional paid-in capital


880,709


870,520Accumulated other comprehensive loss


(7,915
)

(36,422
)Retained earnings


709,695


558,675Less: Treasury Stock (2009, 13.5 million shares; 2008, 7.2 million shares)


(133,946
)

(77,605
)Total stockholders' equity


1,449,464


1,316,084Total liabilities and stockholders' equity

$
3,814,856

$
3,862,163


See notes to consolidated financial statements.

F-4

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        For the Three Years Ended December 31, 2009        (in
thousands, per share amounts in dollars)

2009

2008

2007Net premium and policyholder fees earned

$
4,918,898

$
4,600,454

$
2,941,419Net investment income


49,814


81,270


106,970Fee and other income


19,776


37,130


26,412Realized loss:Total other-than-temorary impairment losses on securities


(24,206
)

(59,786
)

(40,997
)Portion of loss recognized in other comprehensive income


6,830





Net other-than-temporary impairment losses on securities recognized in earnings


(17,376
)

(59,786
)

(40,997
)Realized (loss)/gain, excluding other-than-temporary impairment losses on securities


(7,612
)

105


819Net realized losses on investments


(24,988
)

(59,681
)

(40,178
)Total revenues


4,963,500


4,659,173


3,034,623Benefits, claims and expenses:Claims and other benefits


3,998,634


3,851,582


2,389,938Change in deferred acquisition costs


7,786


14,273


15,963Amortization of present value of future profits


23,560


23,763


12,251Commissions


118,278


147,125


167,145Reinsurance commissions and expense allowances


(26,577
)

(65,707
)

(71,221
)Interest expense


19,937


23,694


20,480Early extinguishment of debt








1,343Loss on reinsurance and other related costs


7,624





Restructuring costs


4,904





Goodwill impairment





3,893


Other operating costs and expenses


595,002


582,059


422,762Total benefits, claims and expenses


4,749,148


4,580,682


2,958,661Income before equity in earnings of unconsolidated subsidiary


214,352


78,491


75,962Equity in earnings of unconsolidated subsidiary


280


72,813


56,664Income before taxes


214,632


151,304


132,626Provision for income taxes


74,328


56,212


48,554Net income

$
140,304

$
95,092

$
84,072Earnings per common share:Basic

$
1.73

$
1.09

$
1.20Diluted

$
1.73

$
1.08

$
1.18Weighted average shares outstanding:Weighted average common shares outstanding


87,227


74,997


64,175Less weighted average treasury shares


(10,305
)

(3,635
)

(556
)Basic weighted shares outstanding


76,922


71,362


63,619Weighted average common equivalent of preferred shares outstanding


4,211


16,157


6,609Effect of dilutive securities


71


342


1,261Diluted weighted shares outstanding


81,204


87,861


71,489


See notes to consolidated financial statements.

F-5

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME        For the Three Years Ended
December 31, 2009        (in thousands)

Preferred
Stock
Series A

Preferred
Stock
Series B

Common
Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
(Loss) Income

Retained
Earnings

Treasury
Stock

TotalBalance at January 1, 2007

$


$


$
599

$
252,542

$
1,883

$
379,511

$
(10,626
)

623,909Net income

















84,072





84,072Other comprehensive loss














(1,949
)







(1,949
)Comprehensive income























82,123Preferred stock issuance


47


128





331,932











332,107Issuance of common stock








9


9,109











9,118Equity transactions related to the acquisition of MemberHealth








142


283,358











283,500Stock based compensation











10,683











10,683Repayments of loans to officers











38











38Treasury shares reissued











3,220








6,368


9,588Balance at December 31, 2007


47


128


750


890,882


(66
)

463,583


(4,258
)

1,351,066Net income

















95,092





95,092Other comprehensive loss














(36,356
)







(36,356
)Comprehensive income























58,736Preferred stock conversion


(5
)

(128
)

133














Issuance of common stock








11


4,843











4,854Purchase price adjustment for acquisition of MemberHealth








(20
)

(34,521
)










(34,541
)Stock based compensation











9,469











9,469Treasury shares purchased, at cost




















(74,821
)

(74,821
)Treasury shares reissued











(153
)







1,474


1,321Balance at December 31, 2008


42





874


870,520


(36,422
)

558,675


(77,605
)

1,316,084Net income

















140,304





140,304Other comprehensive income














39,223








39,223Comprehensive income























179,527ASC 320-10-65-1 implementation adjustment














(10,716
)

10,716





Issuance of common stock








5


542











547Stock based compensation











9,775











9,775Treasury shares purchased, at cost




















(63,693
)

(63,693
)Treasury shares reissued











(128
)







7,352


7,224Balance at December 31, 2009

$
42

$


$
879

$
880,709

$
(7,915
)
$
709,695

$
(133,946
)
$
1,449,464


See notes to consolidated financial statements.

F-6

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Three Years Ended December 31, 2009        (in
thousands)

2009

2008

2007Cash flows from operating activities:Net income

$
140,304

$
95,092

$
84,072Adjustments to reconcile net income to net cash provided by operating activities, net of balances acquired:Equity in earnings of unconsolidated subsidiary


(280
)

(72,813
)

(56,664
)Distribution from unconsolidated subsidiary


5,593


67,500


58,371Deferred income taxes


9,337


7,050


(24,931
)Realized losses on investments


24,988


59,681


40,178Amortization of intangible assets


23,560


23,763


12,251Impairment of goodwill





3,893


Loss on reinsurance, net of tax


2,221





Net amortization of bond premium


2,346


2,171


1,356Changes in operating assets and liabilities:Deferred policy acquisition costs


7,786


14,273


15,963Reserves for future policy benefits


9,724


8,562


15,953Policy and contract claims payable


(114,860
)

(23,732
)

66,660Reinsurance balances


(16,610
)

25,839


(86,932
)Due and unpaid/advance premium, net


67,206


3,246


44,958Income taxes payable/receivable


34,591


(7,076
)

(6,791
)Other Part D (payables)/receivables


(228,794
)

35,480


254,779Other, net


47,576


(60,180
)

(65,089
)Cash provided by operating activities


14,688


182,749


354,134Cash flows from investing activities:Proceeds from sale or redemption of fixed maturity investments


670,157


221,142


246,636Cost of fixed maturity investments purchased


(566,969
)

(233,276
)

(307,822
)Assets transferred on life reinsurance


(454,487
)




Purchase of business and return of purchase price, net of cash acquired





40,990


(307,931
)Purchase of fixed assets


(18,156
)

(20,935
)

(7,417
)Other investing activities


2,742


735


8,938Cash (used in) provided by investing activitiescontinuing operations


(366,713
)

8,656


(367,596
)Cash used in investing activitiesdiscontinued operations








(19,836
)Cash (used in) provided by investing activities


(366,713
)

8,656


(387,432
)Cash flows from financing activities:Net proceeds from issuance of common and preferred stock, net of tax effect


4,411


7,662


347,068Cost of treasury stock purchases


(63,693
)

(74,821
)

Receipts from CMS contract deposits


4,161,518


3,498,773


1,284,919Withdrawals from CMS contract deposits


(3,383,056
)

(3,713,841
)

(1,710,472
)Deposits and interest credited to policyholder account balances


4,357


17,051


19,761Surrenders and other withdrawals from policyholder account balances


(17,548
)

(54,382
)

(70,090
)Principal repayment on loan payable and other long term debt


(6,867
)

(28,500
)

(156,438
)Issuance of new debt








450,000Payment of debt issue costs


(1,171
)




(5,895
)Cash provided by (used in) financing activities


697,951


(348,058
)

158,853Net increase (decrease) in cash and cash equivalents


345,926


(156,653
)

125,555Cash and cash equivalents at beginning of period


511,032


667,685


542,130Cash and cash equivalents at end of period

$
856,958

$
511,032

$
667,685


See notes to consolidated financial statements.

F-7

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND COMPANY BACKGROUND

Universal American Corp., which we refer to as "we," the "Company," or "Universal American," is a specialty health and life insurance holding company with an emphasis on providing a
broad array of health insurance and managed care products and services to the growing senior population. Universal American was incorporated in the State of New York in 1981. Collectively, our
insurance company subsidiaries are licensed to sell life, accident and health insurance and annuities in all fifty states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. We
currently sell Medicare Advantage private fee-for-service Plans, known as PFFS Plans, Medicare coordinated care Plans, which we call HMOs, Medicare coordinated care products
built around contracted networks of providers, which we call PPOs, Medicare Part D prescription drug benefit Plans, known as PDPs, Medicare supplement, fixed benefit accident and sickness,
insurance, and senior life insurance. We distribute these products through career and independent general agency systems and on a direct to consumer basis.

On
April 24, 2009, we completed the closing of the previously announced Life Insurance and Annuity Reinsurance transaction with the Commonwealth Annuity and Life Insurance
Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS). Under this transaction, effective April 1,
2009, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty. This transaction is discussed in more detail in Note 11 of notes to the
Consolidated Financial Statements.

Under
the Part D program, we offer our Community CCRxSM and Prescriba RxSM stand alone PDPs throughout the United States and the U.S. territories. We
also operate a pharmacy benefits manager, or PBM, servicing the PDPs as well as the members in our Medicare Advantage plans offering a Part D benefit.

We
currently operate Medicare Advantage PFFS and PPO plans through American Progressive Life & Health Insurance Company of New York and The Pyramid Life Insurance Company and our
Medicare Advantage HMOs in Houston and Beaumont, Texas through SelectCare of Texas, L.L.C., in North Texas through SelectCare Health Plans, Inc., and in Oklahoma through SelectCare of
Oklahoma, Inc. and GlobalHealth, Inc. All of these companies are our subsidiaries. In addition, beginning in 2007, we expanded into new health plan markets in Wisconsin.

CHCS
Services, Inc., our administrative services company, provides administrative services for both affiliated and unaffiliated insurance companies for senior market insurance and
non-insurance programs.

2. BASIS OF PRESENTATION

We have prepared the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, in accordance with
Article 10 of the Securities and Exchange Commission's Regulation S-X, and consolidate the accounts of Universal American and its subsidiaries:



F-8

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. BASIS OF PRESENTATION (Continued)



During
2005, we entered into a strategic alliance with Caremark and created Part D Management Services, L.L.C., known as PDMS. PDMS was 50% owned by Universal American and 50%
owned by Caremark. We did not control PDMS and therefore we did not consolidate PDMS in our financial statements. We accounted for our investment in PDMS on the equity basis and included it in other
assets. PDMS was dissolved in December 2009. See Note 10Unconsolidated Subsidiary, for additional information on PDMS and its dissolution,

For
the insurance and health plan subsidiaries, U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities.

We
have eliminated all material intercompany transactions and balances.

Subsequent
events were evaluated through the date these consolidated financial statements were issued.

Use of Estimates:The preparation of our financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the
amounts reported by us in our consolidated financial statements and the accompanying notes. Critical accounting policies are ones that require significant subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based on information available at the time the estimates are made, as well as
anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become
determinable, we may revise the recorded estimates and reflect them in operating results. In our judgment, the accounts involving estimates and assumptions that are most critical to the preparation of
our financial statements are policy related liabilities and expense recognition, deferred policy acquisition costs, goodwill and other intangible assets, investment valuation, revenue
recognitionMedicare Advantage products, and income taxes. There have been no changes in our critical accounting policies during the current year.

Reclassifications:We have reclassified $228.5 million in the December 31, 2008 consolidated balance sheet from Policy
and contract
claimshealth to Other Part D liabilities, consistent with its presentation at December 31, 2009. This amount relates to payments owed to pharmacies for which we are
reimbursed by Centers for Medicare and Medicaid Services, known as CMS, through low income

F-9

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. BASIS OF PRESENTATION (Continued)

cost
sharing subsidies and catastrophic reinsurance. We do not recognize claims expense for these subsidies and the related receivables are recorded as CMS contract deposits in our consolidated
balance sheets. We believe that separation of this liability from Policy and contract claimshealth provides a clearer presentation based on the amounts for which we are at risk.

Commencing
with our filing on Form 10-Q for the period ended September 30, 2009, we have reclassified certain balances within the consolidated balance sheets
and statements of operations for all periods presented with respect to following line items:



We
believe that these changes made after our life reinsurance transaction will enhance the usefulness of our consolidated financial statements by combining immaterial balances and
providing a clear differentiation of reinsurance and reserve balances between health and life insurance business. These reclassifications had no effect on total assets, total liabilities,
stockholders' equity, net income, or earnings per share as previously reported.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents:We consider all highly liquid investments that have maturities of three months or less at the date of purchase
to be cash
equivalents. Cash equivalents include such items as certificates of deposit, commercial paper, and money market funds.

Investments:The Company follows Accounting Standards Codification No. 320,InvestmentsDebt
and Equity
Securities, known as ASC 320. ASC 320 requires that debt and equity securities be classified into one of three categories and accounted for as
follows:



F-10

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Unrealized
gains and losses on available for sale securities are excluded from earnings and reported as accumulated other comprehensive income (loss), net of tax and deferred policy acquisition cost
adjustments unless the losses are determined to be other-than-temporary.

As
of December 31, 2009 and 2008, we classified all fixed maturity securities as available for sale and carried them at fair value, with the unrealized gain or loss, net of tax
and deferred policy acquisition cost adjustments, included in accumulated other comprehensive income (loss). We stated policy loans at the unpaid principal balance. We carried short-term
investments at cost, which approximates fair value. Other invested assets consist principally of equity securities, mortgage loans and collateral loans. We carried equity securities at current fair
value. We carried mortgage loans at the unpaid principal balance. We carried the collateral loans at the underlying value of their collateral that is the cash surrender value of life insurance.

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



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

We
regularly evaluate the amortized cost of our investments compared to the fair value of those investments. We generally recognize impairments of securities when we consider a decline
in fair value below the amortized cost basis to be other-than-temporary. The evaluation includes the intent and ability to hold the security to recovery, and we consider it on
an individual security basis, not on a portfolio basis. We generally recognize impairment losses for mortgage-backed and asset-backed securities when an adverse change in the amount or timing of
estimated cash flows occurs, unless the

F-11

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

adverse
change is solely a result of changes in estimated market interest rates. We also recognized impairment losses when we determine declines in fair values based on quoted prices to be other than
temporary.

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



Our
accounting policy requires that we assess a decline in the value of a security below its cost or amortized cost basis to determine if the decline is
other-than-temporary. During 2009, ASC 320-10-65-1 modified the criteria for recognition of other-than-temporary
impairment (OTTI) of a debt
security and we have adopted this new criterion into our accounting policy for investments.



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

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



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

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

We
generally record investment income when earned. We amortize premiums and discounts arising from the purchase of mortgage-backed and asset-backed securities into investment income over
the estimated remaining term of the securities, adjusted for anticipated prepayments. We use the prospective method to account for the impact on investment income of changes in the estimated future
cash flows for these securities. We amortize premiums and discounts on other fixed maturity securities using the interest method over the remaining term of the security.

Deferred Policy Acquisition Costs:We defer the cost of acquiring new business, principally non-level commissions, agency
production,
policy underwriting, policy issuance, and associated costs, all of which vary with, and are primarily related to the production of new and renewal business.

For
other life and health products, we amortize DAC in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in
accordance with ASC 944. Under ASC 944,Financial ServicesInsurance, any unamortized DAC relating to lapsed policies must be amortized as
of the date of the lapse.

We
test for the recoverability of DAC at least annually. To the extent that we determine that the present value of future policy premiums would not be adequate to recover the unamortized
costs, we would write off the excess deferred policy acquisition costs. Based on our review of DAC recoverability, we determined the DAC was recoverable.



Valuation of acquired intangible assets:Business combinations accounted for as a purchase result in the allocation of the
purchase consideration to
the fair values of the assets and liabilities acquired, including the present value of future profits, establishing these fair values as the new accounting basis. We base the present value of future
profits on an estimate of the cash flows of the in-force business acquired, discounted to reflect the present value of those cash flows. The discount rate we select depends upon the
general market conditions at the time of the acquisition and the inherent risk in the transaction. We allocate purchase consideration in excess of the fair value of net assets acquired, including the
present value of future profits and other identified intangibles, for a specific acquisition, to goodwill. We perform the allocation of purchase price in the period in which we consummate the

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purchase.
Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies, tax matters and refinements made to estimates of fair value in connection with
the preliminary allocation.

