Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                        toCommission file Number: 0-11321




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

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

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


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

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



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

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

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

Class of Common Stock

Outstanding at
July 26, 2010$0.01 par value

75,499,273 shares




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Table of Contents

TABLE OF CONTENTS



Item

Description

PagePART I

Financial Information1

Financial Statements:Consolidated Balance Sheets


4Consolidated Statements of OperationsThree Months


5Consolidated Statements of OperationsSix Months


6Consolidated Statements of Stockholders' Equity and Comprehensive Income


7Consolidated Statements of Cash Flows


8Notes to Consolidated Financial Statements


92

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


323

Quantitative and Qualitative Disclosures About Market
Risk


494

Controls and Procedures


50PART II

Other Information1

Legal Proceedings


521A

Risk Factors


522

Unregistered Sales of Equity Securities and Use of Proceeds


553

Defaults Upon Senior Securities


554

Other Information


555

Exhibits


55Signatures


56


1

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Table of Contents

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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



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.

2

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Table of Contents

The
risks and uncertainties set forth in this report in Part IItem 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations,"
and the risks and uncertainties set forth in or incorporated by reference into Part IIItem 1A "Risk Factors," and other risks and uncertainties set forth in this report,
constitute important factors that may cause actual results to differ materially from forward-looking statements. We assume no obligation to update or supplement any forward-looking statements that may
become untrue because of subsequent events, whether as a result of new information, future events or otherwise.

3

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Table of Contents

PART I

ITEM 1FINANCIAL STATEMENTS (Unaudited)



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

June 30,
2010

December 31,
2009(Unaudited)ASSETSInvestments:Fixed maturities available for sale, at fair value (amortized cost: 2010, $1,076,451; 2009, $961,265)

$
1,097,359

$
964,553Other invested assets


1,367


1,276Total investments


1,098,726


965,829Cash and cash equivalents


826,647


856,958Accrued investment income


11,307


9,005Deferred policy acquisition costs


147,283


150,398Reinsurance recoverableslife


564,265


622,547Reinsurance recoverableshealth


128,092


126,524Due and unpaid premiums


277,854


35,466Present value of future profits and other amortizing intangible assets


155,885


167,545Goodwill and other indefinite lived intangible assets


525,673


530,031Income taxes receivable





3,441Other Part D receivables


203,750


168,159Advances to agents


72,320


66,418Other assets


130,320


112,535Total assets

$
4,142,122

$
3,814,856LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESReserves and other policy liabilitieslife

$
561,506

$
599,442Reserves for future policy benefitshealth


405,757


408,625Policy and contract claimshealth


461,416


380,519Premiums received in advance


27,561


12,535Loan payable


312,124


313,758Other long term debt


110,000


110,000Amounts due to reinsurers


5,591


7,078Income taxes payable


10,176


Deferred income tax liability


24,816


31,564CMS contract deposit liabilities


420,082


169,169Other Part D liabilities


136,923


163,332Other liabilities


168,417


169,370Total liabilities


2,644,369


2,365,392STOCKHOLDERS' EQUITYPreferred stock (Authorized: 3 million shares):Series A Preferred Stock (Authorized: 300,000 shares, issued and outstanding: 42,105 shares, liquidation value 2010, $60,631; 2009, $49,263)


42


42Series B preferred stock (Authorized: 300,000 shares)





Common stockvoting (Authorized: 200 million shares, issued and outstanding: 2010, 78.2 million shares; 2009, 87.9 million
shares)


782


879Common stocknon-voting (Authorized 30 million shares)





Additional paid-in capital


790,697


880,709Accumulated other comprehensive income (loss)


2,318


(7,915
)Retained earnings


732,105


709,695Less: treasury stock (2010, 2.7 million shares; 2009, 13.5 million shares)


(28,191
)

(133,946
)Total stockholders' equity


1,497,753


1,449,464Total liabilities and stockholders' equity

$
4,142,122

$
3,814,856


See Notes to unaudited Consolidated Financial Statements.

4

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30, 2010 and 2009

(Unaudited)

(in thousands, per share amounts in dollars)

2010

2009Net premium and policyholder fees earned

$
1,444,592

$
1,236,076Net investment income


10,985


12,487Fee and other income


912


4,980Realized gain (loss):Total other-than-temorary impairment losses on securities


(289
)

(8,265
)Portion of loss recognized in other comprehensive income


131


3,742Net other-than-temporary impairment losses on securities recognized in earnings


(158
)

(4,523
)Realized gain (loss), excluding other-than-temporary impairment losses on securities


263


(3,523
)Net realized gain (loss) on investments


105


(8,046
)Total revenues


1,456,594


1,245,497Benefits, claims and expenses:Claims and other benefits


1,254,409


1,055,538Change in deferred acquisition costs


131


885Amortization of present value of future profits


5,764


6,006Commissions


34,500


30,658Reinsurance commissions and expense allowances


(4,897
)

(6,911
)Interest expense


5,075


4,806Loss on reinsurance and other related costs





7,624Restructuring costs





4,727Other operating costs and expenses


130,489


134,202Total benefits, claims and expenses


1,425,471


1,237,535Income before equity in earnings of unconsolidated subsidiary


31,123


7,962Equity in earnings of unconsolidated subsidiary





8Income before taxes


31,123


7,970Provision for income taxes


10,114


3,036Net income

$
21,009

$
4,934Earnings per common share:Basic

$
0.27

$
0.06Diluted

$
0.27

$
0.06Weighted average shares outstanding:Weighted average common shares outstanding


76,465


86,738Less weighted average treasury shares


(2,724
)

(9,926
)Basic weighted shares outstanding


73,741


76,812Weighted average common equivalent of preferred shares outstanding


4,211


4,211Effect of dilutive securities


308


334Diluted weighted shares outstanding


78,260


81,357


See
Notes to unaudited Consolidated Financial Statements.

5

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months Ended June 30, 2010 and 2009

(Unaudited)

(in thousands, per share amounts in dollars)

2010

2009Net premium and policyholder fees earned

$
2,942,040

$
2,585,209Net investment income


21,781


28,223Fee and other income


5,726


9,109Realized loss:Total other-than-temorary impairment losses on securities


(420
)

(16,341
)Portion of loss recognized in other comprehensive income


131


3,742Net other-than-temporary impairment losses on securities recognized in earnings


(289
)

(12,599
)Realized gain (loss), excluding other-than-temporary impairment losses on securities


111


(2,669
)Net realized losses on investments


(178
)

(15,268
)Total revenues


2,969,369


2,607,273Benefits, claims and expenses:Claims and other benefits


2,589,183


2,249,129Change in deferred acquisition costs


3,115


8,583Amortization of present value of future profits


11,700


11,899Commissions


65,298


62,363Reinsurance commissions and expense allowances


(9,536
)

(12,430
)Interest expense


10,089


10,064Loss on reinsurance and other related costs





7,624Restructuring costs





4,727Other operating costs and expenses


269,823


277,992Total benefits, claims and expenses


2,939,672


2,619,951Income (loss) before equity in earnings of unconsolidated subsidiary


29,697


(12,678
)Equity in earnings of unconsolidated subsidiary





105Income (loss) before taxes


29,697


(12,573
)Provision for (benefit from) income taxes


7,287


(4,359
)Net income (loss)

$
22,410

$
(8,214
)Earnings (loss) per common share:Basic

$
0.29

$
(0.10
)Diluted

$
0.29

$
(0.10
)Weighted average shares outstanding:Weighted average common shares outstanding


80,669


86,782Less weighted average treasury shares


(6,976
)

(9,361
)Basic weighted shares outstanding


73,693


77,421Weighted average common equivalent of preferred shares outstanding


4,211


4,211Effect of dilutive securities


307


383Diluted weighted shares outstanding


78,211


82,015


See
Notes to unaudited Consolidated Financial Statements.

6

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

For the Six Months Ended June 30, 2010 and 2009

(Unaudited)

(in thousands)

Preferred
Stock
Series A

Preferred
Stock
Series B

Common
Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
(Loss) Income

Retained
Earnings

Treasury
Stock

Total2009Balance at January 1, 2009

$
42

$


$
874

$
870,520

$
(36,422
)
$
558,675

$
(77,605
)
$
1,316,084Net loss

















(8,214
)




(8,214
)Other comprehensive income














21,076








21,076Comprehensive income























12,862ASC 320-10-65 implementation adjustment














(10,716
)

10,716





Issuance of common stock








1


146











147Stock-based compensation











6,173











6,173Treasury shares purchased at cost




















(27,156
)

(27,156
)Treasury shares reissued











24








4,148


4,172Balance at June 30, 2009

$
42

$


$
875

$
876,863

$
(26,062
)
$
561,177

$
(100,613
)
$
1,312,2822010Balance at January 1, 2010

$
42

$


$
879

$
880,709

$
(7,915
)
$
709,695

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

















22,410





22,410Other comprehensive income














10,233








10,233Comprehensive income























32,643Issuance of common stock








3


1,987











1,990Stock-based compensation











2,030











2,030Retired treasury stock








(100
)

(98,959
)







99,059


Treasury shares purchased at cost




















(2,845
)

(2,845
)Treasury shares reissued











4,930








9,541


14,471Balance at June 30, 2010

$
42

$


$
782

$
790,697

$
2,318

$
732,105

$
(28,191
)
$
1,497,753


See Notes to unaudited Consolidated Financial Statements.

7

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2010 and 2009

(Unaudited)

(in thousands)

2010

2009Cash flows from operating activities:Net income (loss)

$
22,410

$
(8,214
)Adjustments to reconcile net income (loss) to net cash used in operating activities, net of balances sold:Equity in earnings of unconsolidated subsidiary





(105
)Distribution from unconsolidated subsidiary





6,800Deferred income taxes


(13,023
)

(37,323
)Realized losses on investments


178


15,268Amortization of intangible assets


11,700


11,899Loss on reinsurance, net of tax





2,221Net amortization of bond premium


2,377


1,219Changes in operating assets and liabilities:Deferred policy acquisition costs


3,115


8,583Reserves for future policy benefits


(32,517
)

3,345Policy and contract claims payable


72,610


(100,798
)Reinsurance balances


52,766


(5,484
)Due and unpaid/advance premium, net


(227,362
)

(187,903
)Income taxes payable/receivable


13,617


47,589Other Part D (payables)/receivables


(62,000
)

(90,851
)Other, net


(7,987
)

24,123Cash used in operating activities


(164,116
)

(309,631
)Cash flows from investing activities:Proceeds from sale or redemption of fixed maturity investments


83,441


558,616Cost of fixed maturity investments purchased


(201,149
)

(382,956
)Assets transferred on life reinsurance





(454,487
)Proceeds from sale of CHCS, net of cash sold


6,492


Purchase of fixed assets


(6,214
)

(14,063
)Other investing activities


2,019


(1,860
)Cash used in investing activities


(115,411
)

(294,750
)Cash flows from financing activities:Net proceeds from issuance of common stock, net of tax effect


2,782


2,717Cost of treasury stock purchases


(2,845
)

(27,156
)Receipts from CMS contract deposits


1,979,175


1,837,979Withdrawals from CMS contract deposits


(1,728,262
)

(1,373,418
)Deposits and interest credited to policyholder account balances





4,357Surrenders and other withdrawals from policyholder account balances





(17,548
)Principal repayment on loan payable and other long term debt


(1,634
)

(1,750
)Cash provided by financing activities


249,216


425,181Net decrease in cash and cash equivalents


(30,311
)

(179,200
)Cash and cash equivalents at beginning of period


856,958


511,032Cash and cash equivalents at end of period

$
826,647

$
331,832


See
Notes to unaudited Consolidated Financial Statements.

8

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND COMPANY BACKGROUND

Universal American Corp., which we refer to as "we," the "Company," or "Universal American," is a specialty health and life insurance holding company with an emphasis on providing a
broad array of health insurance and managed care products and services to the growing senior population. Universal American was incorporated in the State of New York in 1981. Collectively, our
insurance company subsidiaries are licensed to sell life, accident and health insurance and annuities in all fifty states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. We
currently sell Medicare Part D prescription drug benefit Plans, known as PDPs, Medicare coordinated care Plans, which we call HMOs, Medicare coordinated care products built around contracted
networks of providers, which we call PPOs, Medicare Advantage private fee-for-service Plans, known as PFFS Plans, Medicare supplement, fixed benefit accident and sickness
insurance, and senior life insurance. We distribute these products through career and independent general agency systems on a direct to consumer basis.

On
June 9, 2010, we sold the outstanding common stock of CHCS Services, Inc., our administrative services company, to Patni Americas, Inc, a wholly-owned subsidiary of
Patni Computer Systems, Limited (NYSE: PTI), with an effective date of April 1, 2010. The operations of CHCS are included in consolidated results up to the effective date of the sale. This
transaction is discussed in more detail at Note 14 of Notes to our Consolidated Financial Statements.

On
April 24, 2009 we entered in to an agreement with the Commonwealth Annuity and Life Insurance Company, known as Commonwealth, and the First Allmerica Financial Life Insurance
Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS) to reinsure substantially all of our in-force life insurance and annuity business as of April 1, 2009, under a 100%
coinsurance treaty. This transaction is discussed in more detail at Note 14 of Notes to the Consolidated Financial Statements.

2. BASIS OF PRESENTATION

We have prepared the accompanying Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, for interim reporting in
accordance with Article 10 of the Securities and Exchange Commission's Regulation S-X. Accordingly, they
do not include all of the disclosures normally required by U.S. GAAP or those normally made in an annual report on Form 10-K. For the insurance and health plan subsidiaries,
U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. We have eliminated all material intercompany transactions and balances. The interim
financial information in this report is unaudited, but in the opinion of management, includes all adjustments, including normal, recurring adjustments necessary to present fairly the financial
position and results of operations for the periods reported. For further information, the reader of this quarterly report on Form 10-Q should refer to our annual report on
Form 10-K for the year ended December 31, 2009, that was filed with the Securities and Exchange Commission, or the SEC, on March 1, 2010. The results of operations for
the three and six months ended June 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates:The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and
assumptions that
affect the amounts reported by us in our Consolidated Financial Statements and the accompanying Notes. Critical accounting policies require significant subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based on information available at

9

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

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 the revisions 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 quarter.

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



We
believe that these changes will enhance the usefulness of our Consolidated Financial Statements by combining similar balances into single financial statement line items. These
reclassifications had no effect on stockholders' equity, net income, or earnings per share as previously reported.

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

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

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

Fair Value Disclosures:In January 2010, the FASB issued ASC Update No. 2010-06,Fair Value
Measurements
and Disclosures, which updates ASC 820-10-20,Fair Value Measurements and Disclosures.The new
literature requires disclosures about transfers into and out of Levels 1 and 2 fair value measurements and clarifies existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. These new rules impact disclosures only and had no impact on our consolidated financial position or consolidated results of operations. The

10

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

new
rules also require additional disclosures regarding Level 3 fair value measurements which are effective for reporting periods beginning after December 15, 2010.

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

Future Adoption of Accounting Standards:We determined that all other recently issued accounting standards that are not yet
effective will not have a
material impact on our Consolidated Financial Statements, or do not apply to our operations.

4. INVESTMENTS

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

June 30, 2010Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI(1)

Fair Value(in thousands)U.S. Treasury securities and obligations of U.S. Government

$
36,603

$
429

$
(1
)
$


$
37,031Government sponsored agencies


121,609


7,650








129,259Other political subdivisions


8,359


335


(334
)




8,360Corporate debt securities


473,219


18,738


(743
)




491,214Foreign debt securities


34,932


1,174


(1,619
)




34,487Mortgage-backed and asset-backed securities


401,729


20,995


(8,863
)

(16,853
)

397,008$
1,076,451

$
49,321

$
(11,560
)
$
(16,853
)
$
1,097,359


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)



December 31, 2009Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI(1)

Fair 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


(1)Other-than-temporary
impairments.


At
June 30, 2010, gross unrealized losses on mortgage-backed and asset-backed securities totaled $25.7 million, consisting of unrealized losses of $22.5 million on
subprime residential mortgage loans, as discussed below, and $3.2 million related to obligations of commercial mortgage-backed securities and other asset- backed securities. The value of a
majority of these securities is depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Management and the Investment Committee have evaluated
these holdings, with input from our investment managers, and do not believe them to be other-than-temporarily impaired.

The
amortized cost and fair value of fixed maturity investments at June 30, 2010 by contractual maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

Fair
Value(in thousands)Due in 1 year or less

$
127,491

$
129,656Due after 1 year through 5 years


453,491


469,882Due after 5 years through 10 years


77,393


84,429Due after 10 years


16,347


16,384Mortgage and asset-backed securities


401,729


397,008$
1,076,451

$
1,097,359


12

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

The
fair value and unrealized loss as of June 30, 2010 and December 31, 2009 for fixed maturities, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, are shown below:

Less than 12 Months

12 Months or Longer

TotalJune 30, 2010

Fair
Value

Gross
Unrealized
Losses
and OTTI

Fair Value

Gross
Unrealized
Losses
and OTTI

Fair
Value

Gross
Unrealized
Losses
and OTTI(in thousands)U.S Treasury securities and obligations of U.S. Government

$


$


$
51

$
(1
)
$
51

$
(1
)Government sponsored agencies

















Other political subdivisions








1,665


(334
)

1,665


(334
)Corporate debt securities


117,064


(493
)

3,307


(250
)

120,371


(743
)Foreign debt securities


13,893


(1,619
)







13,893


(1,619
)Mortgage-backed and asset-backed securities


4,336


(409
)

26,526


(25,307
)

30,862


(25,716
)Total fixed maturities

$
135,293

$
(2,521
)
$
31,549

$
(25,892
)
$
166,842

$
(28,413
)Total number of securities in an unrealized loss position

















51




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


Subprime Residential Mortgage Loans

We hold securities with exposure to subprime residential mortgages. Subprime mortgage lending is the origination of residential
mortgage loans to customers with weak credit profiles. The significant

13

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

decline
in U.S. housing prices, combined with the relaxed underwriting standards for some originators of subprime loans have led to higher delinquency and loss rates, especially with regard to
securities issued in 2005, 2006 and 2007 that are collateralized by interests in mortgages originated in 2005, 2006 and 2007. These factors have caused a significant reduction in market liquidity,
repricing of risk, and expectation of higher losses to securitized mortgage pools, which has led to a decrease in the market valuation of these securities sector wide.

As
of June 30, 2010, we held subprime securities with par values of $52.3 million, an amortized cost of $46.9 million and a fair value of $24.4 million
representing approximately 1.3% 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 & OTTI(in thousands)2003

$
3,858

$
3,071

$
(787
)2004


771


546


(225
)2005


20,635


14,402


(6,233
)2006


16,642


4,267


(12,375
)2007


4,988


2,149


(2,839
)Totals

$
46,894

$
24,435

$
(22,459
)


We
continuously review our subprime holdings stressing multiple variables, such as cash flows, prepayment speeds, default rates and loss severity, and comparing current base case loss
expectations to the loss required to incur a principal loss, or breakpoint. We expect delinquency and loss rates in the
subprime mortgage sector to continue to increase in the near term but at a decreasing rate. Those securities with a greater variance between the breakpoint and base case can withstand this further
deterioration. However, holdings where the base case is closer to the breakpoint, principally holdings from the 2005, 2006 and 2007 vintage years, are more likely to incur a loss of principal. 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.

14

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

The
following table summarizes, on a pre-tax basis, our other-than-temporary impairments on fixed maturity investments recorded in our Consolidated
Statements of Operations since the subprime deterioration began in 2007:

2010 Quarter End

Year EndedCumulative

June 30

March 31

2009

2008

2007(in thousands)Subprime

$
99,747

$
158

$
131

$
10,497

$
47,964

$
40,997Other structured


11,043








6,398


4,645


Corporate


7,177











7,177


$
117,967

$
158

$
131

$
16,895

$
59,786

$
40,997


During
the quarter ended June 30, 2010, we recognized an other-than-temporary impairment on one structured security that had not been previously impaired.

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

For the three months
ended June 30,

For the six months
ended June 30,2010

2009

2010

2009(in thousands)

(in thousands)Realized gains:Fixed maturities

$
373

$
4,732

$
941

$
6,078Other


22


175


22


175395


4,907


963


6,253Realized losses:Fixed maturities, excluding OTTI


(90
)

(8,430
)

(810
)

(8,922
)OTTI on fixed maturities


(158
)

(4,523
)

(289
)

(12,599
)Other


(42
)




(42
)

(290
)

(12,953
)

(1,141
)

(21,521
)Net realized gains (losses)

$
105

$
(8,046
)
$
(178
)
$
(15,268
)


15

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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 accumulated other comprehensive income are as follows:

Three months ended
June 30, 2010

Six months ended
June 30, 2010(in thousands)

(in thousands)Balance, beginning of period

$
7,846

$
7,846Credit related impairments recognized in current period earnings on securities:With credit related impairments previously recognized





With credit related impairments not previously recognized


158


158Cumulative credit related impairments as of June 30, 2010

$
8,004

$
8,004


We
did not recognize any additional other-than-temporary impairments during the quarter ended June 30, 2010. For the six months ended June 30, 2010,
we recognized other-than-temporary impairments of approximately $0.1 million on securities for which the impairment was not split between earnings and accumulated other
comprehensive income.

5. FAIR VALUE MEASUREMENTS

We carry fixed maturity investments, equity securities and interest rate swaps at fair value in our Consolidated Financial Statements. These fair value disclosures consist of information
regarding the valuation of these financial instruments, followed by the fair value measurement disclosure requirements ofFair Value Measurements and Disclosures
Topic, ASC 820-10.



The following section applies the ASC 820-10 fair value hierarchy and disclosure requirements to our financial instruments
that we carry at fair value. ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels,
numbered 1, 2, and 3.

Level 1
observable inputs reflect quoted prices for identical assets or liabilities in active markets that we have the ability to access at the measurement date. We currently have
no Level 1 securities.

Level 2
observable inputs, other than quoted prices included in Level 1, reflect the asset or liability or prices for similar assets and liabilities. Most debt securities
and some preferred stocks are model priced by vendors using observable inputs and we classify them within Level 2. Derivative instruments that are priced using models with observable market
inputs, such as interest rate swap contracts, are also reflected as Level 2.

Level 3
valuations are derived from techniques in which one or more of the significant inputs, such as assumptions about risk, are unobservable. Generally, Level 3
securities are less liquid securities such as highly structured or lower quality asset-backed securities, known as ABS, and private placement

16

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

equity
securities. Because Level 3 fair values, by their nature, contain unobservable market inputs, as there is no observable market for these assets and liabilities, we must use considerable
judgment to determine the Level 3 fair values. Level 3 fair values represent our best estimate of an amount that we could realize in a current market exchange absent actual market
exchanges.

The
following table presents our assets and liabilities that are carried at fair value by hierarchy levels, as of June 30, 2010 (in thousands):

Total

Level 1

Level 2

Level 3Assets:Fixed maturties, available for sale

$
1,097,359

$


$
1,093,698

$
3,661Equity securities


9








9Total assets

$
1,097,368

$


$
1,093,698

$
3,670Liabilities:Interest rate swaps

$
17,342

$


$
17,342

$



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
820-10 reflect market participant objectives and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. We determine
the fair value of our financial assets and liabilities based upon quoted market prices where available. Fair values of our interest rate swap liabilities reflect adjustments for counterparty credit
quality, our credit standing, liquidity and, where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the
financial instruments listed in the above table.



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:



17

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

Based
on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent
reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported
trades, the third party pricing services may use matrix or model processes to develop a security price where the pricing services develop future cash flow expectations based upon collateral
performance, discounted at an estimated market rate. The pricing for mortgage-backed and asset-backed securities reflects estimates of the rate of future prepayments of principal over the remaining
life of the securities. The pricing services derive these estimates based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels
projected for the underlying collateral.

We
have analyzed the third party pricing services' valuation methodologies and related inputs, and have also evaluated the various types of securities in our investment portfolio to
determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, we
classified each price into Level 1, 2, or 3. We classified most prices provided by third party pricing services into Level 2 because the inputs used in pricing the securities are market
observable.