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

Description

Weighted Average Life At Acquisition

Amortization BasisInsurance policies acquired


79

The pattern of projected future cash flows for the policies acquired over the estimated weighted average life of the policies acquiredDistribution channel acquired


330

Straight line over the estimated life of the assetMembership base acquired


710

Straight line over the estimated weighed average life of the membership baseTrademarks/tradenames


9

Straight line over the estimated weighted average life of the trademarks/tradenamesLicenses


15

Straight line over the estimated weighed average life of the licensesProvider contracts


10

Straight line over the estimated weighted average life of the contractsNon-compete


7

Straight line over the length of the agreementAdministrative service contracts


6

The pattern of projected future cash flows for the customer contracts acquired over the estimated weighted
average life of the contractsHospital network contracts


10

The pattern of projected future cash flows for the hospital network contracts acquired over the estimated
weighted average life of the contracts


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

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

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

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

The
Company performed its annual goodwill assessment for the individual reporting units as of October 1, 2009. The conclusion reached as a result of the annual goodwill impairment
testing for 2009 was that the fair value of each reporting unit, for which goodwill had been allocated, was in excess of the respective reporting unit's carrying value (the first step of the goodwill
impairment test).

During
each quarter, we perform a review of certain key components of our valuation of our reporting units, including the operating performance of the reporting units compared to plan
(which was the primary basis for the prospective financial information included in our last goodwill impairment

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test
as of October 1, 2009), the company's weighted average cost of capital and the company's stock price and market capitalization. Based on our review of these items through the reporting
date, we believe that our estimate of fair value for each of our reporting units remains reasonable.

Recognition of Premium Revenues and Policy BenefitsMedicare Plans:Medicare is a federal health insurance program that
provides
Americans age 65 and over, and some disabled persons under the age of 65, certain hospital, medical and prescription drug benefits. The Medicare program consists of four parts, labeled
Parts AD.

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

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

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

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

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

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

Policy
and contract claims include actual claims reported but not paid and estimates of health care services and prescription drug claims incurred but not reported. The estimated claims
incurred but not reported are based upon current enrollment, historical claim receipt and payment patterns, historical medical cost trends and health service utilization statistics. These estimates
and assumptions are derived from and are continually evaluated using per member per month trend analysis, claims trends

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developed
from our historical experience in the preceding month (adjusted for known changes in estimates of recent hospital and drug utilization data), provider contracting changes, changes in benefit
levels, product mix and seasonality. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially
from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect
them in operating results.



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



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



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

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

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

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Adjustment
Provisions." All health benefit organizations must capture, collect, and submit the necessary diagnosis code information to CMS within prescribed deadlines. Accordingly, we collect,
capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines for our HMO, PPO and PFFS plans. We estimate changes in CMS premiums related to revenue adjustments
based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. Risk scores are updated annually by CMS and reconciled to our estimated amounts by us with any adjustments recorded in
premium revenue. Although such adjustments have not been considered to be material in the past, future adjustments could be material.

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

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

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

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

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

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

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



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

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

Revenue AdjustmentsThe monthly CMS Direct Premium Subsidy is based upon the members' health status, which is determined by CMS, as more fully
described above under "Medicare Risk Adjustment Provisions." We do not have access to diagnosis data with respect to our stand-alone PDP members and therefore, we cannot anticipate changes in our
members' risk scores. Changes in CMS premiums related to risk-score adjustments for our stand alone PDP membership are recognized when the amounts become determinable and collectability is
reasonably assured, which occurs when we are notified by CMS of such adjustments. Although such adjustments have not been considered to be material in the past, future adjustments could be material.

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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the
Plan. See "Deposit Accounting" below for a description of the accounting for low-income cost sharing subsidies.

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

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

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

Recognition of Premium Revenues and Policy Benefits for our Traditional Accident & Health Insurance Products:Our traditional
accident and
health products include Medicare supplement, fixed benefit accident and sickness and other health, and long term care products. These products are considered to be long-duration contracts
in accordance with ASC 944-40,Financial ServicesInsuranceClaim Costs and Liabilities for Future Policy Benefits,because they are largely guaranteed renewable (renewable at the option of the insured). For these products, we record premiums as revenue over the premium-paying periods of the contracts when due from
policyholders. We recognize benefits and expenses associated with these policies over the current and anticipated renewal periods of the policies so as to result in recognition of profits over the
life of the policies. We accomplish this association by recording a provision for future policy benefits and amortizing deferred policy acquisition costs. The liability for future policy benefits for
accident & health policies consists of active life reserves and the estimated present value of the remaining ultimate net cost of incurred claims. Active life reserves consist primarily of
unearned premiums and additional contract reserves. We compute the additional contract reserves on the net level premium method using assumptions for future investment yield, mortality and morbidity.
The assumptions are based on past experience. We establish claim

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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

reserves
for future payments not yet due on incurred claims, primarily relating to individual disability and long term care insurance and group long-term disability insurance products. We
initially establish these reserves based on past experience, continuously reviewed and updated with any related adjustments recorded to current operations. Claim liabilities represent policy benefits
due for unpaid claims, consisting primarily of claims in the course of settlement and a liability for incurred but not yet reported claims, known as IBNR.

Our
accounting for premium revenues and policy benefits, particularly a) the recognition of benefits and expenses associated with earned premiums as the related premiums are
earned and b) the recording a liability for future policy benefits consisting of active life reserves and the estimated present value of the remaining ultimate net cost of incurred claims is as
follows:



Recognition of Revenues, Contract Benefits and Expenses for Investment and Universal Life Type Policies:Revenues for universal
life-type policies and investment products consist of mortality charges for the cost of insurance and surrender charges assessed against policyholder account balances during the period. We
do not reflect amounts received for investment and universal life type products as premium revenue; rather we account for these amounts as deposits, with the related liability reflected in
policyholder account balances. We expense benefit claims incurred in excess of policyholder account balances. We determine the liability for policyholder account balances for universal
life-type policies and investment products under ASC 944-20, Financial ServicesInsuranceInsurance
Activities,following a "retrospective deposit" method. The retrospective deposit method establishes a liability for policy benefits at an amount determined by the account or
contract balance that accrues to the benefit of the policyholder, which consists principally of policy account values before any applicable surrender charges. As of September 30, 2006, we
ceased selling annuity products. On April 24, 2009, we reinsured all of our interest sensitive life insurance and annuity business to the Commonwealth Annuity and Life

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Insurance
Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS). This transaction is discussed in more
detail at Note 11 of notes to the consolidated Financial Statements.

Recognition of Premium Revenues and Policy Benefits for Traditional Life Products:We generally recognize premiums from
traditional life policies as
revenue when due. We match benefits and expenses with this revenue so as to result in the recognition of profits over the life of the contracts. We accomplish this matching by recording a provision
for future policy benefits and the deferral and subsequent amortization of policy acquisition costs. The liability for future policy benefits represents the present value of future benefits to be paid
to or on behalf of policyholders, less the future value of net premiums and we calculate it based on actuarially recognized methods using morbidity and mortality tables, which we modify to reflect our
actual experience when appropriate. The liability for unpaid claims, including IBNR, reflects estimates of amounts to fully settle known reported claims related to insured events that we estimate have
occurred, but have not yet been reported to us.

Recognition of Administrative Service Revenue:We generally recognize fees for administrative services over the period for which
we are obligated to
provide service.

Income Taxes:We use the asset and liability method of accounting for income taxes. Under this method, we recognize deferred tax
assets and
liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates
that we expect to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a
change in tax rates in income in the period that includes the enactment date of a change in tax rates.

We
establish valuation allowances based upon an analysis of projected taxable income and our ability to implement prudent and feasible tax planning strategies. We carried valuation
allowances on deferred tax assets of $5.8 million at December 31, 2009 and $4.4 million at December 31, 2008. At December 31, 2009, we assessed the amount of the
deferred tax asset that was more likely than not to be realized under ASC 740,Income Taxes, and concluded that we can record tax benefits related to
our realized losses relating to our investments for financial statement purposes.

Reinsurance:We reflect amounts recoverable under reinsurance contracts in total assets as reinsurance recoverables rather than
netting those amounts
against the related policy asset or liability. We account for the cost of reinsurance related to long-duration contracts over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies. We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our exposure
to significant losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the
reinsurance agreement. As of December 31, 2009, all of our primary reinsurers were rated "A " (Excellent) or better by A.M. Best. We do not know of any instances
where any of our reinsurers have been unable to pay any policy claims on any reinsured business.

Derivative InstrumentsCash Flow Hedge:We use interest rate swap agreements to manage risk arising from interest rate
volatility.
Interest rate swap agreements, which are cash flow hedges, are contracts to exchange interest payments on a specified principal or notional amount for a specified

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period.
By using derivatives to manage risk, we expose ourselves to credit risk and additional market risk. Credit risk is the exposure to loss if a counterparty fails to perform under the terms of
the derivative contract. We minimize credit risk by entering into transactions with counterparties that maintain high credit ratings. Market risk is the exposure to changes in the market price of the
underlying instrument and the related derivative. These price changes result from movements in interest rates, and as a result, assets and liabilities will appreciate or depreciate in market value. We
recognize these derivative instruments on the consolidated balance sheets at their fair value, based on external quotes provided by banks. We report the fair value of the derivative instruments as
assets or liabilities in other assets or other liabilities.

On
the date we enter into the interest rate swap contract, we may designate it as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related
to a recognized asset or liability, or a cash flow hedge, if specified criteria are met. At the inception of the contract, we formerly document all relationships between the hedging instrument and the
hedged item, as well as its risk-management objective and strategy for undertaking each hedge transaction. We also formerly assess, both at the hedge's inception and on an ongoing basis,
whether the derivative used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items.

For
a derivative designated as a cash flow hedge, we record the effective portion of changes in the fair value of the derivative in accumulated other comprehensive income (loss) and
recognize it in the income statement when the hedged item affects results of operations. If we determine that



If
we discontinue hedge accounting, we will continue to carry the derivative at fair value, with change in the fair value of the derivative recognized in the current period results of
operations. When we discontinue hedge accounting because it is probable that a forecasted transaction will not occur, we recognize the accumulated gains and losses included in other accumulated other
comprehensive income (loss) immediately in results of operations.

Stock Based Compensation:We have various stock-based incentive plans for our employees, non-employee directors and agents.
Detailed
information for activity in our stock plans can be found in Note 22Stock-Based Compensation. As of January 1, 2006, the Company adopted ASC 718, CompensationStock Compensation,
using the modified prospective method. ASC 718 requires companies to recognize compensation costs for
share-based payments to employees and non-employee directors based on the grant date fair value of the award and permits them to amortize this fair value over the grantees' service period.
The provisions of this standard require the fair value to be calculated using a valuation model such as the Black-Scholes or binomial-lattice models. We have elected to use the Black-Scholes valuation
model to value employee stock options, as we had done for our previous pro forma stock compensation disclosures. Under the modified prospective method, we recognize

F-23

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

compensation
cost for the fair value of the unvested portion of existing arrangements as of January 1, 2006, as well as the fair value for all new share-based arrangements.

We
determine stock-based compensation for agents based on guidance contained in ASC 505-50,EquityEquity-Based Payments to
Non-Employees. We expense the fair value of the awards over the vesting period of each award.

4. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

GAAP Codification:In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standard, or SFAS,
No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement
No. 162. This
statement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards
Codification, or ASC, also known collectively as the "Codification," is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules
and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants
Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting
guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. The Codification is effective for financial statements issued for
reporting periods that end after September 15, 2009. Updates to the ASC are issued as Accounting Standards Updates, or ASU. Because the Codification did not change GAAP, the Codification had no
impact on our consolidated financial statements and footnotes, other than the replacement of pre-codification references with ASC or ASU references herein.

Measuring Liabilities at Fair Value:On August 28, 2009, the FASB issued ASU No. 2009-05,Measuring
Liabilities at Fair Value. ASU 2009-05 provides guidance on several key issues regarding the estimate of fair value for liabilities and amends ASC 820, Fair Value Measurements and
Disclosures. Among other things, the guidance addresses restrictions on the transfer of a liability, and clarifies how the
price of a traded debt security should be considered in estimating the fair value of the issuer's liability. This pronouncement did not have a material impact on our consolidated financial statements.

Fair Value Measurements:In April 2009, the FASB issued new guidance to address concerns about (1) measuring the fair value
of financial
instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2) recording impairment charges on investments in debt securities. The FASB also issued
new guidance to require disclosures of fair values of certain financial instruments in interim financial statements.

Fair Value Measurements and Disclosures TopicASC 820-10-65 provides additional guidance to highlight and expand
on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. It also requires new disclosures relating to fair
value measurement inputs and valuation techniques (including changes in inputs and valuation techniques).

Investments Debt and Equity Securities TopicASC 320-10-65-1 modified the criteria for recognition of
other-than-temporary impairment (OTTI) of a debt security. If management intends to sell the debt

F-24

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

security,
or it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire
difference between the debt security's amortized cost basis and its fair value at the balance sheet date. After recognition of the OTTI, the debt security is accounted for as if it had been purchased
on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.

If
management does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before recovery of its amortized
cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the debt security (referred to as the credit loss), an OTTI is considered to have
occurred. In this instance, the total OTTI is bifurcated into the amount related to the credit loss, which is recognized in earnings, with the remaining amount of the total OTTI attributed to other
factors (referred to as the noncredit portion) and recognized as a separate component in other comprehensive loss. After the recognition of an OTTI, the debt security is accounted for as if it had
been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. In addition, ASC 820 expands and
increases the frequency of existing disclosures about OTTIs for debt and equity securities regarding expected cash flows, credit losses and an aging of securities with unrealized losses.

We
adopted the aforementioned changes effective April 1, 2009, resulting in an increase in the opening balance of retained earnings by $10.7 million, with a corresponding
increase to the accumulated other comprehensive loss on our consolidated statements of stockholders' equity and comprehensive income to reclassify the noncredit portion of previously impaired debt
securities held as of April 1, 2009.

The
following summarizes the components of the adjustment (in thousands):

Unrealized OTTIIncrease in amortized cost

$
16,487Income Tax


(5,771
)Net cumulative effect adjustment

$
10,716


The
adjustment was calculated for all debt securities held as of April 1, 2009, for which an OTTI was previously recognized, but as of April 1, 2009, we did not intend to
sell the security and it was not more likely than not that we would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be
received as of April 1, 2009, to the amortized cost basis of the debt securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate
for each respective debt security in effect before recognizing any OTTI, except for on variable rate debt securities, on which the rate used was the current rate in effect as of the date the cash flow
estimate was being made.

F-25

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

Following
is a summary of the adjustment as of April 1, 2009, by asset class (in thousands):

Subprime

$
15,689Non-agency residential mortgage-backed securities


798$
16,487


In
addition, we have enhanced our financial statement presentation to separately present the total OTTI recognized in realized loss, with an offset for the amount of noncredit
impairments recognized in accumulated other comprehensive loss, on the face of our consolidated statements of operations. The enhanced financial statement disclosures required under ASC 825, Financial
Instruments, are included in Notes 5 and 6.

Subsequent Events DisclosureOn June 30, 2009, we adopted ASC 855-10-50,Subsequent
EventsDisclosure, which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial
statements are issued. ASC 855-10-50 defines two types of subsequent events. The effects of events or transactions that provide additional evidence about conditions that
existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements, are recognized in the financial statements. The effects of events that provide
evidence about conditions that did not exist at the date of the balance sheet but arose after that date are not recognized in the financial statements.

Business CombinationsIn December 2007, the FASB issued guidance codified into ASC 805,Business
Combinations, which replaced previous business combination accounting guidance. The new guidance revises how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree and any goodwill acquired. The guidance as amended includes recognition provisions for
assets acquired and liabilities assumed that arise from contingencies and the treatment of contingent purchase price. It also requires additional disclosure requirements intended to enable users to
evaluate the nature and financial effects of the business combination. The Company adopted the new guidance on January 1, 2009, and will apply the provisions prospectively to all new
acquisitions closing on or after that date. The adoption did not have an impact on our consolidated financial statements.



We determined that all other recently issued accounting standards that are not yet effective will not have a material impact on our
consolidated financial statements, or do not apply to our operations.