Due
to a general lack of transparency in the process that brokers use to develop prices, we have classified most valuations that are based on broker's prices as Level 3. We may
classify some valuations as Level 2 if we can corroborate the price. We have also classified internal model priced securities, primarily consisting of private placement asset-backed securities,
as Level 3 because this model pricing includes significant non-observable inputs. We have classified private placement equity securities as Level 3 due to the lack of
observable inputs.



Interest rate swaps are reported at fair value as other liabilities in our consolidated balance sheets. 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.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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

Fixed
Maturities

Equity
Securities

Total(in thousands)Fair value as of December 31, 2009

$
1,563

$
9

$
1,572Net purchases and sales


(97
)




(97
)Net transfers out


(50
)




(50
)Unrealized losses included in AOCI(1),(2)


17





17Fair value as of March 31, 2010


1,433


9


1,442Net transfers in(3)


2,143





2,143Unrealized losses included in AOCI(1),(2)


85





85Fair value as of June 30, 2010

$
3,661

$
9

$
3,670


(1)AOCI:
Accumulated other comprehensive income(2)Unrealized
gains/losses represent losses from changes in values of Level 3 financial instruments only for the periods in which the instruments are
classified as Level 3.(3)Transfer
of one security from Level 2 to Level 3 due to lack of observable inputs.


6. EARNINGS PER COMMON SHARE COMPUTATION

We calculate earnings per common share using the two-class method. This method requires that we allocate net income (loss) between net income (loss) attributable to
participating preferred stock and net income (loss) 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 (loss) attributable to common stock divided by the weighted average number of common shares outstanding.
For the periods ended June 30, 2010 and 2009, we allocated earnings (losses) between common and participating preferred stock as follows:

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009(in thousands)Net income (loss) attributable to common stock

$
19,874

$
4,680

$
21,199

$
(7,794
)Undistributed income (loss) allocated to participating preferred stock


1,135


254


1,211


(420
)Net income (loss)

$
21,009

$
4,934

$
22,410

$
(8,214
)


7. SHARE REPURCHASE PLAN

We have approved share repurchase plans that have authorized us to repurchase up to $175 million of shares of our common stock. Through December 31, 2009, we had
repurchased 13.4 million shares of our common stock for an aggregate amount of $132.7 million, under these

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. SHARE REPURCHASE PLAN (Continued)

programs.
There have been no share repurchases since December 31, 2009 under these programs. As of June 30, 2010, we have $42.3 million that remains available to repurchase
additional shares under these plans. However, share repurchases are also limited by the remaining available restricted payments under our 2007 Credit Facility, which, giving effect to the
July 27, 2010 Amendment, limits share repurchases, dividends and other restricted payments to an aggregate of $300 million (see Note 15Subsequent Events in the Notes
to the Consolidated Financial Statements). We are not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

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

For the six months ended June 30,2010

2009Shares

Amount

Weighted
Average
Cost Per
Share

Shares

Amount

Weighted
Average
Cost Per
ShareTreasury stock beginning of year


13,538,081

$
133,946

$
9.89


7,194,387

$
77,605

$
10.79Retirement of treasury stock


(10,000,000
)

(99,059
)

9.91








Shares repurchased


191,025


2,845


14.89


3,257,174


27,156


8.32Shares distributed in the form of employee bonuses


(996,734
)

(9,541
)

9.57


(383,610
)

(4,148
)

10.71Treasury stock, end of period


2,732,372

$
28,191

$
10.32


10,067,951

$
100,613


9.99


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

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as follows:

June 30,
2010

December 31,
2009(in thousands)Net unrealized gains on investments

$
37,761

$
21,405Gross unrealized OTTI


(16,853
)

(18,117
)Fair value of cash flow swap on debt


(17,342
)

(15,465
)Deferred income taxes on the above


(1,248
)

4,262Total accumulated other comprehensive income (loss)

$
2,318

$
(7,915
)


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

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

Three months ended June 30,2010

2009Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(in thousands)Net unrealized gain arising during the period

$
10,968

$
3,839

$
7,129

$
40,108

$
14,038

$
26,070Reclassification adjustment for gains (losses) included in income


105


37


68


(8,046
)

(2,816
)

(5,230
)Net unrealized gain arising during the period


11,073


3,876


7,197


32,062


11,222


20,840Cash flow hedge


(687
)

(241
)

(446
)

4,857


1,700


3,157Foreign currency translation adjustment











(144
)

(51
)

(93
)Other comprehensive income

$
10,386

$
3,635

$
6,751

$
36,775

$
12,871

$
23,904




Six months ended June 30,2010

2009Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(in thousands)Net unrealized gain arising during the period (net of deferred acquisition costs)

$
17,798

$
6,230

$
11,568

$
42,634

$
14,922

$
27,712Reclassification adjustment for (losses) gains included in income


(178
)

(63
)

(115
)

(15,268
)

(5,344
)

(9,924
)Net unrealized gain arising during the period


17,620


6,167


11,453


27,366


9,578


17,788Cash flow hedge


(1,877
)

(657
)

(1,220
)

5,226


1,829


3,397Foreign currency translation adjustment











(168
)

(59
)

(109
)Other comprehensive income

$
15,743

$
5,510

$
10,233

$
32,424

$
11,348

$
21,076


9. STOCK-BASED COMPENSATION

We have various stock-based incentive plans for our employees, non-employee directors and agents. We issue shares upon the exercise of options granted under these plans.
Detailed information

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

for
activity in our stock-based incentive plans can be found in Note 22Stock-Based Compensation to the financial statements in our annual report on Form 10-K for
the year ended December 31, 2009.

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

Three months ended
June 30,2010

2009(in thousands)Stock-based compensation expense by type:Stock options(1)

$
(332
)
$
1,840Restricted stock awards


2,223


1,578Total stock-based compensation expense


1,891


3,418Tax benefit recognized


348


1,196Stock-based compensation expense, net of tax

$
1,543

$
2,222




Six months ended June 30,2010

2009(in thousands)Stock-based compensation expense by type:Stock options(1)

$
1,240

$
3,604Restricted stock awards


4,056


2,563Total stock-based compensation expense


5,296


6,167Tax benefit recognized


1,540


2,158Stock-based compensation expense, net of tax

$
3,756

$
4,009


---



We recognize compensation cost for share- based payments to employees and non-employee directors based on the grant date
fair value of the award, which we amortize over the grantees' service period in accordance with the provisions ofCompensation-Stock Compensation Topic,ASC 718-10. We use the Black-Scholes valuation model to value employee stock options.

22

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. 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:2010

2009Weighted-average grant date fair value

$5.57

$3.93Risk free interest rates

1.72%-2.26%

1.28%-3.04%Dividend yields

0.0%

0.0%Expected volatility

48.96%-54.91%

40.61%-55.63%Expected lives of options (in years)

3.3-3.8

3.5-3.8


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

A
summary of option activity for the six months ended June 30, 2010 is set forth below:

Options

Shares
(in thousands)

Weighted
Average
Exercise
PriceOutstanding, January 1, 2010


5,351

$
14.55Granted


1,029


13.89Exercised


(293
)

6.71Forfeited or expired


(242
)

18.18Outstanding, June 30, 2010


5,845

$
14.71Exercisable, June 30, 2010


3,600

$
14.73


The
total intrinsic value of options exercised during the first six months of 2010 was $2.5 million and the total intrinsic value of options exercised during the first six months
of 2009 was $0.2 million. As of June 30, 2010, the total compensation cost related to non-vested awards not yet recognized was $11.7 million, which we expect to
recognize over a weighted average period of 1.1 years.

We
received proceeds of $2.0 million from the exercise of stock options during the first six months of 2010 and proceeds of $0.1 million from the exercise of stock options
during the first six months of 2009. ASC 718-10 also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow. We recognized
$0.8 million of financing cash flows for these excess tax deductions for the six months ended June 30, 2010 and less than $0.1 million for the six months ended June 30,
2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)



In accordance with our 1998 Incentive Compensation Plan, we may grant restricted stock to our officers and non-officer
employees and directors. We have issued restricted stock grants which vest ratably over three and four year periods, and some restricted stock grants have contained portions that vest immediately. We
value restricted stock awards at an amount equal to the market price of our common stock on the date of grant and generally issue restricted stock out of treasury shares. We recognize compensation
expense for restricted stock awards on a straight line basis over the vesting period. A summary of the status of our non-vested restricted stock awards is set forth below:

Non-vested Restricted Stock

Shares
(in thousands)

Weighted
Average
Grant-Date
Fair ValueNon-vested at January 1, 2010


609

$
13.32Granted


563


13.76Vested


(161
)

11.34Forfeited


(22
)

13.16Non-vested at June 30, 2010


989

$
13.90


The
total fair value of shares of restricted stock vested during the six months ended June 30, 2010 was $2.4 million and the total fair value of shares of restricted stock
vested during the six months ended June 30, 2009 was $0.8 million.

During
2009, the Board of Directors approved a performance share award program for our officers. The performance shares are structured such that target shares with a
three-year cliff vesting period are awarded. The actual number of shares earned at the conclusion of the vesting period can vary from 0% to 150% of the target award, based on our total
shareholder return relative to a group of peer companies that were selected prior to the award. Compensation expense is recognized on a straight line basis over the vesting period. Prior to vesting,
previously recognized compensation expense may be reversed in the event a grantee resigns, however, once the vesting date is reached, previously recognized expense may not be changed, even if the
actual award varies from the target. In connection with this program, we awarded 442,000 performance shares to officers during 2010 and 373,000 shares in 2009.

24

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. MEDICARE PART D

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

June 30, 2010

December 31, 2009Plan Year

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total
Due from
(to) CMS

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total
Due from
(to) CMS(in thousands)2010

$
(239,347
)
$
127,047

$
(112,300
)
$


$


$
2009(3)


(204,181
)

(32,555
)

(236,736
)

(194,062
)

(35,957
)

(230,019
)2008


251





251








2007(4)


20,940


12,536


33,476


21,433


12,536


33,9692006


2,255


1,595


3,850


3,460


1,595


5,055Total due (to) from CMS

$
(420,082
)
$
108,623

$
(311,459
)
$
(169,169
)
$
(21,826
)
$
(190,995
)


(1)Amounts
reported in CMS contract deposit liabilities in the consolidated balance sheets.(2)Amounts
reported in Due and unpaid premiums in the consolidated balance sheets.(3)We
expect to pay the amount due to CMS for the 2009 Plan year during the fourth quarter of 2010.(4)For
the 2007 Plan year, reconciliation data was received from CMS and amounts were preliminarily settled during the fourth quarter of 2008. Subsequent to
this preliminary settlement, the Company requested a reopening of the 2007 Plan year and received an $80 million interim payment on January 2, 2009, as part of this request.


11. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank, on a total notional
amount of $250 million, where we pay an average locked-in fixed rate of 4.14% and receive a floating rate based on LIBOR to hedge the variability of cash flows to be paid under our
credit facility. We have determined that the critical terms of the hedging instrument and the hedged forecasted transaction were the same and have designated these swaps as cash flow hedges. As a
result, we reflect changes in the fair value in other comprehensive income and the unrealized loss on these hedges in accumulated other comprehensive income. We perform periodic assessments of hedge
effectiveness by verifying and documenting whether the critical terms of the hedging instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant
changes in cash flows. The combined fair value of these swaps was a $17.3 million liability at June 30, 2010 and a $15.5 million liability at December 31, 2009. We have
reflected this fair value in other liabilities.

In
connection with the swap transaction executed with Citibank, 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
$8.6 million as of June 30, 2010 and $8.1 million as of December 31, 2009. The swap agreements and our credit facility are

25

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE (Continued)

described
in more detail in Note 16Derivative InstrumentsCash Flow Hedges and Note 14Loan Payable in the Notes to the Consolidated Financial
Statements in our annual report on Form 10-K for the year ended December 31, 2009.