F-26

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS

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

December 31, 2009Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI

Mkt Value(in thousands)U.S. Treasury securities and obligations of
U.S. Government

$
35,572

$
554

$
(4
)
$


$
36,122Government sponsored agencies


137,839


3,051


(59
)




140,831Other political subdivisions


10,020


223


(229
)




10,014Corporate debt securities


312,225


16,826


(1,206
)




327,845Foreign debt securities


19,465


1,259








20,724Mortgage-backed and asset-backed securities


446,144


14,588


(13,598
)

(18,117
)

429,017$
961,265

$
36,501

$
(15,096
)
$
(18,117
)
$
964,553




December 31, 2008Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI

Mkt Value(in thousands)U.S. Treasury securities and obligations of U.S. Government

$
33,963

$
1,372

$


$


$
35,335Government sponsored agencies


90,030


4,999








95,029Other political subdivisions


9,993


133


(241
)




9,885Corporate debt securities


441,681


4,055


(25,453
)




420,283Foreign debt securities


32,779


41


(1,930
)




30,890Mortgage-backed and asset-backed securities


466,632


8,109


(33,770
)




440,971$
1,075,078

$
18,709

$
(61,394
)
$


$
1,032,393


At
December 31, 2009, total gross unrealized and OTTI losses of $31.7 million on mortgage-backed and asset-backed securities reflect unrealized losses of
$27.4 million on subprime residential mortgage loans, as discussed below, and $4.3 related to obligations of other mortgage-backed and asset-backed securities. The value of a majority of these
securities is depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Corporate debt securities have gross unrealized losses of $1.2 million
at December 31, 2009. These unrealized losses relate to corporate securities across select sectors, and reflect company specific credit risks that existed at December 31, 2009.
Management and the Investment Committee have evaluated these holdings, with input from our investment managers, and do not believe them to be other-than-temporarily impaired.

F-27

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

The
amortized cost and fair value of fixed maturities at December 31, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

Fair
Value(in thousands)Due in 1 year or less

$
84,044

$
85,873Due after 1 year through 5 years


328,216


344,688Due after 5 years through 10 years


85,332


88,495Due after 10 years


17,529


16,480Mortgage and asset-backed securities


446,144


429,017$
961,265

$
964,553


The
fair value and unrealized loss as of December 31, 2009 and December 31, 2008 for fixed maturities, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, are shown below:

Less than 12 Months

12 Months or Longer

TotalDecember 31, 2009

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI(in thousands)U.S Treasury securities and obligations of
U.S. Government

$


$


$
48

$
(4
)
$
48

$
(4
)Government sponsored agencies


52,666


(59
)







52,666


(59
)Other political subdivisions


25





1,771


(229
)

1,796


(229
)Corporate debt securities


7,409


(366
)

11,373


(840
)

18,782


(1,206
)Foreign debt securities


25











25


Mortgage-backed and asset-backed securities


100,339


(5,668
)

28,643


(26,047
)

128,982


(31,715
)Total fixed maturities

$
160,464

$
(6,093
)
$
41,835

$
(27,120
)
$
202,299

$
(33,213
)Total number of securities in an unrealized loss position


64




F-28

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

Less than 12 Months

12 Months or Longer

TotalDecember 31, 2008

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI(in thousands)U.S Treasury securities and obligations of
U.S. Government

$
53

$


$


$


$
53

$
Other political subdivisions


878


(162
)

920


(79
)

1,798


(241
)Corporate debt securities


182,411


(12,942
)

51,017


(12,511
)

233,428


(25,453
)Foreign debt securities


26,803


(1,318
)

1,872


(612
)

28,675


(1,930
)Mortgage-backed and asset-backed securities


79,877


(9,748
)

57,370


(24,022
)

137,247


(33,770
)Total fixed maturities

$
290,022

$
(24,170
)
$
111,179

$
(37,224
)
$
401,201

$
(61,394
)Total number of securities in an unrealized loss position


209


Fixed
maturity securities in an unrealized loss position were diversified, representing 64 different securities as of December 31, 2009. Collectively, the fair value to amortized
cost ratio for these securities was over 86%, meaning that unrealized losses were less than 14% of amortized cost. The fair value for these securities was approximately 73% of their par value.
Individually, the fair value to amortized cost ratio for approximately 59% of these securities was greater than 75%.

The
group of securities in an unrealized loss position for less than twelve months was comprised of 22 securities. Collectively, the fair value to amortized cost ratio for these
securities was 96%, meaning that unrealized losses for the securities in this group were 4% of amortized cost. The fair value for the securities in this group was 87% of their par value. The majority
of the securities in the group are depressed due to the deterioration of value in the mortgage-backed security market.

The
group of securities depressed for twelve months or more was comprised of 42 securities. Collectively, the fair value to amortized cost ratio for these securities was 61%, meaning
that unrealized losses for the securities in this group was approximately 39% of their amortized cost. The fair value for the securities in this group was 45% of their par value. Individually, the
fair value to amortized cost ratio for approximately 55% of these securities was greater than 75%. Mortgage and asset-backed securities represent approximately 68% of the total fair value for the more
than twelve month group and Corporate debt securities represent approximately 27%. There were 3 corporate debt securities with a fair value to amortized cost ratio below 90%, which had a combined
unrealized loss of $0.5 million. The majority of the securities in the group are depressed due to the deterioration of value in the mortgage-backed security market and related businesses,
subprime securities in particular. Subprime securities in the portfolio represented $22.8 million of the $27.1 million unrealized loss on the 12 months or longer mortgage-backed
securities. A description of the factors considered, in determining that recording an other-than-temporary impairment was not warranted, are outlined below.

As
part of the Company's ongoing security monitoring process by a committee of investment and accounting professionals, the Company has reviewed its investment portfolio and recorded an
other-than-temporary decline in the value of certain of our securities with exposure to subprime mortgages totaling $10.5 million in the year ended December 31,
2009. In addition, we recorded $6.4 million in other-than-temporary impairments on other mortgage backed securities. There were no

F-29

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

impairments
of corporate securities in 2009. We recorded $48.0 million in other-than-temporary impairments on certain subprime mortgages and $11.8 million in
other-than-temporary impairments on corporate and other mortgage backed securities for the year ended December 31, 2008. We recorded $41.0 million in
other-than-temporary impairments on certain subprime mortgages for the year ended December 31, 2007.



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

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

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

Vintage Year

Amortized
Cost

Fair
Value

Unrealized
Loss(in thousands)2003

$
4,229

$
3,389

$
(840
)2004


2,102


1,614


(488
)2005


23,384


14,914


(8,470
)2006


17,478


4,298


(13,180
)2007


5,427


1,730


(3,697
)Totals

$
52,620

$
25,945

$
(26,675
)


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

F-30

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

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

2009 Quarter EndedCumulative

2009

December 31

September 30

June 30

March 31

2008

2007(in thousands)Subprime

$
99,458

$
10,497

$
3,841

$
146

$
2,135

$
4,375

$
47,964

$
40,997Other structured


11,043


6,398


201


108


2,388


3,701


4,645


Corporate


7,177

















7,177


$
117,678

$
16,895

$
4,042

$
254

$
4,523

$
8,076

$
59,786

$
40,997


At
December 31, 2007, we recognized an other-than-temporary impairment on fourteen 2006 and 2007 vintage year subprime holdings. As of December 31,
2008, we recognized an additional other-than-temporary impairment on the same fourteen securities impaired at December 31, 2007 plus four additional subprime holdings
that were initially impaired during the first quarter of 2008. In addition, during 2008, we recognized an other-than-temporary impairment on five other structured securities
and three corporate securities. The corporate other-than-temporary impairment included $6.1 million on two Lehman Brothers securities. During the year ended
December 31, 2009, we recognized an additional other-than-temporary impairment on twelve subprime securities impaired in 2007 and 2008, plus one additional subprime
holding in 2009. Further, we recognized other-than-temporary impairments on twelve other structured securities, seven of which had not been previously impaired.

The
components of the change in unrealized gains and losses for fixed maturity securities included in the consolidated statements of stockholders' equity are as follows:

2009

2008

2007(in thousands)Change in net unrealized gains and losses:Fixed maturities

$
45,973

$
(42,152
)
$
(2,295
)Other invested assets








(8
)Adjustment relating to deferred policy acquisition costs


(6,617
)

6,392


(670
)Change in net unrealized losses before income tax


39,356


(35,760
)

(2,973
)Income tax benefit


(13,775
)

12,516


1,040Change in net unrealized losses

$
25,581

$
(23,244
)
$
(1,933
)


F-31

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

The
details of net investment income are as follows:

2009

2008

2007(in thousands)Investment Income:Fixed maturities

$
47,557

$
59,170

$
62,090Cash and cash equivalents


1,851


21,303


44,428Policy loans


805


1,971


1,342Other


918


632


1,095Gross investment income


51,131


83,076


108,955Investment expenses


(1,317
)

(1,806
)

(1,985
)Net investment income

$
49,814

$
81,270

$
106,970


There
was no non-income producing fixed maturity securities for the years ended December 31, 2009 or 2007. The two Lehman Brothers securities referred
to above were the only non-income producing fixed maturity securities for the year ended December 31, 2008.

Subsequent
to the Life and Annuity Reinsurance transaction in April 2009, we elected to reduce the risk and exposure of our investment portfolio to be more conservative in nature and
more appropriately aligned with our health insurance focused businesses. Due to this risk reducing effort, we incurred net realized losses totaling $10.8 million. The table below reflects gross
realized gains and gross realized losses included in the consolidated statements of operations, which includes the results of the risk reduction program:

2009

2008

2007(in thousands)Realized gains:Fixed maturities

$
7,300

$
1,788

$
324Other


337


12


2,0737,637


1,800


2,397Realized losses:Fixed maturities, excluding OTTI


(15,158
)

(1,234
)

(644
)OTTI on fixed maturities


(16,895
)

(59,786
)

(40,997
)OTTI on equity maturities


(481
)




Other


(91
)

(461
)

(934
)(32,625
)

(61,481
)

(42,575
)Net realized losses

$
(24,988
)
$
(59,681
)
$
(40,178
)


At
December 31, 2009 and 2008, we held unrated or less-than-investment grade corporate debt securities as follows:

2009

2008(in thousands)Carrying value (estimated fair value)

$
4,461

$
22,492Percentage of total assets


0.2
%

0.6
%


F-32

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS (Continued)

The holdings of less-than-investment grade securities are diversified and the largest investment in any one such security was $1 million, or 0.1% of total
assets at December 31, 2009 and $5.4 million, or 0.1% of total assets at December 31, 2008.

We
have reflected investments held by various states as security for our policyholders within those states in fixed maturities. These investments had carrying values of
$43.4 million at December 31, 2009 and $41.9 million at December 31, 2008.

Changes
in the amount of other-than-temporary impairments recognized in earnings on securities for which a portion of the
other-than-temporary impairments related to other factors was recognized in other comprehensive income:

2009(in thousands)Balance, April 1, 2009 (implementation date)

$
390Credit related impairments recognized in current period earnings on securities:With credit related impairments previously recognized


3,949With credit related impairments not previously recognized


3,507Cumulative credit related impairments as of December 31, 2009

$
7,846


In
addition, during 2009, we recognized other-than-temporary impairments of approximately $1.4 million, on fixed maturity securities for which the
impairment was not split between earnings and other comprehensive income.

6. FAIR VALUE MEASUREMENTS

We carry fixed maturity investments, equity securities and interest rate swaps at fair value in our consolidated financial statements. These fair value disclosures consist of information
regarding the valuation of these financial instruments, followed by the fair value measurement disclosure requirements of ASC 820,Fair Value Measurements and
Disclosure.

Effective
April 1, 2009, we applied the provisions of ASC 820 prospectively to financial instruments that we record at fair value. Our adoption of ASC 820 did not have an impact
on opening retained earnings.



The following section applies the ASC 820 fair value hierarchy and disclosure requirements to our financial instruments that we carry
at fair value. ASC 820 establishes a fair value hierarchy that prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels, numbered 1, 2, and 3.

Level 1
observable inputs reflect quoted prices for identical assets or liabilities in active markets that we have the ability to access at the measurement date. We currently have
no Level 1 securities.

Level 2
observable inputs, other than quoted prices included in Level 1, reflect the asset or liability or prices for similar assets and liabilities. Most debt securities
and some preferred stocks are model priced by vendors using observable inputs and we classify them within Level 2. Derivative instruments

F-33

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

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

Level 3
valuations are derived from techniques in which one or more of the significant inputs, such as assumptions about risk, are unobservable. Generally, Level 3
securities are less liquid securities such as highly structured or lower quality asset-backed securities, known as ABS, and private placement equity securities. Because Level 3 fair values, by
their nature, contain unobservable market inputs, as there is no observable market for these assets and liabilities, we must use considerable judgment to determine the ASC 820 Level 3 fair
values. Level 3 fair values represent our best estimate of an amount that we could realize in a current market exchange absent actual market exchanges.

The
following table presents our assets and liabilities that we carry at fair value by ASC 820 hierarchy levels, as of December 31, 2009 and 2008 (in thousands):

Total

Level 1

Level 2

Level 3December 31, 2009Assets:Fixed maturties, available for sale

$
964,553

$


$
962,990

$
1,563Equity securities


9








9Total assets

$
964,562

$


$
962,990

$
1,572Liabilities:Interest rate swaps

$
15,465

$


$
15,465

$
December 31, 2008Assets:Fixed maturties, available for sale

$
1,032,393

$


$
1,028,449

$
3,944Equity securities


490








490Total assets

$
1,032,883

$


$
1,028,449

$
4,434Liabilities:Interest rate swaps

$
20,298

$


$
20,298

$



In
many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, we will
determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value.



The valuation methodologies used to determine the fair values of assets and liabilities under the "exit price" notion of ASC 820
reflect market participant objectives and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. We determine the fair value of
our financial assets and liabilities based upon quoted market prices where available. Fair values of our interest rate swap liabilities reflect adjustments for counterparty credit quality, our credit
standing, liquidity and, where appropriate, risk margins on unobservable parameters.

F-34

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

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



We determine the fair value of the majority of our fixed maturity and equity securities using third party pricing service market
prices. The following are examples of typical inputs used by third party pricing services:



Based
on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent
reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported
trades, the third party pricing services may use matrix or model processes to develop a security price where the pricing services develop future cash flow expectations based upon collateral
performance, discounted at an estimated market rate. The pricing for mortgage-backed and asset-backed securities reflects estimates of the rate of future prepayments of principal over the remaining
life of the securities. The pricing services derive these estimates based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels
projected for the underlying collateral.

We
have analyzed the third party pricing services' valuation methodologies and related inputs, and have also evaluated the various types of securities in our investment portfolio to
determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis,
we classified each price into Level 1, 2, or 3. We classified most prices provided by third party pricing services into Level 2 because the inputs used in pricing the securities are
market observable.

Due
to a general lack of transparency in the process that brokers use to develop prices, we have classified most valuations that are based on broker's prices as Level 3. We may
classify some valuations as Level 2 if we can corroborate the price. We have also classified internal model priced securities, primarily consisting of private placement asset-backed securities,
as Level 3 because this model pricing includes significant non-observable inputs. We have classified private placement equity securities as Level 3 due to the lack of
observable inputs.

F-35

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

The
following table presents the fair value of the significant asset sectors within the ASC 820 Level 3 securities as of December 31, 2009 and 2008:

December 31, 2009

December 31, 2008Fair Value

% of Total
Fair Value

Fair Value

% of Total
Fair Value(in thousands)Mortgage and asset-backed securities

$
50


3.2
%
$
1,862


42.0
%Corporate debt securities


1,513


96.2
%

2,082


47.0
%Equity securities


9


0.6
%

490


11.0
%Total Level 3 securities

$
1,572


100.0
%
$
4,434


100.0
%


Mortgage
and asset-backed securities represent private-placement securities that are thinly traded and priced using an internal model or modeled by independent brokers.



We report interest rate swaps in other liabilities on our consolidated balance sheets at fair value. Their fair value is based on the
present value of cash flows as determined by the LIBOR forward rate curve and credit spreads, including our own credit.

We
have classified interest rate swaps as Level 2. We have determined their valuations using pricing models with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data.



We classify the fair values of financial instruments within Level 3 if there are no observable markets for the instruments or,
in the absence of active markets, the majority of the inputs used to determine the fair value of the instruments are based on assumptions about market participant assumptions. Rollforward tables for
each quarter from January 1, 2009 to December 31, 2009 for the

F-36

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

Level 3
financial instruments for which we have used significant unobservable inputs in the fair value measurement on a recurring basis are presented below:

Fixed
Maturities

Equity
Securities

Total(in thousands)Fair value as of Junuary 1, 2009

$
3,944

$
490

$
4,434Net purchases and sales


(157
)




(157
)Net transfers in/(out)


(464
)




(464
)Unrealized losses included in AOCL(1),(2)


7





7Fair value as of March 31, 2009


3,330


490


3,820Net purchases and sales


(57
)




(57
)Net transfers in/(out)


(95
)




(95
)Unrealized losses included in AOCL(1),(2)


(710
)




(710
)Fair value as of June 30, 2009


2,468


490


2,958Net purchases and sales


(72
)




(72
)Realized loss





(481
)

(481
)Unrealized gains included in AOCL(1),(2)


472





472Fair value as of September 30, 2009


2,868


9


2,877Net purchases and sales


(1
)




(1
)Net transfers in/(out)


(1,260
)




(1,260
)Unrealized losses included in AOCL(1),(2)


(44
)




(44
)Fair value as of December 31, 2009

$
1,563

$
9

$
1,572


(1)AOCI:
Accumulated other comprehensive income (loss).(2)Unrealized
losses represent losses from changes in values of Level 3 financial instruments only for the periods in which the instruments are
classified as Level 3.


F-37

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INTANGIBLE ASSETS

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

December 31, 2009

December 31, 2008Weighted
Average
Life
(Years)Value
Assigned

Accumulated
Amortization

Value
Assigned

Accumulated
Amortization(in thousands)Traditional Insurance:Policies in forceHealth


9

$
17,246

$
12,996

$
18,473

$
13,068Distribution channel


3


4,628


3,085


4,628


1,543Policies in forceLife/Annuity


7








4,127


2,465Medicare Part D:Membership base


10


135,426


30,809


135,426


17,267Trademarks/tradenames


9


20,433


5,165


20,433


2,895Licenses


15


3,500


531


3,500


297Senior Managed CareMedicare Advantage:Membership base


7


23,988


11,821


23,988


9,785Distribution channel


30


22,055


4,962


22,055


4,227Provider contracts


10


15,539


7,072


15,539


5,462Non-compete


7


1,425


528


1,425


325Senior Administrative Services:Administrative service contracts


6


7,671


7,671


7,671


7,628Hospital network contracts


10


1,797


1,523


1,797


1,358Total


12

$
253,708

$
86,163

$
259,062

$
66,320


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

2009

2008(in thousands)Balance, beginning of year

$
192,742

$
213,518Additions and adjustments


(1,637
)

2,987Amortization, net of interest


(23,560
)

(23,763
)Balance, end of year

$
167,545

$
192,742


The
adjustment in 2009 relates to the reduction related to the reinsurance of substantially all of our in force life insurance and annuity business under a 100% coinsurance
treatyrefer to Note 11 of notes to Consolidated Financial Statements. We had approximately $1.6 million, net, of amortizing intangibles related to the policies in
forceLife/Annuity as of the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding commission. The additions in
2008 relate to the acquisition of a distribution system, net of adjustments to the amortizing intangibles related to the MemberHealth acquisition. The additions in 2007 relate to primarily to the
acquisition of MemberHealth in the third quarter of 2007.

F-38

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INTANGIBLE ASSETS (Continued)

Amortization,
net of interest increased in 2008 over 2007 as a result of a full year of amortization of MemberHealth intangible assets in 2008 compared with 3 months in 2007.

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

2010

$
22,7972011


20,9482012


20,7842013


20,6522014


20,432Thereafter


61,932$
167,545


Changes
in the carrying amounts of goodwill and intangible assets with indefinite lives (primarily trademarks and licenses) are shown below:

Total

Traditional

Medicare
Part D

Senior
Managed
Care-
Medicare
Advantage

Senior
Administrative
Services(in thousands)Balance, December 31, 2007

$
606,972

$
3,893

$
520,764

$
77,958

$
4,357Acquisitions


1,646








1,646


Impairments


(3,893
)

(3,893
)Adjustments


(74,694
)




(72,549
)

(2,145
)Balance, December 31, 2008


530,031





448,215


77,459


4,357Acquisitions














Impairments














Adjustments














Balance, December 31, 2009

$
530,031

$


$
448,215

$
77,459

$
4,357


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

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

F-39

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. INTANGIBLE ASSETS (Continued)

Therefore,
at December 31, 2008, we recorded an impairment charge of $3.9 million to eliminate the goodwill for our Traditional reporting unit.

The
decrease in goodwill for Medicare Part D in 2008 was due to the reduction in the purchase price for MemberHealth of $81.9 million, net of $9.4 million of
increases to goodwill as a result of our completion of the purchase price allocation process for the acquisition, including the finalization of the valuation and, measurement of the asset acquired.
The decrease in goodwill in Senior Managed CareMedicare Advantage in 2008 was the result of the pre-acquisition tax adjustment related to the Heritage acquisition and the
settlement of pre-acquisition adjustments in connection with the Harmony Health acquisition.

8. DEFERRED POLICY ACQUISITION COSTS

Details with respect to deferred policy acquisition costs are as follows:

2009

2008(in thousands)Balance, beginning of year

$
237,630

$
245,511Capitalized costs, net of reinsurance commissions and allowances


37,766


43,659Adjustment relating to unrealized (losses) gains on fixed maturities


(6,617
)

6,392Amortization


(45,552
)

(57,932
)Adjustment in connection with reinsurance transaction


(72,829
)

Balance, end of year

$
150,398

$
237,630


In
the first quarter of 2009, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treatyrefer to Note 11 of
notes to Consolidated Financial Statements. We had approximately $72.8 million of deferred acquisition costs as of the effective date of the transaction that were reduced to zero as a result of
the recovery of such costs through the initial ceding commission.

F-40

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. MEDICARE PART D

At December 31, 2009 and 2008, the balances due (to) from CMS for the 2006 through 2009 Plan years were ($191.0) million and $640.9 million, respectively. The following
table provides balances due (to) from CMS by Plan year:

December 31, 2009

December 31, 2008Plan Year

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total
Due from (to)
CMS

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total
Due from (to)
CMS(in thousands)2009

$
(194,062
)
$
(35,957
)
$
(230,019
)
$


$


$
2008(3)











528,993


16,551


545,5442007(4)


21,433


12,536


33,969


85,909


16,917


102,8262006


3,460


1,595


5,055


(5,609
)

(1,815
)

(7,424
)Total due (to) from CMS

$
(169,169
)
$
(21,826
)
$
(190,995
)
$
609,293

$
31,653

$
640,946


(1)Amounts
reported in CMS contract deposit (liabilities) receivables in the consolidated balance sheets.(2)Amounts
reported in Due and unpaid premiums in the consolidated balance sheets.(3)We
collected the amount due from CMS for the 2008 Plan year during the third quarter of 2009.(4)For
the 2007 Plan year, reconciliation data was received from CMS and amounts were preliminarily settled during the fourth quarter of 2008. Subsequent to
this preliminary settlement, the Company requested a partial reopening of the 2007 Plan year and received an $80 million interim payment on January 2, 2009 as part of this request.


Prior Plan Year Settlements and Adjustments Under Stand-alone Medicare Part D Plans and MA-PD:The Medicare Part D
prescription drug benefit program is detail oriented and relatively complex. The amount due to or from CMS consists of low-income cost subsidy, catastrophic reinsurance and the risk
corridor adjustment. These amounts are affected by: membership; risk scores; prescription drug events ("PDEs") and rebates. Approximately 9 months after the close of the annual Plan year
(December 31st) CMS completes its reconciliation of membership and PDEs and provides the information needed to finalize the accounting for these items to each Plan.

For
our stand-alone Part D Plans, retroactive revenue adjustments and Plan year settlements for the 2008 Plan year were received in the third quarter of 2009. Net premiums for the
year ended December 31, 2009 included retroactive adjustments related to prior Plan years, which increased total revenue by approximately $14.7 million (net of the impact of government
risk corridor). These adjustments were comprised of $9.2 million in risk adjustment revenue related to our 2008 membership and $5.5 million related to the final CMS PDE reconciliations
for prior Plan years. For the 2007 Plan year, we received retroactive revenue adjustments and Plan year settlements in the third quarter of 2008. Net premiums for the year ended December 31,
2008 included retroactive adjustments which reduced total revenue by approximately $4.6 million (net of the impact of government risk corridor). These adjustments were comprised of
$0.8 million related to risk adjustment revenue for our 2007 membership and $3.8 million related to the final CMS PDE reconciliation for the 2007 Plan year.

F-41

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. MEDICARE PART D (Continued)

The
reconciliation and settlement process with CMS for the Part D coverage within Medicare Advantage Plans is similar to Medicare Part D Plans with the two exceptions:
1) PFFS Plans are ineligible for aggregate risk corridor payments; and 2) prospective monthly catastrophic reinsurance payments to PFFS Plans are based on CMS estimated average
reinsurance payments to other MA-PD Plans for their Part D coverage. In the third quarter of 2009, for MA-PD, we received a retroactive revenue adjustment for the 2008
Plan year that increased revenues by $1.3 million (net of risk corridor). In the third quarter of 2008, we received a retroactive revenue adjustment for the 2007 Plan year that increased
revenues by $0.6 million (net of
risk corridor). In the third quarters of 2009 and 2008, we received notification from CMS of an adjustment to our catastrophic reinsurance payment for the Part D coverage within our PFFS Plans
for the prior Plan year that lowered the payment by $7.3 million and $4.5 million, respectively.

10. UNCONSOLIDATED SUBSIDIARY

During 2005, we entered into a strategic alliance with Caremark and created Part D Management Services, L.L.C., known as PDMS. PDMS was 50% owned by Universal American and 50%
owned by Caremark. We did not control PDMS and therefore PDMS is not consolidated in our financial statements. We accounted for our investment in PDMS on the equity basis and included it in other
assets. PDMS was dissolved in December 2009.

PDMS
principally performed marketing and risk management services on behalf of our Prescription PathwaySM PDP, for which it received fees and other remuneration from our
PDPs and Caremark. Together with Caremark, on February 13, 2008, we announced that the strategic alliance would end as of December 31, 2008, subject to regulatory approval. On
July 31, 2008, PDMS received approval from CMS of the Novation Agreement for Change of Ownership of a Medicare Prescription Drug Plan (PDP) Line of Business. As such, effective
January 1, 2009, PDMS no longer managed the strategic alliance and did not earn revenue or incur expenses related to the 2009 PDP year. PDMS continued to operate in 2009 solely to service the
run-off activity related to pharmacy claims, rebates, and revenue related to prior PDP years. On December 22, 2009, PDMS was dissolved and the remaining economic interest of PDMS
was split equally between the Company and Caremark to match the 50% voting and ownership rights held by each entity.

Our
investment in the equity in PDMS at December 31, 2009 was zero pursuant to the dissolution and final distribution. At December 31, 2008, our share in the equity of PDMS
was $6.9 million. Our share in the income of PDMS is included in "equity in earnings (loss) of unconsolidated subsidiary." For the years ended December 31, 2009, 2008 and 2007, our share
in the net income was $0.3 million, $72.8 million and $56.7 million, respectively. During the years ended December 31, 2009, 2008 and 2007, PDMS made distributions to its
owners, including the 2009 final distribution, aggregating $11.2 million, $135.0 million and $116.7 million, respectively. Our share of these distributions was
$5.6 million, $67.5 million and $58.4 million, respectively.

F-42

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. UNCONSOLIDATED SUBSIDIARY (Continued)

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

As of December 31,

2009

2008(in thousands)AssetsCash and investments

$


$
580Other





14,436Total Assets

$


$
15,016Liabilities and EquityAccrued expenses and other

$


$
1,148Equity





13,868Total liabilities and equity

$


$
15,016




Years ended December 31,

2009

2008

2007(in thousands)Total revenue

$
525

$
149,348

$
121,267Total expenses


(35
)

3,722


7,939Net income

$
560

$
145,626

$
113,328


11. REINSURANCE

In the normal course of business, the Company reinsures portions of certain policies that it underwrites. The Company enters into reinsurance arrangements with unaffiliated reinsurance
companies to limit our exposure on individual claims and to limit or eliminate risk on our
non-core or underperforming blocks of business. Accordingly, the Company is party to various reinsurance agreements on its life and accident and health insurance risks. The Company's
traditional accident and health insurance products are generally reinsured under quota share coinsurance treaties with unaffiliated insurers, while the life insurance risks are reinsured under either
quota share coinsurance or yearly-renewable term treaties with unaffiliated insurers. Under quota share coinsurance treaties, the Company pays the reinsurer an agreed upon percentage of all premiums
and the reinsurer reimburses the Company that same percentage of any losses. In addition, the reinsurer pays the Company certain allowances to cover commissions, cost of administering the policies and
premium taxes. Under yearly-renewable term treaties, the reinsurer receives premiums at an agreed upon rate for its share of the risk on a yearly-renewable term basis. The Company also uses excess of
loss reinsurance agreements for certain policies whereby the Company limits its loss in excess of specified thresholds. The Company's quota share coinsurance agreements are generally subject to
cancellation on 90 days notice for future business, but policies reinsured prior to cancellation remain reinsured as long as they remain in force.

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

F-43

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. REINSURANCE (Continued)

We
have several quota share reinsurance agreements in place with General Re Life Corporation, Hannover Life Re of America and Swiss Re Life & Health America, Wilton Reassurance
Company and Commonwealth Annuity & Life Insurance Company (and affiliates). These agreements cover various insurance products, including Medicare supplement, long term care, life and annuity
products and contain ceding percentages ranging between 15% and 100%.

In
connection with the termination of our strategic alliance with CVS/Caremark on December 31, 2008, the agreement to reinsure the Prescription PathwaySM PDPs
sponsored by our subsidiaries on a 50% coinsurance funds withheld basis to PharmaCare Re ended. As result of the termination, during 2009, ceded premiums decreased to approximately $1.7 million
from $277.9 million in 2008. On July 1, 2008, the agreement to provide an insured drug benefit for the employees of the State of Connecticut and to reinsure the risk with PharmaCare Re
under a 100% quota-share contract was not renewed. Direct and ceded premium under this agreement was $171.8 million and $325.0 million for the years ended December 31, 2008 and
2007, respectively.

Life Insurance and Annuity Reinsurance Transaction:Effective April 1, 2009, we reinsured substantially all of the net in
force life and
annuity business with Commonwealth under a 100% coinsurance treaty. In accordance with ASC 944,Financial ServicesInsurance Topic,reinsurance recoverables are to be reported as separate assets rather than as reductions of the related liabilities. Accordingly, we increased the amounts due from reinsurers by approximately
$544 million as of the effective date of the transaction, April 1, 2009, representing the GAAP basis liabilities reinsured. We transferred approximately $454 million of cash, net
of the ceding commission of $77 million, and $22 million of policy loans, related to the reinsured policies, to the reinsurer. We had approximately $74 million of deferred
acquisition costs and present value of future profits as of the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding
commission. On a GAAP basis, the transaction resulted in a loss and other related costs of approximately $7.6 million, including approximately $2.8 million related to the transition of
the administration of the business to the reinsurer.

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

F-44

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. REINSURANCE (Continued)

Reinsurance Recoverables:Amounts recoverable from our reinsurers are as follows:

As of December 31,

2009

2008ReinsurerCommonwealth and affiliates

$
551,941

$
Rannover


27,197


28,322Swiss Re


22,778


24,290Other life


20,631


22,678Total life


622,547


75,290Gen Re


78,310


82,486Hannover


23,517


27,931PharmaCare Re


4,190


12,271Other health


20,507


23,008Total health


126,524


145,696Total

$
749,071

$
220,986


At
December 31, 2009, the total amount recoverable from reinsurers of $749.1 million included $727.6 million recoverable on future policy benefits and unpaid claims,
$11.7 million in funds held and $9.8 million for amounts due from reinsurers on paid claims, commissions and expense allowances net of premiums reinsured. At December 31, 2008,
the total amount recoverable from reinsurers of $221.0 million included $203.7 million recoverable on future policy benefits and unpaid claims, $13.1 million in funds held and
$4.2 million for amounts due from reinsurers on paid claims, commissions and expense allowances net of premiums reinsured.