12. COMMITMENTS AND CONTINGENCIES



Plaintiff Arthur Tsutsui filed a shareholder derivative action (the "Tsutsui Action") on December 30, 2005, in the Supreme Court
for New York State, Westchester County. The remaining defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch and
Robert A. Waegelein, former officer Gary W. Bryant, as well as the three directors affiliated with Capital Z Partners who were sitting on our board of directors as of the time the
complaint was filed. The Tsutsui Action alleges that the same alleged misstatements that were the subject of earlier shareholder actions, which have now all been dismissed or voluntarily withdrawn,
constituted a breach of fiduciary duty by the officer defendants and the directors that caused the Company to sustain damages. The Tsutsui Action also seeks recovery of any proceeds derived by the
officer and director defendants from the sale of our stock that the plaintiff claims was in breach of
their fiduciary duties. The defendants filed a motion to dismiss the complaint for failure to state a claim, as well as on other grounds. The court granted this motion in a decision and order dated
May 16, 2008, and the plaintiff appealed the dismissal. On appeal, the Appellate Division for the Second Department issued a decision dated November 17, 2009 affirming the dismissal with
respect to one count of the complaint concerning alleged false statements, but reversing with respect to the two remaining counts concerning stock sales both by the officer defendants and by
Capital Z Partners that the complaint alleges should be attributed to the three directors described above. Proceedings have now resumed in the lower court, and discovery is scheduled to be
completed by December 16, 2010.

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 state and federal healthcare programs are complex and subject to
significant interpretation. We are subject to various governmental reviews, audits and investigations to verify our compliance with our contracts and applicable laws and regulations. As part of the
healthcare reform legislation, CMS has been exercising increased oversight and regulatory authority over our Medicare businesses. Compliance with such contracts, laws and regulations is subject to CMS
audit, other government review and significant interpretation and there can be no assurance that we will be found to be in compliance with all such contracts, laws and regulations. Failure to be in
such compliance can subject us to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other state and 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
marketing, sales and enrollment practices for our Today's Health Medicare HMO Plans which are offered in the State of

26

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (Continued)

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

13. BUSINESS SEGMENT INFORMATION

Our business segments are based on product and consist of



Our
remaining segment, Corporate & Other, includes the activities of our holding company, along with the operations formerly reported in the Senior Administrative Services
segment.

We
closed the sale of CHCS during the second quarter of 2010 (see Note 14 of Notes to Consolidated Financial Statements). The sale eliminated substantially all of the business
operations of Senior Administrative Services. As a result, beginning with this quarterly report on Form 10-Q, we will report current and historical results of the former Senior
Administrative Services and Corporate segments in one segment called Corporate & Other.

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 Corporate & Other segment for our other segments and interest on notes payable or receivable between the Corporate &
Other 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 U.S. generally
accepted accounting principles is as follows:

Three months ended June 30,2010

2009Revenues

Income (Loss)
Before
Income
Taxes

Revenues

Income (Loss)
Before
Income
Taxes(in thousands)Senior Managed CareMedicare Advantage

$
796,343

$
51,621

$
661,222

$
28,965Medicare Part D


582,351


(14,446
)

506,666


13,595Traditional Insurance


77,368


3,857


82,543


(10,407
)Corporate & Other


441


(10,014
)

10,434


(16,137
)Intersegment revenues


(14
)




(7,314
)

Adjustments to segment amounts:





Net realized gains (losses)(1)


105


105


(8,046
)

(8,046
)Equity in earnings of unconsolidated subsidiary(2)








(8
)

Total

$
1,456,594

$
31,123

$
1,245,497

$
7,970


27

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION (Continued)



Six months ended June 30,2010

2009Revenues

Income (Loss)
Before
Income
Taxes

Revenues

Income (Loss)
Before
Income
Taxes(in thousands)Senior Managed CareMedicare Advantage

$
1,581,389

$
99,224

$
1,307,468

$
75,207Medicare Part D


1,226,570


(46,433
)

1,122,405


(22,269
)Traditional Insurance


157,658


(1,842
)

186,646


(25,896
)Corporate & Other


9,909


(21,074
)

22,607


(24,347
)Intersegment revenues


(5,979
)




(16,480
)

Adjustments to segment amounts:Net realized losses(1)


(178
)

(178
)

(15,268
)

(15,268
)Equity in earnings of unconsolidated subsidiary(2)








(105
)

Total

$
2,969,369

$
29,697

$
2,607,273

($
12,573
)


(1)We
evaluate the results of operations of our segments based on income before realized gains and losses and income taxes. We believe that realized gains and
losses are not indicative of overall operating trends.(2)We
reported the equity in the earnings of unconsolidated subsidiary as revenue for our Medicare Part D segment as the amount is incorporated in the
calculation of the risk corridor adjustment. For consolidated reporting, we included this amount as a separate line following income from operations.


14. OTHER DISCLOSURES

Income Taxes:Our effective tax rate was 32.5% for the second quarter of 2010, compared to 38.1% for the second quarter of 2009.
For the six months
ended June 30, 2010, our effective tax rate was 24.5%, compared with 34.7% for the same period of 2009. The decrease in the effective rate for the three- and six-month periods is
attributable to $1.5 million and $3.8 million, respectively, of non-recurring tax benefits recognized during those periods. These benefits were recognized upon the completion
of examinations by the Internal Revenue Service and primarily are attributable to pre-acquisition tax returns of MemberHealth, Inc.

Reinsurance:We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our
exposure to significant
losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement.
As of June 30, 2010, all of our primary reinsurers were rated "A-" (Excellent) or better by A.M. Best. We do not know of any instances where any of our reinsurers have been
unable to pay any policy claims on any reinsured business.

Sale of CHCS:On April 26, 2010, we entered into an agreement to sell the outstanding common stock of CHCS, our
administrative services
company, to Patni Americas, Inc, a wholly-owned subsidiary

28

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

of
Patni Computer Systems (NYSE: PTI), Limited for $6.0 million in cash, subject to an adjustment for any net working capital remaining at CHCS on the closing date. The transaction closed on
June 9, 2010,
with an effective date of April 1, 2010. The operations of CHCS are included in consolidated results up to the effective date of the sale. The total consideration was approximately
$7.5 million. Our carrying value of the assets disposed of in connection with the sale of CHCS was approximately $7.2 million, including $4.4 million of goodwill. We recognized an
immaterial loss on the disposition after consideration of transaction costs of approximately $0.3 million.

Life Insurance and Annuity Reinsurance Transaction:On April 24, 2009 we entered into an agreement with the Commonwealth
Annuity and Life
Insurance Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS) to reinsure substantially all of our
in-force life insurance and annuity business as of April 1, 2009, under 100% coinsurance. 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, which was recognized during the second quarter of 2009.

Restructuring Charges:In 2009, we had undertaken several initiatives to realign our organization and consolidate certain
functions to increase
efficiency and responsiveness to customers and reduce costs, in order to meet the challenges and opportunities presented by the current economic environment and anticipated Medicare reform. We engaged
a consultant and began a comprehensive review of our ongoing business with an emphasis on potential operating cost reductions. These efforts had taken on additional significance, in light of the
reinsurance of the Life and Annuity business and the anticipated reductions in funding of Medicare Advantage Plans announced during the first quarter of 2009. As a result of this review, in the second
quarter of 2009, we committed to a plan to reduce costs, including the in-sourcing of billing and enrollment for our HMO business, workforce reduction and consolidation of facilities. This
plan was substantially completed at December 31, 2009.

We
incurred total restructuring charges of $4.9 million during the year ended December 31, 2009. Substantially all of these charges were included in restructuring costs in
our Consolidated Statements of

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

Operations
for the second quarter of 2009. A summary of our restructuring liability balance as of June 30, 2010 and 2009 is as follows:

Segment

January 1,
Balance

Charge to
Earnings

Cash Paid

Non-cash

June 30,
Balance(in thousands)2010Contract termination costs

Medicare Advantage

$


$


$


$


$
Workforce reduction

Traditional


147





(147
)




Facility consolidation

Traditional


697








(74
)

623Total



$
844

$


$
(147
)
$
(74
)
$
6232009Contract termination costs

Medicare Advantage

$


$
3,500

$


$


$
3,500Workforce reduction

Traditional





608


(293
)




315Facility consolidation

Traditional





619





(14
)

605Total



$


$
4,727

$
(293
)
$
(14
)
$
4,420


Reverse Repurchase Agreements:Beginning in the second quarter of 2010, we began to enter into
tri-party reverse repurchase agreements, as a means of enhancing investment yield. We carry these securities at fair value, with unrealized gains and losses reflected in accumulated other
comprehensive income. Interest received on the reverse repurchase agreements is recorded in interest income at the contractually specified rate.

Our
policy is to require all such agreements to be adequately collateralized, with daily mark-to-market funding requirements to protect us against counterparty
credit exposure.

At
June 30, 2010, we had $150.0 million of reverse repurchase agreements outstanding, which are reflected in cash and cash equivalents on the consolidated balance sheets.

15. SUBSEQUENT EVENTS

Credit Facility Amendment:On July 27, 2010, we amended our 2007 Credit Facility (the "July 2010 Amendment") to provide us
with the ability to
make an additional $100 million of restricted payments (which includes purchases of company stock and payment of dividends) up to a total of $300 million (including the November 2009
Amendment). As part of the July 2010 Amendment, among other things, we agreed to prepay term loan debt principal at a rate of 50% of all restricted payments above the $125 million restricted
payment limit in the original agreement. We currently have made $132.7 million of restricted payments under the 2007 Credit Facility. In addition, we agreed to an increase in LIBOR based spread
by up to 25 basis points depending on our consolidated leverage ratio, and based on our current consolidated leverage ratio, by 12.5 basis points from LIBOR plus 100 basis points to LIBOR plus 112.5
basis points. In connection with the 2010 Amendment, we paid upfront fees totaling $0.8 million, which will be amortized over the remaining term of the Credit Facility.

Special Dividend:On July 28, 2010, the Board of Directors of the Company approved the payment of a special cash dividend
of $2.00 per share
to each holder of the Company's outstanding

30

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

15. SUBSEQUENT EVENTS (Continued)

common
stock and Series A Preferred Stock. This special cash dividend will be payable on August 19, 2010 to the stockholders of record as of the close of business on August 5,
2010. On the payment date, as required under the terms of the 2007 Credit Facility, we will make an additional principal payment on our term loan equal to 50% of the dividend payment. We expect the
cumulative dividend payment to be approximately $155.9 million and the principal payment to be approximately $78.0 million. In addition, pursuant to the terms of our 1998 Incentive
Compensation Plan, we will establish a dividend payable liability to hold amounts expected to be paid in the future to holders of our restricted stock and performance shares as such shares vest. This
liability is expected to amount to approximately $3.5 million. As these future payments are made, we will also make additional payments on our term loan at the rate of 50% of dividends paid.

31

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Table of Contents

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

Introduction

The following discussion and analysis presents a review of our financial condition as of June 30, 2010 and our results of
operations for the three and six months ended June 30, 2010 and 2009. You should read the following analysis of our consolidated results of operations and financial condition in
conjunction with the Consolidated Financial Statements and related consolidated Footnotes included elsewhere in this quarterly report on Form 10-Q as well as the Consolidated
Financial Statements and related consolidated Footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on
Form 10-K for the year ended December 31, 2009. You should also read the following analysis in conjunction with the Risk Factors contained in our annual report on
Form 10-K for the year ended December 31, 2009, as supplemented by the risk factors set forth in Part II, Item 1A "Risk Factors" below.

Significant Second Quarter Items



Membership

The following table presents our membership in Medicare Advantage and Part D segments as of June 30, 2010
and 2009.

As of
June 30,Membership by Segment

2010

2009(in thousands)Medicare AdvantagePFFS


202


175Network-based (HMO and PPO)


93


63Total Medicare Advantage


295


238Total Part D


1,898


1,694Total Membership


2,193


1,932


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Table of Contents

Healthcare Reform

In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability
Reconciliation Act legislating
broad-based changes to the U.S. health care system. Provisions of the health reform legislation become effective at various dates over the next several years. The Department of Health and Human
Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and guidance with respect to the
health reform legislation. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance and gradual implementation,
the impact of the health reform legislation is difficult to predict and not yet fully known. However, we will need to dedicate significant resources and expenses to complying with these new rules and
there is a possibility that this new legislation could have a material adverse effect on our business, financial position and results of operations.