F-45

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. REINSURANCE (Continued)



Year Ended December 31,2009

2008

2007(in thousands)PremiumsLife insurance

$
70,864

$
73,387

$
74,431Accident and health


4,978,196


5,103,721


3,603,318Total gross premiums


5,049,060


5,177,108


3,677,749Ceded to other companiesLife insurance


(55,509
)

(23,740
)

(20,340
)Accident and health


(129,856
)

(600,732
)

(755,927
)Total ceded premiums


(185,365
)

(624,472
)

(776,267
)Assumed from other companiesLife insurance


3,304


3,169


3,693Accident and health


51,899


44,649


36,244Total assumed premium


55,203


47,818


39,937Net amountLife insurance


18,659


52,816


57,784Accident and health


4,900,239


4,547,638


2,883,635Total net premium

$
4,918,898

$
4,600,454

$
2,941,419Percentage of assumed to net premiumLife insurance


18
%

6
%

6
%Accident and health


1
%

1
%

1
%Total assumed to total net


1
%

1
%

1
%Claims recovered


138,634


552,635


695,158




As of December 31,2009

2008

2007(in thousands)Life insurance in forceGross amount

$
2,569,753

$
2,915,595

$
2,962,286Ceded to other companies


(2,459,260
)

(887,677
)

(853,767
)Assumed from other companies


58,388


72,620


80,692Net amount

$
168,881

$
2,100,538

$
2,189,211Percentage of assumed to net in force


35
%

3
%

4
%


F-46

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LIABILITIES FOR POLICY AND CONTRACT CLAIMSHEALTH

Activity in the policy and contract claimshealth liability is as follows:

2009

2008(in thousands)Balance at beginning of year

$
500,577

$
522,228Less reinsurance recoverable


(33,086
)

(56,580
)Net balance at beginning of year


467,491


465,648Incurred related to:Current year


3,979,830


3,846,808Prior year development


3,603


(44,803
)Total incurred


3,983,433


3,802,005Paid related to:Current year


3,640,970


3,210,310Prior year


447,358


589,852Total paid


4,088,328


3,800,162Net balance at end of period


362,596


467,491Plus reinsurance recoverable


17,923


33,086Balance at end of period

$
380,519

$
500,577


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

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

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

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



F-47

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LIABILITIES FOR POLICY AND CONTRACT CLAIMSHEALTH (Continued)

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

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

During
the fourth quarter of 2008, we determined that a number of PFFS claims had been submitted to us by fictitious providers, as well as by some actual providers seeking reimbursement
for services that were not rendered. We believe that these activities were part of a pattern that targeted traditional Medicare, as well as several Medicare Advantage PFFS plans including ours. We
estimated that we paid approximately $18.9 million in benefits as a result of these false claims, mostly incurred in the fourth quarter of 2008, which reduced our fourth quarter profits by
approximately $0.14 per share. These false claims, which we reflected in claims and other benefits in the consolidated statements of operations, did not have any impact on our prior year claim reserve
development incurred in 2008, as discussed above.

13. INCOME TAXES

The parent holding company files a consolidated return for federal income tax purposes that includes all of the life and non-life insurance company subsidiaries,
including Heritage.

The
Company's federal and state income tax expense (benefit) for continuing operations is as follows:

2009

2008

2007(in thousands)CurrentUnited States

$
70,761

$
49,162

$
66,074DeferredUnited States


3,567


7,050


(17,520
)Total tax expense

$
74,328

$
56,212

$
48,554


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

2009

2008

2007(in thousands)Expected tax expense

$
75,121

$
52,956

$
46,419State taxes


2,053


1,067


(636
)Change in valuation allowance


1,345


1,289


2,931Foreign tax credit


(4,594
)




Other, net


403


900


(160
)Actual tax expense

$
74,328

$
56,212

$
48,554


F-48

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES (Continued)

In
addition to federal and state income tax, the Company's insurance company subsidiaries are subject to state premium taxes, which are included in other operating costs and expenses in
the consolidated statements of operations.

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

2009

2008(in thousands)Deferred tax assets:Reserves for future policy benefits

$
4,553

$
26,314Deferred policy acquisition costs


5,388


Loss carryforwards


6,108


5,690Asset valuation differences


7,631


18,907Deferred revenues


298


342Other


2,806


Unrealized losses on investments


4,262


19,612Total gross deferred tax assets


31,046


70,865Less valuation allowance


(5,778
)

(4,433
)Net deferred tax assets


25,268


66,432Deferred tax liabilities:Deferred policy acquisition costs





(2,782
)Present value of future profits


(56,832
)

(65,362
)Other





(5,165
)Total gross deferred tax liabilities


(56,832
)

(73,309
)Net deferred tax liability

$
(31,564
)
$
(6,877
)


At
December 31, 2009, the Company had net operating loss carryforwards, subject to certain consolidating limitations, of approximately $1.0 million that expire in 2025.

The
Company establishes valuation allowances based upon an analysis of projected taxable income and its ability to implement prudent and feasible tax planning strategies. The Company
carried valuation allowances on its deferred tax assets of $5.8 million at December 31, 2009 and $4.4 million at December 31, 2008. During 2009, the Company established a
deferred tax asset of $1.3 million for state net operating loss carry forwards; concurrently, a valuation allowance of $1.3 million also was established. At December 31, 2009, we
assessed the amount of the deferred tax asset that was more likely than not to be realized under ASC 740,Income Taxes, and concluded that we can record
tax benefits related to our realized losses relating to our investments for financial statement purposes. Management believes it is more likely than not that the Company will realize the recorded
value of its net deferred tax assets.

The
Company adopted provisions of ASC 740-10-25,Income TaxesRecognition, related the recognition,
measurement, presentation and disclosure of uncertain tax positions on January 1, 2007.

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES (Continued)

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

A
federal tax return, generally, is open for examination for three years from the date on which it is filed, or, if applicable, from the extended due date unless the statute is extended
by mutual consent. The Company has not entered into any agreement to extend the statute of limitations of any state tax return for any jurisdiction. In connection with the examination of the Company's
2005 federal tax return, the statute of limitations was extended to December 31, 2010. Consequently, federal tax returns for the years ending December 31, 2005 through 2008 are open.
Certain earlier returns remain open to the extent that net operating loss carry forwards were used or generated in those years. Also, various state tax returns remain open for examination under
specific state statutes of limitation for an additional period of time.

In
2009 we recognized foreign tax credit benefits of $4.6 million in our total tax expense. These benefits resulted from the settlement of the Internal Revenue Service examination
of 2005 primarily related to the treatment of a controlled foreign corporation sold in 2006.

Currently,
the Company's 2006 federal tax return and the pre-acquisition MemberHealth 2006 and 2007 federal tax returns are under examination by the Internal Revenue Service.
The proposed adjustments would not impact any unrecognized tax benefits. It is reasonably possible that a change may occur within the next twelve months. While it is not possible to determine the
range of any adjustment, no material impact is expected.

Our
effective tax rate was 36.4% for the fourth quarter of 2009, and 36.7% for the fourth quarter of 2008. For the year ended December 31, 2009, our effective tax rate was 34.6%,
compared with 37.2% for the same period of 2008. The decline in the effective rate for the year ended December 31, 2009 is due to the recording of $5.5 million of
non-recurring tax benefits during the third quarter of 2009. These benefits resulted from the settlement of the Internal Revenue Service examination of 2005 primarily related to the
treatment of a controlled foreign corporation sold in 2006.

14. LOAN PAYABLE



In connection with the MemberHealth transaction, we refinanced our Amended Credit Facility and Revolving Credit Facility with a new
credit facility (the "2007 Credit Facility") consisting of a $350 million term loan and a $150 million revolver. A portion of the proceeds from the refinancing was used to repay in full
the amounts outstanding on our previous credit facility and revolving credit facility. The 2007 Credit Facility contains certain covenants and requirements including a leverage ratio test, minimum
risk based capital requirements for our insurance companies and, under certain conditions, the ability to pose limitations on certain investments, dispositions and our ability to make restricted
payments. As of December 31, 2009, we were in compliance with all financial covenants.

In
November 2009, the 2007 Credit Facility was amended (the "November 2009 Amendment") which provided us with the ability to make an additional $75 million of restricted payments,
up to a total of $200 million, in exchange for prepayments of term loan debt principal at a rate of 50% of all restricted payments above the prior limit of $125 million. Since execution
of the amendment, we have

F-50

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. LOAN PAYABLE (Continued)

made
$7.7 million of restricted payments, through repurchases of stock, in excess of the $125 million limit and prepaid $3.8 million of principal on our debt. In addition, we
agreed to increases in our LIBOR-based spread and our unutilized revolving credit facility commitment fee. Interest under the 2007 Credit Facility is currently based on LIBOR plus a spread of 100
basis points, compared to 62.5 basis points prior to the amendment, and a commitment fee at an annualized rate of 25 basis points, compared to 10 basis points prior to the amendment.

In
accordance with the credit agreement for the 2007 Credit Facility, the spread and fee are determined based on our consolidated leverage ratio. Effective December 31, 2009, the
weighted average interest rate on the term loan portion of the 2007 Credit Facility was 1.28%. We had not drawn on the revolving loan facility as of the date of this report.

Our
obligations under the 2007 Credit Facility are guaranteed by our subsidiaries, Heritage Health Systems, Inc. and MemberHealth LLC and if, and only if, a rating
condition exists whereby we are either no longer rated by S&P or such rating falls below BBB , this facility would be secured by substantially all of the assets of each of the
Guarantors. In March 2008, S&P placed a rating of BB+ on us that triggered this added security requirement.

In
connection with the 2007 Credit Facility, we had incurred additional loan origination fees of approximately $4.7 million, which were capitalized and are being amortized on a
straight-line basis, which does not differ significantly from the effective yield basis, over the life of the 2007 Credit Facility. In connection with the November 2009 Amendment, we
incurred amendment fees of approximately $1.2 million, which were capitalized and are also being amortized on a straight-line basis. The early extinguishment of the Amended Credit
Facility in 2007 triggered the immediate amortization of the related capitalized loan origination fees, resulting in a pre-tax expense of approximately $0.9 million during the year
ended December 31, 2007.

Under
the original terms of the 2007 Credit Facility, we were required to make principal repayments quarterly at the rate of $3.5 million per year over a five-year
period with a final payment of $308.4 million due upon maturity in September, 2012. As a result of the prepayments, we are required to ratably apply those prepayments through the remaining
scheduled repayments. As a result of the $25 million prepayment in April 2008 and prepayments pursuant to the November 2009 Amendment, the following table reflects the schedule of principal
payments remaining on the new credit facility as of December 31, 2009:

2007 Credit
Facility(in thousands)2010

$
3,2102011


3,2102012


307,338$
313,758


On
December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank to hedge the variability
of cash flows for interest payments on a total notional amount of $250 million of our 2007 Credit Facility. In entering the swap with Citibank, N.A., we agreed to swap our floating rate
interest payment based on

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. LOAN PAYABLE (Continued)

the
floating LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a fixed 4.14% locked in base rate. In entering the swap with Calyon
Corporate and Investment Bank, we agreed to swap our floating rate interest payment based on the floating LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest
rate payment based on a fixed 4.13% locked in based rate. (See Note 16Derivative InstrumentsCash Flow Hedges).



We made regularly scheduled principal payments of $3.1 million and prepayments of $3.8 million, as a result of the
November 2009 Amendment, during the year ended December 31, 2009, $3.5 million plus the $25.0 million prepayment discussed above during 2008, and $3.5 million during 2007
in connection with its credit facilities. The Company paid interest of $7.2 million during 2009 and $13.0 million during 2008 in connection with its credit facilities.

The
following table sets forth certain summary information with respect to total borrowings of the Company:

As of December 31,

Year Ended December 31,Amount
Outstanding

Interest
Rate

Maximum
Amount
Outstanding

Weighted
Average
Amount
Outstanding(1)

Weighted
Average
Interest
Rate(2)(in thousands)



(in thousands)

(in thousands)2009

$
313,758


1.28
%
$
320,625

$
319,120


1.56
%2008

$
320,625


4.46
%
$
349,125

$
330,595


4.06
%


---

15. OTHER LONG TERM DEBT

The Company has formed separate statutory business trusts (the "Trusts"), which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial
interests in the assets of the trust, investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures of the Company (the "Junior Subordinated
Debt") and engaging in only those activities necessary or incidental thereto. In accordance with the adoption of ASC 810-10-05, ConsolidationVariable Interest Entities, the Company does not
consolidate the trusts.

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. OTHER LONG TERM DEBT (Continued)

As
of December 31, 2009, the Trusts have an outstanding balance of a combined $110.0 million in thirty year trust preferred securities (the "Capital Securities") as
detailed in the following table:

Maturity Date

Amount
Issued

Term

Spread Over
LIBOR

Rate as of
December 31, 2009(in thousands)



(Basis points)April 2033

$
10,000

Floating


400


4.3
%May 2033


15,000

Floating


420


4.5
%May 2033


15,000

Fixed/Floating


410
(1)

4.4
%October 2033


20,000

Fixed/Floating


395
(2)

4.2
%March 2037


50,000

Fixed/Floating


275
(3)

7.7
%$
110,000


---

The
Trusts have the right to call the Capital Securities at par after five years from the date of issuance (which ranged from December 2002 to March 2007). The proceeds from the sale of
the Capital Securities, together with proceeds from the sale by the Trusts of their common securities to the Company, were invested in thirty-year floating rate Junior Subordinated Debt of
the Company. From the proceeds of the trust preferred securities, $26.0 million was used to pay down debt during 2003. The balance of the proceeds has been used, in part to fund acquisitions,
to provide capital to the Company's insurance subsidiaries to support growth and to be held for general corporate purposes.

The
Capital Securities represent an undivided beneficial interest in the Trusts' assets, which consist solely of the Junior Subordinated Debt. Holders of the Capital Securities have no
voting rights. The
Company owns all of the common securities of the Trusts. Holders of both the Capital Securities and the Junior Subordinated Debt are entitled to receive cumulative cash distributions accruing from the
date of issuance, and payable quarterly in arrears at a floating rate equal to the three month LIBOR plus a spread. The floating rate resets quarterly and is limited to a maximum of 12.5% during the
first sixty months. Due to the variable interest rate for these securities, the Company would be subject to higher interest costs if short-term interest rates rise. The Capital Securities
are subject to mandatory redemption upon repayment of the Junior Subordinated Debt at maturity or upon earlier redemption. The Junior Subordinated Debt is unsecured and ranks junior and subordinate in
right of payment to all present and future senior debt of the Company and is effectively subordinated to all existing and future obligations of the Company's subsidiaries. The Company has the right to
redeem the Junior Subordinated Debt after five years from the date of issuance.

The
Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debt for a period not exceeding 20 consecutive quarters up to each

F-53

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. OTHER LONG TERM DEBT (Continued)

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

The
Company paid $7.2 million in interest in connection with the Junior Subordinated Debt during the year ended December 31, 2009, $8.3 million during 2008, and
$8.7 million during 2007.

16. DERIVATIVE INSTRUMENTSCASH FLOW HEDGES

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, and one with Calyon Corporate and Investment Bank to hedge the variability of
cash flows to be paid under the new credit facility described in Note 14Loan Payable in the notes to the Consolidated Financial Statements. In entering into the swap with Citibank,
we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based
on a 4.14% locked-in fixed rate. In entering into the swap with Calyon, we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional
amount of $125 million in exchange for a fixed interest rate payment based on a 4.13% locked-in fixed rate. The objective of the hedges is to eliminate the variability of cash flows
in the interest payments on a combined $250 million amount of the variable rate term loan portion of our new credit facility, which is due to changes in the LIBOR base rate, through September
2012. We expect changes in the cash flows of the interest rate swap to exactly offset the changes in cash flows from interest rate payments attributable to fluctuations in the LIBOR base rate on the
$250 million portion of the variable rate term loan portion of our new credit facility. The combined fair value of these swaps was a $15.5 million liability at December 31, 2009
and a $20.3 million liability at December 31, 2008. We have reflected this fair value in other liabilities. In connection with the transaction executed with Citibank, N.A. we are
required to post collateral when we are in a net liability position. The collateral amount required is based on the fair value of the swap including net accrued interest less a $1 million
threshold amount as determined by our credit rating of BB+. Should we be downgraded or cease to be rated by S&P or Moody's, the threshold amount would be reduced to zero and we would need to post
$1 million in additional collateral. This collateral is reflected in cash and cash equivalents and was $8.1 million as of December 31, 2009 and $9.3 million as of
December 31, 2008. Based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction were the same, we have concluded that we expect
changes in cash flows attributable to the risk being hedged to be completely offset by the hedging derivative, and have designated these swaps as cash flow hedges. As a result, we reflected the
unrealized loss on these hedges in accumulated other comprehensive loss. We perform periodic assessments of hedge effectiveness by verifying and documenting whether the critical terms of the hedging
instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. DERIVATIVE INSTRUMENTSCASH FLOW HEDGES (Continued)

The
Company paid $6.3 million in interest in connection with the $250 million of interest rate swap agreements pertaining to our credit facility during the year ended
December 31, 2009. The Company paid $1.4 million in interest in connection with the $250 million of interest rate swap agreements pertaining to our credit facility during the year
ended December 31, 2008, but did not make any payments during 2007. Effective September 4, 2003, we entered into a swap agreement whereby we pay a fixed rate of 6.7% on a
$15.0 million notional amount relating to the December 2002 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 400 basis points, capped at 12.5%. This swap
contract expired in December 2007. Effective April 29, 2004, we entered into a second swap agreement whereby we pay a fixed rate of 6.98% on a $20.0 million notional amount relating to
the October 2003 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 395 basis points, capped at 12.45%. This swap contract expired in October 2008. The fair value of
this swap was $0 at December 31, 2008 and $0.3 million at December 31, 2007 and is reflected in other assets. During the year ended December 31, 2008, we reported a net
$0.3 million in realized gains relating to the increase in the fair value of the cash flow swap agreement. During the year ended December 31, 2007, we reported a realized loss of
$0.9 million relating to the reduction in the fair value of the cash flow swap agreement.

17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

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

Fixed maturity investments available for sale:The fair value for fixed maturity securities is largely
determined by third party pricing service market prices. Typical inputs used by third party pricing services include, but are not limited to:



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

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Other invested assets:Other invested assets consists of collateralized loans which are carried at the underlying collateral value,
cash value of
life insurance and mortgage loans which are carried at the aggregate unpaid balance. The determination of fair value for these invested assets is not practical
because there is no active trading market for such invested assets and therefore, the carrying value is a reasonable estimate of fair value. Equity securities are carried at fair value, based on
quoted market price.

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

Cash flow swaps:The cash flow swaps are carried at fair value, obtained from external quotes provided by banks.

Investment contract liabilities:For annuity contracts, the carrying amount is the policyholder account value; estimated fair value
equals the
policyholder account value less surrender charges. Effective April 1, 2009, these balances were 100% ceded.

Loan payable and trust preferred securities:For the loan payable and trust preferred securities fair value represents the present
value of
contractual cash flows discounted at current spreads for equivalent credit quality.

The
estimated fair values of the Company's financial instruments are as follows:

2009

2008Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value(in thousands)

(in thousands)Financial assets:Fixed maturities available for sale

$
964,553

$
964,553

$
1,032,393

$
1,032,393Policy loans


19


19


22,274


22,274Other invested assets


1,257


1,257


1,649


1,649Cash and cash equivalents


856,958


856,958


511,032


511,032Cash flow swap


(15,465
)

(15,465
)

(20,298
)

(20,298
)Financial liabilities:Investment contract liabilities


204,875


197,954


237,752


228,160Loan payable


313,758


288,657


320,625


271,880Trust preferred securities


110,000


84,300


110,000


92,802


18. EARNINGS PER COMMON SHARE COMPUTATION

We calculate earnings per common share using the two-class method. This method requires that we allocate net income between net income attributable to participating preferred
stock and net income attributable to common stock, based on the dividend and earnings participation provisions of the preferred stock. Basic earnings per share excludes the dilutive effects of stock
options outstanding during the periods and is equal to net income attributable to common stock divided by the weighted average number of common shares outstanding for the periods.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. EARNINGS PER COMMON SHARE COMPUTATION (Continued)

At
December 31, 2009, 2008, and 2007 we allocated earnings between common and participating preferred stock as follows:

2009

2008

2007(in thousands)Net income attributable to common stock

$
133,023

$
77,537

$
76,160Undistributed income allocated to participating preferred stock


7,281


17,555


7,912Net income

$
140,304

$
95,092

$
84,072


Diluted
EPS gives the dilutive effect of the participating preferred stock and stock options outstanding during the year. We excluded 2,557,267, 3,770,080 and 450,185 stock options from
the computation of diluted EPS at December 31, 2009, 2008 and 2007, respectively because they were antidilutive.

19. STOCKHOLDERS' EQUITY



We have 3.0 million authorized shares of preferred stock, of which we have designated 300,000 shares as Series A
preferred stock and 300,000 shares as Series B preferred stock. The holders of both Series A preferred stock and Series B preferred stock possess specified rights whereby they
may, in specified circumstances, convert the shares directly or indirectly into shares of common stock. In addition, we have the right to convert the shares of our Series B preferred stock to
common stock, in the ratio of 100 shares of common stock for each share of Series B preferred stock, from and after the first anniversary of the issuance of the shares of Series B
preferred stock. On November 24, 2008, we converted all of the then-outstanding 132,895 shares of Series B preferred stock into 13,289,500 shares of our common stock.

At
December 31, 2009 and 2008, there were 42,105 shares of Series A preferred stock outstanding and no shares of Series B preferred stock outstanding.



Subject to the exceptions described below, each share of Series A preferred stock ranks equally in all respects and has the same
rights, powers and preferences, and the same qualifications, and limitations, as our Series B preferred stock:

Rank.The Series A preferred stock ranks



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. STOCKHOLDERS' EQUITY (Continued)



Dividends.Holders of shares of Series A preferred stock are entitled to participate equally and ratably with the holders of
shares of common
stock in all dividends and distributions paid on the shares of common stock as if, immediately prior to each record date for payment of a dividend or distribution on the common stock, the shares of
Series A preferred stock then outstanding were converted into shares of common stock.

Liquidation Preference.In the event that we voluntarily or involuntarily liquidate, dissolve or wind up, the holders of shares of
Series A
preferred stock are, with respect to each such share of Series A preferred stock, entitled to receive the greater of



Neither
a consolidation or merger nor a sale or transfer of all or any part of our assets for cash, securities or other property, is considered a liquidation, dissolution or winding up.

Voting Rights.Holders of shares of Series A preferred stock are not entitled to vote on any matter submitted to a vote of our
shareholders,
but are entitled to prior written notice of, and are entitled to attend and observe, all special and annual meetings of our shareholders. However, so long as any shares of Series A preferred
stock are outstanding, we will not, without the written consent or affirmative vote by holders of at least a majority of the outstanding shares of Series A preferred stock, voting as a single
and separate class:



Merger or Consolidation.Unless approved by holders of the shares of Series A preferred stock, we will not merge or consolidate
into, or sell,
transfer or lease all or substantially all of our property to any other entity, unless the successor, transferee or lessee entity expressly assumes the due and punctual performance and observance of
each and every covenant and condition described above to be performed and observed by us and expressly agrees to exchange, at the holder's option, shares of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. STOCKHOLDERS' EQUITY (Continued)

Series A
preferred stock for shares of the surviving entity's capital stock on terms substantially similar to the terms described above.

Conversion upon Transfer.Any share of Series A preferred stock owned by any equity investor that was an original purchaser of the
share or
any affiliate of an equity investor is not convertible into common stock so long as such share of Series A preferred stock is owned by that equity investor or affiliate. At any time when a
share of Series A preferred stock is not or ceases to be owned by an equity investor or an affiliate of an equity investor, the share of Series A preferred stock, without any further
action or deed on our part or any other individual, entity or group, will automatically convert into the number of fully paid and non-assessable shares of common stock determined by
dividing $2,000 by the conversion price in effect at the time of conversion. The initial conversion price is $20.

Exchange of Shares.Under the securities purchase agreements that governed the original issue of the Series A preferred stock, we
have agreed
that, at an equity investor's request, we will exchange all or any shares of Series A preferred stock held by the equity investor for a like number of shares of Series B preferred stock;
provided that, prior to the consummation of any exchange, the equity investor shall have obtained a clearance, approval or waiver, under specified laws governing insurance companies or the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or shall have represented to us that no clearance, approval or waiver is not required in connection with such an exchange.



Subject to the exceptions described below, each share of our Series B preferred stock ranks equally in all respects and has the
same dividend and other rights, powers and liquidation and other preferences, and the same qualifications, limitations and restrictions as our Series A preferred stock.

Voting Rights.In addition to the voting rights described above, holders of our Series B preferred stock may vote with holders of
our common
stock together as one class on all matters submitted for a vote of holders of our common stock. Holders of our Series B preferred stock are entitled to a number of votes equal to the number of
votes to which the shares of our common stock issuable upon conversion of their shares of Series B Preferred Stock would have been entitled if those shares of common stock had been outstanding
at the time of the applicable record date.

Right to Convert.A holder of our Series B preferred stock has the right, at any time and from time to time, to convert any or all
of the
holder's shares of Series B into the number of fully paid and non-assessable shares of common stock determined by dividing $2,000 by the conversion price in effect at the time of
conversion. The initial conversion price is $20.

We
have the right to require the holder of each share of our Series B preferred stock, from and after the first anniversary of the date of original issuance of the share, from
time to time, at our option, to convert the share of Series B preferred stock into fully paid and non-assessable shares of our common stock at the applicable conversion price. The
number of shares of common stock into which one share of the Series B preferred stock is convertible is determined by dividing the preferred share price by the conversion price in effect at the
time of conversion.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. STOCKHOLDERS' EQUITY (Continued)



We currently have authorized for issuance 200 million shares of voting common stock, par value $0.01 per share. Changes in the
number of shares of common stock issued were as follows:

Years ended December 31,

2009

2008

2007Common stock outstanding, beginning of year


87,447,100


74,952,177


59,890,500Conversion of Preferred B into common stock





13,289,500


Return of stock issued and stock issued in connection with MemberHealth acquisition





(2,027,071
)

14,175,000Exercise of stock options


543,000


1,184,237


861,633Retired shares


(50,537
)




Agent stock award








2,801Stock purchases pursuant to agents' stock purchase and deferred compensation plans


3,100


48,257


22,243Common stock outstanding, end of year


87,942,663


87,447,100


74,952,177




We currently have authorized for issuance 30 million shares of non-voting common stock, par value $0.01 per share.
None of this class of stock is, or has been, issued.



Changes in treasury stock were as follows:

For the years ended December 31,2009

2008Shares

Amount

Weighted
Average
Cost Per
Share

Shares

Amount

Weighted
Average
Cost Per
ShareTreasury stock beginning of year


7,194,387

$
77,605

$
10.79


285,545

$
4,258

$
14.91Shares repurchased


7,024,097


63,693


9.07


7,028,154


74,821


10.65Shares distributed in the form of employee bonuses


(680,403
)

(7,352
)

10.80


(119,312
)

(1,474
)

12.36Treasury stock, end of period


13,538,081

$
133,946

$
9.90


7,194,387

$
77,605

$
10.79


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. STOCKHOLDERS' EQUITY (Continued)



The components of accumulated other comprehensive loss are as follows:

As of December 31,

2009

2008(in thousands)Net unrealized gains (losses) on investments

$
21,405

$
(42,685
)Gross unrealized OTTI


(18,117
)

Deferred acquisition cost adjustment





6,617Foreign currency translation gains





332Fair value of cash flow swap on debt


(15,465
)

(20,298
)Deferred income taxes


4,262


19,612Total accumulated other comprehensive loss

$
(7,915
)
$
(36,422
)


20. OTHER COMPREHENSIVE INCOME (LOSS)

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

For the Year ended December 31, 2009

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(in thousands)Net unrealized gain arising during the period (net of deferred acquisition costs)

$
14,369

$
5,030

$
9,339Reclassification adjustment for losses included in income


24,988


8,746


16,242Net unrealized gain


39,357


13,776


25,581ASC 320-10-65-1 implementation


16,487


5,771


10,716Cash flow hedge


4,833


1,692


3,141Foreign currency translation adjustment


(332
)

(117
)

(215
)Other comprehensive income

$
60,345

$
21,122

$
39,223




For the Year ended December 31, 2008

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(in thousands)Net unrealized loss arising during the period (net of deferred acquisition costs)

$
(95,441
)
$
(33,404
)
$
(62,037
)Reclassification adjustment for losses included in income


59,681


20,888


38,793Net unrealized loss


(35,760
)

(12,516
)

(23,244
)Cash flow hedge


(20,019
)

(7,006
)

(13,013
)Foreign currency translation adjustment


(153
)

(54
)

(99
)Other comprehensive loss

$
(55,932
)
$
(19,576
)
$
(36,356
)




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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20. OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

For the Year ended December 31, 2007

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(in thousands)Net unrealized loss arising during the period (net of deferred acquisition costs)

$
(43,151
)
$
(15,104
)
$
(28,047
)Reclassification adjustment for losses included in income


40,178


14,064


26,114Net unrealized loss


(2,973
)

(1,040
)

(1,933
)Cash flow hedge


(279
)

(97
)

(182
)Foreign currency translation adjustment


252


86


166Other comprehensive loss

$
(3,000
)
$
(1,051
)
$
(1,949
)


21. SHARE REPURCHASE PLAN

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

22. STOCK-BASED COMPENSATION



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

The
total number of shares of our common stock reserved and available for delivery to participants in connection with awards under the 1998 ICP, prior to amendment on August 23,
2007, was



provided,
however, that the total number of shares of common stock with respect to which incentive stock options, or ISOs, may be granted, may not exceed 1.5 million. On August 23, 2007,
our shareholders approved an amendment to increase the number of shares of common stock authorized

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. STOCK-BASED COMPENSATION (Continued)

for
issuance under the 1998 ICP by 5.0 million shares. As of December 31, 2009, a total of 19.3 million shares were eligible for grant under the plan, giving effect to the
potential conversion of our Series A preferred stock. We have awarded a total of 14.4 million shares under the plan, of which 6.5 million
shares were reserved for delivery under outstanding options awarded under the 1998 ICP. As of December 31, 2009, 4.9 million shares were available for future awards.

Executive
officers, directors, and other officers and employees of our parent holding company or any subsidiary, as well as other persons who provide services to us, are eligible to
receive awards under the 1998 ICP, which is administered by our Board of Directors or a committee established pursuant to the plan. Our Board has designated its Compensation Committee to administer
the 1998 ICP. The committee, may, in its discretion, accelerate the exercisability, the lapsing of restrictions, or the expiration of deferral or vesting periods of any award, and any accelerated
exercisability, lapse, expiration and vesting occurs automatically in the case of a change in control of the Company, except to the extent otherwise determined by the committee at the date of grant or
thereafter. The committee has not yet exercised any of its discretion noted above, except that in the case of some options issued under the plan, the committee has determined to restrict the automatic
vesting on change of control.

The
compensation expense that has been included in other operating costs and expenses for these plans and the related tax benefit were as follows for the years ended December 31,:

2009

2008

2007(in thousands)Stock-based compensation expense by type:Stock options

$
7,127

$
6,367

$
4,573Restricted stock awards


4,688


3,151


1,519Total stock-based compensation expense


11,815


9,518


6,092Tax benefit recognized


4,135


3,331


2,132Stock-based compensation expense, net of tax

$
7,680

$
6,187

$
3,960


The
tax benefit recognized in our consolidated financial statements is based on the amount of compensation expense recorded for book purposes. The actual tax benefit realized in our tax
return is based on the intrinsic value or the excess of the market value over the exercise or purchase price, of stock options exercised and restricted stock awards vested during the period. The
actual tax benefit realized for the deductions taken on our tax returns from option exercises and restricted stock vesting totaled $1.6 million in 2009, $3.3 million in 2008, and
$3.7 million in 2007. There was no capitalized stock-based compensation expense.



Beginning January 1, 2006, we adopted provisions of ASC 718-10,Compensation-Stock
Compensation, on share-based payments using the modified prospective method, and began recognizing compensation cost for share-based payments to employees and
non-employee directors based on the grant date fair value of the award, which we amortize over the grantees' service period. We elected to use the Black-Scholes valuation model to value
employee stock options, as we had done for our previous pro forma stock compensation disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. STOCK-BASED COMPENSATION (Continued)

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

For options granted in:2009

2008

2007Weighted-average grant date fair value

$3.92

$2.85

$7.91Risk free interest rates

1.28%3.05%

1.33%3.15%

4.01%5.16%Dividend yields

0.0%

0.0%

0.0%Expected volatility

40.61%55.63%

35.60%49.31%

35.39%42.53%Expected lives of options (in years)

3.53.8

3.55.0

3.06.0


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

Activity
for our option plans for the year ended December 31, 2009 is set forth below:

Options

Shares
(in thousands)

Weighted Average
Exercise PriceOutstanding at December 31, 2008


5,640

$
14.85Granted


1,100


10.00Exercised


(543
)

3.25Forfeited or expired


(846
)

17.89Outstanding at December 31, 2009


5,351

$
14.55




Shares Under Options
(in thousands)

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual Term

Aggregate
Intrinsic
Value Per
Share(1)

Aggregate
Intrinsic
Value(1)
(in thousands)Options exercisable at December 31, 2009


3,150

$
14.32

2.8 years

$
1.53

$
4,825Options vested and expected to vest at December 31, 2009(2)


5,351


14.55

3.2 years


1.21


6,487


(1)Computed
based upon aggregate intrinsic value divided by shares under options.(2)The
Company began estimating forfeitures under ASC 718-10,CompensationStock Compensation
Topic,upon adoption on January 1, 2006.