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



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

Recent
rules promulgated by CMS include the limitation on the number of plan submissions by Medicare Advantage and Part D sponsors, a push to eliminate plans with few members and
to increase the quality of plans and restrictions on benefit packages, among other items to consider in the 2011 bids submitted in June 2010, and in connection therewith, CMS is reviewing 2011
applications more critically to ascertain plan sponsors are conforming to the new rules. These rules could impact our ability to expand into new regions and offer multiple plans within the same
region; consequently we are focusing our new 2011 Medicare Advantage filings on Network Private Fee for Service plans. For additional information, see Part IIItem 1A Risk
Factors.

33

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Table of Contents

Results of OperationsConsolidated Overview

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

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009(in thousands)

(in thousands)Senior Managed CareMedicare Advantage

$
51,621

$
28,965

$
99,224

$
75,207Medicare Part D


(14,446
)

13,595


(46,433
)

(22,269
)Traditional Insurance


3,857


(10,407
)

(1,842
)

(25,896
)Corporate & Other


(10,014
)

(16,137
)

(21,074
)

(24,347
)Net realized gains (losses) on investments


105


(8,046
)

(178
)

(15,268
)Income (loss) before provision for income taxes


31,123


7,970


29,697


(12,573
)Provision for (benefit from) income taxes


10,114


3,036


7,287


(4,359
)Net income (loss)(1)

$
21,009

$
4,934

$
22,410

$
(8,214
)Earnings (loss) per common share (diluted)

$
0.27

$
0.06

$
0.29

$
(0.10
)


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




Net income for the three months ended June 30, 2010 was $21.0 million, or $0.27 per diluted share, compared to net income
of $4.9 million, or $0.06 per diluted share for the three months ended June 30, 2009. The net income for the second quarter of 2010 includes realized investment gains, net of taxes, of
$0.1 million, or less than $0.01 per diluted share, including a loss of $0.1 million, after tax, related to the recognition of other-than-temporary impairments on
investments. Net income for the second quarter of 2009 includes realized investment losses, net of taxes, of $5.2 million, or $0.06 per diluted share, of which $2.9 million relates to
the recognition of other-than-temporary impairments on investments. Our effective tax rate was 32.5% for the second quarter of 2010, and 38.1% for the second quarter of 2009.
The lower effective tax rate in the second quarter of 2010 was attributable to $1.5 million of non-recurring tax benefits recognized during 2010. These benefits were recognized upon
the completion of examinations by the Internal Revenue Service and primarily are attributable to pre-acquisition tax returns of MemberHealth, Inc.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $51.6 million for the three months ended June 30, 2010, an increase of
$22.7 million compared to the three months ended June 30, 2009. The increase in earnings was driven by a 24% increase in the member months for the three months ended June 30, 2010
compared to the three months ended June 30, 2009 and a 171 basis point decrease in the medical expense ratio due to $16.2 million in

34

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Table of Contents

favorable
development from the prior periods in the quarter ended June 30, 2010, compared with $10.5 million in the same period of 2009. The second quarter of 2009 also included a
$3.5 million restructuring charge related to the in-sourcing of billing and enrollment for our HMO business.

Our
Part D business generated a loss before taxes of $14.4 million for the second quarter of 2010, compared to income before taxes of $13.6 million for the second
quarter of 2009. Approximately $3.4 million of the $28.0 million decrease in segment income was attributable to negative prior period development recorded in the second quarter of 2010,
and the remaining $24.6 million decrease is attributable to the increased seasonal loss and bidding strategy described below in the segment results discussion on Part D, exacerbated by
higher membership.

Income
before taxes for our Traditional Insurance segment increased by $14.3 million compared to the three months ended June 30, 2009. The transaction with Commonwealth in
April 2009, 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 during the prior year
period. Additionally, a $1.2 million restructuring
charge was recorded in the second quarter of 2009 as a result of re-alignment of operations with the lower level of net retained business. Excluding these impacts, the increase to net
income before taxes was primarily caused by a $4.0 million decrease in commissions and general expenses due to a lower level of business in-force and a $2.2 million increase
due to improvement in medical benefit ratios. This improvement in income was offset by a $1.6 million decrease in net investment income caused by lower average yields and a lower average
invested asset base due to the transfer of assets in conjunction with the reinsurance transaction noted above.

The
loss before taxes from our Corporate & Other segment improved by $6.1 million, or 38%, for the second quarter of 2010 compared to the second quarter of 2009. This was
due primarily to a $6.3 million charge recorded in 2009, related to the closing and restructuring of certain career sales offices. In addition, during 2010 we recorded a
$2.0 million benefit related to the true-up of the forfeiture rate estimate on stock option expense, partially offset by a $2.5 million decline in Senior Administrative
Services profitability due to the sale of CHCS.



Net income for the six months ended June 30, 2010 was $22.4 million, or $0.29 per diluted share, compared to a net loss
of $8.2 million, or $0.10 per diluted share for the six months ended June 30, 2009. Net income for the first half of 2010 includes realized investment losses, net of taxes, of
$0.1 million, or less than $0.01 per diluted share, including a loss of $0.2 million, after tax, related to the recognition of other-than-temporary impairments on
investments. The net loss for the first half of 2009 includes realized investment losses, net of taxes, of $9.9 million, or $0.12 per diluted share, relating primarily to the recognition of
other-than-temporary impairments on investments. Our effective tax rate was 24.5% for the first half of 2010, and 34.7% for the first half of 2009. The lower effective tax rate
in the first half of 2010 was attributable to $3.8 million of non-recurring tax benefits recognized during 2010. These benefits were recognized upon the completion of examinations
by the Internal Revenue Service and primarily are attributable to pre-acquisition tax returns of MemberHealth, Inc.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $99.2 million for the six months ended June 30, 2010, an increase of
$24.0 million compared to the six months ended June 30, 2009. The increase in earnings was driven principally by higher members in all products resulting in a 24% increase in member
months for the six months ended June 30, 2010 compared to the six months ended June 30, 2009, as well as $22.8 million of favorable development from prior periods in the six
months ended June 30, 2010, compared with $19.4 million in the same period last year. 2009 also included a $3.5 million restructuring charge related to the in-sourcing of billing
and enrollment for our HMO business.

Our
Part D business generated a loss before taxes of $46.4 million for the six months ended June 30, 2010, compared to a loss before taxes of $22.3 million
for the six months ended June 30, 2009.

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Approximately
$8.1 million of the $24.1 million decrease in segment income was attributable to negative prior year development which totaled $9.5 million and $1.4 million
during the six months ended June 30, 2010 and 2009, respectively. The remaining $16.0 million decrease in segment income is attributable to the increased seasonal loss and bidding
strategy described below in the segment results discussion on Part D, exacerbated by higher membership.

Loss
before taxes for our Traditional Insurance segment for the six months ended June 30, 2010 decreased by $24.1 million compared to the six months ended June 30,
2009. The transaction with Commonwealth in April 2009, 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 during the prior year period. Additionally, a $1.2 million restructuring charge was recorded in the second quarter of 2009 as a result of re-alignment of
operations with the lower level of net retained business. Excluding these impacts, the decrease to the loss before taxes was primarily caused by a $13.2 million decrease in commissions and
general expenses due to a lower level of business in-force and improvements in the underwriting gain due to lower policyholder benefit ratios.

The
loss before taxes from our Corporate & Other segment improved by $3.2 million, or 13%, for the six months ended June 30, 2010 compared to the same period of
2009. This was due primarily to a $6.3 million charge to income before taxes in 2009, related to the closing and restructuring of certain career sales offices. In addition, during 2010 we
recorded a $2.0 million benefit related to the true-up of the forfeiture rate estimate on stock option expense, partially offset by a $2.5 million decline in Senior
Administrative Services profitability due to the sale of CHCS effective April 1, 2010 as well as $2.1 million lower profitability of CHCS prior to its sale, due to anticipated reductions
in service fee revenues, along with a corresponding decrease in general expenses.

Segment ResultsSenior Managed CareMedicare Advantage

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009(in thousands)

(in thousands)Net premiums

$
789,809

$
653,986

$
1,567,640

$
1,294,871Net investment and other income


6,534


7,236


13,749


12,597Total revenue


796,343


661,222


1,581,389


1,307,468Medical expenses


652,001


551,116


1,295,370


1,068,887Amortization of intangible assets


1,100


1,146


2,240


2,292Restructuring costs





3,500





3,500Commissions and general expenses


91,621


76,495


184,555


157,582Total benefits, claims and expenses


744,722


632,257


1,482,165


1,232,261Segment income before taxes

$
51,621

$
28,965

$
99,224

$
75,207


Our
Senior Managed CareMedicare Advantage segment includes the operations of our Medicare coordinated care Plans including PPOs and HMOs as well as our PFFS business, which
offers coverage to Medicare beneficiaries in 45 states. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas and the area surrounding Dallas/Ft. Worth, 15 counties
in Oklahoma and 4 counties in Wisconsin. In January 2010, we expanded our PPO products to 114 counties in 17 states. As a result of the passage of the Medicare Improvements for
Patients and Providers Act of 2008, known as MIPPA, the PFFS product will no longer be available as of January 1, 2011, except in areas that have met approved CMS network access
requirements or in certain designated rural areas. We have developed products meeting CMS network access requirements in selected core markets to enable the retention of our PFFS membership in these
areas. 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 $51.6 million for the three
months ended June 30, 2010, an increase of $22.7 million compared to the three months ended June 30, 2009. The increase in earnings was driven by a 24% increase in the member
months for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and a 171 basis point decrease in the medical expense ratio due to
$16.2 million in favorable development from the prior periods in the quarter ended June 30, 2010, compared with $10.5 million in the same period of 2009, and the incurral of
$3.5 million in restructuring costs in 2009.

Revenues.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $135.8 million compared to the
three
months ended June 30, 2009, primarily due to an increase in the amount of premium resulting from growth in membership in all products.

Medical expenses.Medical expenses increased by $100.9 million compared to the second quarter of 2009, consistent with the higher
level of net
premiums. The medical expense ratio decreased to 82.6% for the second quarter of 2010 from 84.3% for the same period in 2009. During the second quarter of 2010, there was a $12.0 million net
favorable items related to prior periods medical expense compared to $4.9 million of favorable development in the second quarter 2009. The 2010 favorable development included
$7.5 million related to prior years and $4.5 million related to the prior quarter of 2010. Adjusting for the prior period items, the benefit ratio for the second quarter of 2010
was 84.5%.

Commissions and general expenses.Commissions and general expenses for the three months ended June 30, 2010 increased
$15.1 million
compared to the three months ended June 30, 2009, primarily as the result of increased level of membership. The ratio of commissions and general expenses to net premiums was relatively stable
at 11.6% in the second quarter of 2010 compared to 11.7% in second quarter of 2009.

The
second quarter of 2009 also included a $3.5 million restructuring charge related to the in-sourcing of billing and enrollment for our HMO business.



Our Senior Managed CareMedicare Advantage segment generated income before taxes of $99.2 million for the six months
ended June 30, 2010, an increase of $24.0 million compared to the six months ended June 30, 2009. The increase in earnings was driven principally by higher members in all products
resulting in a 24% increase in member months for the six months ended June 30, 2010 compared to the six months ended June 30, 2009, as well as $22.8 million of favorable
development from prior periods in the six months ended June 30, 2010, compared with $19.4 million in the same period last year. 2009 also included a $3.5 million restructuring
charge related to the in-sourcing of billing and enrollment for our HMO business.

Revenues.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $272.8 million compared to the six
months ended June 30, 2009, primarily due to the higher member months in all plans. In addition, our ongoing chart review process resulted in a $13.4 million favorable premium adjustment
in the first quarter 2010 related to 2009 risk scores compared to an $8.0 million favorable adjustment of 2008 risk scores recorded during the first quarter 2009.