The
total intrinsic value of stock options exercised during 2009, 2008, and 2007 was $3.2 million, $7.7 million, and $10.2 million, respectively.

We
received proceeds of $1.8 million, $4.2 million, and $8.8 million from the exercise of stock options during the years ended December 31, 2009, 2008, and
2007, respectively. ASC 718-10 also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow, rather than as an operating
cash flow as required under the prior statement. We recognized $2.6 million, $2.8 million, and $5.8 million of financing cash flows for these excess tax deductions for the years
ended 2009, 2008, and 2007, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. STOCK-BASED COMPENSATION (Continued)

The
compensation expense related to non-vested awards not yet recognized was $9.4 million at December 31, 2009, which we expect to recognize over a weighted
average period of 1.1 years.



In accordance with our 1998 Incentive Compensation Plan, we may grant restricted stock to our officers and non-officer
employees and directors. We have issued restricted stock grants which vest ratably over three and four year periods, and some restricted stock
grants have contained portions that vest immediately. We value restricted stock awards at an amount equal to the market price of our common stock on the date of grant and generally issue restricted
stock out of treasury shares. We recognize compensation expense for restricted stock awards on a straight line basis over the vesting period.

During
2009, the Board of Directors approved a performance share award program for our officers. The performance shares are structured such that target shares with a
three-year cliff vesting period are awarded. The actual number of shares earned at the conclusion of the vesting period can vary from 0% to 150% of the target award, based on our total
shareholder return relative to a group of peer companies that were selected prior to the award. Compensation expense is recognized on a straight line basis over the vesting period. Prior to vesting,
previously recognized compensation expense may be reversed in the event a grantee resigns, however, once the vesting date is reached, previously recognized expense may not be changed, even if the
actual award varies from the target. In connection with this program, we awarded 373,000 performance shares to officers during 2009. Related compensation cost of $1.2 million has been
recognized in other operating costs and expenses.

The
weighted-average grant date fair value of our restricted stock awards was $13.32 and $18.89 for the years ended December 31, 2009 and 2008, respectively. Activity for our
restricted stock awards was as follows for the year ended December 31, 2009:

Non-vested Restricted Stock

Shares
(in thousands)

Weighted Average
Grant-Date
Fair ValueNon-vested at December 31, 2008


471

$
18.89Granted


403


10.28Vested


(165
)

18.98Forfeited


(100
)

17.96Non-vested at December 31, 2009


609

$
13.32


The
fair value of shares of restricted stock vested during the years ended 2009, 2008 and 2007 was $0.8 million, $1.8 million, and 1.1 million, respectively. Total
compensation expense not yet recognized related to nonvested restricted stock awards was $6.0 million at December 31, 2009. We expect to recognize this compensation expense over a
weighted average period of 4.0 years.

23. UNIVERSAL AMERICAN CORP. 401(k) SAVINGS PLAN

Effective April 1, 1992, we adopted the Universal American Corp. 401(k) Savings Plan. The 401(k) plan is a voluntary contributory plan under which employees may elect to defer
compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986. The employee is entitled to participate in the 401(k) plan by contributing through
payroll deductions up to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

23. UNIVERSAL AMERICAN CORP. 401(k) SAVINGS PLAN (Continued)

100%
of the employee's compensation. The participating employee is not taxed on these contributions until they are distributed. Amounts credited to employee's accounts under the 401(k) plan are
invested by the employer-appointed investment committee. Currently, we match employee contributions with our common stock in amounts equal to 100% of the employee's first 1% of contributions and 50%
of the employee's next 4% of contributions to a maximum matching contribution of 3% of the employee's eligible compensation. Our matching contributions vest at the rate of 25% per plan year, starting
at the end of the second year. We made discretionary matching contributions under the 401(k) plan of $2.2 million in 2009 and 2008 and $1.2 million in 2007. Employees must to hold the
employer contribution in our common stock until vested, at which point the employee has the option to transfer the amount to any of the other investments available under the 401(k) plan. The 401(k)
plan held 798,523 shares of our common stock at December 31, 2009, which represented 25% of total plan assets and 610,131 shares at December 31, 2008, which represented 22% of total plan
assets. Generally, a participating employee is entitled to distributions from the 401(k) plan upon termination of employment, retirement, death or disability. 401(k) plan participants who qualify for
distributions may receive a single lump sum, have the assets transferred to another qualified plan or individual retirement account, or receive a series of specified installment payments.

In
connection with the September 21, 2007 acquisition of MemberHealth, Inc., the Company assumed responsibility for administration of the MemberHealth, Inc.
Retirement Savings Plan. The MemberHealth savings plan is a voluntary contributory plan under which employees could elect to defer compensation for federal income tax purposes under
Section 401(k) of the Internal Revenue Code of 1986. Eligible employees were entitled to participate in the MemberHealth savings plan by contributing through payroll deductions up to 75% of the
employee's compensation. The participating employee does not pay tax on these contributions until they are distributed. Moreover, the employer's contributions vest after 5 years of credited
service. MemberHealth matched employee contributions at
an amount equal to 50% of the first 6% of the employee's contribution not to exceed 3% of employee compensation. We made matching contributions under our 401(k) plan of $0.1 million in 2007.
Effective January 1, 2008, the MemberHealth savings plan was merged into our 401(K) plan.

24. STATUTORY FINANCIAL DATA

Our insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, substantially more than such minimum
amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries' operations. Each of the insurance
subsidiaries' statutory capital and surplus exceeds its respective minimum statutory requirement and are at levels we believe are sufficient to support their currently anticipated levels of operation.
Additionally, the National Association of Insurance Commissioners, known as NAIC, imposes regulatory risk-based capital, known as RBC, requirements on life insurance enterprises. At
December 31, 2009, all of our insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the "authorized control level." The combined statutory capital and surplus,
including asset valuation reserve, of the insurance subsidiaries totaled $695.6 million and $525.5 million at December 31, 2009 and 2008, respectively. For the years ended
December 31, 2009, 2008 and 2007, the insurance subsidiaries generated statutory net income of $156.2 million, $67.8 million and $114.6 million, respectively.

Our
health plan affiliates are also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and are also subject to RBC requirements. At
December 31, 2009,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

24. STATUTORY FINANCIAL DATA (Continued)

the
statutory capital and surplus of each of our health plan affiliates exceeds its minimum requirement and its RBC is in excess of the "authorized control level." The statutory capital and surplus
for our health plan affiliates was $105.3 million and $86.6 million at December 31, 2009 and 2008, respectively. Statutory net income for our health plan affiliates was
$8.4 million, $29.1 million and $15.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Effective
for the quarter ended September 30, 2009, the National Association of Insurance Commissioners, known as the NAIC, required adoption of SSAP No. 43R, Loan-backed and Structured Securities. SSAP
43R supersedes SSAP 98, which amended SSAP 43. SSAP 43R establishes statutory accounting
principles for evaluating and recording other-than-temporary impairments on investments in loan-backed and structured securities.

SSAP
43R effectively changed the impairment trigger for loan-backed and structures securities from an undiscounted cash flow test to a discounted cash flow test. In addition,
SSAP 43R changes the method of valuing the new cost basis of the impaired security from an undiscounted cash flow basis to a discounted cash flow basis. We adopted SSAP 43R effective for
September 30, 2009, as required. For the quarter ended September 30, 2009, we recognized an additional $50.9 million of realized losses, pre-tax, for
other-than-temporary impairments of investments on a statutory basis, all related to the current quarter. Of this amount, $50.1 million related to securities with an
NAIC rating of 6, which were, therefore, already marked to the lower of cost or market for statutory reporting purposes. Accordingly, at September 30, 2009, the implementation of SSAP 43R
reduced surplus by $0.8 million.

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

25. OTHER OPERATIONAL DISCLOSURES

Restructuring Charges:We have undertaken several initiatives to realign our organization and consolidate certain functions to
increase efficiency
and responsiveness to customers and reduce costs, in order to meet the challenges and opportunities presented by the current economic environment and anticipated Medicare reform. In 2009, we engaged a
consultant and began a comprehensive review of our ongoing business with an emphasis on potential operating cost reductions. These efforts have taken on additional significance, in light of the
reinsurance of the Life and Annuity business and the anticipated reductions in funding of Medicare Advantage Plans announced during the first quarter of 2009. As a result of this review, in the second
quarter of 2009, we committed to a plan to reduce costs, including the in-sourcing of billing and enrollment for our health Plan business, workforce reduction and consolidation of
facilities. This plan was substantially completed at December 31, 2009. We incurred total restructuring charges of $4.9 million during the year ended December 31, 2009. These
charges are included in restructuring costs in our Consolidated Statements of Operations. A summary

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

25. OTHER OPERATIONAL DISCLOSURES (Continued)

of
our restructuring liability balance as of December 31, 2009 and restructuring activity for 2009 is as follows:

Segment

January 1,
Balance

Charge to
Earnings

Cash
Paid

Non-cash

December 31,
Balance(in thousands)2009Contract termination costs

Medicare Advantage

$


$
3,500

$
(3,500
)
$


$
Workforce reduction

Traditional





608


(461
)




147Facility consolidation

Traditional





796





(99
)

697Total



$


$
4,904

$
(3,961
)
$
(99
)
$
844


Agent Balances:In late 2006 we began recruiting career managers to develop offices for distribution of our new Medicare
Advantage products. We have
opened a significant number of new "expansion" offices since then. The Company has advanced much of the cost of the development of these new offices; however, these costs are the responsibility of the
manager of the individual office, to be repaid from future profits of the office.

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

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

Supplemental Cash Flow Information:Cash and cash equivalents reflect cash on deposit, money market funds, and short term
investments that had an
original maturity of three months or less from the time of purchase. At December 31, 2009, cash equivalents contained $960.1 million of government money market funds. Supplemental cash
flow information for interest and income taxes paid for continuing and discontinued operations is as follows:

2009

2008

2007(in thousands)Supplemental cash flow information from continuing operations:Cash paid for interest

$
20,632

$
22,721

$
18,679Cash paid for income taxes

$
33,322

$
52,215

$
103,007Non-cash financing activities:(Return) issuance of common stock in connection with MemberHealth acquisition

$


$
(34,541
)
$
283,500


F-68

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26. COMMITMENTS AND CONTINGENCIES



Plaintiff Arthur Tsutsui filed a shareholder derivative action on December 30, 2005, in the Supreme Court for New York State,
Westchester County. The defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch, Robert A. Waegelein and Gary W. Bryant, as well as all of the
directors sitting on our board of directors as of the time the complaint was filed. The Tsutsui action alleges that the same alleged misstatements that were the subject of earlier shareholder actions,
which have now all been dismissed or voluntarily withdrawn, constituted a breach of fiduciary duty by the officer defendants and the directors that caused the Company to sustain damages. The Tsutsui
action also seeks recovery of any proceeds derived by the officer and director defendants from the sale of our stock that the plaintiff claims was in breach of their fiduciary duties. The defendants
filed a motion to dismiss the complaint for failure to state a claim, as well as on other grounds. The court granted this motion in a decision and order dated May 16, 2008, and the plaintiff
appealed the dismissal. On appeal, the Appellate Division for the Second Department issued a decision dated November 17, 2009 affirming the dismissal with respect to one count of the complaint
concerning alleged false statements, but reversing with respect to the two remaining counts concerning stock sales by officer and director defendants. There have been no further developments in the
lower court since the decision of the Appellate Division.



We have litigation in the ordinary course of our business asserting claims for medical, disability and life insurance benefits and
other matters. In some cases, plaintiffs seek punitive damages. We believe that after liability insurance recoveries, none of these actions will have a material adverse effect on our results of
operations or financial condition.



Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation.
We believe that we are in compliance with all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review
and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs.

In
July 2009, we received a subpoena from the Department of Health and Human Services, Office of Inspector General, known as HHS-OIG, requesting documents related to our
marketing, sales and enrollment practices for our Today's Health Medicare HMO Plans which are offered in the State of Wisconsin. We are cooperating with HHS-OIG and responding to the
subpoena. We are not aware of any other material regulatory proceeding or investigation underway or threatened involving allegations of potential wrongdoing.



We are obligated under lease arrangements for our executive and administrative offices in New York, Florida, Indiana, Texas, Wisconsin,
Oklahoma, Ohio, Virginia, Missouri, and Washington, D.C. Rent expense was $8.2 million for the year ended December 31, 2009, $7.1 million for 2008 and

F-69

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

26. COMMITMENTS AND CONTINGENCIES (Continued)

$5.8 million
for 2007. Annual minimum rental commitments, subject to escalation, under non-cancelable operating leases (in thousands) are as follows:

2010

$
6,4612011


5,6592012


5,2502013


4,6892014


3,945Thereafter


6,280Total

$
32,284


In
addition to the above, Pennsylvania Life is the named lessee on 33 properties occupied by career agents for use as field offices. The career agents reimburse Pennsylvania Life the actual rent for
these field offices. The total annual rent paid by the Company and reimbursed by the career agents for these field offices during 2009, 2008 and 2007 was approximately $3.7 million,
$4.0 million and $2.9 million, respectively.

27. BUSINESS SEGMENT INFORMATION



We
also report the activities of our holding company in a separate segment. A description of these segments follows:

Senior Managed CareMedicare AdvantageThe Senior Managed CareMedicare
Advantage segment contains the operations of our initiatives in managed care for seniors.



F-70

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

27. BUSINESS SEGMENT INFORMATION (Continued)



Medicare Part DThis segment consists of



The
growth in our Medicare Part D business has resulted in an increase in the level of seasonality in our reported results during a given calendar year. This is due to the uneven
nature of the standard benefit design under Medicare Part D. As a result, this business generally sees higher claims experience in the first two quarters of the year while beneficiaries are in
the deductible and initial coverage phases of the benefit design. As the beneficiary reaches the coverage gap and catastrophic phases of the benefit design, the plan experiences lower claims liability
which is generally in the last two quarters of the year, resulting in a pattern of increasing reported net income attributable to the Part D business.

Traditional InsuranceThis segment consists of



F-71

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

27. BUSINESS SEGMENT INFORMATION (Continued)



Senior Administrative ServicesOur senior administrative services subsidiary acts as a third party administrator and service provider of senior market
insurance products and geriatric care management for both affiliated and unaffiliated insurance companies.

CorporateThis segment reflects the activities of our parent holding company, such as debt service, senior executive compensation, and compliance with
requirements resulting from our status as a public company.

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

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

2009

2008

2007Revenues

Income(Loss)
Before
Income Taxes

Revenues

Income(Loss)
Before
Income Taxes

Revenues

Income(Loss)
Before
Income Taxes(in thousands)Senior Managed CareMedicare Advantage

$
2,642,990

$
134,810

$
2,420,693

$
94,625

$
1,943,451

$
52,726Medicare Part D


1,984,391


178,344


1,896,070


127,444


642,538


116,888Traditional Insurance


346,444


(20,518
)

455,584


4,845


514,663


14,106Senior Administrative Services


42,221


8,486


84,888


22,020


106,954


24,124Corporate


665


(61,502
)

3,426


(37,949
)

5,747


(35,040
)Intersegment revenues


(27,943
)




(68,994
)




(81,888
)

Adjustments to segment amounts:Net realized losses(1)


(24,988
)

(24,988
)

(59,681
)

(59,681
)

(40,178
)

(40,178
)Equity in earnings of
unconsolidated subsidiary(2)


(280
)




(72,813
)




(56,664
)

Total

$
4,963,500

$
214,632

$
4,659,173

$
151,304

$
3,034,623

$
132,626


(1)We
evaluate the results of operations of our segments based on income before realized gains and losses and income taxes. Management believes that realized
gains and losses are not indicative of overall operating trends.(2)We
report the equity in the earnings of unconsolidated subsidiary as revenue for our Medicare Part D segment for purposes of analyzing the ratio of
net pharmacy benefits incurred because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, this amount is included as a separate line following
income from continuing operations.(3)Income
before income taxes for 2008 includes a $3.9 million charge related to impairment of goodwill. 
(see Note 7Intangible Assets).