Medical Expenses.Medical expenses increased by $226.5 million compared to the six months ended June 30, 2009, consistent
with the
higher level of net premium. The medical expense ratio increased to 82.6% for the six months ended June 30, 2010 from 82.5% for the same period in 2009. For the six months ended June 30,
2010, there was $7.7 million of net favorable items related to prior years medical expenses compared to $12.6 million of favorable development for the six months ended June 30,
2009. Adjusting for the prior year items, the benefit ratio for the first six months of 2010 was 83.9%.

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Commissions and general expenses.Commissions and general expenses for the six months ended June 30, 2010 increased by
$26.9 million
compared to the six months ended June 30, 2009 primarily related to the growth in member months and higher expenses to support the continued investment in the development of provider networks
for our expansion in PPO markets. However, the ratio of commissions and general expenses to premiums decreased to 11.8% for the six months ended June 30, 2010 from 12.2% in 2009.

2009
also included a $3.5 million restructuring charge related to the in-sourcing of billing and enrollment for our HMO business.

Segment ResultsMedicare Part D

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009(in thousands)

(in thousands)Net premium, excluding risk corridor

$
555,358

$
511,760

$
1,094,445

$
1,008,562Risk corridor adjustment/government reinsurance


26,427


(6,046
)

130,450


111,683Net premiums


581,785


505,714


1,224,895


1,120,245Other Part D incomePDMS





8





105Total Part D revenue


581,785


505,722


1,224,895


1,120,350Net investment and other income


566


944


1,675


2,055Total revenue


582,351


506,666


1,226,570


1,122,405Pharmacy benefits


548,799


445,208


1,177,798


1,038,993Amortization of intangibles


4,012


4,011


8,023


8,022Commissions and general expenses


43,986


43,852


87,182


97,659Total benefits, claims and expenses


596,797


493,071


1,273,003


1,144,674Segment (loss) income before taxes

$
(14,446
)
$
13,595

$
(46,433
)
$
(22,269
)


Reported
results for our Medicare Part D business ("Part D") are subject to anticipated seasonality during a given calendar year. This is due to the nature of the standard
benefit design under Medicare
Part D. Consequently, this business generally incurs higher claims experience in the first two quarters of the year while beneficiaries are in the deductible and initial coverage phases of the
benefit design. As the beneficiary reaches the coverage gap and catastrophic phases of the benefit design, the Plan experiences lower claims liability which is generally in the last two quarters of
the year. As a result, we generally anticipate a pattern of net losses from our Part D segment during the early part of the year, with a break-even point during the third quarter
and most of the segment's net income earned during the fourth quarter resulting in a pattern of increasing reported net income attributable to the Part D business.

As
a result of changes made by the federal government to the standard benefit design in 2010 and due to the way we bid our business for the 2010 plan year, we expect to experience a
greater degree of seasonality in our Part D business throughout 2010 as compared to 2009, with higher losses expected in the first half of the year and higher profitability expected for the
second half of the year. For a discussion of the accounting for Part D see Note 3 of the Notes to the Consolidated Financial Statements in our annual report on
Form 10-K for the year ended December 31, 2009.



Our Part D business generated a loss before taxes of $14.4 million for the second quarter of 2010, compared to income
before taxes of $13.6 million for the second quarter of 2009. Approximately

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$3.4 million
of the $28.0 million decrease in segment income was attributable to negative prior period development recorded in the second quarter of 2010, and the remaining
$24.6 million decrease is attributable to the increased seasonal loss and bidding strategy described above, exacerbated by higher membership.

Net Premiums.Net premiums, excluding risk corridor, for the second quarter of 2010 increased by $43.6 million, or 8.5%, versus the
second
quarter of 2009. The increase in net premiums, excluding risk corridor, was primarily attributable to growth in membership by 204,000 members, and was partially offset by decreases in member premium
rates and risk-adjusted direct subsidy rates paid by CMS. Risk-adjusted direct subsidy rates decreased as a result of an improvement in our members' health status in 2010, as determined by
CMS. Risk-adjusted rates are determined by CMS based upon the member's health status and are described in further detail in Note 3 of the Notes to the Consolidated Financial
Statements in our annual report on Form 10-K for the year ended December 31, 2009. In addition, direct and assumed premiums for the second quarters of 2010 and 2009 included
risk adjustment revenue totaling $19.8 million and $16.7 million for our 2010 and 2009 membership, respectively. The decrease in member premium rates was attributable to the bids
submitted for the 2010 Plan year that contained lower rates, which contributed to the growth in membership. In addition, a larger portion of our 2010 membership enrolled in standard plans which have
lower member premium rates than enhanced plans. The $32.5 million increase in risk corridor adjustment for the second quarter of 2010 versus the comparable period in 2009 was expected with the
increase in the ratio of pharmacy benefits to net premiums.

Pharmacy Benefits.Pharmacy benefits for the second quarter of 2010, increased by $103.6 million, or 23.3%, compared to the second
quarter of
2009, and the ratio of pharmacy benefits to net premium was 94.3% and 88.0% for the second quarters of 2010 and 2009, respectively. Pharmacy benefits increased as a percentage of net premiums due to
the combination of lower member premium and direct subsidy rates (previously described), higher drug costs and a shift in the seasonal pattern of the costs incurred by the Plan due to benefit design
changes in 2010 from 2009. In addition, the second quarter of 2010 included $9.9 million of net negative development related to prior periods pharmacy benefits. Higher drug costs were
attributable to price increases imposed by pharmaceutical manufacturers which are customary and were consistent with historical experience. These increases were partially offset by a lower utilization
of drugs by our members, which is consistent with the aforementioned improvement in our members' health status.

Commissions and general expenses.Commissions and general expenses for the six months ended June 30, 2010 amounted to
$44.0 million, or
7.9% of net premium, excluding risk corridor, compared to $43.9 million, or 8.6%, in the comparable period in 2009. This decrease in the ratio of commissions and general expenses to net
premium, excluding risk corridor was attributable to continued operating efficiencies and increased scale.



Our Part D business generated a loss before taxes of $46.4 million for the six months ended June 30, 2010 compared
to a loss before taxes of $22.3 million, for the six months ended June 30, 2009. Approximately $8.1 million of the $24.1 million decrease in segment income was attributable
to negative prior year development which totaled $9.5 million and $1.4 million in the six months ended June 30, 2010 and 2009, respectively. The remaining $16.0 million
decrease in segment income is attributable to the increased seasonal loss and bidding strategy described above, exacerbated by higher membership.

Net Premiums.Net premiums, excluding risk corridor, for the six months ended June 30, 2010, increased by $85.9 million, or
8.5%,
versus the six months ended June 30, 2009. The increase in net premiums, excluding risk corridor, was primarily attributable to growth in membership by 204,000

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members,
and was partially offset by decreases in member premium rates and risk-adjusted direct subsidy rates paid by CMS. Risk-adjusted direct subsidy rates decreased as a result of an
improvement in our members' health status in 2010, as determined by CMS. Risk-adjusted rates are determined by CMS based upon the member's health status and are described in further detail
in Note 3 of the Notes to the Consolidated Financial Statements in our annual report on Form 10-K. In addition, direct and assumed premiums for 2010 and 2009 included risk
adjustment revenue totaling $19.8 million and $16.7 million for our 2010 and 2009 membership, respectively. The decrease in member premium rates was attributable to the bids submitted
for the 2010 Plan year that contained lower rates in 2010, which contributed to the growth in membership. In addition, a larger portion of our 2010 membership enrolled in standard plans which have
lower member premium rates than enhanced plans. The $18.8 million increase in risk corridor adjustment for the six months ended June 30, 2010 versus the comparable period in 2009, was
expected with the increase in the ratio of pharmacy benefits to net premiums.

Pharmacy Benefits.Pharmacy benefits for the six months ended June 30, 2010, increased by $138.8 million, or 13.4%, compared
to the six
months ended June 30, 2009, and the ratio of pharmacy benefits to net premium was 96.2% and 92.7% for the six months ended June 30, 2010 and 2009, respectively. Pharmacy benefits
increased as a percentage of net premiums due to the combination of lower member premium and direct subsidy rates (previously described), higher drug costs and a shift in the seasonal pattern of the
costs incurred by the Plan due to benefit design changes in 2010 from 2009. In addition, the six months ended June 30, 2010 included $13.1 million of net negative development related to
prior period pharmacy benefits compared to $1.4 million of net negative development during the six months ended June 30, 2009. Higher drug costs were attributable to price increases
imposed by pharmaceutical manufacturers which are customary and were consistent with historical experience. These increases were partially offset by a lower utilization of drugs by our members, which
is consistent with the aforementioned improvement in our members' health status.

Commissions and general expenses.Commissions and general expenses for the six months ended June 30, 2010 decreased by
$10.5 million,
or 10.7%, versus the comparable period in 2009. This decrease was attributable to our continuing efforts to reduce general expenses, as well as the restructuring of the Part D call center and
other member services which were completed during 2009. The ratio of commissions and general expenses to net premium, excluding risk corridor decreased to 8.0% for the six months ended June 30,
2010 from 9.7% in the comparable period of 2009.

Segment ResultsTraditional Insurance

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009(in thousands)

(in thousands)Net premiums

$
73,016

$
76,441

$
149,521

$
170,170Net investment income


4,033


5,652


7,277


14,953Other income


319


450


860


1,523Total revenue


77,368


82,543


157,658


186,646Policyholder benefits


53,626


59,275


116,031


141,323Change in deferred acquisition costs


130


884


3,115


8,583Amortization of intangible assets


584


796


1,299


1,480Loss on reinsuance and other related costs





7,624





7,624Restructuring costs





1,228





1,228Commissions and general expenses, net of allowances


19,171


23,143


39,055


52,304Total benefits, claims and expenses


73,511


92,950


159,500


212,542Segment income (loss) before taxes

$
3,857

$
(10,407
)
$
(1,842
)
$
(25,896
)


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Income before taxes for our Traditional Insurance segment increased by $14.3 million compared to the three months ended
June 30, 2009. The transaction with Commonwealth in April 2009, 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 during the prior year period. Additionally, a $1.2 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 increase to net income before taxes was primarily caused by a $4.0 million decrease in commissions and general expenses due to
a lower level of business in-force and a $2.2 million increase due to improvement in medical benefit ratios. This improvement in income was offset by a $1.6 million decrease
in net investment income caused by lower average yields and a lower average invested asset base due to the transfer of assets in conjunction with the reinsurance transaction noted above.

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

Premium

Three months ended June 30,2010

2009Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
73,481

$
(17,902
)
$
55,579

$
80,700

$
(20,782
)
$
59,918Specialty health


16,726


(2,677
)

14,049


18,357


(2,872
)

15,485Life insurance and annuity


19,050


(15,662
)

3,388


19,080


(18,042
)

1,038Total premium

$
109,257

$
(36,241
)
$
73,016

$
118,137

$
(41,696
)
$
76,441


Revenues.Net premium declined by $3.4 million or 4.5% from the second quarter of 2009. This is primarily the result of the
continued effect
of lapsation on our Medicare supplement and specialty health in-force business.

Policyholder benefits.Policyholder benefits declined by $5.6 million, or 9.5%, compared to the second quarter of 2009. This
decline was
principally due to the overall decline of insurance in-force in the senior market and specialty health lines of business, as well as a decrease in the policyholder benefit ratios in the
second quarter of 2010 from the same period last year. For the three months ended June 30, 2010, the policyholder benefit ratio for senior market was 71.5%, compared with 74.2% for the same
period last year, and 85.5% for specialty health, compared with 99.5% for the same period last year. The improvements are primarily the result of more aggressive rate management in the senior market
lines combined with a higher frequency of closed long term care and disability income claims in specialty health.

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

Three months ended
June 30,2010

2009(in thousands)Commissions

$
11,803

$
13,461Other operating costs


12,374


17,824Reinsurance allowances


(5,006
)

(8,142
)Commissions and general expenses, net of allowances

$
19,171

$
23,143


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Commissions
and general expenses, net of allowances, decreased by $4.0 million compared to the second quarter of 2009. The lower level of commissions is associated with the
continued aging of our in-force renewal premium which pays lower commissions as the duration of the policies increase. Other operating costs decreased $5.5 million for the quarter
ended June 30, 2010, compared to the second quarter of 2009. This is primarily due to savings associated with the outsourcing of certain administrative services previously provided by our CHCS
subsidiary that was sold during the second quarter of 2010 as well as cost reductions implemented to align with the lower levels of business in-force. Allowances received from reinsurers
decreased $3.1 million for the second quarter of 2010 from the second quarter of 2009. This is primarily due to the fact that, as of the fourth quarter of 2009, Commonwealth began performing
the administration for the majority of the life insurance and annuity business. We therefore no longer receive the related expense allowances from third party reinsurers and allowances paid by
Commonwealth to reimburse costs incurred from the effective date of the transaction until the administration of the blocks was transferred to them.



Loss before taxes for our Traditional Insurance segment for the six months ended June 30, 2010 decreased by $24.1 million
compared to the six months ended June 30, 2009. The transaction with Commonwealth in April 2009, 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 during the prior year period. Additionally, a $1.2 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 the loss before taxes was primarily caused by a $13.2 million decrease in commissions and
general expenses due to a lower level of business in-force and improvements in the underwriting gain due to lower policyholder benefit ratios.

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

Premium

Six months ended June 30,2010

2009Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
152,161

$
(37,387
)
$
114,774

$
167,874

$
(43,754
)
$
124,120Specialty health


33,852


(5,202
)

28,650


37,227


(5,692
)

31,535Life insurance and annuity


35,208


(29,111
)

6,097


38,415


(23,900
)

14,515Total premium

$
221,221

$
(71,700
)
$
149,521

$
243,516

$
(73,346
)
$
170,170


Revenues.Net premium declined by $20.6 million, or 12.1%. The continued effect of lapsation on our senior market health and
specialty health
in-force business resulted in a decrease of $12.2 million. Additionally, as a result of the reinsurance transaction with Commonwealth, life insurance and annuity ceded premium
increased by $5.2 million over the six months ended June 30, 2009.

Policyholder Benefits.Policyholder benefits incurred declined by $25.3 million, or 17.9%, compared to the six months ended
June 30,
2009. This decline was principally due to the overall decline of insurance in-force in the senior market and specialty health lines of business, as well as a decrease in the policyholder
benefit ratios for the six months ended June 30, 2010 from the same period last year. The policyholder benefit ratio for senior market health was 74.6%, compared with 76.6% for the same period
last year, and 93.7% for specialty health, compared with 99.0% for the same period last year. Additionally, the reinsurance transaction with Commonwealth in April 2009 resulted in a decrease in life
insurance and annuity policyholder benefits retained during the six months ended June 30, 2010 compared to the same period last year. The change in deferred acquisition costs

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decreased
$5.5 million or 63.7%. This was primarily caused by the elimination of the deferred acquisition costs and the related amortization on the life insurance and annuity business reinsured
to Commonwealth.

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

Six months ended
June 30,2010

2009(in thousands)Commissions

$
23,319

$
28,772Other operating costs


26,259


38,340Reinsurance allowances


(10,523
)

(14,808
)Commissions and general expenses, net of allowances

$
39,055

$
52,304


Commissions
and general expenses, net of allowances, decreased by $13.2 million compared to the six months ended June 30, 2009. The lower level of commissions is associated
with the continued aging of our in-force renewal premium which pays lower commissions as the duration of the policies increase. Other operating costs decreased $12.1 million for the
six months ended June 30, 2010, compared to the six months ended June 30, 2009. This is primarily due to cost reductions implemented to align with the lower levels of business
in-force as well as savings associated with the outsourcing of certain administrative services previously provided by our CHCS subsidiary that was sold during the second quarter of 2010.
Allowances received from reinsurers decreased $4.3 million for the second quarter of 2010 from the second quarter of 2009. This is primarily due to the fact that, as of the fourth quarter of
2009, Commonwealth began performing the administration for the majority of the life insurance and annuity business. We therefore no longer receive the related expense allowances from third party
reinsurers and allowances paid by Commonwealth to reimburse costs incurred from the effective date of the transaction until the administration of the blocks was transferred to them.

Segment ResultsCorporate & Other

The following table presents the primary components comprising the loss before taxes for the segment:

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009(in thousands)

(in thousands)Interest expense

$
5,076

$
4,805

$
10,089

$
10,064Amortization of capitalized loan origination fees


415


262


829


524Stock-based compensation expense


554


2,450


2,921


4,214Other parent company expense, net of revenue


3,710


10,905


8,313


15,255Net (gain) lossSenior Administrative Services


259


(2,285
)

(1,078
)

(5,710
)Segment loss before taxes

$
10,014

$
16,137

$
21,074

$
24,347


The
sale of CHCS during the second quarter of 2010 (for further discussion, see Note 14 of Notes to Consolidated Financial Statements), eliminated substantially all of the
business operations of our former Senior Administrative Services segment. As a result, beginning with this quarterly report on Form 10-Q, we will report current and historical
results of the former Senior Administrative Services and Corporate segments in one segment called Corporate & Other.

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The loss before taxes from our Corporate & Other segment improved by $6.1 million, or 38%, for the second quarter of 2010
compared to the second quarter of 2009. This was due primarily to a $6.3 million charge recorded in 2009, related to the closing and restructuring of certain career sales offices. In addition,
during 2010 we recorded a $2.0 million benefit related to the true-up of the forfeiture rate estimate on stock option expense, partially offset by a $2.5 million decline in
Senior Administrative Services profitability due to the sale of CHCS.

The
increase in interest expense of $0.3 million is due primarily to a weighted average increase in the interest rates charged on the debt, as compared to the second quarter of
2010. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

Amortization
of capitalized loan origination fees was $0.1 million higher in the second quarter of 2010, compared with the same period in 2009 due to additional amortization
related to the costs associated with the amendment of our credit facility in November 2009.

The
$1.9 million decrease in stock-based compensation expense resulted primarily from a $2.0 million true-up of our forfeiture rate estimate related to options
that terminate non-vested, which was completed in the second quarter of 2010.

Other
parent company expenses, net of revenues, decreased $7.1 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-wide cost reduction effort, we recorded a $6.3 million charge to income before taxes. The remaining variance was
primarily due to lower legal and outside service costs in the second quarter of 2010 compared with the same period in 2009.

The
net gain on Senior Administrative Services declined by $2.5 million as the result of the sale of CHCS, which was effective April 1, 2010.



The loss before taxes from our Corporate & Other segment improved by $3.2 million, or 13%, for the six months ended
June 30, 2010 compared to the same period of 2009. This was due primarily to a $6.3 million charge to income before taxes in 2009, related to the closing and restructuring of certain
career sales offices. In addition, during 2010 we recorded a $2.0 million benefit related to the true-up of the forfeiture rate estimate on stock option expense, partially offset by
a $2.5 million decline in Senior Administrative Services profitability due to the sale of CHCS effective April 1, 2010 as well as $2.1 million lower profitability of CHCS prior to
its sale, due to anticipated reductions in service fee revenues, and a corresponding decrease in general expenses.

Amortization
of capitalized loan origination fees was $0.3 million higher in 2010, compared with the same period in 2009 due to additional amortization related to the costs
associated with the amendment of our credit facility in November 2009.

The
$1.3 million decrease in stock-based compensation expense resulted primarily from a $2.0 million true-up of our forfeiture rate estimate related to options
that terminate non-vested, which was completed in the second quarter of 2010. This was partially offset by an increase in stock compensation expense related to new awards made in the first
quarters of 2009 and 2010.

Other
parent company expenses, net of revenue, decreased $6.9 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-wide cost reduction effort, we recorded a $6.3 million charge to income before taxes. The remaining variance was
primarily due to lower legal and outside service costs in 2010 compared with the same period in 2009.

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The
net gain on Senior Administrative Services declined by $4.6 million, $2.5 million was the result of the sale of CHCS which was effective April 1, 2010. The
remaining $2.1 million variance was due to lower profitability of CHCS prior to its sale, due to anticipated reductions in service fee revenues, along with a corresponding decrease in general
expenses.

Prior
to the sale, CHCS' revenue declined by $2.9 million, or 24%, during the first quarter of 2010 compared to the first quarter of 2009. Affiliated service fee revenue decreased
by $2.7 million primarily as a result of a reduction in fee levels and lower policies in-force for our affiliated Medicare supplement business as well as a reduction in service
levels on our affiliated life insurance business as a result of the reinsurance of substantially all of this business to Commonwealth in April 2009. Unaffiliated service fee revenue remained
relatively flat in the first quarter of 2010 compared to the same period of 2009. General expenses for the segment decreased by $0.8 million, or 10%, primarily due to the decline in the
business discussed above.

Liquidity and Capital Resources

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

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

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



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 primary uses of liquidity 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 subsidiariesSurplus Note, Dividends and Capital Contributions.We require cash at our insurance
subsidiaries and HMO subsidiaries to meet our policy related obligations and to pay operating expenses, including the cost of administration of the policies, and to maintain adequate capital levels.
Excess capital can be used to make dividend payments to our insurance subsidiaries holding company, UAC Holding, Inc., subject to certain restrictions, and from there to our parent company.

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 subsidiaries are also required by regulatory authorities to maintain minimum amounts of
capital and surplus and each currently exceeds this minimum requirement.

At
June 30, 2010, we held cash and cash equivalents totaling $589 million and fixed maturity securities that could readily be converted to cash with carrying values of
$1,096 million at our insurance

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companies
and HMO subsidiaries. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.

In
2007, our wholly-owned subsidiary, The Pyramid Life Insurance Company issued $60.0 million of surplus notes payable to our parent company, which bear 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. At December 31, 2009, Pyramid's risk-based capital ratio was below 450%, and therefore no payments of principal or interest has been made or accrued to
date.

Capital
contributions to and dividends from for our Insurance companies are made through our unregulated holding company, UAC Holding, Inc. UACH did not make capital contributions
to the insurance subsidiaries during the first half of 2010. In May 2010, our wholly-owned subsidiary, Pennsylvania Life Insurance Company declared and paid a dividend of $119 million and our
wholly-owned subsidiary, American Progressive Life & Health Insurance Company of New York declared and paid a dividend of $12 million, both to UACH.

Capital
contributions to and dividends from for our HMO subsidiaries are made through our managed care holding company, Heritage Health Systems, Inc. During the first half of
2010, HHSI made a capital contribution of $25,000 to SelectCare of Oklahoma. No dividends were declared nor paid to HHSI from its subsidiaries during the first six months of 2010.

Debt principal and interestCredit Facility, Swaps and Other Long Term Debt.We currently have a credit facility consisting of a
$350 million term loan and a $150 million revolver (the "2007 Credit Facility"). This Credit Facility has customary covenants and requirements including a leverage ratio test, minimum
risk based capital requirements for our insurance companies and, under certain conditions, the ability to pose limitations on certain investments, dispositions and our ability to make restricted
payments. Other than the limitations on restricted payments (see the ensuing paragraph), as of June 30, 2010, we were in compliance with all
covenants in the Credit Agreement.

In
November 2009, we amended the 2007 Credit Facility (the "November 2009 Amendment") which provided us with the ability to make $75 million of restricted payments, in addition to
the $125 million provided for in the original agreement for a total of $200 million, in exchange for prepayments of Term Loan principal and increases in borrowing spreads and fees. In
July 2010, we further amended the 2007
Credit Facility (the "July 2010 Amendment") which provided us with the ability to make an additional $100 million of restricted payments, for a total of $300 million, in exchange for
prepayments of Term Loan principal and increases in borrowing spreads. As of June 30, 2010, $312.1 million was outstanding under the term loan agreement and the weighted average interest
rate on the term loan portion of the credit facility was 1.32%. $250 million of this $312.1 million term loan outstanding has been swapped from a LIBOR-based floating rate to an average
fixed rate of 4.14% (see Note 11Derivative InstrumentsCash Flow Hedgesand the ensuing paragraph), resulting in a total blended
interest rate of 4.38% on the $312.1 million as of June 30, 2010. We pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 25 basis points. We had not
drawn on the revolving loan facility as of the date of this report. We made regularly scheduled principal payments totaling $0.8 million, and interest payments totaling $2.0 million
during the six months ended June 30, 2010.