F-72

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

27. BUSINESS SEGMENT INFORMATION (Continued)

Identifiable assets by segment are as follows:

As of December 31,

2009

2008(in thousands)Senior Managed CareMedicare Advantage

$
877,920

$
970,297Medicare Part D


1,133,976


1,133,596Traditional Insurance


1,649,762


1,508,127Senior Administrative Services


18,142


20,330Corporate


1,915,020


1,661,194Intersegment assets(1)


(1,779,964
)

(1,431,381
)Total Assets

$
3,814,856

$
3,862,163


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


28. CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The quarterly results of operations are presented below. Due to the use of weighted average shares outstanding when determining the denominator for earnings per share, the sum of the
quarterly per common share amounts may not equal the full year per common share amounts.

Three Months Ended2009

March 31,

June 30,

September 30,

December 31,(in thousands)Total revenue

$
1,361,776

$
1,245,497

$
1,149,705

$
1,206,522(Loss) income before income taxes


(20,543
)

7,970


87,722


139,483(Benefit) provision for income taxes


(7,395
)

3,036


27,976


50,711Net (loss) income

$
(13,148
)
$
4,934

$
59,746

$
88,772(Loss) earnings per common share:Basic:Net (loss) income

$
(0.16
)
$
0.06

$
0.74

$
1.12Diluted:Net (loss) income

$
(0.16
)
$
0.06

$
0.74

$
1.12


F-73

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

28. CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)



Three Months Ended2008

March 31,

June 30,

September 30,

December 31,(in thousands)Total revenue

$
1,224,787

$
1,242,041

$
1,097,999

$
1,094,346(Loss) income before income taxes


(55,313
)

28,561


77,140


100,916(Benefit) provision for income taxes


(9,313
)

193


28,328


37,004Net (loss) income

$
(46,000
)
$
28,368

$
48,812

$
63,912(Loss) earnings per common share:Basic:Net (loss) income

$
(0.50
)
$
0.32

$
0.57

$
0.75Diluted:Net (loss) income

$
(0.50
)
$
0.32

$
0.56

$
0.75


During
the year ended 2009, the Company recognized other-than-temporary impairments in the value of certain of its securities with exposure to subprime mortgages
totaling $10.5 million. During the year ended 2008, the Company recognized other-than-temporary impairments in the value of certain of its securities with exposure to
subprime mortgages totaling $48.0 million.

F-74

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Schedule ISummary of Investments Other Than Investments in Related Parties        UNIVERSAL AMERICAN CORP.        December 31, 2009 and 2008

December 31, 2009Classification

Face
Value

Amortized
Cost

Fair
Value

Carrying
Value(in thousands)U.S. Treasury securities and obligations of U.S. Government

$
35,195

$
35,572

$
36,122

$
36,122Government sponsored agencies


137,405


137,839


140,831


140,831Other political subdivisions


10,060


10,020


10,014


10,014Corporate debt securities


309,538


312,225


327,845


327,845Foreign debt securities


19,423


19,465


20,724


20,724Mortgage-backed and asset-backed securities


532,822


446,144


429,017


429,017Sub-total

$
1,044,443


961,265

$
964,553


964,553Policy loans





19





19Other invested assets





1,257





1,257Total investments




$
962,541




$
965,829




December 31, 2008Classification

Face
Value

Amortized
Cost

Fair
Value

Carryinge
Value(in thousands)U.S. Treasury securities and obligations of U.S. Government

$
33,155

$
33,963

$
35,335

$
35,335Government sponsored agencies


90,314


90,030


95,029


95,029Other political subdivisions


10,035


9,993


9,885


9,885Corporate debt securities


441,943


441,681


420,283


420,283Foreign debt securities


32,958


32,779


30,890


30,890Mortgage-backed and asset-backed securities


565,537


466,632


440,971


440,971Sub-total

$
1,173,942


1,075,078

$
1,032,393


1,032,393Policy loans





22,274





22,274Other invested assets





1,649





1,649Total investments




$
1,099,001




$
1,056,316


F-75

---





Schedule IICondensed Financial Information of Registrant        UNIVERSAL AMERICAN CORP.        (Parent Company)        CONDENSED BALANCE SHEETS
       December 31, 2009 and 2008

2009

2008(in thousands)ASSETSCash and cash equivalents

$
112,571

$
165,029Investments in subsidiaries


1,656,193


1,472,592Advances to agents


8,504


19,530Surplus note receivable from affiliate


60,000


65,550Due from affiliates


36,950


37,115Deferred loan origination fees


6,045


6,202Income tax receivable





29Deferred income tax asset


19,891


8,057Other assets


9,761


8,690Total assets

$
1,909,915

$
1,782,794LIABILITIES AND STOCKHOLDERS' EQUITYLoan payable

$
313,758

$
320,625Other long tern debt


110,000


110,000Fair value of cash flow hedges


15,465


20,298Income tax payable


17,740


Amounts payable and other liabilities


3,488


15,787Total liabilities


460,451


466,710Total stockholders' equity


1,449,464


1,316,084Total liabilities and stockholders' equity

$
1,909,915

$
1,782,794


See
notes to condensed financial statements.

F-76

---





UNIVERSAL AMERICAN CORP.        (Parent Company)        CONDENSED STATEMENTS OF OPERATIONS        For the Three Years Ended December 31, 2009

2009

2008

2007(in thousands)REVENUES:Surplus note investment incomeaffiliated

$
65

$
570

$
1,783Net investment incomeunaffiliated


485


3,491


5,849Realized loss





(449
)

(928
)Total revenues


550


3,612


6,704EXPENSES:Selling, general and administrative expenses


10,037


2,045


13,859Stock compensation expense


7,127


6,369


4,572Interest expenseloan payable


13,069


15,467


11,642Interest expenseother long term debt


6,868


8,227


8,838Total expenses


37,101


32,108


38,911Loss before income taxes and equity in income of subsidiaries


(36,551
)

(28,496
)

(32,207
)Income tax benefit


13,820


11,946


11,394Loss before equity in income of subsidiaries


(22,731
)

(16,550
)

(20,813
)Equity in income of subsidiaries, net of taxes


163,035


111,642


104,885Net income

$
140,304

$
95,092

$
84,072


See
notes to condensed financial statements.

F-77

---





UNIVERSAL AMERICAN CORP.        (Parent Company)        CONDENSED STATEMENTS OF CASH FLOWS        For the Three Years Ended December 31, 2009

2009

2008

2007(in thousands)Cash flows from operating activities:Net income


140,304

$
95,092

$
84,072Adjustments to reconcile net income to net cash used in operating activities:Equity in income of subsidiaries


(163,035
)

(111,642
)

(104,885
)Realized loss





449


928Stock based compensation


7,127


6,369


4,572Change in amounts due to/from subsidiaries


165


(2,034
)

(13,353
)Amortization of deferred loan origination fees


158


1,048


2,510Change in income taxes receivable/payable


17,769


6,756


Deferred income taxes


(5,881
)

(1,571
)

(2,999
)Change in other assets and liabilities


(6,191
)

13,642


(193
)Cash used in operating activities


(9,584
)

8,109


(29,348
)Cash flows from investing activities:Issuance of surplus note to affiliate








(60,000
)Redemption of surplus note due from affiliate


5,549


12,000


10,000Capital contributions to subsidiaries








(81,000
)Purchase of business and return of purchase price





40,990


(358,286
)Purchase of agent advances from subsidiaries, net of collections


11,026


12,464


4,740Cash provided by (used in) investing activitiescontinuing operations


16,575


65,454


(484,546
)Cash used in investing activitiesdiscontinued operations








(19,836
)Cash provided by (used in) investing activities


16,575


65,454


(504,382
)Cash flows from financing activities:Net proceeds from issuance of common stock


4,411


7,661


14,961Proceeds from issuance of preferred stock








332,107Purchase of treasury stock


(63,693
)

(74,821
)

Issuance of new debt








450,000Principal repayment on debt


(6,867
)

(28,500
)

(156,438
)Dividends received from subsidiaries


7,871


15,660


12,043Other financing activities


(1,171
)




(5,895
)Cash (used in) provided by financing activities


(59,449
)

(80,000
)

646,778Net (decrease) increase in cash and cash equivalents


(52,458
)

(6,437
)

113,048Cash and cash equivalents:At beginning of year


165,029


171,466


58,418At end of year

$
112,571

$
165,029

$
171,466Supplemental disclosure of cash flow information:Cash paid during the year for:Interest

$
20,632

$
22,721

$
18,679Income taxes

$
53,301

$
36,950

$
39,100


See notes to condensed financial statements.

F-78

---





UNIVERSAL AMERICAN CORP.        (Parent Company)        NOTES TO CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

In the parent-company-only financial statements, the parent company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since
date of acquisition. The parent company's share of net income of its wholly owned unconsolidated subsidiaries is included in its net income using the equity method. Certain reclassifications have been
made to prior years' financial statements to conform to current period presentation. Parent-company-only financial statements should be read in conjunction with the Company's consolidated
financial statements.

2. AGENT ADVANCES

Universal American's insurance subsidiaries advance commissions to their respective agents for business submitted by the agents. Universal American has agreements with certain of its
insurance subsidiaries whereby it had purchased the related receivables. The advances are recovered as the commissions are earned through the balance of the policy period.

3. DERIVATIVE INSTRUMENTSCASH FLOW HEDGES

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, and one with Calyon Corporate and Investment Bank to hedge the variability of
cash flows to be paid under the new credit facility described in Note 14Loan Payable in the notes to the Consolidated Financial Statements. In entering into the swap with Citibank,
we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based
on a 4.14% locked-in fixed rate. In entering into the swap with Calyon, we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional
amount of $125 million in exchange for a fixed interest rate payment based on a 4.13% locked-in fixed rate. The objective of the hedges is to eliminate the variability of cash flows
in the interest payments on a combined $250 million amount of the variable rate term loan portion of our new credit facility, which is due to changes in the LIBOR base rate, through September
2012. We expect changes in the cash flows of the interest rate swap to exactly offset the changes in cash flows from interest rate payments attributable to fluctuations in the LIBOR base rate on the
$250 million portion of the variable rate term loan portion of our new credit facility. The combined fair value of these swaps was a $15.5 million liability at December 31, 2009
and a $20.3 million liability at December 31, 2008. We have reflected this fair value in other liabilities. In connection with the transaction executed with Citibank, N.A. we are
required to post collateral when we are in a net liability position. The collateral amount required is based on the fair value of the swap including net accrued interest less a $1 million
threshold amount as determined by our credit rating of BB+. Should we be downgraded or cease to be rated by S&P or Moody's, the threshold amount would be reduced to zero and we would need to post
$1 million in additional collateral. This collateral is reflected in cash and cash equivalents and was $8.1 million as of December 31, 2009 and $9.3 million as of
December 31, 2008. Based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction were the same, we have concluded that we expect
changes in cash flows attributable to the risk being hedged to be completely offset by the hedging derivative, and have designated these swaps as cash flow hedges. As a result, we reflected the
unrealized loss on these hedges in accumulated other comprehensive loss. We perform periodic assessments of hedge effectiveness by verifying and documenting whether the critical terms of the

F-79

---



UNIVERSAL AMERICAN CORP.

(Parent Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

3. DERIVATIVE INSTRUMENTSCASH FLOW HEDGES (Continued)

hedging
instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

The
Company paid $6.3 million in interest in connection with the $250 million of interest rate swap agreements pertaining to our credit facility during the year ended
December 31, 2009. The Company paid $1.4 million in interest in connection with the $250 million of interest rate swap agreements pertaining to our credit facility during the year
ended December 31, 2008, but did not make any payments during 2007. Effective September 4, 2003, we entered into a swap agreement whereby we pay a fixed rate of 6.7% on a
$15.0 million notional amount relating to the December 2002 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 400 basis points, capped at 12.5%. This swap
contract expired in December 2007. Effective April 29, 2004, we entered into a second swap agreement whereby we pay a fixed rate of 6.98% on a $20.0 million notional amount relating to
the October 2003 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 395 basis points, capped at 12.45%. This swap contract expired in October 2008. The fair value of
this swap was $0 at December 31, 2008 and $0.3 million at December 31, 2007 and is reflected in other assets. During the year ended December 31, 2008, we reported a net
$0.3 million in realized gains relating to the increase in the fair value of the cash flow swap agreement. During the year ended December 31, 2007, we reported a realized loss of
$0.9 million relating to the reduction in the fair value of the cash flow swap agreement.

4. SURPLUS NOTES RECEIVABLE FROM AFFILIATES

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

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

F-80

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Schedule IIISUPPLEMENTAL INSURANCE INFORMATION

UNIVERSAL AMERICAN CORP.

(in thousands)

Deferred
Acquisition
Costs

Reserves for
Future Policy
Benefits

Unearned
Premiums

Policy and
Contract
Claims

Net
Premium
Earned

Net
Investment
Income

Policyholder
Benefits

Net Change
in DAC

Other
Operating
Expense2009Senior Managed CareMedicare Advantage

$


$


$


$
238,920

$
2,616,596

$
23,111

$
2,156,603

$


$
351,577Medicare Part D











91,027


1,980,907


2,844


1,587,076





218,972Traditional Insurance


150,398


992,736





65,903


321,423


23,062


254,991


7,786


104,185Senior Administrative Services

















1








33,735Corporate

















665








63,341Intersegment and other adjustments














(28
)

131


(36
)




(29,082
)Segment Total

$
150,398

$
992,736

$


$
395,850

$
4,918,898

$
49,814

$
3,998,634

$
7,786

$
742,7282008Senior Managed CareMedicare Advantage

$


$


$


$
257,308

$
2,404,067

$
16,626

$
2,001,163

$


$
324,905Medicare Part D











180,309


1,802,127


1,052


1,533,090





235,536Traditional Insurance


237,630


1,021,712





73,093


394,275


60,189


317,344


14,273


119,122Senior Administrative Services


























62,868Corporate

















3,345








41,272Intersegment and other adjustments














(15
)

58


(15
)




(68,876
)Segment Total

$
237,630

$
1,021,712

$


$
510,710

$
4,600,454

$
81,270

$
3,851,582

$
14,273

$
714,8272007Senior Managed CareMedicare Advantage

$


$


$


$
303,281

$
1,920,309

$
23,142

$
1,611,824

$
574

$
278,327Medicare Part D











139,552


578,791


6,685


427,195





98,455Traditional Insurance


245,511


1,051,309





91,608


442,163


71,189


350,790


15,389


134,378Senior Administrative Services


























82,830Corporate

















5,398








41,664Intersegment and other adjustments














156


556


129





(82,894
)Segment Total

$
245,511

$
1,051,309

$


$
534,441

$
2,941,419

$
106,970

$
2,389,938

$
15,963

$
552,760


F-81

---





Universal American Corp.

Schedule V

Valuation and Qualifying Accounts

Balance
Jan 1

Charged to
Statement of
Operations

Write-offs
against
allowance

Acquisition
and Other
Adjs.

Balance
Dec 31(in thousands)2009Due and unpaid premiums(1)

$
3,282

$


$
(3,282
)
$


$
Other Part D receivables(1)


16,079





(16,079
)




Advances to agents


10,412


14,034








24,446Other assets(3)


20,814


18,549


(3,534
)

1,442


37,271Deferred income taxes


4,433


1,551








5,9842008Due and unpaid premiums(1)

$
7,298

$
2,432

$
(8,881
)
$
2,433

$
3,282Other Part D receivables(1)


13,836


7,959


(6,378
)

662


16,079Advances to agents


4,682


5,730








10,412Other assets(3)


18,100


2,817


(552
)

449


20,814Deferred income taxes


3,144


1,289








4,4332007Due and unpaid premiums(1)

$
3,230

$
2,079

$
(89
)
$
2,078

$
7,298Other Part D receivables(2)


5,830





(4,372
)

12,378


13,836Advances to agents


3,494


1,188








4,682Other assets(3)





17,548





552


18,100Deferred income taxes


2,949


195








3,144


(1)Amount
in Acquisition and Other Adjs. column includes 50% share of current year increment recovered from joint venture partner.(2)Amount
in Acquisition and Other Adjs. column includes valuation account acquired in connection with acquisition of MemberHealth.(3)Represents
valuation account on receivables related to Medicare Advantage products.


F-82

---