On
December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in
fixed rate of 4.14% and receive a floating rate based on LIBOR. In the first six months of 2010, we paid a net amount of $4.9 million in association with these swap agreements.

In
2003 and 2007, we formed statutory business trusts, in order to issue a combined $125.0 million in thirty year trust preferred securities, with $110 million currently
outstanding. $60 million of these securities have floating interest rates based on LIBOR and are currently at an average rate of 4.46%.

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The
remaining $50 million is fixed at 7.68% until March 2012. We made interest payments on the trust preferred securities totaling $3.2 million during the six months ended
June 30, 2010.

Investments

We invest primarily in fixed maturity securities of the U.S. Government and its agencies, mortgage-backed securities and in corporate
fixed maturity securities with investment grade ratings of BBB-or higher by S&P or Baa3 or higher by Moody's Investor Service. As of June 30, 2010, approximately 99% of our fixed
maturity investments had investment grade ratings from S&P or Moody's.

We
have recently begun investing a portion of our cash in medium duration securities and in non-Government short term investments. As a result, as of June 30, 2010,
approximately 46% of our portfolio is in cash equivalents, of which, approximately 50% is invested in U.S.
government short term securities. In the aggregate, approximately 52% of our cash and invested assets are in securities backed by the U.S. government or its agencies.

The
net yields on our cash and invested assets decreased to 2.3% for the six months ended June 30, 2010, from 4.1% for the six months ended June 30, 2009. The overall drop
in yield is primarily due to a drop in the yield on our fixed maturity portfolio after our de-risking efforts that commenced in the second quarter of 2009 and ongoing prepayments on our
higher yielding RMBS portfolio due to the low interest rate environment, coupled with a continued drop in yield on our short-term portfolio.

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

Critical Accounting Policies

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



The following table presents the components of the change in our liability for policy and contract claimshealth for the
six months ended June 30, 2010:

June 30,
2010(in thousands)Balance at beginning of year

$
380,519Less reinsurance recoverable


(17,923
)Net balance at beginning of year


362,596Incurred related to:Current year


2,582,235Prior year development


5,333Total incurred


2,587,568Paid related to:Current year


2,204,443Prior year


305,109Total paid


2,509,552Net balance at end of period


440,612Plus reinsurance recoverable


20,804Balance at end of period

$
461,416


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Policy and contract claimshealth increased by $80.9 million at June 30, 2010 from December 31, 2009. This increase was primarily
attributable to timing with regards to the payment of claims and seasonality of the Part D business. Due to the nature of the plan design, the Part D business generally incurs higher
claims experience in the first two quarters of the year while beneficiaries are in the deductible and initial coverage phases of the benefit design. As the beneficiary reaches the coverage gap and
catastrophic phases of the benefit design, the Plan experiences lower claims liability which is generally in the last two quarters of the year. Growth in our Medicare Advantage membership was another
contributing factor.

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

During
the six months ended June 30, 2010, claim reserves settled for $5.3 million more than estimated at December 31, 2009. Prior period development represents 0.1%
of the incurred claims recorded in 2009.

Sensitivity Analysis

The following table illustrates the sensitivity of our accident and health IBNR payable at June 30, 2010 to identified
reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health care cost trend
rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):

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

Increase
(Decrease) in
Net Health
IBNR

(Decrease)
Increase
in Factor

(Decrease)
Increase in
Net Health
IBNR($ in thousands)-3%

$
1,205


-3%

$
(14,464
)-2%

$
797


-2%

$
(9,649
)-1%

$
388


-1%

$
(4,835
)1%

$
(428
)

1%

$
4,7942%

$
(836
)

2%

$
9,6093%

$
(1,244
)

3%

$
14,424


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


Effects of Recently Issued and Pending Accounting Pronouncements

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

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ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Investment Interest Rate Sensitivity

Our profitability could be affected if we were required to liquidate fixed income securities during periods of rising and/or volatile
interest rates. 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 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. In periods of declining interest rates, individuals may refinance higher rate mortgages to take
advantage of the lower rates then available. We monitor and adjust our investment portfolio mix to mitigate this risk.

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

The
sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100
and 200 basis points from their levels as of June 30, 2010, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest
rates.

Effect of Change in Market Interest Rates on Fair Value
of Fixed Income Portfolio as of June 30, 2010June 30, 2010200 Basis
Point Decrease

100 Basis
Point Decrease

100 Basis
Point Increase

200 Basis
Point IncreaseFair Value of
Fixed Income Portfolio(in millions)$1,097.4

$31.6

$21.0

$(29.1)

$(60.7)


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 June 30, 2010, we have fixed the rate on a total of $300 million of our debt, including $250 million of our loan payable and
$50 million of our trust preferred securities.

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

The
sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the six months
ended June 30, 2010,

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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 six months ended June 30, 2010Weighted
Average
Balance
OutstandingDescription of Floating Rate Debt

Weighted
Average
Interest Rate

200 Basis
Point
Decrease(1)

100 Basis
Point
Decrease(1)

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)Loan payable


1.26%

$
63.3

$
0.1

$
0.1

$
(0.3
)
$
(0.6
)Other long tern debt


4.35%

$
60.0


0.1


0.1


(0.3
)

(0.6
)Total







$
0.2

$
0.2

$
(0.6
)
$
(1.2
)


(1)During
the first half of 2010, the LIBOR rate on our loan payable and our other long term debt has increased to approximately 33 basis points as of
June 30, 2010. As a result, for the purposes of this illustration, decreases in monthly rates over this period have been limited to the year to date average of 26 basis points on our loan
payable and 29 basis points on our other long term debt.


As
noted above, we have fixed the interest rate on $300 million of our $422 million of total debt outstanding, leaving $122 million of the debt exposed to rising
interest rates, as of June 30, 2010. We had approximately $827 million of cash and cash equivalents as of June 30, 2010. We anticipate that any increase or decrease in the
interest cost of our debt as a result of an increase in interest rates will be mitigated by an increase or decrease in the net investment income from our cash and cash equivalents.

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

ITEM 4CONTROLS AND PROCEDURES



We maintain disclosure controls and procedures that are designed to ensure that we record, process, summarize and report the
information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 within the time periods specified in the SEC's rules and forms, and that we
accumulate this information and communicate it to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.



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

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potential
future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures.



We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010, at a reasonable assurance level, to timely alert management to
material information required to be included in our periodic filings with the Securities and Exchange Commission.



There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II



ITEM 1LEGAL PROCEEDINGS

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

ITEM 1ARISK FACTORS

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

There
have been no material changes in our risk factors from those set forth in our annual report on Form 10-K for the year ended December 31, 2009, except as
set forth below:

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

In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability
Reconciliation Act legislating broad-based changes to the U.S. health care system. Provisions of the health reform legislation become effective at various dates over the next several years. The
Department of Health and Human Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and
guidance with respect to the health reform legislation. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance
and gradual implementation, the impact of the health reform legislation is difficult to predict and not yet fully known. However, we will need to dedicate significant resources and expense to
complying with these new rules and there is a possibility that this new legislation could have a material adverse effect on our business, financial position and results of operations.

Laws
and regulations governing the Medicare, Medicaid and other state and federal healthcare programs are complex and subject to significant interpretation. We are subject to various
governmental reviews, audits and investigations to verify our compliance with our contracts and applicable laws and regulations. As part of the healthcare reform legislations CMS has been exercising
increased oversight and regulatory authority over our Medicare businesses. Compliance with such contracts, laws and regulations is subject to CMS audit, other government review and significant
interpretation and there can be no assurance that we will be found to be in compliance with all such contracts, laws and regulations. Failure to be in such compliance can subject us to significant
regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other state and federal healthcare programs.

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



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Gradual closing of the Part D donut holeIn 2010, a rebate of $250 will be provided by CMS for beneficiaries reaching the "coverage gap"
(i.e., the dollar threshold at which an individual has to pay full price for his or her medications). Then, on a gradual basis, the coverage gap is closed by 2020, with beneficiaries retaining
a 25% co-pay. In addition, there is a 50% discount on brand-name drugs. While this change ultimately results in increased insurance coverage, such improved benefits could
result in changes in member behavior with respect to drug utilization. Such actions could also impact the cost structure of our Part D programs.

Reduced Medicare Advantage reimbursement ratesBeginning in 2012, the Medicare Advantage "benchmark" rates transition to target Medicare
fee-for-service cost benchmarks of 95%; 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period will be 3, 5 or
7 years depending upon the applicable county in which services are provided. The counties are divided into quartiles based on each county's fee-for-service Medicare
costs. For counties in the highest cost quartile, the Medicare Advantage benchmark rate will equal 95% of the calculated Medicare fee-for-service costs. We estimate that
approximately 36% of our current membership resides in the highest cost quartile counties, with 31% having a 7-year transition period. Under the new law, the premiums for such members will
be transitioned to 95% of Medicare fee-for-service costs beginning in 2012. This follows the freezing of Medicare Advantage reimbursement rates in 2011 based on our 2010
levels. To address these rate freezes/reductions, we may have to reduce benefits, charge or increase member premiums, reduce profit margin expectations, or implement some combination of these actions.
Such actions could adversely impact our membership growth, revenue expectations, and our operating margins.

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

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

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

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

Non-deductible federal premium taxesBeginning in 2014, the new
healthcare reform legislation will impose an annual aggregate non-deductible tax of $8.0 billion (increasing incrementally to $14.3 billion by 2018) on health insurance
premiums, including Medicare Advantage premiums. Our share of the new tax will be based on our pro rata percentage of premiums compared to the industry as a whole, calculated annually. Although there
is time to take into account this new tax in adjusting our business model and in designing future years' plan bids, there can be no assurance that such tax will not result in reduced member benefits,
reduced profits, or both which could have a material adverse effect on our results of operations.

Coding intensity adjustmentsUnder the new healthcare reform legislation, the coding intensity adjustment instituted in 2010 became permanent,
resulting in mandated minimum reductions in risk scores of 4.71% in 2014 increasing to 5.7% for 2019 and beyond. These coding adjustments may adversely affect the level of payments from CMS to our
Medicare Advantage and PDP plans.

Limitation on the federal tax deductibility of compensation earned by individualsBeginning in 2013, with respect to services performed after 2009,
the federal tax deductibility of compensation under Section 162(m)(6) of the Internal Revenue Code for health insurance companies is limited to $500,000 per individual. This limitation will
increase our effective tax rate, beginning in the second quarter of 2010.

Established a de-minimus allowance for Medicare Part D Benchmark bid cut-offsBeginning with the bids for the 2011 plan
year, submitted in 2010, Medicare Part D plans can continue to participate in the auto assignment of dual eligibles when the plan's bid is over the Low Income Subsidy benchmark by a
de-minimus amount, as defined by CMS, as long as the difference between the bid premium and the benchmark premium is waived. This could impact the number of plans participating in the auto
assignment of dual-eligibles and have an impact on the number of dual eligibles assigned to our plans.

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

Recent
rules promulgated by CMS include the limitation on the number of plan submissions by Medicare Advantage and Part D sponsors, a push to eliminate plans with few members and
to increase the quality of plans and restrictions on benefit packages, among other items to consider in the 2011 bids submitted in June 2010, and in connection therewith, CMS is reviewing 2011
applications more critically to ascertain plan sponsors are conforming to the new rules. These rules could impact our

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ability
to expand into new regions and offer multiple plans within the same region; consequently we are focusing our new 2011 Medicare Advantage filings on Network Private Fee for Service plans.

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

Issuer Purchases of Equity Securities

We have approved share repurchase plans that have authorized us to repurchase up to $175 million of shares of our common stock.
Through December 31, 2009, we had repurchased 13.4 million shares of our common stock for an aggregate amount of $132.7 million, under these programs. There have been no share
repurchases since December 31, 2009 and as of June 30, 2010, we have $42.3 million that remains available to repurchase additional shares under these plans. We are not obligated
to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

Recent Sales of Unregistered Securities

None.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4OTHER INFORMATION

None.

ITEM 5EXHIBITS

Each exhibit identified below is filed as a part of this report.

31.1

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

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

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


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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.July 29, 2010

/s/ RICHARD A. BARASCHRichard A. Barasch Chief Executive OfficerJuly 29, 2010

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


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